Dave Ramsey’s Awful Advice

If you’ve been reading this blog, you know that I am not a fan of gurus.  Gurus are usually people with an easily-understood message that appeals to the desperate and inexperienced.  Unfortunately, more often than not, key parts of the advice they give are harmful to the financial well-being of their adherents.  This is especially true of ultra-popular faith-based financial guru Dave Ramsey.

Let’s look at a few of the whoppers Dave tells, and examine his possible motives for doing so.

Dave Ramsey’s Awful Advice

The Debt Snowball – Dave Ramsey advocates a “debt snowball” debt repayment method, where the person in debt arranges their debts from smallest to largest, paying them off in that order.  Dave believes that this method is advantageous for those who are buried under crushing debt because it allows for an immediate psychological “win” as the smallest debts are paid off quickly.

The obvious problem with this method is that for those who are truly mired in debt, it may very likely extend the time needed to be debt free, and thus cost the person far more in the end.  If our goal is truly to look after the financial health of others, we have a moral responsibility to teach them the best way to get there.

12% Average Returns – Dave Ramsey also likes to use 12% as the rate of return for all of his investing advice.  On his own web site, he says that the average return of the S&P 500 since inception is 12% per year.

There’s just one problem.  It isn’t.  First off, the S&P 500 as we know it today has only existed since 1957, not 1926, as Dave states.  If you look at the modern history of the S&P 500 (1957 to 2015) and reinvest all dividends, you get an annualized return of 9.98%.  Even if you include the data from the first S&P index through today, you still only get about 10%.  Adjust for inflation and you get about 7%. Try it for yourself!

This probably shouldn’t be that surprising, considering Dave doesn’t seem to actually know what the S&P 500 is.  He claims that it’s the 500 largest companies on the New York Stock Exchange (which is closer to what the Fortune 500 is), while the actual inclusion criteria completely contradict that claim.

All Debt is Poison – Regardless of how sophisticated or unsophisticated one is financially, Dave is pretty absolute in his condemnation of debt.  Regardless of the interest rate, Dave counsels his readers to pay it all down, and avoid it entirely in the future.  He does not agree that credit cards (when paid off monthly, thus costing the user nothing) can be used effectively when disciplined, he does not see a low-interest rate mortgage as an inflation hedge.

On one hand, I like this advice because I too believe that debt is poisonous.  However, I also recognize that if you already have a low-interest mortgage, it makes no sense to pay it down if the rate is at or near the rate of inflation.

This advice is really more inefficient than anything else.  While it’s not optimal to pay down low interest rate debt before investing, it’s also not as damaging as some of the other advice.

Roth IRAs are better than Traditional IRAs – Dave pushes hard for readers to use a Roth IRA once they max out employer matching in a 401(k), but there are two vehicles that should probably come first:  The HSA, and a traditional IRA.  A Roth IRA is only better than a traditional IRA in retirement if you expect to be paying higher taxes in retirement– something almost nobody will be. If you want to see the (mathematically) optimal investment order, it’s on the early retirement infographic.

Why does Dave give this advice?  I honestly can’t figure it out.  It’s possible that he just doesn’t know any better.  However, that’s not acceptable when you are peddling your advice via radio, literature, and online.

A More Self-Serving Motive?

In the “12% Average returns” section above, I told a little lie of my own.  I said there was one problem with Dave Ramsey’s statement that the market returns 12% over time.

There’s actually a second problem.  Dave doesn’t actually advise you to purchase products which beat the market over retirement-length timeframes.  He refers his readers and listeners to his “Endorsed Local Providers,” an organization of financial counselors who, according to numerous accounts, generally suggest that people purchase expensive “front load” funds from American Funds.  Sickeningly, Dave’s ELPs are all commission-based, and thus have absolutely no legal (fiduciary) responsibility to look out for their client’s best interests.  They also aren’t legally obligated to divulge the referral fees that Dave receives from the fund companies.

If you are reading because you are trying to understand what the catch is with Dave Ramsey’s advice, you’ve found it.  You will spend a fortune purchasing, owning, and ultimately selling these funds, and you are highly unlikely to match or beat the market.  By contrast, you can match the market’s returns (and you should!) without paying any load, without paying huge ongoing costs, and without paying transaction costs when you get out.

Dave outright says that “mutual funds” (without naming names) tend to beat the market.  This is a complete fabrication– almost no mutual funds beat the market over the medium term, let alone retirement-length time periods.   Dave routinely claims that any suggestion to the contrary is false, which presents something of a problem: If you accuse those calling out your untruths of being liars, you muddy the water and create a situation in which you might salvage some business.

Most tellingly, Dave’s site advises against use of Exchange Traded Funds without ever explaining why.  It simply states “Dave does not own ETFs and does not recommend them as part of your investment plan. ETFs are baskets of single stocks that are intended to operate like mutual funds, but they are not mutual funds.”  Ramsey is ruling out ETFs, many of which outperform everything he does advise (while simultaneously costing the investor far, far less, in the case of Vanguard ETFs), and gives no legitimate reason for doing so.

Though it’s impossible to conclusively prove Dave’s specific motives without a supervillain-style monologue before he cuts me in half on the laser table, it’s difficult not to conclude that Dave uses some decent advice, charisma, and religious piety as the delivery method for a whole lot of potentially damaging suggestions.

Love Dave? Love Dave but disagree with his advice? Love Dave and currently soaking your torch in kerosene and wondering to whom you lent your pitchfork?  Let me know in the comments! 

18 thoughts on “Dave Ramsey’s Awful Advice

  1. Hannah

    I will come to Dave Ramsey’s defense and say that most people are clamoring for a plan, and Dave is one of the few people who will give them one, no matter what their situation.

    Yes the ELP thing isn’t my favorite, nor is the 12% example (though that’s a common ROI in real estate, so I don’t get too hung up on that), but most people need to get rid of the weight of debt, and some studies show that the debt snowball tends to work more often than the avalanche (because math and psychology work differently).

    As far as ETFs, I own them, but due to the nature of trading and the high number of Robo-Advisors pushing people to the same 2-3 funds, the risk adjusted ROI tends to be a bit lower than a corresponding mutual fund though the tax loss harvesting benefits outweigh that factor in my opinion.

    1. The Vagabond Post author

      Hi Hannah, thanks for commenting! I definitely agree that Dave gives people a framework to get rid of their debt (despite it being less than optimal). I don’t fault him for that at all– in the end, the best plan for getting out of debt is the one that someone will actually follow.

      Definitely the part that makes me most uncomfortable is the aggressive pushing of exploitative investment strategies. Dave seems to stubbornly and consciously push investments that benefit him and delay or in some cases sabotage his listeners and readers. After all this time, it would be tough for him to claim that he simply didn’t know that the front loads and high expense ratios harm his fans, and to me, it really calls into question his fundamental motivations.

  2. Maggie

    I agree with Hannah on those points: I hate the ELP thing and the 12% return rate the most and people are just looking for SOMEONE to tell them the baby steps to take to make good financial decisions. Dave just seems to talk the loudest. I do like his emphasis on giving and debt snowballs do work (although it makes the most sense to snowball them in order of interest rate from highest to smallest). But I do think it’s funny how so many Dave advocates have no idea how to maximize a credit card (or even use one). We’ll just head to Europe while they dole out the cash…

    1. The Vagabond Post author

      Thanks, Maggie. I agree that the people turning to Dave are in over their heads. I want to clarify that I’m not saying that debt snowballs can’t work, just that those who can ill afford to pay it are paying what is often even more interest to the credit card companies.

  3. Our Next Life

    Admittedly, we’ve never seen or heard Dave’s show, but we’re certainly familiar with his debt snowball approach since it’s widely discussed on PF blogs. For people who have their finances in order, and are ready to make changes at all costs, I agree with you — they’re better off going with the debt avalanche method. But, for those who don’t have as much intrinsic motivation, I do think the snowball makes sense, and the power of the wins can really help propel people forward.

    We have an upcoming post about this, but sometimes it does make sense to prepay your mortgage — like in our case, when we retire in a couple years, we’d lose out on pretty huge Obamacare subsidies if we needed enough income to cover our living expenses and our mortgage payment. So even though our mortgage rate is super low, we’re far better off paying the thing off while we have employer-provided insurance, and then keeping our monthly expenses as low as possible once we’re on our own for health care. Worth considering!

  4. Fervent Finance

    As much as I disagree about his advice to those of us knowledgeable about the subject, he’s got to get across to the people who have credit card debt, don’t know what a mutual fund is or a 401k, etc. Those people need a slap in the face, and he’s that person to give them that. But for us, I agree, his advice isn’t very useful.

    1. The Vagabond Post author

      I do believe that there’s a place for his advice on debt repayment if it’s literally the only way to convince someone to do pay off debt, but I’m still pretty troubled by Dave’s shilling for his advisory services and American Funds, which are actively harmful to his fans. The fact that he shouts down any suggestion to the contrary is pretty problematic to me. Honestly, I think he’s acting to protect his income at the expense of the well-being of his readers and listeners.

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    1. The Vagabond Post author

      Ha! Thanks! To be honest, I hesitated on whether I should write this article in the first place- I know he’s a beloved figure to some, and I get why… but I just couldn’t leave the sketchy stuff he says and does unsaid.

  6. ZJ Thorne

    As a person wary of hierarchies, Dave never appealed to me. Anyone making money off of you but hiding it behind charisma is not to be trusted.

    The 12% lie makesme so mad.

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  8. tom

    Dave Ramsey has so many conflicts of interest that he does not reveal and his numbers and percentages are complete fantasy, that his investment advice should not be taken seriously by anyone.

  9. Jill

    Thanks for this post. My husband and I have followed Dave’s baby steps for a few years now and we’re close to being debt free (except for the mortgage). I admittedly know very little about investing and I’m happy to hear now (before it is too late) that his investing advice isn’t the best. We never agreed with stopping all retirement investing while working the baby steps, and we also kept a credit card for emergency use because out $1,000 EF did not feel like enough to weather a big storm. I think Dave’s getting-out-of-debt principles are helpful, but he’s gotten so big over the years and has branched out into offering other advice that he doesn’t seem to know enough about. Thanks for the post!

  10. Butch

    You pretty much summarized my disagreements with the Ramsey Way. Well done!

    The biggest one is the 12% return. I look at it from a different perspective. In today’s low interest rate environment, it is unreasonable to expect 12%. Cut it in half, +/- a point or two and be glad when and if you get more.

    The second one is using a credit card and paying it before the due date. I heard him say nobody ever became a millionaire from credit card rebates. I say if someone is giving you a gift, take it. I understand why he says this. Most of his followers got burned and burned badly by credit card debt. He says it for the same reason you don’t offer a recovering alcoholic just one beer. This doesn’t make sense for those disciplined few who pay all their debts on time.

    The Roth IRA is another item of disagreement. It is my considered opinion that a tax deduction now is better than tax free later. For the overwhelming majority of people, the largest income item on their tax return is their compensation, whether it be on a W-2, K-1, or Schedule C. This disappears when you retire and your income and your tax liability will decrease accordingly (subject to the whims of Congress). If this is not true and your income will increase or stay the same in retirement, why are you working? The elephant in the room nobody is discussing is Congress changing the taxation of Roth IRAs and making them partially or wholly taxable. Before you say that will never happen, they said the same thing about social security benefits. Zero taxable. Then up to 50% taxable. Now up to 85% taxable. Never underestimate the insatiable appetite of a government for tax revenue.

    I also think the debt snowball should be repaid based on interest rate, with the highest rate debt paid first and so on down the line. We are talking about real money here. The interest rate is the true cost, not the balance.

    All debt is poison? Debt free is peace of mind. If you are going to spend money on a discretionary expenditure, why not pay off low interest rate debt? Markets have corrections. I look at it as an iron clad, guaranteed, no risk rate of return of x% (the interest rate on the debt). Whatever it is, it has to be higher than what the bank is paying on savings accounts or what the mutual fund company is paying on money market funds.

    Investment selection is something much more complex. Most mutual funds do not beat their benchmark, that is true. But some do. They can be discovered. Hint: Look at the fund manager, specifically their performance in both bull and bear markets. They are out there. Ramsey talks about the four categories of funds for his investments but is silent about the specific investments (and rightfully so).

    What I did not know was all of Ramsey’s ELPs are commission based advisers selling front end load funds. This is just plain wrong. I strongly believe there is NO reason anybody should pay a load when purchasing a mutual fund.

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