Dave Ramsey: 9 things I like, and 9 things I don’t
Given my passion for personal finance and Christianity, it may surprise you that until recently I had never read any of Dave Ramsey’s books.
Ramsey is an evangelical Christian well-known for his radio program The Ramsey Show. His interactions with callers are entertaining. He gives hard-hitting, blunt financial advice.
To better understand what Ramsey is all about, I recently read two of his books: The Total Money Makeover and Baby Steps Millionaires. As discussed in both books, Ramsey’s recommended approach to personal finance is oriented around seven “baby steps”.
Ramsey gets a lot of things right and has clearly helped a lot of people escape financial ruin. But there are numerous areas where he lacks nuance or is flat out wrong.
9 things Dave Ramsey gets right
#1 - Financial freedom is for everyone
Living right financially…is not complicated; it may be difficult, but it is not complicated.
Ramsey is writing to the everyman, and his message is clear: financial freedom can be yours. You don’t need an ivy league degree. And wealth isn’t reserved for lucky recipients of a large inheritances.
His stories are about normal people, with average salaries, that ultimately achieve great outcomes by putting financial discipline into practice. I appreciate that Ramsey reaches an audience that most financial gurus ignore.
#2 - Build an emergency fund
Baby steps 1 and 3 emphasize the importance of having an emergency fund of liquid cash on hand to be ready in case something goes wrong. I couldn’t agree more.
While somewhat elementary and obvious advice, many people clearly need to hear this counsel. According to a study conducted by the Federal Reserve, nearly 4 out of 10 Americans would be unable to pay a surprise $400 bill without borrowing money or selling something they own. That’s a scary financial cliff to be teetering on.
#3 - Avoid debt like the plague
If you know just one thing about Dave Ramsey, you probably know that he despises debt – especially high-interest consumer debt. Many callers on the Ramsey Show are up to their eyeballs in debt. Here’s an extreme example of a couple who amassed nearly $1,000,000 in debt by age 32.
Ramsey’s solution in these situations: Eat rice and beans! That is, aggressively reduce your expenses and use all available cash to pay off any (non-mortgage) debt.
One of my favorite quotes is attributed to Albert Einstein: “Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.” I’m highly aligned with Ramsey on this point: debt is the enemy of financial freedom.
#4 - Pay off your mortgage early
In Step 6, Ramsey advocates for paying off your mortgage early. There are many situations where it makes sense to aggressively pay off your mortgage. In normal times, most people will be paying a mortgage rate that exceeds the risk-free rate they can earn by buying bonds. It makes no sense to be short a bond with a higher rate (your mortgage) while being long bonds with lower rates (your investments). Most financial advisers would never give you this advice, as this would lower the fees they earn on your portfolio.
That said, the decision is certainly more nuanced than Ramsey’s blanket advice. If I was sitting on a 3.0% mortgage from 2020 – would I pay it off early in the current environment? No way. I’d put the extra cash in a money market fund earning 4.5% and capture the risk-free arbitrage. But this only works if you have the discipline not to spend the extra cash.
#5 - Giving is important
Ramsey advocates for the biblical notion of tithing 10% of your income by donating to your church and other Christian ministries.
I’ve written previously about the importance of prioritizing giving by giving the Lord the “firstfruits” of your income. When it comes to “how to give”, donating appreciated securities and bunching donations via a donor advised fund can be highly tax efficient.
#6 - Don’t slave away at a job you hate
Retirement in America has come to mean ‘save enough money so I can quit the job I hate.’ That is a bad life plan.
You already possess the ability to quit your job, and if you don’t like your work, you should consider doing that. If not today, develop a five-year game plan for transitioning into what God designed you to do; however, don’t wait till you’re sixty-five to do what you love.
This holistic view of life and vocational calling really resonated with me. Great advice.
#7 - Millionaire is not billionaire
In Baby Steps Millionaires, Ramsey does a great job painting a picture of what a millionaire in America looks like today. She is more likely to drive a Honda than a Porshe. She likely still clips coupons, and she price compares before making a purchase. She probably has a budget.
I appreciated Ramsey’s point that most people can reach financial freedom and amass a multi-million-dollar net worth. He also rightfully points out that most people will not become Jeff Bezos and flippantly be able to purchase a yacht on a whim.
#8 - It’s okay to have fun with your money
Near the end of The Total Money Makeover, Ramsey says, “Someone who never has fun with money misses the point.”
In my first post, I pointed out that money is only useful in that it can be spent. Savers (like me) sometimes need to be reminded that it’s okay to have fun with your money – especially when you are farther along your journey to financial freedom.
If you know me, you know that I love Duke basketball. I watch every game. Anytime Duke makes the Final Four, I’ve decided I’m going to be there in person. I went to Indianapolis in 2010 and 2015 to see Duke cut down the nets. And in 2022, my wife and I took both of our dads to New Orleans to see Duke play UNC in Coach K’s last game. Amazing memories.
#9 - Money is not the answer to all of life’s questions
My kids, you, and I can have good things happen as a result of our Total Money Makeover only if we have the spiritual character to recognize that wealth is not the answer to life’s questions.
Finally, I appreciate Ramsey’s effort to put finances into their proper place in the context of life. He quotes Antoine Rivaroli, who said: “There are men who gain from their wealth only the fear of losing it.” Sounds silly, but I’m sure we’ve all encountered people like this.
As Ecclesiastes eloquently points out, a sole pursuit of wealth is meaningless. We are here to serve the Lord.
9 things Dave Ramsey gets wrong
#1 - He thinks he can beat the market – and encourages you to try
I am a glass-half-full guy. If I have a tee time at 9:00 am and there's a 62% chance of rain, that tells me there's a 38% chance of sunshine – so I'll be at the golf course to play. In the same way, if even 70% of mutual funds don't outperform the market, that means I should be able to find one of the 30% of funds that DOES outperform the market.
This is arrogant, bad advice. Active managers consistently underperform low-cost total stock market funds after fees over the long term. Don’t try to beat the market – just own the whole thing.
#2 - He preaches that you will get a 12% return on your investments
The basis for his statement is the historical returns of the S&P 500, which have an impressive annual (arithmetic) average of 11.7% from 1928-2023. But Ramsey makes 2 critical errors.
First, Ramsey confuses the arithmetic average (11.7%) with the geometric average (9.8%). If you invested in 1928 and got a 9.8% return every year, you would end at exactly the value of the index in 2023 (the correct outcome). It may not seem like a big difference on the surface, but using an 11.7% return every year would incorrectly overstate reality by 5x by 2023! I’ll do a whole post on this concept someday, but for now suffice it to say that it’s the geometric average that matters for the long-term investor.
Secondly, recall that past performance doesn’t predict future performance. The US stock market has delivered astounding results over the last 100 years. But the financial experts I respect are less rosy about the next 30 years. Bill Bernstein thinks the real return (i.e. after inflation) will be ~3.6%. Victor Hagani from Elm Wealth estimates a real return of ~3.3%. If inflation is 2.0%, these estimates put the total nominal return in the 5-6% range.
#3 - He advocates for a 100% equity portfolio
Ramsey advocates for investing 100% of your investment portfolio in equity mutual funds, and 0% in bonds.
This is…insane. Ramsey’s approach gives almost no acknowledgement to the reality of market volatility. A retiree with a 100% stock portfolio would be forced to “sell low” if the market crashed just to be able to buy groceries. A 100% equity allocation is far too risky for almost everyone. Asset allocation is one of the most important investing decisions, and Ramsey completely misses the mark here.
#4 - He suggests an 8% safe withdrawal rate in retirement
One of the key questions in retirement planning is: How much of my portfolio can I afford to spend each year while also having confidence that I won’t run out of money before I die?
William Bengen first articulated the popular “4% rule”, which says you can withdraw 4% your first year of retirement and increase this dollar amount by inflation each year thereafter. It’s a complex topic with significant nuance, but most people fall in the 3.0-4.5% range.
Dave Ramsey astonishingly suggests that you can withdraw 8% of your portfolio each year. My jaw hit the floor when I read this. 8% is absurdly high.
John Rekenthaler of Morningstar wrote a nice piece that dismantles Ramsey’s recommendation. Retirees following Ramsey’s 8% rule would run out of money 45% of the time within 30 years. I wouldn’t be comfortable with those odds, and I doubt many people would be.
#5 - He claims Roth always beats Traditional
When it comes to retirement savings vehicles, Ramsey asserts that Roth accounts are always superior to Traditional IRAs / 401(k)s. This is certainly sometimes true, but definitely not always true.
If you expect your future marginal tax rate to be lower than your current marginal tax rate, it is easy to show that utilizing a Traditional account will be more advantageous than using a Roth.
#6 - His “debt snowball” is a suboptimal payoff strategy
Ramsey advocates paying off debts by sequencing your loans from smallest to largest balance. He’s trying to help people build psychological momentum by putting some quick wins on the board.
Mathematically speaking, this is definitively suboptimal (which Ramsey acknowledges). I just can’t get behind a strategy that leaves free money on the table.
#7 - He is dogmatically against credit cards
Ramsey’s audience typically has a history of carrying credit card debt. So it’s not surprising that he is extremely against the use of credit cards and insists on using debit cards or cash. Perhaps this is akin to insisting that an alcoholic avoid all future sips of alcohol. In that case, I agree.
But for the population who can confidently commit to paying off their balance in full each month, using a credit card can generate 2%+ back on every dollar spent (plus the float of holding onto your cash for an extra month). Again, that’s free money.
#8 - He is against all student loans in college
Ramsey categorizes college as a want (not a need) and says you should only go if you can pay cash.
Paying cash for college should certainly be the goal. But if pressed between A) not going to college and B) financing college with student loans, I would take option B. That said, in this situation, I’d go to a more affordable school and select a major with a strong ROI. The evidence is clear that those with college degrees significantly outearn those without them.
#9 - He puts zero value in Social Security
Citing the questionable financial footing of Social Security, Ramsey tells people to assume it will be zero benefit to them.
The funding of Social Security is a well-known and very real problem. However, I do not think it will be politically feasible for it to completely disappear. There would be outrage from workers (voters) who paid into the system if they get nothing in return. I think you should assume a diluted benefit, but zero is too extreme.
Conclusion
Dave Ramsey is entertaining, and he is great at motivating people to get out of debt and start saving money. But go elsewhere for advice on investing and retirement planning.