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Tuesday, April 8, 2014

27. On Dave Ramsey

A personal finance blog wouldn't be complete without a post on Dave Ramsey. From my experience people either love the guy or really dislike him. Dave’s target audience: They just don't understand money, have dropped their guard, made mistakes or have simply had a bad lot in life.

A. Dave Ramsey’s show I believe is in the top 5 for talk radio. 

B. The average devotee loves the guy.

C. He offers up his approved providers sometimes when asked and other times when not asked.

D. Those on the consumer credit treadmill can take his book out of the library free and/or watch/listen to his free show and apply his common sense principles and get out of debt. All common sense true but some people simply need the guidance or clarity.

E. Most of the people that follow Dave Ramsey’s get-out-of-debt-program aren’t in a position to invest money in the short-term.

I do like Dave Ramsey’s 7 Baby Step program

1) Putting $1000 in an Emergency Fund 
2) Paying off debt with the Debt Snowball (smallest balance) 
3) having 3-6 months of expenses in savings
4) Investing 15% of household income
5) setting aside money for college for kids
6) paying off the home mortgage early, 
7) being generous givers are all great goals. 

We used this program ourselves to get out of debt the first time before we purchased a house. 

I also like Dave Ramsey's book The Total Money Makeover.

Here’s some issues I have with what Dave Ramsey says: 

1st Credit Cards… For people who don’t pay off their CC’s monthly I’d agree with Dave that cutting them up is the best idea. For those who have gotten a handle on their finances, spend less than they make, and pay off the credit card bill(s) every month the cash back and mileage rewards can be very beneficial. Dave Ramsey believes that nobody should have credit cards. The assumption is people are too irresponsible to handle them. This may be true for many but not all people.

2nd Investments… Don’t agree with Dave on this either. Dave claims that a person can make 10-12% in {actively managed} mutual funds. Here’s the thing: Fees do matter. Low cost index funds are a good alternative to mutual funds from Dave’s list of sponsored alternatives. Also maxing out your 401k/403b and investing in a Roth IRA (2014 max contribution is $5500) are investments that I believe Dave Ramsey doesn't emphasize enough. That said, I believe getting people to invest anything towards retirement and their future is better than nothing at all. 

Personally, I would prefer Dave direct people towards index funds rather than actively-managed funds. Simple advice? Never buy a front load mutual fund. Remember over time nearly all funds will beat the market. You can keep it simple with a portfolio of no load Vanguard mutual funds and do quite well. Here’s what Dave Ramsey says about upfront fees:


There’s nothing wrong with paying your financial advisor. After all, making sure your investments earn money can be hard work; so they definitely earn their keep. You just need to find out whether the advisor gets paid an annual percentage of your assets (fee-based planning) or an upfront commission. Dave prefers paying on commission because it is cheaper over time; an upfront 5% fee is less expensive than a 1.5% annual fee that lasts forever.” From this source.

There he is encouraging people to pay a 5% load up front… I consider this bad advice. Many would agree. Others might disagree.

What do you think of Dave Ramsey and his ideas? Have you used his Financial Peace University material? Have you read any of his books? Leave a comment!


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