Two Things Dave Ramsey Gets Wrong

Ever buy a “one size fits all” pair of pants? Me either. It’s no mystery why there’s no such thing. Boogie Cousins and I, for instance, can’t wear the same pair of jeans because he’s 7-feet tall and I’m 6-feet tall. Guess what? Boogie and I need different financial planning and investing strategies too. He’s going to earn a lot in a short period of time but, even if healthy, not for very long. That’s a much different situation than someone like me who has worked for more than 30 years and has one child graduating from college this year and another starting next fall.

Dave Ramsey, the debt-evangelist radio show host who brow beats people about their debt, talks to audiences in the millions with advice that may not be right for all of them. While I will admit that some probably need this tough love approach to fixing their finances and will only benefit from a crash debt diet in order to right their sinking ships, most people need a more balanced approach. Here are two areas of advice Dave Ramsey gets wrong:

1. His sole focus on debt reduction ignores the fact that our finances should really be a balancing act between now and the future.

• He tells people not to contribute to their 401(k) or other retirement funds until their debt is erased. This is wrong on two levels. First, never, ever, lose your employer’s match to your workplace retirement account. That’s part of your compensation! Second, the compounding effect of contributing to your retirement early in life pays off exponentially later in life. Just $100 per month starting at age 25, earning 7% annually on average, will total about $262,000 at age 65. Don’t miss out on that.
• Not all debt is bad. Compare the interest rate of your debt to what your money can earn, on average, by being invested. We usually estimate a 7% average annual return if the time horizon is a decade or more. If your debt has an interest rate at about 5% or less, your money will do you more good earning 7% than paying off debt of 4% or 5%. That’s why paying off a mortgage early usually isn’t a good financial idea. See more on that topic here: https://www.moneywatchadvisors.com/blog/your-home-asset-not-investment-a.... Conversely, if you have credit card debt, those interest rates are often between 15%-25% and should be attacked as a priority.

2. His admonition to only invest in mutual funds of large companies ignores the benefits of diversification.

• While he talks about investing much less than about debt, his website says invest only in mutual funds – good – who only own large companies – not so good. He specifically advises not to own bond mutual funds. Diversification in investing is key to long-term success. The right mix for Boogie is different than the right mix for me, for instance, but a mix is still important to both of us. Owning some of several different asset classes – bonds, small and mid-size companies, international companies, real estate funds - will help capture each category’s upside when they take their turn performing well and will help smooth out the ride during the inevitable bumps of the stock market.
• I do agree with him on several of his investing points:
  • Don’t purchase annuities. If you have your investments in TIAA, incidentally, you probably own an annuity;
  • Don’t purchase whole or permanent life insurance – they are billed as investments and life insurance but, not unlike the business in the front/party in the back that is the mullet haircut, they don’t do either very well. Buy term insurance instead;
  • Do get help from a financial advisor.

There’s a reason that doctors don’t examine and diagnose hundreds of patients in one room at the same time – it’s impossible! While Dave Ramsey’s “eliminate debt at all costs” advice may be right for some, it may not be right for many others. So, like most of life, it’s important to examine your own personal situation and determine what’s best for you, not just copy what’s best for Boogie.

Steve Byars, CFP®