Random Thoughts

Extra, Extra: No Credit Needed Disagrees With Dave Ramsey

I’ve been a fan of the Dave Ramsey Show for more than four years. I’ve listened to Dave’s advice, read Dave’s books,attended Dave’s “live event”, and called Dave’s show. Readers of my blog can tell that I’ve been heavily influenced by Dave’s ideas about credit, debt, money, investing, and budgeting. I love the concept of the “Baby Steps” and I strongly agree when he says that personal finance is more about behavior and less about math. I agree that debts should be paid, smallest-balance first. I agree that people should buy used, not new, cars. I agree that term-life is better than whole-life. But, I have found a few instances where I, yes, good old NCN, disagree with Dave.

Dave suggests that you postpone 401k/403b contributions until you are debt-free, including amounts that would be matched by your employer. (I’ve actually hear Dave say this, at a live event I attended in Atlanta.)

I reduced my 403b contributions to a bare minimum while I was getting out of debt, but I wasn’t about to forfeit an employer-match. If I found myself in a situation where I was missing payments or falling behind, then I’d consider canceling all retirement contributions. But, as long as I could reduce my debt AND fund my retirement so that I could receive the match, that’s what I would do. I’m all for getting out of debt, but leaving matching funds “on the table” strikes me as unreasonable. If your company matches 50% of the first $2000 you contribute, that’s an automatic 50% return on your investment! I don’t care how high your credit card rates are, giving up a 50% return would be ridiculous. Please don’t misunderstand. I fully agree that, while reducing debt, retirement contributions should be temporarily lowered, but not below the amount an employer will match.

Dave suggests that you sell your car, unless you can pay it off in 18 months, even if this means that you have to borrow the difference between the amount for which you sell it and the amount you owed for it, and buy a cheaper, used car.

I’ve run the numbers, over and over, and there are times when simply taking a few extra months to pay off the car makes more since than selling it, financing the difference, and buying a junker. Personally, I was able to payoff my car note in less than 10 months, but I know, for a fact, if it had taken me more than 18 months, my wife would NEVER have gone along with the idea of getting rid of her car and replacing it with another, especially if it meant getting another loan for the “difference”. This is one of those ideas that turn people off to Dave and his message. I realize, trust me, that Dave, like me, is excited about helping people get out of debt. Instead of a hard and fast “rule”, may I suggest that you analyze the “total cost” of owning the automobile that you are buying and make an informed, rational decision about whether or not to sell it? In some cases, you should sell the automobile “you cannot afford”. In other cases, you might be better off paying for the car you already have and driving it until the “wheels fall off”.

After completing your emergency fund, Dave suggest putting 15% of your income into retirement. Dave always uses 12% when calculating anticipated returns.

I’m just not a fan of using “percentages”. Instead, I like to focus on the concepts of “fully-funding” or “maxing out”. But, the single, biggest problem I have with Dave is that he assumes a 12% return on retirement investments. I’ve heard Dave’s rational for using the “12%” figure, but, there are SO many factors that go into determining exactly how much an investment will return, that I think it’s somewhat “reckless” to assume that “everyone” can depend on a 12% return. Trust me, I know very, very little about investing, but I DO know that markets fluctuate, meaning that they go up AND down. I’m a big-time proponent of investing for the long-term over a long-time, but I worry about using such, in my opinion, an aggressive percentage. Call me pessimistic, but I always use 8% when I calculate anticipated returns and then HOPE that I’m off by 4%.

Whew. This has been a difficult post to write, but I’ve been thinking about these things for more than two years. I don’t believe in “throwing the baby out with the bathwater” so I’ll continue to listen to Dave’s show and read his books, but on these issues, I’ll have to “disagree” with Dave.

Check out these posts over at My Two Dollars and The Simple Dollar and All Financial Matters and Five Cent Nickel.
They’ve written articles about various aspects of investing, saving, and debt reduction.

31 thoughts on “Extra, Extra: No Credit Needed Disagrees With Dave Ramsey

  1. 12% is the market average and he uses it to estimate to figure what you could make, its not supposed to be a hard figure.

    I do agree with you about car thing though..and although I do agree with the retirement mathcing, we’re self-employed, so no mathcing for us…also we can’t afford it right now.

  2. 12% does seem a little high, especially without giving the specifics as to how you arrive at those numbers. According to the Ibbottson SBBI 2007 Yearbook, small cap stocks have an average annual rate of return of 12.6% (1926-2006) so that could be where he’s getting his numbers.

    I am comfortable with a long-term rate of 10% (7.5% real returns, which are adjusted for inflation). By long-term I’m talking about a 20-year time horizon.

    Anyway, thanks for the mention!


  3. I love Dave Ramsey, too, but I must say I agree with you on the 401k point. It doesn’t make sense to let go of free money from your employer.

  4. I’m going to go ahead and back Dave on the retirement issue. Two major reasons:
    1) The proportional. Let’s pretend I had, say, $15,000 worth of debt to pay off. I make $32,000/year, and the $2,000 (plus match) I’ll be contributing to my 401(k) this year represents more than a third of my overall margin. For me, as, I think, for a substantial part of Dave’s audience, “enough to get the match” is actually a pretty large amount of money, and setting it aside really substantially extends the amount of time I’d be in debt under my hypothetical scenario there.
    2) The psychological. Dave’s reasoning rings true to me: it’s a sort of “you have to crawl before you can run” issue. He prefers that you focus intensely on each of the baby steps, rather than diffusing your energies, and I have to say, I agree. My personal style about these things is not about multitasking: I’d rather focus on one thing, knock it out of the park, and move on to the next. Dave believes in working on a sound financial foundation first, and I’m with him on that one.

  5. English Major..
    As you know, I’m a HUGE believer in the psychological impact of reducing debt… but, in some cases, the shear “mathematics” of a decision have to come first. Trust me, I’m a huge Dave fan… but I think that you can reach a point where you OVER-simplify an issue..
    Thanks, as always, for your input!

  6. I think you should do enough to get the match because it lessens the chance that if you don’t complete the whole program you’ll end up with nothing.

    I know that there is more to the ‘baby steps’ than getting debt free, but thats what most people seem to focus on – I can see that it would be so easy to stop once you get back up to debt free. Also, stopping and starting up retirement savings is a lot more effort than cutting back once, many employer’s plan interfaces are not user friendly.

  7. I disagree with Dave Ramsey in a couple of points. As for all personal finance gurus. It’s no one size fits all.

    I remember when DR told a caller do not contribute to 401K until he pay off his student loans debt. Guess what? He student loan debt was $200,000 yes he was a Doctor. He said it will take him years to pay it off. DR got smart as said you should not have taken those loans out thinking you was going to make big money. So arrogant !

    Anyway, If I was him I would have least applied 5% to my 401k.

    I did not lower my 401k and still paid off things. So I do not agree with DR.

  8. I disagree with the life insurance advice. While term may be the way to go for most, when I ran the numbers of my insurance options past not one, but two, financial planners, it turned out that universal life was a better deal.

    Not because it was cheaper, but because after the combined use of life, auto, house, and liability, adding universal life over term caused me to get a 120 dollar discount on the rates of the other policies as an incentive to go with universal. (Because all the insurance is by one company). However, going with term over universal was a 25 dollar savings.

    For me, it made more sense to get an umbrella policy that included universal life for 95 dollars cheaper than it cost to get the same coverage that included term life. If I were renting and working for a company, then dave’s advice works.

    But since I’m a homeowner and I am self employed, getting several types of insurance rolled together with riders and multiple policy discounts means that universal is cheaper.

    Of course, I’m still a big fan of Dave, and I recommend him to friends, but the bottom line is that everyone should do the math on his suggestions and make sure that what he says will work for them.

  9. I am just in the first year of paying down major debt while organizing my financials (and just recently started blogging it). One of my to-dos has been to figure out what a 401k was and get one (because everyone says you should have one).

    Thankfully my boss helped me figure this out, I actually get a 403b, and gave me some great background and advice on getting started.

    Here’s my question though … my employer does NOT match funds for 403bs. And I’m concentrating on paying off a very high amount of CC debt. Should I still sign up for my 403b if I can afford even a small amount per month or wait until I’m farther along in my snowball?

    Any advice would be much appreciated. I was hoping to sign up for my 403b by next month.

  10. If it’s about behavior, then the real bottom line question is how effective is Dave’s behavior modification program.

    How many people start and then give up Dave’s program? Why didn’t their behavior change so much to convince them to keep going?

    My guess is Dave’s behavior technics are about as effective or ineffective as anyones who does the same type of advice. Smallest debt to largest or highest interest to lowest. The completion rate of those who embark is probably about the same.

    I think Dave does care about what he does. I also think he deeply cares about selling his books, his advertising, his live events and anything else to perpetuate his organization.

    If he were really interested in behavior change, then there would be follow up with market studies to determine why people bought the book and took no further interest. People who bought the book or attended FPU and gave up. People who graduated from BS2, screamed I’m debt free and lost interest. He would find out what tool he needs to implement to significantly improve book bought to lessen implemented and completed ratio.

    (Please understand I’m not letting the people off the hook or saying the lack of completion is all Dave’s fault. They should most of the acccountability. But Dave can’t wash his hands of not trying to find the hooks that will keep ever more people involved.)

  11. We are doing a 1 year debt paydown of $55,000+ following Dave Ramsey’s baby steps. But we continue to max our 401k b/c we felt it was important to continue to save for our retirements (we are 35). We are hoping to both pay off our unsecured debt and max out our retirement accounts this year.

    Car wise, both of our cars were paid off, but I understand and generally agree with Dave’s advice on this one. Having a car payment or a lease payment when you are deep in debt is just plain stupid.

    Planning for retirement is so specific as to each person, your age, your income, when you plan to retire, what kind of retirement you are planning for, that any general advice is going to be just that – general.

  12. Great post! I’ve always thought that Dave Ramsey’s overall message (get control of your finances and get out of debt) was excellent, but I’ve been turned off by exactly the types of things you pointed out.

    P.S. I love the new look!

  13. So you are doing the math on the points that you disagree with, but ignore it for things like “I agree that debts should be paid, smallest-balance first.” 😉

  14. Lazy… There are times when the “math” makes more sense… and times when the “psychology” makes more sense… and, the reality is, those times will be different for different folks. I’m a very emotional dude, so I “needed” the emotional boost of getting rid of small balances first… others, who might be more analytical, might be find paying highest rates first… again, personal finance is “personal”…

  15. Flip…
    This is NCN.
    I decided to leave a comment here, on my blog, and over at your blog.

    If I did not receive a match, I would follow Dave’s plan, especially considering the amount of credit card debt that you are facing. I would attack that debt and worry about my retirement at a later date. Remember, I’m looking for a ‘guaranteed’ return if I can get it. Paying off debt is ‘guaranteed’ return. Getting a match from my employer is a ‘guaranteed’ return. Investing in retirement, w/ out a match, will NOT provide a ‘guaranteed’ return. So, if you have a ‘guaranteed’ return, go in that direction. Again, I am NOT a professional financial adviser… I’m just talking about what I would do…
    Good luck!

  16. Dave sucks, every day his show is the same thing over and over again, moron who really don’t understand money and spouses that can’t get their partners on the stupid snowball.

    I read his book and learned a couple of principles from him and now I’m moving on, reading other books, learning from other authors, why stick to only one ?

    You will never be rich!! stop trying!!

  17. Thanks NCN. I’m going to look over all my numbers, figure out what the minimum I would need for a 403b is, and then make the decision after some homework.

    I appreciate your input (and also the comment from Moneymonk at my blog).

  18. NCN–as you well know, having responded to a post on my blog covering the same ground, I, too, disagree with Dave when it comes to 401 (k) payments. Leaving money on the table that could be yours is ludicrous. At the very least, a person should meet their company match. In my case, I do more than that because I have a short time frame (11 years if I retire at age 69)and got a late start on my retirement savings.

    I think Dave sticks with the same advice over and over because if he started making exceptions, the wrong people would take advantage of them and it would derail them from getting their debts wiped out. His program is aimed at an unsophisticated audience–I can relate to that because that would be me a couple of years ago.

    As with many things in life, I take from Dave Ramsey what works–the debt snowball works, the need to focus works, the need for an emergency fund works. The rest of his plan works most of the time for most folks–but not all, as you have discovered.

  19. Definitely disagree with Dave Ramsey about leaving free money on the table. One major problem is everyone is at a different stage. Being 45 and paying off debt for 2-3 years doesn’t makes sense to stop contributing. You need to be saving for retirement.

    I also don’t think people who take more than 2+ years to pay off debt even in their 20s should stop retirement because that is a long time. If you are taking 5+ years no matter what age you are it’s ridiculous.

    Second he’s not realistic to assume a 12%. What happens if the market tanks for 2-3 years? Most financial analysts and advisors say 8% and anything above and beyond is gravy. It’s unrealistic to use that number.

    Third, his investment mix is just plain stupid. 25% in large, small, mid-cap, and international mutual funds? Where are the bonds? And is that an appropriate mix for a 45 year old or 55 year old or 65 year old? Stupid. Actually any portfolio without bonds even a 25 year old is dumb. Bonds do not decrease the returns by a lot and actually stabilize the portfolio. Just look at the statistical analysis on fundadvice.com. Even a 10% bond share decrease the beta factor (risk) by 25% and returns decrease by 1%. Investing is not DR’s strong point. But he probably doesn’t do his own investing.

  20. I heard that show with the doctor! Of course the Ramsey one-size fits all didn’t work. It didn’t work for him to go to school (in Ramsey’s world, all doctors must be kids of millionaires), and it didn’t work for him to pay it off. As a doctor in a 33% tax bracket with low-interest student loans, you are a moron not to max out the 401K, and you can pay your car of next year. Problem is, this isn’t Ramsey’s target audience.

    For the working-class, his plan is right on, except maybe the 401K match. I even agree with getting rid of a car you can’t afford, even if you are underwater. What really turns me off of Dave Ramsey is the junk he advertises. Yuck.

  21. Dave’s advice is aimed LOW. It is fine for the financially illiterate and those who want a simple answer to a simple problem. They are in over their heads. If you are mentally weak and need psychological tricks to do the right thing and save and stop spending, follow DR’s advice.

    The “one size fits all” solutions are obviously going to be inferior technically to more nuanced ones tailored to a specific individual. What I find annoying is his arrogant insistance that his is some sort of pious religious “ministry” rather than simple a good way to make himself a fortune while helping the financially ignorant dig themselves out of their holes.

    A religious ministry isn’t a profit making enterprise. Just keep in mind how many from the past (Jim Baker, etc) have used religion to seperate the gullible from their cash. Churches are used as an “in” to get to a receptive audience. Coming in from a secular perspective, he realises that he would face a much more sceptical audience.

    Not to say he’s a crook. Just that a thin pamphlet could contain all his ideas, they’re that simple and easy to follow. The multitude of books, tapes, shows, speeches, pep rallies, etc, are done for HIS wallet, not the consumers’.

  22. Bruno –

    Dave never hides the fact that he is a “for-profit” ministry. You simply can not lump him in the same post as Jim Baker: it shows that you really do not get either one of them. The thin pamphlet’s you refer to are all on his web site: the outline of the baby steps, the cash flow worksheets and the budgetting worksheets. There you go. All for free. His website even streams a free radio broadcast. He often does give aways (free FPU classes, books, tickets to live events, etc).

    Dave never says that you are going to get 12% back on your investments – he says to look for a good growth stock mutal funds that have been around awhile (20+ years) with an average of 12%. Then, you invest LONG TERM to ride the ups and downs of the market.

    Finally, Dave will tell you to stop your investments into retirement (even the 401k) for the purpose of cash flowing. Some times, you are doing a little investing, a littel saving and a little debt reduction. The idea is that if you concentrate on one thing it is not going to take you as long to complete it. The first thing is getting out of debt, the second is giving yourself a nice emergency fund so that you do not go back into debt. You will also hear Dave say that you are only going to stop investing towards retirement for a short period. If you go beyond two years, that is too long. And he doesn’t suggest that.

    Anyways, my 2 cents.

  23. A point that I disagree with is paying off student loans before emergency fund of 3-6 months living expenses. If one of us were to get laid off, I can always get a forbearance on my student loan debt, but I can’t for my mortgage, so I’m building that first.

  24. Dave Ramsey is a Jesus guy.

    His advice about not contributing to your 401(k) and selling your car and buying a junker all make sense when you read this quote from his website:

    “As a Christian, you probably know that you’re called to tithe. That means one-tenth of your income – off the top and before anything else – should go to your church. Beyond that, anything you give is an offering, which is over and above the tithe.”

    Churches love putting on his seminars. If you can get parishioners out of debt, they can contribute more to the church. Does his advice start to make more sense now?

    Less money for YOU, more for the CHURCH. A parishioner out of debt, driving a junker car and not contributing to his 401(k) can fork over a TON of dough to the local evagelical snake-handler league.

    Praise the Lord!

    BTW, I am disappointed to hear that you bought his books and attended his seminars. BUYING things to save money is like eating food to lose weight. It just doesn’t work.

    Go to your local libary and check out these books for free.

    The only people who are getting rich in the financial self-help market are these self-appointed Gurus like Dave Ramsey, Suze Orman, et al.

    Put a stick in their eye and check out their books at the library for FREE!

  25. The math works out in most cases by suspending your 401k contributions (even with a match) short term (around 2 years or less) when following his plan. Mainly because the average person only contributes 4-5% income towards retirement (if that). So one making $1000 week prior to the plan is putting 5% towards retirement even with a 100% match over 2 years is setting asside 5200 in cash contributions and 5200 in matching funds. So a “loss” of 10400 plus interest (between 500-800 dollars with an 8-12% yield). Once the person begins reinvesting after 2 years, the first year will have $7800 in contributions plus a $2600 match. So in most cases suspending 401k contributions will not make a significant difference in total return as long as the debt is paid off quickly.

  26. Joe,

    You have no clue what you are talking about. If you are Christian or Jewish you are called by your faith to give 10% to your local congregation. Dave says if you are not Christian you should still give a percentage away to those in need. Also you can get all of Dave’s information in bits and pieces for free on his website, radio show, etc.. I have followed Dave’s plan and have paid off 48k with a net worth going from a negative to just under 50k in that time and will be well over 6 digits in a year. So yes you can get rich by staying out of debt, donating to charity, and investing in retirement.

  27. I was an Endorsed Local Provider (ELP) for dave’s organization for 6 years. Did you realize ELPs are forced to pay big bucks in return for dave’s “endorsement”? I guess that wouldn’t be so sleazy if dave didn’t go to great lengths to give his “listeners” the impression the ELPs are chosen based on merit, not as it truly is – who will step up & write dave that fat check every month. Third party endorsed marketing can be effective when dealing with clones like the typical DR listener…

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