Thursday, May 30, 2019

What is Davd Ramsey's Fatal Flaw? (Part Two)

There’s no disputing that Dave Ramsey’s advice for getting out of debt and saving money has rescued many a financially troubled family.  One could do much worse than follow Dave Ramsey’s teaching on money matters.  But that doesn’t mean we should accept all his advice uncritically. 
For example, he advises listeners to not contribute to their retirement accounts until they eliminate their debts (though presumably not their mortgage debt), devoting every spare dollar to that goal.  However, that sacrifices an important long-term goal in favor of a (admittedly very good) short-term goal.   If someone following that advice passes up the opportunity to invest in a 401(k) plan in which the employer matches employee contributions, that person is giving up a 100% return on their investment.  And for what?  To save an 18% annual interest rate on that same amount of money?  And that doesn’t even consider the time in the market that is lost by not investing earlier, losing precious years of compounding.  Not starting early in one’s career to save for retirement is one of the leading causes of the low balances in retirement accounts that firms like Vanguard are reporting as they warn about a retirement crisis for these under-savers.
In the very first post I made to this blog, “Follow the Money”, I warned readers to examine what others told them to do with their money, looking for motivations that only served the interests of the person giving the advice, not the recipient.  Bible-thumping evangelists of financial freedom should not escape this scrutiny.  Does Dave Ramsey pass the test?  Well, he refers callers to his show or visitors to his website to ELP’s, endorsed local providers, who pay Ramsey about $80 per lead.  They are frequently paid on commission and sell mutual funds with front-end load charges, meaning that not all the money an investor hands over to be invested actually gets invested; the investor might start off five or six percent behind, right out of the gate.  In an era when investing is easier than ever without an advisor charging commissions; when low-cost funds are widely available to the public; when low fees have been shown to be a predictor of better overall return of an investment; and when mutual fund and ETF choices allow easy diversification and relative safety, is Dave Ramsey’s method really sound?
But put all that aside for a moment.  When someone tells me he is a Christian, I hold him to a higher standard of behavior, truthfulness, and treatment of others.  I will not call Ramsey’s character and beliefs into question.  God is a very capable judge and much fairer than any human being since He sees and knows all.  I will, however, call Ramsey out on his behavior and teachings.
Ramsey is no stranger to disputes with other financial advisors.  He once told a group of them opposed to some of his investment advice that he had helped more people in ten minutes than they had in their entire lives.  And I’ve heard his rants on the radio against these opponents.  His tone lacks what I would call Christian charity.
Ramsey does not reserve his criticism only for professional advisors either.  He dishes it out to listeners who have made bad decisions.  Money cited one particularly intense dressing down he administered to a hapless caller who was in despair about her school loans.  It was not an isolated incident.  Maybe some people can embrace this harsh schoolmaster approach.  To me it seems indiscriminately administered and lacks the compassion I believe Jesus would show these same people.
I would invite you to compare anything Ramsey does or says (and how he says it) to other Christian financial teachers like Rob West, Howard Dayton, or the late Larry Burkett.  I hear those men teaching the same principles of debt elimination but doing it with grace and healing while espousing the use of lower-cost investments and offering a corps of locally based volunteers to help those who are struggling. 
Maybe the world loves a showman, and Ramsey delivers that.  I’m just not convinced it’s what the world needs.

Until next time,


“By insulting the poor, you insult your Creator.  You will be punished if you make fun of someone in trouble.”  Proverbs 17:5 CEV

Tuesday, May 21, 2019

What is Dave Ramsey's Fatal Flaw? (Part One)

Do you listen to Dave Ramsey’s syndicated radio broadcast?  If so, you are one of about 15 million people who do so each week.  Only Sean Hannity and Rush Limbaugh have bigger audiences in the talk radio universe. 
Ramsey, on the chance you haven’t heard of him, has been doling out his insights and advice on personal finance to the debt-weary masses for nearly 30 years.  His calling card: He cajoles, urges, and often shames his listeners into working their way out of debt.  And he does it with a nod to Biblical principles and with an eye to church-going audiences.  He often speaks at large churches and promotes his video series, “Financial Peace University” to Christian organizations.
Getting out of debt?  Biblical-based living?  I’m onboard.  But I’m not sure I’m onboard Ramsey’s particular ship.
Ramsey held a $4 million portfolio of real estate back in the 1980’s but lost nearly everything and declared bankruptcy when he couldn’t muster the cash to pay back the loans when the bank called in those loans.  You might say he “got religion” as he discovered what the Bible says about money and became an ever more popular evangelist of those principles and what he calls the seven baby steps leading to financial freedom (establish a $1000 emergency fund, etc.).
As sensible as his advice may be, Ramsey is not without his critics.  In 2013 Money magazine ran a feature article about him and titled it “Save Like Dave—Just Don’t Invest Like Him”.  As you may guess, it lauded his emphasis on shedding debt but took issue with his advice on investing and on drawing down one’s savings during retirement.  Now Money is back with its May 2019 issue and a front-page article about Ramsey as “the debt slasher” but then asks, “Is his advice sound?”  In this first of two posts about Dave Ramsey, let me give you my take on the man and his financial advice.
*  *  *
I have a couple of friends who are accountants and very familiar with Dave Ramsey, and they don’t like his advice for getting out of debt.  Specifically, they don’t like what Ramsey calls “snowballing” debt—devoting every available dollar and anything extra you can make to pay off the smallest debt first, then adding the money that was going to pay that debt to the monthly payment on the second smallest debt to pay that off, and so on until all the debts are paid.  Being numbers people, my friends correctly point out that it ultimately saves the debtor more money to pay off the highest interest debts first, regardless of the comparative size of the debts.  But I side with Ramsey on this one.  Most people are not numbers-oriented.  People in debt trouble tend to be emotional spenders, and the snowballing method feeds the emotional side of people.  They can see quick results as the first debt is dispatched and they accelerate payment on the next one.  It’s like being on a diet; people need to get some positive early reinforcement of their progress, and snowballing does that very well.  Score one for Ramsey.
In the 2013 article, Money focused on the controversy around Ramsey’s investment advice which was to go full tilt on equities (i.e. 100% stocks instead of holding a mix of stocks and bonds) when investing, count on an “average” return of 12% a year, then in retirement one may safely withdraw 8% to live on.  That advice gave professional financial advisers heartburn, with one even saying that if Ramsey were in their profession, he would be liable for malpractice for that advice.  They point out that the real, annualized return on stocks is about 10%, not 12%, and that’s before mutual fund fees, etc. are deducted. Counting on that high of a return to justify an 8% withdrawal rate in retirement is a recipe for disaster, they claim.  The retiree’s portfolio could be exhausted well before he is in his early 80’s.
To his credit, Ramsey has apparently been steering away from investment as a topic of conversation and focusing on the fundamentals of personal finance, namely, getting out of debt.  Nevertheless, I side with the critics on this issue.  The generally accepted rate of drawing down a retirement portfolio, based on study after study, is 4% annually, adjusted each year for inflation.  Some advisors are even going lower (not higher) now, suggesting that 3% is a more reasonable withdrawal rate to ensure money doesn’t run out before about age 95-100.  Score one for the Ramsey critics.
So after two rounds, it’s a draw.  But next week will be decisive, and I will explain what I think is Dave Ramsey’s real flaw.

Until then,


“Listening to good advice is worth much more than jewelry made of gold.  A messenger you can trust is just as refreshing as cool water in summer.” Proverbs 25: 12, 13 CEV

Thursday, May 2, 2019

Lucky Thirteen

Keep your eye on number 13.  That’s the spot in which Christian Wilkins was taken in last month’s NFL draft, during the first round, the thirteenth pick overall, by the Miami Dolphins. 
I don’t expect him to wear the #13 jersey when he takes the field, but he should.  It’s certainly not his unlucky number.  In fact, he should buck convention and make it his lucky number.  Wilkins does have a history of going against the norm—and never so much as when he is handling money.
According to Wilkins, his teammates at Clemson know him as “the cheapest guy in the world”.  He’s the one in the restaurant that asks for a glass of water, six slices of lemon, then uses those plus a few sugar packets to make lemonade.  Do you know any college kids that live like that?  Actually, I did.   He did some pretty amazing stunts to live on a limited budget.  But living frugally is definitely not in vogue with today’s college crowd.  They have their own cars to go anywhere they wish.  Wilkins only had a bike.  They spend freely with their own or their parents’ credit card(s).  Wilkins did not use credit cards.  The average education-related debt of a college student at graduation now is nearly $40,000.  Wilkins leaves Clemson with $15,000 in savings.  He did attend on a scholarship, but even scholarship students typically run up debt by living beyond the financial allowance for room and board and by spending on things the scholarship money doesn’t cover.  And who comes out of college with thousands in his savings account?
I was intrigued to read in the Wall Street Journal about Wilkins’s budgeting plan.  It was a version of the old “envelope system”.  He divided his monthly allowance into four bank accounts, each one devoted to covering certain defined expenses.  If the money ran out in one account before the end of the month, he simply stopped spending on the expenses that account covered.  He didn’t borrow between accounts.  If there wasn’t enough money for it—whatever “it” was—he didn’t buy it.
I will be most interested to see if he can maintain that kind of financial integrity in the face of all the temptations of a rich life in the NFL.  Veteran players on some teams like to have a lavish welcoming dinner for team newcomers and stick the new guy with the tab, which is often tens of thousands of dollars.  Let’s see if that works with Wilkins.  I suspect he’ll have the budget lemonade flowing freely.  Let’s see if he can avoid the get-rich-quick schemes that unscrupulous “advisors” try to foist on these newly rich kids in professional sports.  Let’s see if he can avoid bankruptcy, which even the richest players have often not evaded.  I’ll be rooting for him, if not on the field then certainly off.  Keep your eye on that young man.

Until next time,


“Seest thou a man diligent in his business?  He shall stand before kings; he shall not stand before mean men.” Proverbs 22:29 (King James Version).