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
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,
Roger
“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
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