I should start this post off by saying I really enjoy listening to Dave Ramsey. He's on the radio every weeknight for 3 hours so I often listen to him coming or going from a shift. He is far better than the other two “gurus” on local radio, one of which sells his advisory services and the other of which is selling permanent life insurance.
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I think he is a fantastic motivator at getting people out of debt and keeping them from screwing up the big things, like using credit cards for credit, spending more than you earn etc. You can do far worse than following his “baby steps” out of debt and toward financial independence.
I also like the advice he gives people about money and relationships. He does a great job advising those being hounded by creditors and facing possible bankruptcy. In fact, the worse the shape of your finances, the better Dave's advice is. His investing advice, however, leaves a lot to be desired.
4 Ways Dave Ramsey's Investing Advice May Be Leading You Astray
1) The Cost of Debt Aversion
Many people have a problem with Dave's absolutely rabid anti-debt stances. For Ramsey, there is basically no good debt. Dave's approach leans a little too far toward the behaviorally correct thing to do, and too far away from the mathematically correct thing to do.
For instance, it's nice to have no house payment and no risk of losing your house to the bank if you lose your job. So Dave recommends paying off your mortgage as soon as possible. Behaviorally, that might be the right answer. But mathematically, it often isn't.
Consider a 3% mortgage, 2% after the mortgage interest tax break. If inflation is 3%, the bank is basically paying you to borrow money after inflation. Even if you only expect 5% out of your investment portfolio, you're still far better off (mathematically) directing new money into the portfolio than toward paying down the mortgage early.
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There are still lots of benefits to paying down the mortgage (less risk of losing home, ability to cut back at work, the feeling of being debt-free, improved cash flow etc), but you should probably calculate how much those benefits are likely to cost you before making that decision.
Consider $100K in your pocket that you can either pay down your mortgage with or put in your investment portfolio. Say the mortgage is costing you 2% after tax, and the portfolio (while riskier) returns 8% after tax and expenses. Over the next 10 years, putting that $100K toward the mortgage will save you something in the neighborhood of $94,000. I might be able to live with a little debt for a decade for $94K. You might too.
2) His Endorsed Local Provider List
Dave continually pushes his “endorsed local providers” for investing (as well as insurance, real estate etc.) Most of these, unfortunately, are commissioned salesmen who sell you loaded mutual funds. My local ELP says he discloses his fees and commissions to clients, but he doesn't do so on his website. He does, at least, recommend against permanent life insurance as an investment product.
Dave's attitude toward loads is that they don't matter over the long run. I disagree. I don't see any reason to pay a commission when commission-free products are available. Even if you view that as a way to pay for “good advice“, you should realize you are introducing a serious conflict of interest for the adviser, and likely getting crappier investments, even ignoring the load.
3) Good Growth Stock Mutual Funds
Dave often recommends you go out and get yourself some “good growth stock mutual funds” that will return you 12% a year. No mention of bond funds or any other type of diversification. Apparently, 3 or 4 growth stock funds will do you. Never mind that is exactly the type of portfolio you are most likely to bail out of in the event of a market downturn. For someone who is so concerned about the behavioral aspects of debt, he seems to ignore them in investing.
12% is an extremely optimistic long-term expected return, especially after paying the high ERs and loads you're likely to get from Dave's ELPs. The long-term return of the S&P 500 (good growth stocks) is on the order of 9-10%, and the return for the ultra-low-cost Vanguard Growth Index Fund is only 8% over the last 20 years. How likely do you think 12% is going forward?
4) The 8% Safe Withdrawal Rate
Dave often mentions that you should be able to spend 8% of your portfolio a year in retirement. Never mind that all the best minds in academia recommend a safe withdrawal rate between 3 and 5%.
In fact, the updated Trinity Study suggests that a withdrawal rate of 8% on a 50/50 portfolio has less than a 50% chance of lasting 20 years. Even if you stick with Dave's recommended asset allocation of 100% stocks throughout your retirement, you still have a 1 in 4 chance of running out of money in 15 years. That's hardly a safe withdrawal rate.
The Real Danger of Following Dave's Investing Advice
The problem with throwing these numbers out — “12% returns” and “8% a year withdrawals” is that if you really run the numbers, you'll arrive at the wrong amount to save.
Consider someone who wants to live on $100K a year in retirement in today's dollars. If you assume a relatively standard 4% withdrawal rate, and a portfolio that returns 5% real a year (some people would argue even these numbers are optimistic), you need a portfolio worth $2.5 Million at retirement. Assuming you acquired that over 30 years, you would need to save about $36,000 per year.
If you followed Dave's advice, and assumed a return of 9% real (let's make a big leap and assume Dave's listeners can adjust for inflation) and an 8% withdrawal rate, you'd need to save $1.25 Million in today's dollars at retirement, and somehow magically do that by only putting away $8500 a year. There's an awfully big difference between $8500 and $36,000 a year.
So, while I like how Dave recommends eating “Rice and Beans, Beans and Rice” until you're out of debt (similar to my recommendation to live like a resident for a few years after graduating), I'd be very cautious taking investing advice from him or his endorsed local providers.
In what ways has Dave Ramsey's advice helped you be a better investor? Do you agree with me that some of his investing advice is off base and detrimental to his followers? Comment below!
My point is that being debt-free is a state of mind. It makes you feel rich because you can live your life how you want, and not feel enslaved to debtors.
Okay, I don’t disagree with that.
Sorry, I don’t agree and maybe I missed something here. Dave has given a plan, all I see you doing is critisizing his plan. If you’re going to be critical, show me your plan and let me decide, otherwise your just blowing your own horn.
It’s unclear to me what you don’t agree with. Do you not agree that paying down low interest debt instead of investing in an investment with much higher expected rates of return may not be wise? Do you not agree that commissioned salesmen don’t make for good advisers? Do you not agree that active management is a loser’s game? Do you not agree that the stock market is unlikely to give you an annualized return of 12% over your investing horizon? do you not agree that 8% is far too high of a safe withdrawal rate? What exactly do you disagree with in this post.
All of that is relatively easily proven with simple mathematics or a cursory glance at the historical data. It’s pretty tough for a financially educated person to disagree with any of that.
“My plan” is easily found on the website and the book. It’s quite basic. But you don’t need to follow my plan. You can follow Dave’s. Just realize that he’s simply wrong about a few of the things he says. If you adjust his plan for those, it should work just fine for you.
The mortgage interest tax deduction is not guaranteed. If you borrow (or make) too little money, it’s not worth anything; your standard deduction is higher. People who live in states without state income tax, in particular, have a hard time exceeding their standard deduction through itemizing, since a major source of itemized deductions (state income tax) is unavailable. Conversely, if you make too much money, the AMT kicks in, which limits the scope of the deduction (e.g. cash-out refinancing not used for home improvements no longer qualifies). There are also various weird situations, such as working in a foreign country, where you would no longer get the benefit of the deduction since the other country doesn’t offer it. One even hears semi-serious talk of Congress changing the law in the future to eliminate the deduction. In light of the uncertainties, I think the deduction should certainly be a part of your planning, but it is not a good idea to rely on it always being there.
What you should really do is compare your mortgage with your other investment options. Paying off your mortgage gives you a 3.8%, risk-free, tax-free return. As far as I know, there is absolutely no savings vehicle on the planet able to match that rate of risk-free return in today’s interest rate environment.
Up to $100K of a cash out refinance still qualifies.
I think you’re confusing the AMT with something else.
“Under the regular tax rules, you can deduct the interest on up to $100,000 of home-equity loans. But under the AMT rules you can only deduct interest on loan balances of up to $100,000 that are used to acquire or improve your first or second residence.”
Source: https://secure.marketwatch.com/story/congratulations-you-owe-the-alternative-minimum-tax-2014-01-14
You can’t claim the deduction on the $100k unless that $100k is used for purchasing costs, or home improvements.
I wasn’t confusing the AMT with anything else. I totally skipped over that part of your comment. You are correct that while under the regular system you can deduct the interest on up to $100K spent on anything, that doesn’t apply if you’re paying under the AMT. Thanks for the correction.
Great article.
Sorry, need to comment. Right off the bat you recommend against the paydown of mortgage debt that Dave recommends. He does not do this.
Step 4 is to put aside 15% for retirement. It is before step 5 which, if you have children, is to set aside money for education for children. Then is step 6 which is to pay off your mortgage .
The 15% in step 4 is considered even by him to be a minimum, but enough to build the foundation of a retirement. The word foundation is important because it’s not the end all. He doesn’t recommend you put paying down your house before investing.
I also find it important to note that he recommends pay down of mortgage for most people because of volatility of jobs. When approached with people who have known stable jobs, he typically eases back on things like the extend of an emergency fund and pay down of mortgage. But he can’t afford to cover every case and treats the majority of his audience as the victims of their own debt. He HAS to educate this way to not confuse those who have been made victims by their misunderstanding of reality and following of the majority.
Then you mention in your section on investing:
“Never mind that is exactly the type of portfolio you are most likely to bail out of in the event of a market downturn. ”
If you’re bailing out, you’re doing yourself a disservice because these are the ones you want to be in WHEN the market downturns because they will recover the best. If you’re bailing out during volatility and slipping into more conservative portfolios, you will never recover what you’ve lost. Track record has a lot to do with this too and you should be picking ones that recover. You have a great time period to look at too over the last 10-15 years to see which ones did recover well from a significant market downturn.
I agree that 12% is likely a pipe-dream, but it should be a goal. You want 7-8% growth with a sizable nestegg so you can regularly withdraw enough to compete with inflation, taxes and draw enough to match your salary prior to retirement.
Your wanting to live on $100k is unrealistic too. Consider the average family lives on $45k a year before taxes to support a full family. You can live on far less. You don’t need to have as much aside as you claim.
At least he presents a plan that most people can understand, and does it relatively for free if you’re willing to listen to a free radio show and put together the pieces. That’s more than most people try to do and more than you’re doing.
I agree, Dave recommends 15% for retirement (plus college) before paying down mortgage. But Dave also recommends paying down debt no matter what the interest rate is, even if it is 0% or less than inflation. That’s the point of the debt section.
I agree you shouldn’t bail out, but people DO bail out, particularly people who are 100% equities.
You have no idea how much I need to have set aside. Remember, it’s a site written FOR DOCTORS BY A DOCTOR. The average physician income in this country is $200K. Living on $45K a year is likely to be quite a change, particularly for a higher earning doctor or one whose spouse is working. Set aside enough for whatever income you personally desire, and I’ll do the same.
Would you like my free plan? Here you go- Don’t use credit cards for credit. Don’t borrow to buy cars or an undergraduate education. Live like a resident for 2-5 years after medical school to jump start your retirement savings and pay off your medical school loans. Save 20% of your income toward retirement and invest it in a reasonably diversified, low-cost manner either on your own or with an adviser who offers good advice at a fair price. That plan is both free, simple, and easy. If you don’t like my site, don’t read it. You’re welcome to go to Dave’s. Just don’t expect any good investing advice and expect the advice to be particularly terrible for you if you are a high earner who has no issues with consumer debt.
I do like Dave Ramsey’s motivational approach and I followed his get out of debt program. Now debt free, with retirement and moving forward! I guess the big turn off was that when I looked at the ELP real estate agent for my area, I realized that it is well known fact in town that the “ELP” is up to their eye balls in debt and they are well known to be a dead beat payer!! A top seller yes, a financially responsible steward, NO. So, I now ask myself is it about “helping” others or who pays the most for advertising in Dave’s world? I would have to say that Dave lost a lot of credibility on this one!!!
So we should take your advice??
No thanks. I like to balance quantitative and qualitative analysis. Along with values and principles.
Oh and by the way, your “keep debt costing 2% while getting an 8% return” has some assumptions that you can’t guarantee.
What if, since you like debt so much, that one gets upside down and the market turns and they can’t pay the mortgage?
[Ad hominem attack deleted. These types of comments aren’t permitted here. If you continue, your comments will be blocked.]
On Mr. Ramsey’s retirement examples. There are assumptions, just like your assumptions, and under his annual 12% return and 8% withdraw, the math works. Now the question might be “is 12% too high to expect?” Maybe but I have seen his programs also suggest putting your own numbers in. Maybe 8% return and 5% withdraw.
You don’t seem the understand the concept of sequence of returns risk. Are you familiar with the Trinity study?
I would also like to point out that they are many stock funds that beat the market. Just looking at Morningstar’s Fantastic 48 and it’s strict criteria including manager tenure and manager investment into the fund of $500,000, there are 19 funds that have averaged 11% or better and 10 of those 12% and better.
BTW – I’ve had 4 of those funds for over 20 years. My average return has been 12.4%
It is possible and yes with a simple 6-8 fund portfolio. Just get the right ones. I have Large, Mid, Small cap and some global/International. Good families, tenured managers, low fees, mild turnover and better than average bear market performance.
I have seen many brokers who average 5-6% a year with all their expert knowledge. LOL
No thanks. Dave Ramsey’s advice is just fine and works. As long as you don’t knit pick the crap out of it and get the overall message.
Congratulations on your success. I think you minimize the difficulty of selecting outperforming actively managed mutual funds. There’s a reason mutual funds are required to post the disclaimer that past performance is not indicative of future performance-its actually true. However, I do agree that if you’re going to attempt it, picking a fund with low-fees and turnover is a good idea, since that seems to be the best indicator of future performance. I’ll stick with guaranteeing market performance and never having to monitor my managers.
I also think that classifying “many” as 20 out of over 7000, is a bit optimistic. While it’s a good thing that you have picked 4 of the winners, I am more interested in the 10 to 20 other investments you have owned in the last 20 years. It would really tell a better story than just picking out 4 of them.
fd
I listen to Dave Ramsey once a week, as he only seems to be on the air where I am on Sunday evenings. I agree with getting out of debt as much as possible. I paid off my own mortgage on a $400,000 home about 10 years ago now, but that is something I only expected of myself and not of others. But by way of warning, I would recommend starting to pull out of the mutual fund scene and invest in physical gold and silver coins and store them on your own property. With Obama in the White House and so much NO GOOD going on in the world economy, the US dollar will be collapsing even as soon as the end of 2015. Your mutual funds, stocks and bonds will be worthless and it will happen sooner than later.
It’ll be fun to check back on your prediction in a few more months. I find it interesting that Obama has been in the White House for 7 years already and there has been “so much NO GOOD” in the world economy for, well, centuries, that only now is the US dollar going to collapse and take stocks and bonds with it. Do you listen to Coast to Coast after Dave Ramsey is over or something?
I have agreed with your review so far, but did I read your comment right that you shouldn’t borrow for an undergraduate education? What exactly would one do if their parents don’t front the bill? My state school was just under $10k a year; I was lucky enough to receive scholarships to cover it, but I still had to borrow to eat. Cheaper college options exist, but getting into medical school is much more difficult from an Ivy tech or similar. The idea of foregoing a year of physician pay for a year at minimum wage saving up for college is obviously as nonsensical as some of Dave Ramseys.
Perhaps that advice would work for some people, but I don’t think it’s universally a good idea. Much like paying a low interest mortgage off early…
You couldn’t make enough money during the summers and during the school year to eat? Not to mention most people academically capable of getting into medical school should be academically capable of getting a tuition scholarship somewhere. And this assumes zero help from parents.
Hi again! Awesome that you keep up with comment threads in old posts. Tuition scholarships cover just that — tuition. It’s pretty hard to cover room and board from scholarships. Room and board alone at most places runs at least $10k, more likely $15k/yr. You can work that off while studying, but that level of employment WILL adversely impact your studies (remember, we’re talking full-time school here). My summers in college were dedicated to side projects and low-paying internships that helped me get ahead in my career; the latter in particular is pretty standard in most fields (it’s not until at least professional school that you can expect high-paying summer jobs). You can forgo career preparation for summer jobs, but it puts you behind your peers, and represents a substantial tradeoff.
Plus, even if you’re right about everything and there’s no need to borrow for school, you won’t be right for very long. Have you noticed the annual rate at which college costs are increasing? It’s been going up at a pretty solid clip of 5% per year for *decades*. This rate far outstrips annual inflation, or wage increases, or anything else really other than the stock market; and unfortunately incomes don’t grow at stock market rates unless you work in finance. So even if you can work your way through college today (which I doubt), you definitely won’t be able to do so in 20 years.
I find it interesting to run into people who say it can’t be done when there are plenty of people out there doing it.
One of the main issues is people don’t choose a college based on what they can afford, nor the city the college is in for its cost of living. Instead, they go to BU ($47K tuition) in one of the most expensive cities in America and wonder why they have to borrow. Meanwhile, tuition at my local community college is $3600 and you can live at home.
I mean, if your parents saved up $300K for you to go to school, then sure, go to BU. But if you’re like most….you’ll be better off with a degree from a less prestigious school and $200K less in debt.
But I doubt I’ll be able to convince you it is possible. But in the 1990s when I was in college I could make $13K in the summer and another $500+ a month during the year. That works out to about $17K. I lived on $5K. Tuition was $3-4K, but like you, I had a full tuition scholarship.
If you think you’ll get ahead by borrowing to go to undergrad, then feel free to do so. I don’t buy it though. I think way too many undergrads borrow because they think that’s what they’re supposed to do, rather than thinking outside the box a bit to try to figure out a way to avoid it. Here’s how to avoid it:
1) Pick a school in a low cost of living area
2) Pick a school you have a scholarship to or at which tuition is very cheap
3) Get any help from parents you can
4) Work. In the summers, and during the year.
5) Get roommates.
6) Don’t get a car.
One great benefit of working your way through school is you do it as fast as you can because you don’t like living that way.
I don’t know of anyone in my medical school class that went to a community college; I’m not saying it’s impossible, but I think it’s an uphill battle. What’s more, most state colleges (read: where you’ll receive full tuition scholarship) aren’t in a place with a low cost of living. Your key points of avoidance are literally mutually exclusive. And if you think Ivy Tech is giving out many full-tuition scholarships, I’m afraid you’ve misunderstood their business plan.
Now let’s talk about summers. That’s wonderful that you were able to make so much in the 1990’s; I also recall the average matriculant had a <30 MCAT back then. Today most medical schools essentially require some form of research, which is usually around a $2-4k stipend for the entire summer. This pays for…again… food and housing for 3 months. The MCAT and application fees alone cost upwards of $1k these days; now add flights/hotels for interviews. You're deluding yourself into thinking that it's still the 1990's when you went through undergrad.
My alma mater’s tuition is $5150 per year today. In 1999 when I graduated, it was $2720 per year. Sure, that’s a big increase, but it is also an amount of money that can earned by an undergrad in the summer and/or during the school year.
My local state school, the Flagship institution in the state system, in a reasonable cost of living area, is $8610.28. Again, an amount that can be earned in a summer.
I did paid research one summer in undergraduate. It didn’t pay as well as other jobs available, but also did not have to be done in the summer.
$4K for 2 months of food and housing? No wonder you think it’s tough. Average rental rates for shared apartments around my alma mater are $277 a month. I’m trying to figure out how an undergrad can eat $1700 worth of food per month. I think I could eat out every meal and spend less than that.
This isn’t an Ivy League school, but it’s hardly a community college. It’s in the top 70 on the US News and World Report National University ranking. The state school is ranked similarly.
But if you want to send your kids to a super expensive school, or borrow all kinds of money because you chose a college more expensive than you could afford in hopes that it would get you into medical school, nobody is going to stop you. Just realize there are very real financial consequences to decisions like that.
But my med school class was full of people from my alma mater, the local state school, and the other state schools in the state. That was probably 80-90% of the class. Most of the rest went to a state school in another state. I don’t know of any that finished at a community college, but I also don’t recall any that attended an Ivy League institution. Almost all finished. Almost all matched into their desired specialty including derm, ENT, ophtho, ortho, rad onc etc.
I’m not going to agree with you that one must borrow for an undergraduate education adequate to get into medical school, especially if the parents can make any kind of reasonable contribution at all, as most readers of this site can do.
I don’t know why you keep piling on the Ivy League. Your criticisms are invalid. Let’s consider Harvard as a concrete example. To start with, all Harvard financial aid packages are loan-free. If you receive financial aid from Harvard, you will be given an aid package which does not require a single dollar of loans. Period. (You may elect to take out a loan anyway, but the aid formula does not require a loan.) All families earning under $65000 per year pay nothing to attend Harvard. Zero. Without exception. Obviously, $0 is much less than the $5150 that your alma mater charges. Furthermore, all families earning under $150000 per year pay no more than 10% of their annual income per year. Again, without exception. So let’s say your family income is $100k. Then your family’s annual monetary cost will be no more than $10000 (and may well be less). Now, granted, $10000 is a bit higher than $5150, but is it “super expensive” as you say? I don’t think it is. Will your expected net lifetime earnings coming out of Harvard be higher by a large enough amount to justify the extra cost as a rational investment? For many people, yes.
One may reasonably wonder whether Harvard needs to charge tuition at all. Harvard has a $36.4 billion endowment. The IRS’s five percent minimum payout requirement means that Harvard’s endowment pays out $1.8 billion per year. Harvard has 6655 undergraduate students, and tuition is nominally $45278 per year. Even if every single undergraduate pays full tuition without financial aid (which is not true), total annual revenue from tuition would be 6655 * $45278 = $300 million, which you’ll note is much much less than $1.8 billion. In other words, Harvard’s endowment is legally required to pay out each year a mininum amount of money equal to six times the theoretical maximum amount of money that Harvard could receive from tuition. It goes without saying that Harvard’s business model does not depend on tuition in any crucial way.
I don’t recall ever being anti-Ivy League. I agree that if someone’s cost of attendance at Harvard is less than $10K then they can certainly work their way through.
If I’m anti-anything, I’m anti expensive private schools that don’t provide any better education or opportunities than a respective state school. I don’t think anyone is going to throw Harvard into that category.
And I’m especially anti-borrowing for undergraduate.
Stanford has similar tuition policies to Harvard.
CMB,
I’m not sure what attracted you to this Dave Ramsey thread, but if you had read his most popular book “Total Money Makeover” you would already know the answer to this question. He tells the story of a high school girl who spent her summer working writing 1000 scholarship applications from a database of 300,000 possibilities. While she got 970 rejections that left 30 scholarships to the tune of $38,000 which was enough for her to go to her school for free while her next door neighbor whined that no money was available for school. So to think no money is available and that you can’t “downsize” your wishes to go to a less expensive institution is to give up before even trying.
Dave
I agree that Dave Ramsey isn’t always spot on with his math. However I find some of the things in the post at least as disconcerting. For instance, a 3% mortgage which after the interest deduction is 2%? Are you in a 100% tax bracket? Because if your blended rate is around 30%, you’re only getting 30 cents on the $1 for the mortgage ineterest you’re paying. Then you follow it up by saying that if inflation is 3% and your portfolio is 5%, this somehow means you’re way ahead mathematically. That simply isn’t true. Inflation doesn’t have anything to do with the math if your options are paying down a mortgage or contributing to a portfolio. And a 2% spread is waaay too little to shift even into blue chip funds over a guranteed gain. That’s like turning down a 7% CD in today’s market: insane! The rist factor of the stock market is more expensive than a 2% gain. Why do you think the bond market is so gigantic even with 1-2% returns?
It only requires a 33% marginal tax rate to turn a 3% mortgage into an after-tax 2%. I have no idea what you mean by a 100% tax bracket. I’m not sure you understand how a deduction works. Let’s say you paid $10K in mortgage interest. At your 35% tax bracket, that gives you a $10K deduction worth a $3500 reduction of your tax bill. That’s the equivalent of a 1/3 reduction on your interest rate, essentially turning a 3% interest rate into a 2% interest rate. Not my opinion, that’s just math.
If you don’t think 2% is adequate payment for taking on a risk, you are free to take the risk free return. You makes your bets and you takes your chances.
WCI,
You are forgetting one very important fact that requires a little more math. Your itemized deduction is more of a marginal affair where as a married person you need $12,600 just to get above zero with your deductions. In the very worst case (which I am sure is not yours) you have $10,000 interest deduction and $2,601 of other itemized deductions. You file schedule A and think that $10,000 interest deduction saved you big on your taxes. I am sure you can see that is not the case. In fact even if your total itemized deductions are $25,200 your effective tax savings is exactly half what you think it is.
Dave
I agree. It may only be partially deductible at relatively low income ranges. Conversely, at the upper ranges I’m at now it phases out due to Pease Limitations. But most docs are squarely in the middle there and it’s pretty much fully deductible.
Ramsey isn’t the first person to use the bible or a religion to help him sell something. His cult followers are popping up in churches just about everywhere offering financial peace classes while selling Ramsey’s products to them. When asking one of Ramsey’s Robots specific questions about the Ramsey plan they just stare off into the distance and recite some memorized Ramsey-ism or some statistic that has been skewed to fit the Ramsey plan. These conversations uncannily remind of my youth at confirmation classes at church when one of my peers would recite the catechisms not knowing what they really meant but quite content that he is a good christian because the pastor thinks him a good christian. Ramsey is taking advantage of our religious beliefs to sell us products. His teachings are so anti-credit system that you would have to wonder if this program of his isn’t part of a vendetta against the credit system spurred on by his forced bankruptcy in 1986 from bad real estate investments. If you are a Ramsey true believer I commend you for reading this far but at the same time I challenge you to consider the following with an open mind and maybe a calculator; Paying off your high interest debt first will get you out of debt sooner and could possibly save you thousands of dollars, Shifting some high interest debt to 0 or low interest credit cards is a good idea if you understand the terms of the card and can meet the obligations to qualify for the lower interest, By using some common sense about handling money you don’t need to buy investment advice from people like Ramsey whose only real experience with the credit system resulted in bankruptcy.
I’ve certainly had the experience of running into Ramseyites. However, most of them have such a simple understanding of financial principles that just blindly following Ramsey is a huge improvement anyway.
That said, I side more with Ramsey on this subject than I do with you and here’s why- behavior. Precious few of us have the discipline, knowledge, and ability to really arbitrage debt in the way you describe. Most who save carry debt don’t invest an amount equal to paying it off- they simply spend it. Math doesn’t get people into debt, behavior does. Learn proper math doesn’t get you out, changing your behavior does.
The other reason is those who get this and have the discipline to arbitrage debt (like you and I) don’t need to. We’ll meet all of our reasonable financial goals whether we pay off low-interest mortgages and student loans early or not.
This post and the replies have had me laughing. I gave up reading them halfway down so I could throw in my two cents..
Please explain to me how losing your job in a poor economy is NOT risk.
Lets talk about all of this for a second.
You have a mortgage payment of 1450 dollars a month, for ease of conversation you are halfway thru your mortgage and you owe 100,000 on your home. 7 years remaining assuming you went with a 15 year fixed at 3% as Whitecoatinvestor had wrote.
Okay we know all the above is true. 2% percent interest after you “save money on your taxes”. At current inflation rates(which i am unsure of) the bank is actually paying you interest to buy your home the slow way!
“This is fantastic”
You lose your 70k a year job. You get a job driving a truck for 25k a year, and deliver pizzas for some extra cash. You are absolutely struggling to make your mortgage payment let alone invest for retirement.
If you can in ACTUALLY explain to me how the bank paying me interest is worth the risk of loosing the 100k you have already invested in your home. Thousands and thousands of families lose their homes to this every year, and many of them on advice from a “financial advisor” that does MATH.
Yes you are correct, in a perfect world you borrow money to make money. I hate to tell you that this is not a perfect world and poor advice like this can cause families problems. You take the average guy reading a blog like this, he feels enlightened that he can make a 2 percent return on his mortgage over 15 years simply by not hurrying to pay it off!!!!
Pay off your debt. Let me remind you of something. Until you make the last payment on your home, It is not YOUR home, It is the banks.
Get out of debt and invest YOUR money in things that can make you alot more money than your mortgage, without risk. Quit trying to pad your net worth by filling your portfolio with hundreds of thousands in debt.
What it boils down to is there are far to many people out there doing math. Stop doing math. That 2 percent can cost you 100k when you lose your home. Get out of debt. Pay it all off loose the stress. Invest with confidence knowing that your home is secure. Be it in mutual funds, real estate, or a business. and retire comfortably. it is pretty easy to retire comfortably when you haven’t had any payments for 15 years. Keep doing your math. You may very well have a whopping 200k more than I when you retire because it, but I promise you, that because i own my home and have no payments, my road to retirement will be full of me doing what i want, when i want and as i want. All while you sit back and do math to have that 200k.
To be honest, we could sit down and figure out the potential of the money invested that i am saving from my mortgage and I am sure that with more to invest, and more time for it to grow, i will be making alot more on that money than “the bank is paying me”. If i put just 1450 dollars a moth into bonds, for arguments sake, you are going to tell me that you paying your mortgage is making you more money than my money is making me.
obviously bonds would be a horrible investment choice, but there is the real math problem for you.
Technically it is your home. If it rises in value, you get that increase. If it goes down in value, you lose money. It does serve as collateral for the mortgage, but that doesn’t make it the bank’s unless you fail to fulfill your end of the contract. And at any rate, you don’t actually lose your equity when they foreclose, at least in theory. In practice, the bank may sell the house for less than it’s worth and will tack a lot of fees on, so you will likely lose at least some of it.
You can’t pad your net worth by borrowing to invest. What you gain on the asset side, you lose on the liability side.
Your example of going from a $75K income to a $25K income is a very real risk. Probably a little less likely for most readers of this site though (high income professionals.)
I have mixed feelings on the topic of paying off a low-interest mortgage early.
Allow me to offer two other criticisms of Dave Ramsey’s program:
1. He basically doesn’t trust people to behave. If he did, he’d have no problem with them having a credit card and paying it off in full each month. I do that, it costs me nothing and I earn frequent flyer points. He dismisses this as a frivolous waste of effort. But if I’m a responsible adult, live within my means and don’t go into debt, what’s the harm of earning free miles?
2. I find his hourly sign off on his radio show insulting: “Remember, there’s ultimately only one way to financial peace, and that’s to walk daily with the Prince of Peace, Christ Jesus.” Sorry, Dave, but you don’t have a monopoly on righteousness. And to suggest that anyone who isn’t an Evangelical Christian such as you is somehow incapable of achieving financial or spiritual peace is at best narrow minded and at worst bigoted.
I was listening to Dave tonight while on business in Phoenix. Happened to be on the radio. Have to say I burst out laughing when he said your FICO score is your “I want to stay in debt forever” score. Nothing further from the truth. Credit is a useful tool when utilized responsibly; try renting a car without one.
With excellent credit, you’re paying (maybe) 1 or 2 points over the Prime Rate for credit cards. We call that “leverage”. The issue is not “debt is bad”, the issue is living within your means, and then expanding those means. I have never heard Dave recommend a side business; he is always taking calls from w-2 status folks. He and Suze Orman are cut from the same cloth; with the major difference being that Dave injects religion into finance.
I have credit card debt that will be paid off within 18 months; I used my credit limits to start a radio show, sponsor some speaking gigs on other peoples’ stages and such. I wonder if Dave would call me a “loser” for that??
I’ve heard Dave encourage many people to open a side business. I’ve also heard him describe how to rent a car without a credit card. Not sure I want to do that, but it sounds like it is at least possible.
The prime rate is currently 3.5%. What credit cards let you borrow at 4.5-5.5% right now for anything but a short-term promotional offer?
I’d also be pretty cautious starting a business with credit card debt. What’s your radio show and how is it doing?
I have rented cars with my debit card. I bought my car and my house with cash. I have no debt, and my net worth is approximately $149,000.
You don’t have to have FICO score to be successful. In fact, not paying interest makes it a lot easier to save for retirement.
Lydia,
Good for you if you found a house to buy for $145k (or less). There are parts of the country where you can do that. That should also let you put maybe 20% or more of your salary towards retirement as you are probably behind schedule in that department. My own personal rule of thumb is to never get more equity in my home than I have in my retirement account so I would not go down your path because of the power of compounding, which equity in your house does not do, but money in a retirement account would. Also having all my net worth in something that can essentially go to zero is a little scary, but many sleep very well just knowing the bank can’t take away my living place.
Everyone has to figure it out for themselves.
Dave
It technically does compound until the mortgage is paid off, but only compounds at the after-tax interest rate on the mortgage. Once it’s paid off, it doesn’t compound, but the “saved rent” certainly helps build wealth faster.
wci,
She said she paid cash for the house, that’s why I said NO compounding involved. Now all that money is in equity and you have a house (asset) appreciating at maybe 3%. All the time you were accumulating that payment, opportunity lost in retirement savings which can not be gotten back. I have worked this math many times and if you get any kind of normal market returns on your money you will not be able to catch up over any reasonable 30 year time period. That is the power of compounding. The person who starts saving earlier wins the race.
You bought your house with cash but have a net worth of only $149K? The median house listing in my city is $375K. What’s your house worth? It’s one thing to buy a $100K house with cash. Quite different to buy a $1M house with cash.
I guess I’d argue that not paying interest doesn’t seem to have done much for building your wealth. What kind of wealth building opportunities did you pass up while saving up to pay cash for your house?
But I agree with your main point- you don’t need a FICO score to be successful. But moderation in all things. I dislike debt, but I’m not going to pass up a 401(k) contribution, much less a match, to pay down a low interest rate mortgage.
“Over the next 10 years, putting that $100K toward the mortgage will save you something in the neighborhood of $94,000. I might be able to live with a little debt for a decade for $94K. You might too.”
Your math is bad. You’re not accounting for interest, which on a 4% loan comes to $21,779.60. Subtract the $5,444.9 that you would “save” on taxes (so you’re paying almost $22k to avoid $6k in taxes) and you’re down $16,334.7.
Let’s pretend you actually did invest the $83,665.30 at a regular rate over the next 7 years; the average amount of time that Ramsey’s listeners take to pay off their homes. That’s $697.21 per month times 12 months time 7 years – and remember, you are paying a mortgage at the same time as socking away about $700 a month. At the average rate of return of 7%, after 10 years, according to Bankrate.com you would have $75,714.39. You would have contributed $58,548, and gained $17,166.39 in interest. So you would have essentially made yourself $821.69 in 7 years.
[Ad hominem attack deleted.]
To clarify, a FICO is not necessary to be successful. It can, however, makes things easier. I fundamentally disagree with Ramsay’s declaration that ‘all debt is bad’……just as I disagreed with Suze Orman saying you must have 9 months of living expenses saved up b4 you can take a vacation. Both pieces of advice coming from guru’s who likely accepted credit cards for their advanced programs.
Interesting question. I just went to find out on Dave’s website. You CANNOT purchase Financial Peace University with a credit card. Debit or paypal yes, but not credit.
Several of the Dave Ramsey links are 404’ed. Maybe link them to his direct website?
I’ve got “fix 404 errors” on my list of tasks to do. Thanks for the reminder.
Allow me to add my two cents on just some of the many areas in which Dave Ramsey does not know what he’s talking about:
1. He says “you can only get a high FICO score by going into debt.” Categorically false. My credit score is well over 800, and all I’ve done is faithfully paid off my credit cards in full every month—not a single dollar of interest paid.
2. He recommends that 100% of your non-real estate portfolio be in equity mutual funds. Virtual insanity. I can’t find another financial expert in the world (and Dave’s no expert) who recommends that none of your portfolio be in bonds, particularly as you get older and presumably more conservative.
3. He dismisses credit cards and earning frequent flyer points by saying “no millionaire ever got to be a millionaire by doing that.” That is a ridiculous position to take. As long as you pay off your cards in full every month—and avoid overspending, which he cites as another potential reason to use cash over credit cards—the miles earned are indeed a free benefit. I’ve redeemed the miles for free business/first class seats on international flights. No, those flights didn’t make me rich, but it sure was more comfortable flying that way and it cost me absolutely nothing.
4. He talks out of both sides of his mouth, saying on the one hand that “investing isn’t rocket science,” but on the other hand, shilling for his “SmartVestor Pros”, who charge fat commissions on their high-load funds. Anyone who spends an hour or two learning about mutual funds can get perfectly fine no-load funds at Vanguard, and not have to pay for the babysitting he suggests to help you pick those funds. Said another way, if Dave cared more about his audience and less about the fees the SmartVestor Pros pay him to be on his referral list, he’d tell everyone to just pick a couple of good funds at Vanguard.
5. Speaking of babysitting, David’s whole approach suggests that people have no self-control whatsoever. I suppose there are some people like that, particularly a subset of those who got in a sea of debt in the first place. But for the rest of us, we don’t need to put the cash for our monthly expenses into envelopes. I do just fine, watching what I spend, and putting as many things as I can on my credit card, and then paying it off every month.
CSI,
1. Going into debt is simply charging “anything” on your credit card. The credit report companies merely look at your monthly balance vs your credit limit. Being in debt for 30 days is still being in debt as far as your FICO score goes.
5. There are many people as you say who don’t need Dave’s advice, but for some reason they seem to be the ones most upset with it.
Agreed and agreed. I do wonder why people who don’t like Ramsey’s advice get so angry about it…probably because they know they’re wrong.
I suppose my biggest consideration about who I want to take money advice from has to do with who has money. Someone who’s throwing a tantrum because they have a credit card addiction versus someone who’s throwing a trantrum because he’s a multi-millionaire and is tired of people with credit card addictions throwing tantrums.
I think I’ll take advice from the multi-millionaire. Thanks.
Just because someone happens to be a multi millionaire does not mean they know anything about attaining or creating wealth. It matters how they became wealthy. Don’t follow someone because they are rich, follow them because their advice lines up with the research on what works. The evidence lies with the passive crowd and not the Dave Ramsey loaded fund crowd.
Re your comment to my #1: I truncated my point. What I’d left off was that Dave goes on to say that “You can only have a good credit score if you’ve paid at least $100,000 in interest.” Again, wrong, when it comes to my use of a credit card. Like I said, I pay it off every month in full–no interest whatsoever–and I have fantastic credit score.
Re your comment to my #5: It’s more than “I don’t need Dave’s advice.” What I’m upset by is that some of what he recommends is wrong, and I feel bad for people who blindly listen to it and implement his wrong advice.
Dave Ramsey is no financial expert, and he is most definitely not a fiduciary, his advice is riddled with conflicts of interest. He is not a CWM, CIMA, CFP, CFA, or CPA, and his sub 3.0 GPA at U-Tenn in finance does not qualify him or anyone else as a “financial expert”. He is a failed real estate investor who declared bankruptcy and has gotten rich pitching his debt phobic prosperity money gospel message to unsuspecting religious poor people. For the record this isn’t about his religious principles, its about evidence from facts. I am an evangelical Christian as well and I think its great that Dave is trying to make a difference and get people out of debt. But his advice in regards to investing is very harmful to investors for many of the reasons outlined by WhiteCoat above, from the 12% return mythology, to the 8% withdrawal rate nonsense. I could write a book including everything that is wrong with his financial advice.
His advice in regards to using debt is also harmful. Wise use of debt is an important tool in building wealth, as WhiteCoat demonstrated with the mortgage example. Dave even convinces people who are using credit cards and paying off the balance every month that they are doing something horribly wrong.
The issue Dave should be targeting is the individual behavior, those who use credit unwisely or live beyond their means. Dave deviates from his usual personal responsibility mantra when it comes to debt, and instead preaches a message that makes people completely afraid of using debt. There are productive uses for debt, such as getting an education, that allows you to earn more money. I don’t know many people who can cash flow medical school, law school, business school, or countless other professional programs, but all should lead to higher salaries.
Don’t follow Dave Ramseys advice. Instead follow academic research when it comes to finances, this will lead you to use low rate debt wisely when appropriate, and invest your money passively. This is all the more true for those who wear the white coat and other high income professionals.
Jonathan,
Most of what you say is entirely correct, but in the case of debt most people, especially those with “money problems,” which is a large part of the population, are not able to make a distinction between what you might call “good debt” and “bad debt.” That fact is the reason credit card debt in this country is spiralling out of control. Check your academic research on the amount of credit card interest paid each year!
As far as DR not being able to understand or talk about passive investing, it takes only a casual listener to know he invests (and has for many years) in the S&P 500 index just like many other smart investors. I know for a fact that many of his educated followers are smart enough to invest in passive index funds as well.
Fair points FinancialDave. I think some form of basic financial literacy course in the schools would go a long way towards allowing people to decipher between good and bad debt. But point taken. For those who have a debt problem, or a shopping problem, etc, then maybe a no debt stance is wise. My issue is with Daves absolutism when it comes to debt as if no debt is the solution for everyone. Even worse he makes it as if you are violating some religious principle if you use debt, even wisely. There is no doubt Americans are drowning in debt, but it comes down to personal responsibility and individual choice. People need to learn that using a credit card is using the banks money, its not yours.
As far as the S&P I listen to his show nearly every day during my commute. He says he only uses the S&P 500 fund to park money while he waits to buy a new real estate property. He tells people to invest for 5 years or more (how he defines long term) using loaded mutual funds with high expenses, and tells people not to worry about fees, going so far as saying “fees dont matter.” Well all evidence to the contrary.
I also disagree with the growth & Income, growth, aggressive growth and International asset allocation he advises. Especially when he defines those categories as Large cap, mid cap, small cap and international, respectively, and tells people not to use bonds or CD’s at all. He even advises this allocation for older people in retirement. When knowledgeable, credentialed advisors challenge him on his advice on twitter he becomes belligerent, Check out the 2013 conversation where he states “I help more people in 10 minutes than you help your entire lives”. In my opinion, that is someone who knows he doesn’t know finance, and is getting defensive because real experts are on to this reality. I am glad Dave helps people who are in trouble with debt. This is good work, but this is where he should end his counsel. His investment advice, ELP program, and absolutism on debt are all detrimental to his listeners especially educated listeners, who may not know anything about money—(see the story above in the comments section about the ivy league lawyers who followed daves advice). I cringe every time I hear a doctor or other high income pro call in. He is no finance guru. He is a great motivational speaker, and entertainer. I enjoy his show just largely disagree with his financial advice.
Jonathan,
I agree with your point that our schools need to do better, but schools are no fiduciary either, so they would only be another source of information that many would probably take exception to and some would be “good” and some would be “bad” but again you and I would probably not agree totally on everything. Everyone needs to get enough information through many sources to find a strategy that makes sense to them and as you say has some academic and historical basis to it.
In my opinion if someone follows DR’s advice in TOTAL, including investing 15% of their gross income from an early age, and minds their expenses and debt, they will certainly be quite well off in retirement. Could you do better by using “leverage” (ie debt) – maybe, maybe not, as debt is not a one sided risk as you seem to think and as many found out in 2008 when their house was “under-water” and they were forced to sell anyway as they lost their job.
Finally,
Let’s get real and understand that DR is a talk show host and has never professed to have any licenses other than a real estate license. He has made this perfectly clear a hundred times and anyone who reads the “gospel” into his advice and follows it blindly – well, could actually do quite worse by following some advice from someone else. Don’t even get me started on how much really bad advice there is out there. Most of it makes DR look like a savior.
Only two final points:
1. Never said debt is a one sided risk, the key is to be prudent. In 2008 people used their homes as ATM’s, and were wildly irresponsible in many cases buying more house than they could afford. I am not advocating this.
But there is nothing wrong with using a credit card and paying it off every month, or taking a student loan to go to Med school. Or using positive financing arrangements like 0% financing rather than paying cash. I have done this and invested the cash in US treasury bonds and done quite well on the risk free spread. It’s all about prudence and personal responsibility. You should never enter into any debt that you can not reasonably pay off. Buying more than you can afford, or living beyond your means is a recipe for disaster.
2. The only point I would say you are really wrong on is that he has never professed to have any licenses other than a real estate license. He has said repeatedly that he has held every license in the industry, and he dropped them so he wouldn’t be regulated as to what he can say on the air.
These licenses are a farce anyway they merely state that someone can sell a product, they indicate no level of skill in providing advice to the public. Most in the financial arena are brokers, brokering sales between financial firms and clients. This is largely who Dave’s “Smartvestor Pro’s” are.
There is a reason Dave does not work with registered investment advisory firms, because they don’t charge commissions, and wouldn’t give him the kickbacks he wants. They are fiduciaries who Dave has made fun of time and time again. As if it is wrong to put your clients interests before your own.
Ultimately Dave is about creating an eco system where people spend money on his books and products, use his ELP’s and create lots of wealth for him, while the average investor who follows him is getting hit with large commissions, that is draining their investment account. Small investors could be paying close to 6% on these loaded funds every single time they invest. The average person scraping together $1,000 every few months would be paying $60 every time they invest. You can’t legitimately tell people to buy these funds and act like you have their best interest at heart, because if you are giving them that advice, you don’t.
Dave tries to rationalize this by saying its good to have someone to help you and states he buys these funds too. But with his high account balances he doesn’t pay loads. The reality again is that brokers are not fiduciaries, they can put themselves first and follow a suitability standard, which harms many investors over the long run. If Dave really cared about the little guy or the wealthy Doctor for that matter he would recommend Vanguard index funds or DFA funds and align himself with RIA’s who are looking out for peoples best interest.
I mostly agree with you, but there is one thing you need to consider.
What fee-only advisor will take a client with $1500 to invest and little hope of ever having more than a few hundred thousand? Not one paid on AUM fees, that’s for sure.
Reasonable point for sure, but I would say it depends. Some RIA’s would take the smaller business if it is for example a young person, with the hopes of getting the family business, or someone with high earning potential. Many also offer by the hour consulting for smaller clients. At the end of the day John Bogle has made this all very easy, for small clients. Open an account at vanguard buy total stock/bond index and leave it alone. Dave could be a powerful voice for passive investing. But instead he is advocating high fee, high commission funds. Commissioned business is great for the broker, but it is hazardous to clients wealth accumulation.
Okay. You’ve got $1500 to invest. You gonna pay an RIA $200 an hour for advice? Really? Get real.
Seriously, for most of the crowd listening to Ramsey, it’s either DIY, a commissioned salesman, or probably the best option for someone not interested in DIY- a roboadvisor. They can’t afford a human fee-only advisor. I have a hard time finding advisors to recommend who don’t require a million dollar portfolio before they’ll even take on a doctor. It’s just not going to happen for Joe “$35K a year income, I just got out of debt last month, help me start investing” America.
Fee-only advising is a profession where the advisor becomes wealthy by serving those with the resources to pay him. That means either wealth or income and most of Ramsey’s crowd (and America for that matter) has neither. The average American has $96K in his 401(k). Nobody wants to serve him, much less anyone below average. Even if they wanted to, they can’t stay in business doing so.
Again fair point for some areas of the country, but I know of DFA shops in various cities that would work with smaller clients on a limited basis. The great thing about not having a lot of money is that you dont need much. Frankly you dont even need an advisor at all. Setting up a simple account at Vanguard will get the job done for someone with $1500. You only pay for advice when you need it. Most of the value of an advisor is for the wealthy, who can benefit from tax planning and other services. The point is there are better alternatives than buying loaded funds from brokers who largely know nothing about investing.
“I have a hard time finding advisors to recommend who don’t require a million dollar portfolio before they’ll even take on a doctor.”
Really? Have you checked out DFA’s website? I worked for an RIA for many years the average client portfolio was maybe $500k, worked with many doc’s some just starting out with small accounts others with $10’s of millions. Doctors with high income and lots of money to invest were great clients, anyone turning them away is foolish. I routinely did favors for clients, helping their kids get started with investing for a small fee. You are right you cant make a living off of small clients alone, but there is room to have a mix of clients. Again the point is, Dave could be a powerful voice for passive investing and Vanguard. Instead he pushes loaded funds, how is this helping the small investor?
If you don’t need an advisor for your first $100K, you don’t need one for your first million, or second for that matter.
Trust me, I’ve met MANY “DFA advisors” with $1M minimums. Maybe they’ll drop it to $100-500K if you’re a doctor. But $10K? Forget it. They’re not interested, no matter what your income. And $10K and a $40K income? They just laugh.
You are not wrong about advisors. From my experience, I firmly believe that a good CPA with knowledge of investing is the only professional a high income investor really needs, preferably one that offers DFA Funds. But again if you dont want an advisor, Vanguard makes this all very easy whether your net worth is $5,000 or $5Million. A doctor, or anyone for that matter, with your book and a Vanguard account can handle things themselves with simple passive investment vehicles.
“But $10K? Forget it. They’re not interested, no matter what your income”
If an advisor turns away a doctor with only $10k to invest and a high income then they are foolish. Student loans go away, and incomes rise, leaving more for investment. Thats just a bad business move.
Why do you need a CPA? And why would a CPA offer DFA funds?
I agree that doctors can do it themselves if they have the interest (and thus acquire the required expertise and discipline), but the fact remains that the majority of doctors do not have that interest. Don’t extrapolate your own interest to other physicians. You’ll quickly find out it simply isn’t there if you talk to a few of them. Go ahead and try it. Try to talk some docs in the lounge into being competent DIY investors. Let me know what percentage you succeed with. In my group, that is people who sit right next to me for 8 hours at a time and to whom I’ll talk about investing and personal finance for hours at a time, it’s about 20% DIYers.
1. I think your questions are getting at the point that traditionally many CPA’s do not know anything about investing, and this is true for some. But there are also CPA firms that offer wealth management services as well. It is these firms and individuals I am talking about who have both deep knowledge of taxation, and investing.
CPA’s offer a unique perspective especially for the high net worth client group who has no interest in DIY investing. Many, such as those who also happen to be PFS’s in addition, tend to be more in tune with the complete picture, including tax planning, estate planning, business succession planning, and follow evidence based investment approaches using Vanguard, Bridgeway, and DFA. These individuals can act as fiduciaries and create a synergistic financial plan across your financial life, which for many doctors can get quite complicated as their wealth grows.
This is largely why I left the investment business, because I saw a lack of understanding of the typical financial professional even those with CFP’s/ChFC’s etc. to the clients needs. Many including those who are using DFA/Vanguard do not understand the case for indexing the portfolio, or the intricacies for how to target higher returns through the factor premiums. I have had advisors admit to me on more than one occasion that they did not know what they were doing and merely used the model portfolios. My reply to this day is…then why is the client paying you to manage their money?
The effect of fees has been well documented, and is only worth it when a client is getting more value than they are paying out. Seeing as an advisor can not time the market, or engage in any effort to attain higher returns beyond factor targeting, there is minimal opportunity for them to be able to provide value to the client within the investment process beyond initial portfolio design, and ongoing rebalancing, though rebalancing is hardly worth the fees. Therefore the real value comes through tax strategies, and holistic financial, and for private practice physicians, business planning.
I think we can agree most of those designations mean very little. A CPA/PFS for example is uniquely positioned to offer financial advice as a fiduciary. The CPA is a real professional license, that requires for many a Master’s degree in Accounting to meet the 150 Credit hr requirement, exam preparation and a grueling multi part examination lasting 14 hours in total, adding the PFS requires additional training and testing in personal finance. You are also subject to continuing educational requirements. In the world of personal finance the CPA/PFS is the gold standard, in my experience of working with individuals with every designation out there. The CFA is a close second though they are mainly geared towards institutional management, and add little to the individual client market, unless you are into stock picking.
2. I agree many doctors have no interest in investing, and I have had many as clients over the years and have talked to plenty more, though not as many as you I am sure. But this makes them all the more susceptible to the advances of the big name firms legions of uneducated brokers, who are trying to sell them on the latest and greatest investment idea, loaded funds, high commission insurance products, high commissioned annuities, and a host of other products and ideas that are simply set up to benefit the one selling it, and not the client buying it. I think people like you are doing great work in this area to educate doctors on the importance of indexing, and not throwing their money away on complex and complicated investment schemes. But I do believe that for those who still have no interest and are not willing to simply index on their own, there is value in working with a knowledgeable and trustworthy CPA who can invest your assets using a low cost evidence based investment approach keeping ones complete financial and business picture in focus.
I always get a kick out of how those with a CFA say the CFA is the gold standard, those with a CFP say the CFP is the gold standard, and those with a CPA/PFS say that is the gold standard.
It’s like when an advisor writes an article about “How to choose an advisor.” All they really do is describe their practice- downplay the aspects they don’t do as well and emphasize the ones they do well.
You are a bit too cynical for me WhiteCoat. I am not a CPA or CPA/PFS, and I no longer work in the investment industry, I have nothing to sell.
I am telling you what my experience is , and what I believe is the best based on that experience. If you choose to disregard it, then so be it. But your response is a bit cynical for me, to assume I am talking up my practice. There are some people who have good intentions and are looking out for the best interest of others.
I never said you in particular were talking up your practice. I was referring to articles I see frequently, not something you wrote.
Cynical? Yea, I’ve been accused of that a lot. Ever been in an ER? It’ll make you cynical very quickly.
It seemed to me that you were responding to my comment that the CPA/PFS is the gold standard. Apologies if I misinterpreted your statement.
I don’t blame you for being cynical in relation to financial pros, the majority of them would be selling shoes if they weren’t trying to get people to buy their high priced products. But we aren’t discussing the effects of working in an ER, which I am sure are significant in making you cynical. We are talking about financial advice and who is best qualified to provide it, and originally, Dave Ramsey. Despite how cynical the day job may make you, rest assured there are some people who genuinely care about doing what is right for others.
I worked in financial services all my life before leaving the industry and embarking on a career change. From that experience I believe CPA’s with additional training in investments whether through attaining the CFP, CFA, or PFS along with AIF’s offer the best experience for clients and are most committed to truly doing what is in clients best interests for their entire financial lifecycle. I respect your view if you disagree.
Good luck to you and your business in guiding Doctors through the financial world. I am a supporter of your work and the mission of WCI.
The first half was responding to that (i.e. how everyone thinks the designation they have is best.) The second was just a general comment, not referring to you at all. By the way, I do really like the combination of CPA/PFS. Heck, add a CFA on to that and I think that’s probably as good as it gets in financial services.
And yes, I’m cynical toward the financial services industry too, but I have met enough “good guys” to know that while they’re few and far between, they do exist.
Jonathan,
Agree with everything you said. But it’s “in regard to,” not “in regards to”–no “s” on regard. Or more simply and shorter, you could say “regarding” or “about”. Only use an “s” on “regard” in the closing to a letter–e.g., “Best regards”.
Common sense: thanks for the lesson. I wrote it in the middle of the night on my phone. Mistakes will be made. Thank you for pointing out my mistake.
No sweat. Thanks for being so open-minded about my suggestion.
I am paying off my mortgage today. Bank of America makes requires a cashier’s check or wire transfer to pay off the loan (with the added cost and headache). I can’t just make a “mortgage payment on the web” like I’ve been doing for the past 8 years. It demonstrates Dave Ramsey’s position that “the borrower is enslaved to the lender”, although I also see it as a right of passage to freedom. This will be first time I will be completely debt free since 1995, when I borrowed student loans to go to medical school.
I started listening to Dave Ramsey at a time when I had student loans, a mortgage, and a little extra money. I considered spending the extra money as down a payment for another home, to use as a vacation home and/or investment. What a terrible decision that would be – deeper into debt! After hearing one of Dave’s rants (“your student loans have been around so long, they are a member of the family!!”), I finally understood his point. I stopped whining about the student loans and destroyed them, and paid them off in a year.
Now I will be debt free – after getting the cashier’s check and sending it to Bank of America, etc.
My advice (although it may conflict with Dave’s Baby Steps) is to invest the maximum amount into a Roth IRA (or traditional IRA) every year you earn income, which for many of us starts during Internship. SP500 Index fund is fine. Then aggressively pay off the student loans and all remaining debt as soon as you have the chance. Note that I did pay off about $16k of higher interest student loans during residency.
Luckily for me, I have always been naturally debt-adverse. Eight years ago, I refinanced my mortgage into a 10-year mortgage (instead of 15 year) because I understood that my net worth would grow faster. And net worth is the only number that matters!!!
Hi. Fee-only planner here. I am glad to see you tackling this taboo subject. Dave Ramsey is never wrong – if you don’t believe me just ask him. If I said publicly what he says, the SEC would shut down my business.
There is a behavior component to paying off your home early and getting it off debt quicker that I think this article overlooks. The assumption when you look at the math is that the person who invests the money they would have paid extra in the mortgage will be just as disciplined in investing as paying off the mortgage. I’m not sure that is a valid assumption. I was very resistant to getting on the Dave Ramsey path at first until I ran some numbers that suggested I could actually get it of debt 2 years faster by eliminating my 2% interest student loans as far as possible rather than my higher interest rate mortgage. That surprised me. It may not be common, but in my situation it was true. What I found interesting over time was how this change in priorities changed my attitudes and behaviors in other ways and areas. At first there were things we didn’t think we could give up. But as we saw the progress we were making, some of those things became less important. In the end we not only paid off our mortgage over 4 years ahead of when we originally thought possible, v we have also been able to save and invest aggressively, even more because of the discipline we developed while getting out of debt. We have also saved more for retirement than we had thought possible at this point in our lives. We are ahead on all financial metrics and on track to meet all our financial goals easily.
As for investment advice, I never felt DR was very clear on how to invest for retirement or plan how much to plan to live on. He seemed to primarily recommend taking with an ELP or Smart VestorPro. I will have to agree that I don’t see much consistency from these individuals these days. Nor do I feel front loaded mutual funds are a good deal. But I’ve been investing with Vanguard for over 18 years. I started there because it is what my 401k was through before I learned about DR. I have done quite well despite not having an adviser. My average rate of return has stayed around 10-12%, even accounting for losses in 2008. I’ve definitely seem that time in the market beats timing the market almost always. One of the big reasons I think I have done so well is that I continued investing throughout the recession while others I knew pulled back or out. But I guess I never felt like DR was providing much real guidance on investing, but on financial behaviors and debt elimination. After all, he is not a licensed financial advisor.
Agree with everything you said.
I don’t know if you’re still updating articles from 2012, but this sentence is very hard to parse or maybe even incorrect: “Over the next 10 years, putting that $100K toward the mortgage will save you something in the neighborhood of $94,000. ”
I’m sure what you meant was something like
“Over the next 10 years, putting that $100K in investments will earn you something in the neighborhood of $94,000 more than putting it toward the mortgage would save you”
The intended meaning was: “Over the next 10 years, putting that $100K toward the mortgage will save you something in the neighborhood of $94,000 compared to the alternative scenario of stuffing $100K in cash under your mattress for ten years.”
Exactly.