Why is Dave Ramsey wrong?

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Ijim
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Why is Dave Ramsey wrong?

Post by Ijim » Sat Nov 29, 2014 8:47 pm

I'm new here and don't want to start a huge debate, but a lot of Dave Ramsey's principals sound pretty solid. I'm not a follower of his but he talks about debt being bad - to pay cash for cars, to pay off your house and other debts prior to investing....and all that money saved on interest is smart. Though he lumps a 9% student loan interest rate with a 4% rate and says they are the same which confuses me a little.

And then he talks about investing 15% of your annual income for retirement - does anyone know where he came up with that number? Does this only work for a 20 or 30 year old?

And I don't believe his comments about specfic mutual funds earning 12% per year - he can't take into account fees and ER...right??? Or does he have such knowledge of investments that he picks mutual funds better than most?

Again, I'm not trying to start a huge debate but I'm new here and i would enjoy an education from the great minds on yhis forum.
Last edited by Ijim on Sat Nov 29, 2014 8:55 pm, edited 1 time in total.

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Re: Why is Dave Ramsey wrong?

Post by White Coat Investor » Sat Nov 29, 2014 8:55 pm

My take here:

http://whitecoatinvestor.com/how-dave-r ... ou-astray/
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.
edit: Fixed the link...whoops
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Re: Why is Dave Ramsey wrong?

Post by Ijim » Sat Nov 29, 2014 8:59 pm

EmergDoc wrote:His investing advice, however, leaves a lot to be desired.
Thanks for the information Doc!
Would you care to elaborate on this point at all? Thanks

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Re: Why is Dave Ramsey wrong?

Post by nisiprius » Sat Nov 29, 2014 9:04 pm

He's wrong because he steers listeners to his network of "endorsed local providers" (ELPs) without making it sufficiently clear that his firm has a financial relationship with them.

https://www.daveramsey.com/elp/faq/#a4
Do ELPs pay a fee?

Yes. For ELPs, the program is a form of local advertising. It’s a way for them to attract clients who follow Dave’s principles, just like they do. We use the fees to fund the large team and technology required to operate the ELP program.
Last edited by nisiprius on Sat Nov 29, 2014 9:13 pm, edited 2 times in total.
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Re: Why is Dave Ramsey wrong?

Post by camptalcott » Sat Nov 29, 2014 9:05 pm

As a general rule I don't like television "gurus". I find them to preachy and too "know it all". I find that for a man who made all the mistakes he supposedly preaches against he definitely shows a distinct lack of compassion.


He is good at trying to keep folks out of debt, pretty much just like Suzy, Gail Vaz Oxlade and others.

As previous posters mentioned I don't agree with his investment advice but I definitely don't like taking advice from folks on tv that know nothing about my life at all.

Lastly, his job is too make money hawking his stuff.

edited to add: I watched him 3 or 4 times. that was enough for me. I still can't figure out the 12% return number he advocates.
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Re: Why is Dave Ramsey wrong?

Post by JoMoney » Sat Nov 29, 2014 9:06 pm

I liked Dave Ramsey's show, but gave up listening to it as I got tired of his occasional political rants, and bizarre agitated defensive arguments against the faceless Internet/Twitter feeds that would point out conflicting views .
I think he's great at motivator for getting out of debt. I think his views about credit cards are a bit extreme, but if you know you have a problem with credit it may be like "giving a drunk a drink".
He gives paid endorsements for mutual fund salesman (i.e. his "Endorsed Local Providers"), that by itself makes his advice for investing suspect to me.
He has explained his 12% argument by pointing out that 12% is the average annual return of the stock market... note that it's not the compound return but the "average annual return" and that makes a difference. Further, he promotes the idea that his smart ELP's will guide you into mutual funds that can beat the market. Bogleheads know better.
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Re: Why is Dave Ramsey wrong?

Post by White Coat Investor » Sat Nov 29, 2014 9:16 pm

Ijim wrote:
EmergDoc wrote:His investing advice, however, leaves a lot to be desired.
Thanks for the information Doc!
Would you care to elaborate on this point at all? Thanks
I wrote 1500 words on it. That's what the link is.
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Re: Why is Dave Ramsey wrong?

Post by nisiprius » Sat Nov 29, 2014 9:18 pm

EmergDoc wrote:
Ijim wrote:
EmergDoc wrote:His investing advice, however, leaves a lot to be desired.
Thanks for the information Doc!
Would you care to elaborate on this point at all? Thanks
I wrote 1500 words on it. That's what the link is.
Unfortunately, it isn't. It's a link to an essay about financing your kids' college. You probably meant to post this other link:

How Dave Ramsey may be leading you astray
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Re: Why is Dave Ramsey wrong?

Post by ObliviousInvestor » Sat Nov 29, 2014 9:31 pm

This comes from another thread. It's my attempt at a generic Boglehead-ish view of Ramsey's investing advice.

-----
From the Boglehead perspective, Ramsey's investing advice ranges from very good to very bad.

The very good:
Ramsey suggests that you not try to time the market. Most Bogleheads agree.

Ramsey suggests that you not try to outperform the market by picking individual stocks. Most Bogleheads agree.

The not-so-good:
Ramsey recommends using commission-paid advisors to buy actively managed mutual funds. Bogleheads would suggest using no-load, low-cost, passively managed mutual funds (e.g., index funds) instead. And, in the cases in which it makes sense to use an advisor, most Bogleheads prefer to use a fee-only advisor so as to reduce conflicts of interest.

The bad:
Ramsey recommends a portfolio entirely of stocks -- that is, no bonds or CDs. For most investors, this will simply not be an appropriate level of risk.

Ramsey quotes a 12% annual return as what you can expect from stocks. This is higher than historical figures support. For example, according to the 2012 Ibbotson SBBI Classic Yearbook, from 1926-2011, U.S. stocks (as measured by the S&P 500 while it has existed, and the S&P 90 prior to that) have averaged a 9.8% return. When you adjust for inflation, that figure is just 6.6%. When you account for investment costs or taxes, it's even lower.

To make matters worse, some Bogleheads suspect that the future may look worse than the past century of U.S. results. So, depending on who you ask, even the 6-7% historical after-inflation figure may be too optimistic a projection.

The very bad:
Ramsey recommends using an inflation-adjusted 8% withdrawal rate in retirement, suggesting that doing so would allow your level of spending to keep up with inflation while keeping your nest egg intact. This is a serious problem. An 8% withdrawal rate presents a very significant possibility of portfolio depletion. For example, according to the updated "Trinity Study," such a withdrawal rate (with the 100%-stock portfolio Ramsey recommends) would only have a 44% chance of lasting 30 years. (And again, some Bogleheads would argue that historical figures are too optimistic to use for planning purposes.)
Mike Piper, author/blogger

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Re: Why is Dave Ramsey wrong?

Post by JoMoney » Sat Nov 29, 2014 9:53 pm

He's factually accurate at quoting the arithmetic "average annual return" of the S&P as 12%, but this is meaningless because it's the geometric/cumulative return that someone who owned it would have achieved (before expenses).
http://www.ehow.com/info_8526561_cumula ... turns.html
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Re: Why is Dave Ramsey wrong?

Post by TradingPlaces » Sat Nov 29, 2014 10:05 pm

nisiprius wrote:
EmergDoc wrote:
Ijim wrote:
EmergDoc wrote:His investing advice, however, leaves a lot to be desired.
Thanks for the information Doc!
Would you care to elaborate on this point at all? Thanks
I wrote 1500 words on it. That's what the link is.
Unfortunately, it isn't. It's a link to an essay about financing your kids' college. You probably meant to post this other link:

How Dave Ramsey may be leading you astray
+1. I went there to read about Dave Ramsey and all I saw was a bunch of talk about how to fund college education.

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Re: Why is Dave Ramsey wrong?

Post by Twins Fan » Sat Nov 29, 2014 10:39 pm

Ijim wrote:I'm new here and don't want to start a huge debate, but a lot of Dave Ramsey's.
Too late... :D Mentioning his name tends to stir stuff up, but that's okay.

I would say overall the feeling about Dave is similar to yours... his advice about getting out of debt is good, his advice about investing not so much. I don't recall his take on paying down/off the mortgage, but that's another often debated topic on it's own (invest or pay off).

Personally, I don't listen to him or any other voices out there.

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Re: Why is Dave Ramsey wrong?

Post by VictoriaF » Sat Nov 29, 2014 10:49 pm

Ijim wrote:I'm new here and don't want to start a huge debate, but a lot of Dave Ramsey's principals sound pretty solid. I'm not a follower of his but he talks about debt being bad - to pay cash for cars, to pay off your house and other debts prior to investing....and all that money saved on interest is smart.
Ramsey sells financial products. Some of his advice is prudent, so that his audience would buy into his entire package, including its imprudent components. This is a standard sales technique.
Ijim wrote:Though he lumps a 9% student loan interest rate with a 4% rate and says they are the same which confuses me a little.
He does not care about your loans. He cares about selling you his funds.
Ijim wrote:And then he talks about investing 15% of your annual income for retirement - does anyone know where he came up with that number? Does this only work for a 20 or 30 year old?
Probably some silly calculation that if you save 15% of your income for 30 years you would get 80% of your income replacement in retirement. Or something like that.

The problem with this approach is that it does not account for different stages in one's life, the risk of various professions, and the total income. if you are 30 years old, have just bought a house and are paying for daycare of your two children, you may not be able to save too much. If you are 50 years old, have a paid-off house and your children grew out from needing your support, you may be able to save 70% of your annual income.
Ijim wrote:And I don't believe his comments about specfic mutual funds earning 12% per year - he can't take into account fees and ER...right??? Or does he have such knowledge of investments that he picks mutual funds better than most?
He does not have superior knowledge. He is compensated for promoting specific mutual funds.

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Re: Why is Dave Ramsey wrong?

Post by carofe » Sun Nov 30, 2014 1:05 am

I tell you my own experience, I came to the USA when I was 30 years old. When I came I wanted to learn and get some good advice about finances in here since I realized that a lot of that in USA is DIY (in Europe it is a lot of "The-Gov't-Does-It-For-You", you don't need to worry that much about Emergency Funds, Investing and all that, that's why you pay a lot in taxes in there).
So I got some books from Dave Ramsey. I learned a lot in his books, ER funds, budgets, investing, insurances, and a lot of good advice about money and life in general.
I still read his advice.

When I got here, I didn't have that much savings so I went and I bought a car with a loan at a low interest of 3.99% and I didn't have that much in ER. So, according to Ramsey, I needed to do this:
*ER of $1000
*Pay the car loan
*Build ER for 3-6 months of expenses
*And then, contribute to my 401k!!
What?!!
*Paying sooner the car loan would take me between 2 to 3 years, I don't think being with an ER of only $1000 for 2-3 years is a wise decision
*Building an ER of 3 to 6 months would take me another 1-2 years.
So, I would miss 3-5 years of the match of my employer and the market growth!!

So, I decided to change my plan after I discovered Bogleheads.
*Build my ER of $4k
*Not pay the car loan sooner, why? the interest is low, my Net Worth will increase faster if I invest that money instead of paying the debt sooner.
*Get good insurances!
*Keep building my ER slowly at the same time I'm contributing to my 401k to the maximize my employer contribution.

So far, I'm way happier with my decision. Now I have an ER of 3 months expenses and a decent 401k balance.
I think Dave Ramsey helps a lot to the people that are very very deep in the mess, but definitely, for investing and overall strategies, Bogleheads is better.
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Re: Why is Dave Ramsey wrong?

Post by LongerPrimer » Sun Nov 30, 2014 1:23 am

His target audience is solid middle income and lower income
If a family is in debt, how does that family get into investments for retirement and who will help this family?
This is the market of ALW, Orman, and Ramsey. :annoyed

Tony Robbins' new book is targeted towards solid mid income to the 35% bracket. He devotes about 10 pages to debt. :annoyed

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Re: Why is Dave Ramsey wrong?

Post by mhalley » Sun Nov 30, 2014 2:07 am

A few of the things I don't like about Dave is the absolute of no debt. Sure, debt can be a curse. But, Debt, when used responsibly, can enable a lot of good things. A zero percent car loan, a zero percent credit card offer, chance to earn points or cash back on credit cards, going to college to get a reasonable degree for a reasonable fee (not his infamous german polka dancing history major). He always talks about not having credit cards and a credit history is no problem, but I wonder exactly how difficult it is to do many things that a good fico score and a reasonable credit limit makes easier. Is your insurance higher with no credit history? Is it harder to rent an apartment or a car? Exactly how hard is it to get a mortgage with no fico score? Is employment more difficult to find?
Also, if you take his advice you will put off putting money away for retirement for potentially many years, decreasing the 8th wonder of the world, compounding.
If you follow daves program you are most likely going to do much better than most, but I would love to see a survey of people that retired in 2008 with 100 percent stock and expected 12% returns, and where their nest egg is right now. How many stuck with it on the way down, coupled with their living expenses etc. I think the 100% portfolio is way to risky for practically everyone.
Mike

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Re: Why is Dave Ramsey wrong?

Post by Leeraar » Sun Nov 30, 2014 3:39 am

Ijim wrote:And then he talks about investing 15% of your annual income for retirement - does anyone know where he came up with that number? Does this only work for a 20 or 30 year old?
This is a good rule of thumb over a working career. It will buy you a pension at retirement that replaces about 1/3 of your final salary.

15% is the percent of payroll that companies used to spend on their defined benefit pension plans. Think of it this way: 1% saved annually during your career will provide 2% of salary when you retire.

Of course, there are a lot of assumptions here. But, it's a good general rule.

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Re: Why is Dave Ramsey wrong?

Post by Lynette » Sun Nov 30, 2014 10:50 am

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Re: Why is Dave Ramsey wrong?

Post by White Coat Investor » Sun Nov 30, 2014 12:26 pm

nisiprius wrote:Unfortunately, it isn't. It's a link to an essay about financing your kids' college. You probably meant to post this other link:

How Dave Ramsey may be leading you astray
You're obviously right (as usual.) I fixed the original link.
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Re: Why is Dave Ramsey wrong?

Post by White Coat Investor » Sun Nov 30, 2014 12:28 pm

TradingPlaces wrote:
+1. I went there to read about Dave Ramsey and all I saw was a bunch of talk about how to fund college education.
My apologies, I struggle with copying and pasting. :)
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Re: Why is Dave Ramsey wrong?

Post by Ijim » Sun Nov 30, 2014 2:17 pm

LongerPrimer wrote:His target audience is solid middle income and lower income
If a family is in debt, how does that family get into investments for retirement and who will help this family?
This is the market of ALW, Orman, and Ramsey. :annoyed

Tony Robbins' new book is targeted towards solid mid income to the 35% bracket. He devotes about 10 pages to debt. :annoyed
who is ALW?
and i have not heard of Robbins' new book - what is it called?

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Re: Why is Dave Ramsey wrong?

Post by Ijim » Sun Nov 30, 2014 2:37 pm

EmergDoc wrote:
nisiprius wrote:Unfortunately, it isn't. It's a link to an essay about financing your kids' college. You probably meant to post this other link:

How Dave Ramsey may be leading you astray
You're obviously right (as usual.) I fixed the original link.
thanks for updating the link - i just read it all

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Re: Why is Dave Ramsey wrong?

Post by MCraw25 » Sun Nov 30, 2014 3:55 pm

Hi. Here is my take: nothing is wrong with Dave Ramsey. Or Jack Boggle or Jim Cramer...I like all 3. This is financial advise+discussion not a cult...its ok to listen to more than one group. :) I personally like to live like Dave R, invest like Jack Boggle, and gamble from time to time like Jim Cramer. All groups have a few people who think the others are heretics or liars. Chill out everyone, no one knows which view will be the best in the future.

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Re: Why is Dave Ramsey wrong?

Post by Leemiller » Sun Nov 30, 2014 3:59 pm

I really like his advice, even though I don't always follow it. There has been a cultural shift in America from paying cash for cars to always having a payment. Not having a car payment is not only very freeing and allows more money for investment and emergencies but it also helps people avoid having too much car for their income. His housing advice is to buy a 15 year that is not more than 25% of your take home. This is great advice for most people and avoids too much leveraged real estate. I work with many people who lost their homes and ended up digging into their 401ks in the last crisis. Most are in their 50s. Investing in 401ks and IRAs is great, but you also need to be in a position to let it ride for several decades.

Sometimes I listen to his podcasts just to keep a bit more grounded outside of the bubble of my existence.

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Re: Why is Dave Ramsey wrong?

Post by stemikger » Sun Nov 30, 2014 4:11 pm

As others have said getting out of debt is one of the few areas of personal finance where everyone agrees. They may not all agree on the order these debts should be paid off but this is where Dave excels. Even though the math doesn't always add up but the reason he wants you to pay smallest to largest no matter what the interest rates is because you will see small wins and stay motivated.

As a Boglehead I do not agree with his investment advice but I also have a problem with him putting off retirement savings until Baby Step 4. In a perfect world Baby Step 2 should not take more than 18 months but life happens and you can get stuck there too long. I think everyone (even people with debt) should be putting something in their retirement accounts.

Lastly, this is a personal issue with Dave, but I'm not crazy about his style when he seems to get angry at people who disagree with him and I'm also not a fan of his religious views. However, to be fair to Dave he does state that if everyone is not on board this plan is not for you and he also says if you don't like him to interject religion you should listen to another show because that is who he is as a person.

All in all, if you follow his plan you will do well, except you should take everything he says about investing and replace it with what John Bogle says. He wants you to invest in high priced managed funds and he does not think bond funds of any kind should be part of anyone's portfolio no matter what their age. You might find this You Tube video interesting.

http://www.youtube.com/watch?v=iRtFDvGORQk
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Re: Why is Dave Ramsey wrong?

Post by basspond » Sun Nov 30, 2014 4:48 pm

Remember most of his advice is for people who really don't understand finances or are over their heads in debt. Similar to people with addictions, there are hard steps one must take to overcome these problems. I don't understand that most people can't control their spending with credit cards, any extra money just burns a hole in their pocket, always need to have the latest and greatest, and don't understand the miraculous power of compound interest savings and investments.

Nobody is perfect (and he is the 1st to admit he is not) and the only way to receive real saving is to have a relationship with the ultimate advisor.

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Re: Why is Dave Ramsey wrong?

Post by jimb_fromATL » Sun Nov 30, 2014 4:50 pm

The very bad:
Ramsey recommends using an inflation-adjusted 8% withdrawal rate in retirement, suggesting that doing so would allow your level of spending to keep up with inflation while keeping your nest egg intact. This is a serious problem. An 8% withdrawal rate presents a very significant possibility of portfolio depletion.
Even several years into the recession that started in 2001/2002 Dave was ranting against naysayers and math nerds who challenged his numbers, and continued assuring his followers that that they could count on earning 12% as though it were a constant even during retirement. He explained then as now that taking out 8% and earning 12% gives you a 4% COLA increase every year.

Dave has never mentioned the name of the fund that has always done that, but many of Dave's followers speculate that the magic fund he says he has is American Funds Growth Fund of America (AGTHX). That's as good as any to illustrate how bad his advice is in that respect:

If you had retired in 1Q 2000 and followed Dave's promise that you can on earning 12%, and started withdrawing 8% of your nest egg, and increased your withdrawals at 4% per year for inflation/COLA, but only earned the actual returns of AGTHX You'd have been broke in less than 12 years. Even if you did not increase the initial withdrawal to keep up with inflation, you'd still be flat broke by the second quarter of 2013.

This table illustrates the result for starting with $500K and withdrawing 8%, $40K per year, at $3333 per month, and no increases for inflation:

Code: Select all

 
year	APY 1Q	APY 2Q	APY 3Q	APY 4Q		withdraw/mo	bal 1Q	  bal 2Q	  bal 3Q	  balance 4Q
  2000	 17.64	 -1.34	  1.89	 -9.11		   $3333	$512,228	$500,525	$492,878	$471,813
  2001	-14.11	  9.54	 -20.6	 17.43		   $3333	$445,482	$446,112	$413,700	$421,844
  2002	 -1.27	-14.48	-13.64	  6.93		   $3333	$410,517	$385,955	$363,056	$359,325
  2003	 -2.49	 17.21	  3.65	 12.19		   $3333	$347,113	$352,119	$345,311	$345,840
  2004	  3.46	  1.06	 -2.34	  9.63		   $3333	$338,811	$329,701	$317,796	$315,428
  2005	 -1.83	  3.57	  6.93	  5.06		   $3333	$304,002	$296,693	$291,806	$285,470
  2006	  4.37	 -1.58	  1.45	  6.46		   $3333	$278,564	$267,478	$258,437	$252,579
  2007	   1.4	  7.71	  4.43	 -2.72		   $3333	$243,453	$238,111	$230,721	$219,178
  2008	 -7.88	  1.24	-15.04	-23.11		   $3333	$204,954	$195,580	$178,443	$158,522
  2009	   -4.	 16.73	 13.38	  5.85		   $3333	$146,975	$143,068	$137,796	$129,772
  2010	  4.17	 -11.7	  10.7	 10.26		   $3333	$121,095	$107,684	$100,501	 $93,015
  2011	  5.29	  -.69	-16.21	  8.55		   $3333	 $84,207	 $74,067	 $61,241	 $52,488
  2012	 14.58	 -4.19	  7.36	  2.28		   $3333	 $44,302	 $33,875	 $24,440	 $14,561
  2013	  8.56	  3.14	  9.23	   9.4		   $3333	  $4,803	 -$5,185

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Re: Why is Dave Ramsey wrong?

Post by leonidas » Mon Dec 01, 2014 7:55 am

I used to listen to dave on long car rides but I haven't found him on any local stations recently. Some people can't get over his political and religious view, but we seem in sync with those. When we got into a bit of debt during my wifes unemployment his show was a small motivator for us. Now, not as much. Didn't like his attitude with his callers but some people just needed a verbal beat down.

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Re: Why is Dave Ramsey wrong?

Post by stemikger » Mon Dec 01, 2014 8:05 am

Whether you like Dave or dislike him, I think we all agree his investment advice is not appropriate for most people. However, how do you feel about putting off saving for retirement until you get out of debt. In his own words, Dave does say most Gazelle Intense participants get out of debt in about 18 months. Do you think one should save something during that time or do you agree with Dave on this point.
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Re: Why is Dave Ramsey wrong?

Post by Grt2bOutdoors » Mon Dec 01, 2014 8:16 am

I used to watch his call-in program for entertainment only purposes when I had cable. As others have said, he's good at preaching getting out of debt, I don't necessarily agree with his $1K emergency fund that to me is like skating over thin ice on a day that is nearing 36 degrees, hit the wrong patch and you are right back into debt or worse, you drown. I only like his financial planning concerning making choices and staying out debt, I would not listen to his "investment advice", it's terrible.

Really, all of the mainstream programs like Suze Orman and Dave Ramsey do good for the most part but the listener of the programs must want to take positive action for some good to happen. There are books that are fantastic, we have them on the wiki under recommended reading - the biggest problem with books is, if you are illiterate (there are people who to this day can not read because of poor academic preparation, cognitive issues, they don't speak the language) you have zero shot of pulling out of the dive, flipping on the tube increases the chances of success and more viewers means more advertising dollars. It's all about the money, literally. :moneybag
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Re: Why is Dave Ramsey wrong?

Post by Grt2bOutdoors » Mon Dec 01, 2014 8:23 am

stemikger wrote:Whether you like Dave or dislike him, I think we all agree his investment advice is not appropriate for most people. However, how do you feel about putting off saving for retirement until you get out of debt. In his own words, Dave does say most Gazelle Intense participants get out of debt in about 18 months. Do you think one should save something during that time or do you agree with Dave on this point.
If the debt costs 18-23% per year, it's pretty evident that your number one focus should be to get rid of the debt. The focus audience is the middle class, the middle class are also the targeted population of predatory credit card issuers and they are the ones you least suspect still charge such high rates. Those issuers are typically store credit cards like Kohl's, Target, Macy's, Nordstrom, JC Penney, Home Depot, Lowes, Sears the very stores that are frequented by the same class of folks who would watch Dave Ramsey or Suze Orman. An informed consumer can usually bypass these "traps" by just saying "NO" when asked if they'd like to save 10% on today's shopping by getting a store card, but chances are most folks would go for the 10% upfront savings then decide they can't pay back the whole bill and then fall into that trap of paying the high rates I wrote about up above and that is how the debt cycle begins. And god forbid, you miss one payment, then they charge you $35 late payment fees plus the 20+% in interest charges for a bill that was only say $40, talk about usurious. So, under these circumstances, the clear choice is to pay off the debt.
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Re: Why is Dave Ramsey wrong?

Post by Jack FFR1846 » Mon Dec 01, 2014 8:38 am

From what I have seen of him, Dave's advice is targeted to:

People who do not even know that you CAN pay more than the minimum on a credit card bill

Don't do math (why the % does not matter)

Likely has a reasonable fear that their car might not be in the driveway tomorrow because they've missed a few payments

Would prefer to "invest" in lottery tickets because of instant gratification

Think that only the 1% has no debt

Believe that they have a big pot of SS gold waiting for them at retirement time

Will probably meet their eventual demise shortly after shouting "watch this!"


Clearly not Bogleheads. I think the market assessments and stock picks are there to show Joe Six Pack how smart he is
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Re: Why is Dave Ramsey wrong?

Post by vested1 » Mon Dec 01, 2014 8:49 am

Jack FFR1846 wrote:
Will probably meet their eventual demise shoutly after shouting "watch this!"
Thanks for the laugh this morning. Sadly, the Jackass crowd won't be reading this because they'll be hurtling down a precipice on a skateboard.

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Re: Why is Dave Ramsey wrong?

Post by Lynette » Mon Dec 01, 2014 8:51 am

Grt2bOutdoors wrote:
stemikger wrote:Whether you like Dave or dislike him, I think we all agree his investment advice is not appropriate for most people. However, how do you feel about putting off saving for retirement until you get out of debt. In his own words, Dave does say most Gazelle Intense participants get out of debt in about 18 months. Do you think one should save something during that time or do you agree with Dave on this point.
The focus audience is the middle class, the middle class are also the targeted population of predatory credit card issuers and they are the ones you least suspect still charge such high rates.
Who is this middle class? I attended the Financial Peace University class at my church. In addition to debt reduction, it was promoted as learning about mutual funds etc. 1/3 of my class had no debt. I only attended a few classes as I was travelling - and I was bored. I did not hear any mention of his ESPs. I wanted to figure out how to track where my money was going. His radio station is not available in my area and his folksy style doesn't go over well. In fact the facilitator called a little corny.

So, as someone else said, take what you like from Ramsey, Bogle or Orman, then figure out what you want to do. I'm not entirely committed to some of what I perceive to be Boglehead's philosophy. Under no condition am I giving up my Wellington fund. :D

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Re: Why is Dave Ramsey wrong?

Post by Ijim » Mon Dec 01, 2014 12:17 pm

stemikger wrote:As others have said getting out of debt is one of the few areas of personal finance where everyone agrees. They may not all agree on the order these debts should be paid off but this is where Dave excels. Even though the math doesn't always add up but the reason he wants you to pay smallest to largest no matter what the interest rates is because you will see small wins and stay motivated.

As a Boglehead I do not agree with his investment advice but I also have a problem with him putting off retirement savings until Baby Step 4. In a perfect world Baby Step 2 should not take more than 18 months but life happens and you can get stuck there too long. I think everyone (even people with debt) should be putting something in their retirement accounts.

Lastly, this is a personal issue with Dave, but I'm not crazy about his style when he seems to get angry at people who disagree with him and I'm also not a fan of his religious views. However, to be fair to Dave he does state that if everyone is not on board this plan is not for you and he also says if you don't like him to interject religion you should listen to another show because that is who he is as a person.

All in all, if you follow his plan you will do well, except you should take everything he says about investing and replace it with what John Bogle says. He wants you to invest in high priced managed funds and he does not think bond funds of any kind should be part of anyone's portfolio no matter what their age. You might find this You Tube video interesting.

http://www.youtube.com/watch?v=iRtFDvGORQk
I just watched the YouTube clip, is Dave factually correct? Is the bond market nearly as Volatile as the stock market but with a lower ceiling?? And he made it sound as though the stock and bond markets rise and fall at similar times when he said the graphs/charts could lay on top of one another --- that's incorrect isn't it? I'm new here so can anyone make heads or tails of this for me please? Thanks

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Re: Why is Dave Ramsey wrong?

Post by Lynette » Mon Dec 01, 2014 12:50 pm

.....
Last edited by Lynette on Wed Dec 06, 2017 9:06 am, edited 1 time in total.

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Re: Why is Dave Ramsey wrong?

Post by Clearly_Irrational » Mon Dec 01, 2014 2:03 pm

camptalcott wrote:I still can't figure out the 12% return number he advocates.
Nominal average return of the stock market 1972-2013 is 12.12%. That's incredibly misleading, but it is true.

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Re: Why is Dave Ramsey wrong?

Post by MathWizard » Mon Dec 01, 2014 2:41 pm

Ijim wrote: ...
And then he talks about investing 15% of your annual income for retirement - does anyone know where he came up with that number? Does this only work for a 20 or 30 year old?
A way to look at this is to use the "rule of 72"

If we assume a real (inflation adjusted) return of 4%, then an investment will approx double
over 72/4 = 18 years. Also assume that your salary raises exactly at the rate of inflation.

If we compute the ending value of saving 15% of gross salary over 18 years compounding 4% annually, we get
about 3.85 times annual salary.

Now, in the next 18 years, this 3.85 x doubles, and we get another 3.85 from saving again for 18 years, so we'd have
3.85 times 3 = 11.55 time salary at the end of 36 years.

In another 9 years, we'd get sqrt(2) time the 11.55 x and we also save another 1.8 x salary for a total of
16.28 times salary.

So saving 15% annually would give you 11.55 time salary after 36 years. Together with SS, that would probably be enough.
Also, since you saved 15% you only had 85% to spend. In addition, you won't be paying 7.62% FICA and your income tax will
probably be less.

If you save at that rate, with only a 4% real return, you should be all right, and if you save for 45 years, you'd even be better off.

I had heard a 10% rule in the past, but I believe that would need a higher rate of return to support retirement.

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Re: Why is Dave Ramsey wrong?

Post by Ice-9 » Mon Dec 01, 2014 2:50 pm

Ijim wrote:
I just watched the YouTube clip, is Dave factually correct? Is the bond market nearly as Volatile as the stock market but with a lower ceiling?? And he made it sound as though the stock and bond markets rise and fall at similar times when he said the graphs/charts could lay on top of one another --- that's incorrect isn't it? I'm new here so can anyone make heads or tails of this for me please? Thanks
Here is a growth of $10k chart for Total Stock Market (blue) and Total Bond Market (yellow). I don't know what Dave was talking about when he said that.

Image

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Re: Why is Dave Ramsey wrong?

Post by White Coat Investor » Mon Dec 01, 2014 3:05 pm

Jack FFR1846 wrote:
Will probably meet their eventual demise shoutly after shouting "watch this!"


Clearly not Bogleheads.
Hey!

First of all, the quote is, "Hold my beer and watch this!"

Second, how we choose to meet our demise has nothing to do with the way we invest! :)
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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Re: Why is Dave Ramsey wrong?

Post by JoMoney » Mon Dec 01, 2014 3:10 pm

Ijim wrote:...I just watched the YouTube clip, is Dave factually correct? Is the bond market nearly as Volatile as the stock market but with a lower ceiling?? And he made it sound as though the stock and bond markets rise and fall at similar times when he said the graphs/charts could lay on top of one another --- that's incorrect isn't it? I'm new here so can anyone make heads or tails of this for me please? Thanks
I think you have stretch things a bit to get there, but if you look at narrow groups of specific types of bonds and specific time periods, ... maybe?... still a tough stretch though.
From 1926 to 2010 stocks had fewer negative three year rolling periods than 10-Year treasuries. The negative periods that occurred in stocks were far larger when they occurred, but there were fewer of them if you only look at "rolling 3 year periods".
Junk Bonds tend to be correlated with stocks, especially in certain types of crisis (i.e. 2008-2009). If you chart JNK over the S&P500 during the global financial crisis they look like they're falling in unison.
There's probably other factoids you could use to push a one side of the story but it glosses over facts such as that most people don't suggest using 10-Year bonds. Somewhere around 5-7 years is more typical. Most people discourage using junk bonds. One of the main points of bonds is that they have a promised return of principal plus interest, regardless of any volatility in market price based one interest rate changes, high-quality bonds essentially guarantee you a return over any specific time period. Stocks can't do that.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Why is Dave Ramsey wrong?

Post by JupiterJones » Mon Dec 01, 2014 3:11 pm

Ijim wrote:...to pay off your house and other debts prior to investing
Actually, his standard advice is to pay off all debts except the house prior to investing.

It's only after you're already putting 15% toward retirement investing and started saving for your children's college (if you have children) that you'd then focus on paying down the mortgage.

Though he lumps a 9% student loan interest rate with a 4% rate and says they are the same which confuses me a little.
I've never heard him say that they were "the same", except inasmuch as they are both debt and therefore both things that you want to get rid of as fast as possible.

You might be thinking about his advice on which debt to pay off first--he favors prioritizing debts by size (smallest first) rather than interest rate (highest first). In other words, while those two loans you mention aren't the same, the rate you're paying on them would not factor into which one you paid off first, under the Ramsey method. Only the balance on those loans matters.
Stay on target...

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Re: Why is Dave Ramsey wrong?

Post by claudia » Tue Dec 02, 2014 4:41 pm

I like Dave Ramsey and his teaching is very basic and easy to understand. I think his teaching is more for the beginners or the dummies who have no idea about financial management. I think his philosophy is helpful if you follow as a beginner. Once you grasp the basic principle and are back on track financially, you can start doing your own thing based on your personal situation.
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Re: Why is Dave Ramsey wrong?

Post by 3CT_Paddler » Tue Dec 02, 2014 5:44 pm

VictoriaF wrote:
Ijim wrote:I'm new here and don't want to start a huge debate, but a lot of Dave Ramsey's principals sound pretty solid. I'm not a follower of his but he talks about debt being bad - to pay cash for cars, to pay off your house and other debts prior to investing....and all that money saved on interest is smart.
Ramsey sells financial products. Some of his advice is prudent, so that his audience would buy into his entire package, including its imprudent components. This is a standard sales technique.
Ijim wrote:Though he lumps a 9% student loan interest rate with a 4% rate and says they are the same which confuses me a little.
He does not care about your loans. He cares about selling you his funds.
Ijim wrote:And then he talks about investing 15% of your annual income for retirement - does anyone know where he came up with that number? Does this only work for a 20 or 30 year old?
Probably some silly calculation that if you save 15% of your income for 30 years you would get 80% of your income replacement in retirement. Or something like that.

The problem with this approach is that it does not account for different stages in one's life, the risk of various professions, and the total income. if you are 30 years old, have just bought a house and are paying for daycare of your two children, you may not be able to save too much. If you are 50 years old, have a paid-off house and your children grew out from needing your support, you may be able to save 70% of your annual income.
Ijim wrote:And I don't believe his comments about specfic mutual funds earning 12% per year - he can't take into account fees and ER...right??? Or does he have such knowledge of investments that he picks mutual funds better than most?
He does not have superior knowledge. He is compensated for promoting specific mutual funds.

Victoria
Victoria, you seem to jump to a very negative conclusion. I don't know how much he is compensated by ELP's from mutual funds, but I would guess it is a fraction of what he gets from his radio shows and book sales. I think he incorrectly believes that he can pick good people to pick good funds... which is a very common assumption among investors. I know many Bogleheads on here have benefitted from his advice without paying him a dollar.

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Re: Why is Dave Ramsey wrong?

Post by LongerPrimer » Tue Dec 02, 2014 5:56 pm

stemikger wrote:Whether you like Dave or dislike him, I think we all agree his investment advice is not appropriate for most people. However, how do you feel about putting off saving for retirement until you get out of debt. In his own words, Dave does say most Gazelle Intense participants get out of debt in about 18 months. Do you think one should save something during that time or do you agree with Dave on this point.

I think you made over reaching assumptions :oops:
Yes I do agree with DR. :annoyed
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Re: Why is Dave Ramsey wrong?

Post by rob » Tue Dec 02, 2014 6:02 pm

JupiterJones wrote:You might be thinking about his advice on which debt to pay off first--he favors prioritizing debts by size (smallest first) rather than interest rate (highest first). In other words, while those two loans you mention aren't the same, the rate you're paying on them would not factor into which one you paid off first, under the Ramsey method. Only the balance on those loans matters.
I had not heard that and while I agree that only SOME of his advice is solid and the rest bunkum... I wonder how much psychology plays into that been the right call for most people in debt...... To see some progress on smaller loans rather than thinking in maths terms.... Interesting topic....
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Re: Why is Dave Ramsey wrong?

Post by mhalley » Tue Dec 02, 2014 6:08 pm

I think psychology is the reason he advocates paying the small debts off first. Everyone would agree that mathematically, you get more bang for the buck by paying off the highest interest rate loan first. But if the high interest rate loan is 10k, and the low one is 500 dollars, you get a psychological boost by seeing that debt go away. This makes you excited, you are seeing some progress, so you can become "gazelle intense" about continuing the debt snowball. Seeing 500 dollars come off that 10k statement just doesn't have the same impact.
Mike

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Re: Why is Dave Ramsey wrong?

Post by Clearly_Irrational » Tue Dec 02, 2014 6:19 pm

mhalley wrote:I think psychology is the reason he advocates paying the small debts off first.
In addition I think there is a very positive bonus to optimizing free cash flow for a person in that situation. Paying off the smaller debts increases the size of your safety buffer in a way that paying down larger debts often doesn't.

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Re: Why is Dave Ramsey wrong?

Post by JupiterJones » Tue Dec 02, 2014 6:24 pm

mhalley wrote:I think psychology is the reason he advocates paying the small debts off first.
Yes, I think the motivational aspect is the main reason he recommends it.

But there's also the cash-flow advantage, which shouldn't be overlooked. It's a risk management move. By paying off smaller debts first, you're more quickly freeing up the money that was forced to go toward that debt. You're more quickly increasing the portion of your paycheck that you have control over. While you will ideally throw that money toward the next debt, you're not forced to... which sure is nice in an emergency.

I liken it to taking off in a plane. Typically, the angle at which you climb isn't necessarily the angle that uses less fuel or gives you the best forward ground-speed. It's the angle that gets you the highest altitude as quickly as possible, even if that increases the cost and time of the entire trip. Because altitude equals safety if something goes wrong.
Stay on target...

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Re: Why is Dave Ramsey wrong?

Post by 1210sda » Tue Dec 02, 2014 7:29 pm

The longer you are a Boglehead, the less likely you will need his guidance.
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