E32: The Best and Worst of Dave Ramsey’s Advice

Nate: In this episode, we’ll be taking a close look at Dave Ramsey’s financial advice, who it’s good for, who it’s not good for, some things that he says that is great advice, and other things that some would say would be poor advice, or at least that’s what we would think. She’s Holly, and she helps people find financial freedom.

Holly: He’s Nate. He makes sense out of money. This is Dollars and Nonsense. If you follow the herd, you will be slaughtered.

Well, Nate, let’s get right into this Dave Ramsey. A lot of us hear and know his name. He is on 500 radio shows across the US, or stations. He has some good stuff and some what we would call poor advice or not-so-great stuff that you need to actually start asking yourself does this make sense. I will say one good thing he does is he takes people that do not know how to control their spending or to live within their means, and he really does teach a disciplined approach or way to actually budget and live within your means.

Nate: That’s some of the best advice. I’m in total agreement there. He has great advice, he’s got some poor advice, and it kind of depends on where you’re at. Most of his advice is great if you find yourself … and you know who you are if you’re listening to this podcast … just really struggling to get a system in place that gives you the ability to start saving money. If every single month you seem to spend everything, then man, his advice is really great. Most of it’s awesome if that’s the position that you’re in, as Holly said. So absolutely, does a great job helping people rein in their spending a little bit, have a systematic approach to building wealth.

So yeah, absolutely, Holly, that’s great advice. I think some other good advice he suggests people do is to get an emergency fund. I don’t disagree with having liquid money. I might jump ahead a little bit, but you and I, I think, have probably done a podcast already before, Holly, on emergency funds and how we use a policy to do that. But still, the fact that we want to have liquid capital, absolutely. You never know what’s going to come up, and total agreement there. I think it’s the first baby step, is to get $1,000 in an emergency fund. Now, if you don’t have $1,000 right now, then listening to him is going to be awesome. It’s going to help you so much. Is there anything else that we actually agree with, Holly, at least on the top of your head?

Holly: That’s about all I agree with. I mean, really, that living within your means, absolutely you’ve got to get your spending under control, and he gives that systematic approach, and also that how do you actually save up for emergency fund … I call it the rainy day fund … how do you save up to do that? Those are great pieces of advice and realistic tools that we all need to know. Even just the budget, you’ve got to know what your budget is and what you are spending.

Nate: Yeah, he does a really good job of making you take a look at reality. We did a podcast recently on facing reality, not hiding from it, so definitely a great job doing that. And I’ve heard some people talk about how when people come to work with us, we’re not really trying to help you budget and help you build a budget and make a plan and all those types of things. That’s not really our goal, so it’s almost like I agree… some people even said this … Dave Ramsey is what needs to happen first before you even talk to somebody like us. So if you can’t do some of the simple things of saving money that he teaches, then it’ll be difficult to talk to someone like you and me on the back end. But most of all, that’s pretty much what we agree with, and we’re all for financial education and discipline. That’s his main message.

The problem comes on the flip side when he starts giving advice on financial issues above just you being disciplined. Then he starts offering things that I don’t necessarily think is the best advice. Much of what he says, Holly, is simple. I understand why he has to say what he has to say, because there’s so many things out there financially that are better than what he suggests, but they’re a little bit more complex and maybe a little less mainstream. Because of that, he can’t devote the time, and his audience, he may not feel, is ready for those types of things. His brunt audience are those who are struggling, maybe not be ready for some of the things out there that are much better advice. So I understand it’s very simple. It just might not be the best.

Holly: And I think one of the approaches that he uses, if anybody has ever listened to his radio show or his podcast, is he draws you in normally with a story, relatable, it’s a story, but then there’s some type of fear that takes place. “What if you don’t have that rainy day fund, and your kid falls and breaks their arm, what are you going to do?” type story. And then, well here’s a solution of how to solve it. But really, we don’t actually listen. We’re so caught up in the connection of that personal story or that fear of I’ve got to do something that we react instead of actually looking at what is said and evaluating it and saying, “Does this fit for my life, and should I do this?” One of the biggest things he says is buy term, invest the difference.

Nate: That’s something. That’s just not him, and we may have talked about this before too, but that’s one of his big mantras, especially that’s when people come to us, because we’re big fans of the Infinite Banking, which uses big time whole life insurance, and that’s one of his main concepts, is run away from whole life insurance, essentially calling us greedy salespeople, slimy, nothing we say is true, and we’re all liars, and you should never touch any of us with a 39-1/2-foot pole or whatever it is. It’s very short-sighted, the buy term, invest the difference mentality is.

Hey, whole life insurance, first off, it has nothing to do with banking, I would say, because it’s based on whole life insurance, the idea of it. If you were to buy a million dollars in life insurance, it’s cheaper in term insurance than it is in whole life. Yeah, absolutely. And he says so take the difference in the payment and invest it somewhere else other than whole life. The problem is, is that he’s really calling life insurance an investment. He says it’s a poor place to invest money. Yeah, the problem with saying that is life insurance is not an investment. In fact, Holly and I as insurance agents, we’re not allowed to call life insurance an investment. You’ll never hear us say that, because it’s not actually classified as an investment.

The problem is, of course, I think it’s mostly ignorance to a certain extent, that what he does is he says if you would take the whole life insurance might grow 4 to 5% per year. The policies that he’s comparing it to, by the way, and he’s using is more like 2%, which is just your basic old whole life insurance not built for banking or anything, just built for a death benefit. He says you can go earn 12% in a mutual fund, which we can get more on that in a little bit, so he’s saying it’s better to put money in the mutual fund, take the difference between the term insurance and the whole life premium and add that to the mutual fund. There’s so much issues here, I don’t even know how we’re going to cover this today. It’s just like I don’t even know where to begin.

Holly: Let’s start, Nate, with just the 12% in a mutual fund. He typically uses that. He still uses that. You can look even on Wikipedia. His reference is 12% on an average rate of return, not actual. He never uses actuals for any of his illustrations. It’s 12% average, is what he’s saying, in a mutual fund, and that mutual fund has to earn that 12% average for more than five or 10 years consistently without a break in that. Realistically, Nate, is that even possible today? Have you seen a 12% mutual fund average … we’ll use average … ever, even more than five years in a row?

Nate: No, I know. It’s very rare. I have not seen it. I know they’re out there somewhere, I’m sure, just the people that are investing with Dave Ramsey are not in them. You see what I’m saying?

Holly: If he actually said, maybe, what that mutual fund is, you could maybe say okay, that’s realistic, but in the research I’ve done, I can’t find a 12% average that consistently does 12% on average, even for two, three, four, five years. You might get that for one year, but we’re not talking consistently getting that type of rate of return. And what mutual fund is doing that, if a mutual fund was doing that, everybody would be investing in it.

Nate: That’s true, and that’s always gross numbers, as you said, Holly. First off, he actually tells you to go invest with a money manager, somebody that signs up with him, that he vets, who probably pays a lot of money to get the leads that come in. So there’s money to be made. That’s why he doesn’t tell you to just go out and invest money in a very low-cost like Vanguard Fund or something like that. He always tells you to work with somebody. That’s a bit of what you call a bias, because he wants to make more money. There would be no money to be made if he says Vanguard, so he says go invest with these other guys, not the S&P 500, which is what he uses in his average numbers and things like that. Go and mess with these other guys who sell mutual funds and pay them fees.

So it’s a gross number, and then he tells you to go find a guy who charges fees. Well, they’re going to already eat away some of the gains there, and then you add on to the top of that, that over 80% of mutual funds don’t beat the market, and that’s what these guys are selling. They’re not selling the S&P 500. There’s no money to be made there, so they sell mutual funds, and the fact that 80% of them are not going to beat the market any given year, and those that do beat the market, that’s 20%, don’t beat the market over a period of time. It’s always like some of them beat them one year, and then they fall behind, and then they have to go switch over, and there’s always these issues.

So it’s definitely a magical number, and my biggest issue with using that number, by the way, Holly, my biggest issue with using that number is the fact that if you used that number as the number that you’re going to use to schedule how much money you need to save and how much money you’ll have, and you don’t hit that number … which we can all agree is a very exaggerated number … then you’re going to have a huge shortfall based on your expectations come time for retirement or whatever you want to call it, passive income time. Guaranteed, it’s just not going to happen, and so people are not going to have enough money, because they thought they would have a certain amount, and it didn’t come true.

Holly: Also, Nate, what is so true is you have to understand, if you are using that 12% average annual return, you are going to be way under-invested for retirement, seriously short when you go to retire, especially if he thinks and he recommends that you take out 8% retirement each year. If you’ve worked on a 12% average, and you don’t have the money to take out 8%, you’re going to be having to go back to work, and that’s one of the biggest pitfalls here, is that you aren’t using realistic numbers. And if we’re not using realistic numbers, then we honestly don’t know how to plan for our future.

Nate: Yeah, that is the biggest problem with Dave Ramsey. I believe some of his numbers are unrealistic, and so it makes it difficult to actually know what’s going on. First off, as you said, he says buy term, invest the difference. The problem comes when he starts talking about where are you going to invest the difference, and then the hyperbole involved in that. But even beyond that, and Holly, we’ve said this before, once again I understand why he has to say it. It’s simple. Buy term, the invest difference is a simple strategy that will probably work for a lot of people. It might not work for everybody, but it’s something you can do.

You run into the issues of the fact that, you know, Holly, we’ve heard people say, “I’m a fan of buy term, invest the difference.” Do people actually run those numbers? Like okay, the whole life would cost me this, term costs me this, so I’m going to buy the term, and then I’m going to save exactly the difference. Has that really ever happened in the first place, or do people just not end up following through with the concept?

Holly: I think they don’t actually follow through with the concept. I actually do know an individual that actually looked at here’s if you bought the term, here’s if you bought a whole life, and here’s based on that Ramsey illustration of 12%, and the term never made more than the whole life, just the traditional whole life earning 4%. And the reality is, is because they were constantly paying fees, once again, eroding that wealth. They’re paying a fee to somebody else. And because Dave Ramsey’s method is to really always put it into stock and mutual funds … no bonds and stuff … but the stocks are volatile, and so when they’re investing that, they have no backup if that stock drops. It’s gone, the money is gone. It’s kind of like we said, if the stock goes up 10% when you made X amount of dollars, and then it drops by … you made nothing the next year, zero is still zero. It’s zero. So if you have no more money, then what do you do? You’ve got to get that average.

Even the stock market is hard to come by, in regards to yes, I should be investing in this method. The concept of hey, buy term, invest the difference is great, but the reality is if your money isn’t saved somewhere else, sitting somewhere where it’s growing tax-free, then you’re going to do a lot better.

Nate: That’s exactly right, but also on top of that, just one more thought as I delve a little bit, and then we’ll move on to something else, the beauty … and I want listeners to get this … the beauty of Infinite Banking and why Holly and I are such big fans of it doesn’t have a ton to do with just whole life insurance and how good of an asset that is to own, and how profitable it can be. That’s great, but the beauty of Infinite Banking is the idea that you can kind of have your cake and eat it too, or you can have your money do multiple things. So it totally makes the buy term, invest the difference concept a moot point, considering the revelation of the banking concept, which is keeping money in motion, where you can actually pay money into a whole life policy and borrow against it to make an investment, and you can actually have not only the whole life policy and the guarantees and the tax-free growth and things like that that we talk about, but you can also go buy the Dave Ramsey 12$ mutual funds. And you can actually use the same dollar to do multiple things.

Is it a simple concept? No. Will Dave Ramsey ever follow it? I’m sure it’s not. It’s just probably too complex for what he believes his readers are there. What we’re trying to say is it’s not an investment if you see it based on what it really is, which is more of a banking tool, which is really what we wish people would start seeing the policies as, then there’s no discussion of buy term, invest the difference. It’s not even a part of it, because you can have the whole life policy and make the investments with the same dollars, and you get the best of both worlds. So regardless of what we want to talk about with mutual funds and their returns and things we can do with that, just the conversation itself doesn’t even have to be made if people understood what they could do with a whole life policy that you can’t do with a buy term, invest the difference strategy.

Holly: We’re going to take a short break and listen to our sponsors. When we come back, we’ll wrap up our Dave Ramsey – good, bad, and the ugly.

Are you tired of being stressed about money? The Dollars and Nonsense Podcast is sponsored by Living Wealth. Visit LivingWealth.com/freedom to get your free smart money ebook and sign up for a personal wealth presentation today. Living Wealth is a family-owned and operated business, which works with individuals, families, and even businesses to slay the money stress dragon. Our clients receive individual coaching regarding wealth creation and how to create a retirement income. You’ll be enabled to have cash today and in the future. Since 1972, Living Wealth has been committed to educating smart people on basic money principles, to assist them in becoming debt-free and finally find financial freedom. Let us help set you free. Remember to visit LivingWealth.com/freedom to receive your free ebook and even sign up for an individual wealth presentation today.

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Welcome back to Dollars and Nonsense. As we left, we were discussing just the basics of the buying term and investing the difference and the beauty of a Infinite Banking concept in a whole life insurance policy that you can borrow from. Another thing we really want to address is one thing Dave Ramsey promotes, very much so, is to pay off your mortgage, to get a 15-year mortgage and to pay that off as quickly as possible, and that then that alleviates debt for you. I’m just going to make one point, that even if you pay off a mortgage, you still have real estate tax, and you can still lose your house if you can’t pay your real estate tax, so you can be quick and pay down mortgages, but you have to realize that there’s still always going to be some type of debt or money owed to somebody, even if you’re paying cash for stuff or you have no mortgage. I’m going to let Nate address some of the key points of why you don’t want to pay off your mortgage, possibly ever, or why a 15-year mortgage isn’t always in your best interest.

Nate: Yeah, absolutely. It’s another thing that he talks about, as you mentioned, Holly, is his goal is to get everyone completely out of all debt and pay cash for everything, including a home. It’s simple advice once again, and it’s not necessarily bad advice in the grand scheme of things, but there is better advice. There really is. Objectively, there’s better advice. Is it bad to be completely out of debt? No, a lot of people would like that, but there’s a big difference between being in debt and borrowing money. There’s a difference between good debt and bad debt. There’s a difference between debt and owing people money.

When you talk about that, a lot of times people in the real estate world, it doesn’t make a ton of sense to purchase properties with cash when you could purchase properties and borrow money and increase your return. So in the world of real estate, Robert Kiyosaki, who I would trust and put him in a much higher level than Dave Ramsey as far as getting financial advice, he says leverage is key. Right now, with low interest rates that we’re in right now, money’s very cheap. You should borrow as much as you can get to go buy income properties and work with the money. That’s what the wealthy people do, is they turn the bank that used to be in loans, they turned them from liabilities to assets.

So I’d like to first off make the proposition that Dave Ramsey, he says all debt’s bad debt, I would disagree. I know a lot of times it would make more sense to borrow some money to buy five homes with 100,000 down than just buy one home in cash for 100,000. You’re going to make $20,000 down payments over five. It normally makes more sense to leverage money from the bank very cheap and get more properties, and most likely increase your return quite nicely. So there’s that aspect of it, that not all debt is bad debt.

I also have this issue where it’s hypocritical to a certain extent, his advice, and what I mean by that, and as Holly said, is his advice is to get people to pay off their mortgages as quickly as they can, hopefully take a 15-year mortgage over a 30-year mortgage, and then if you can, make extra payments and get that thing done in 10 years or five years or as quickly as you possibly can. The only difference between a 15-year and 30-year, the main difference is how much you’re putting towards the principal of the loan. We’ve talked about this before, Holly, in previous podcasts about equity in your home and is it really a great place for money, but you compare that to Dave Ramsey, and he says go buy term and invest the difference, because if you buy term and invest the difference in something that makes a higher rate of return, you’ll be better off, which is misleading to a certain extent.

But if you take that same kind of mentality toward the mortgage world, wouldn’t it make sense to take the 30-year mortgage instead of the 15-year mortgage and invest the difference, if the difference can make you a 12% rate of return inside of a mutual fund that he encourages, and it only costs you 4% to borrow the money? Wouldn’t it make sense if … let’s say the 15-year payment is $1,000 a month and the 30-year payment is $600 a month, wouldn’t it make sense to take the $400 and go buy mutual funds at 12% for 15 years? I’ll tell you, if you run the numbers, you end up with way more money than what you would need to pay off the mortgage at year 15, if his numbers really work out. So is he really giving you the best advice, good advice? Based on his criteria, it seems like it would make more sense to not lock money up in your house and to invest the rest and earn returns with it.

So is it really great advice to throw money at your house? You can back and listen to the podcast we talked about it, but in reality, even just showing with what Dave’s discussing, it doesn’t seem to ever make sense to try to pay off your house as quickly as you can when you could use that money to go generate most likely a higher return elsewhere and control the money a bit better than you can inside of the equity of your house.

Holly: Because often then what you’ve done is you’re asset-rich and cash-poor, and the whole reason why you would buy term and invest the difference is to have more of that cash to be able to invest it. If you think about his reasoning, what he recommends, he’s even contradicting himself in saying use a 15-year mortgage, get out of that debt quicker, because you will be paying less on a 30-year mortgage, but the reality is, is that you can use that difference to go invest it.

Nate: Yeah, and if you really are earning 12% and the mortgage is only 4%, why on earth would you put that cash flow towards the mortgage to save 4% in interest, when you could have taken that cash flow and earned 12%? It doesn’t make any sense, but yet that’s his advice. We have very similar advice as far as extending the timeframe and not leaving a whole bunch of money sitting in the equity of your home, because I don’t believe the equity in your home is the best place for money to sit, especially with interest rates the way they are. I think it would make a lot more sense to go leverage that equity and use it elsewhere, because not only are the interest rates cheap, but here in the US, we get a tax deduction for the interest we pay, so the real cost of the interest is even less than the rate, because you’re going to get a deduction for writing the interest payment check.

So it’s very cheap money, and if we’re really thinking like bankers, which is what we’re trying to teach people to do, we want to buy cheap money and use it to create a higher return. And that seems to make a lot of sense. Is it the most simple? No, so I totally understand why Dave talks about it, but once again, he’s very good at helping people get out of sticky situations and get financially disciplined, but then the advice he gives on the flip side, it’s not a criteria for doing the most that you can do. There’s a lot of holes in it that we’re sure you can do a lot better by taking advice from maybe Robert Kiyosaki or the other people who are really trying to help people build wealth, not just become financially disciplined. If that’s what you need, Dave Ramsey’s great, but if your goal is to build wealth, Robert Kiyosaki and those that are more outside the box do a much better job for people than simply having people stuff money in their mortgage and in their mutual funds.

Holly: I agree 100%. Honestly, you have to honestly evaluate where are you at, and if it’s I need help just living within my means, Dave Ramsey all the way. If it’s I want to leave a legacy for my family and be able to actually have retirement income that’s coming in, you’ve got to think outside the box, and you’ve got to get outside of Dave Ramsey and really investigate what he’s saying, and look at Robert Kiyosaki and what he’s written and what he’s saying, and even listening to individuals that are talking about out-of- the-box thinking to really use your money efficiently and to not get caught up into what everybody else is saying.

Nate: Yeah, definitely. I’ve heard of the joke where it’s in churches, which is what Dave Ramsey a lot of times markets to, you’ve got God’s word and Financial Peace University just one step lower than that. So in reality, though, is his word on financial means really the best advice? A lot of times when you look at it, it’s not always the best. Is it the most simple to follow along with? It might be. Holly, I think we both agree, it’s very simple just to live within your means, pay down your debts, and be debt-free. It makes it simple. We’re not opposed to doing that. We’ve been helping people do that for years, but at least we want people to think outside the box and understand that if you want to expand, there are things you can do to expand your thinking, expand your ability, and earn more money on what you have available.

So is all of his advice great? Probably not. He’s a bit too aggressive in tearing down other people’s opinions, especially when his advice has so many holes that it’s difficult to say I can’t in good conscience tell people if you invest in mutual funds you should expect a 12$ return, so base all your forecasts on making sure you earn 12%. I honestly think it’s a bit irresponsible. What he thought was going to help people may give people delusional on what they’ll actually get and hurt people by them being way short of where they wanted to be.

Some of his other advice, as we talked about with the mortgages and different things, if you’re a real estate investor and you follow Dave Ramsey, you’ll get smoked by the guys who are actually using leverage today. So there’s so many things to think of on Dave Ramsey and whether his advice is good. It’s great for those who don’t have a lot of discipline, but once you get disciplined, you may want to look elsewhere for the wealth-building advice.

Holly: Just to wrap up, there’s been good, there’s been bad. Really evaluate when you’re listening to people what they’re saying, and really actually look at what they’re saying and what they’re doing, and if they’re not doing the same thing, maybe you shouldn’t do it. If so many other people are saying there’s a better option out there, see what those options are.

Nate: Absolutely. Just one quick thought … You just rung something in my head, Holly … before we close down, it’s just so funny, he talks about just buying 20-year term insurance or something like that, because after 20 years if you follow my rules you’ll be self-insured, and then people ask him, “Do you own any life insurance?” He says, “Yeah, I own …” He owns a few million dollars in term insurance, he says. People ask why, he says because his wife wants it or something like that. It’s like a joke, but if anybody meets the definition of being self-insured, it’s Dave Ramsey. He’s extremely wealthy, and he’s done very well.

So if you really are going to become self-insured, that’s great, but once again, as you said, he’s not really following his own advice. He says there actually is a benefit, even when you have a whole bunch of money, to buy insurance, because insurance is always the transfer of risk. There’s always risk of you dying early, no matter what your age, and so transferring that risk to the insurance company makes a lot of sense. I just wanted to throw that in there before we close it up, is that you’re exactly right. He doesn’t always follow his own advice. He should not own any insurance based on his plan, but he does, because he actually sees benefit in it. He just doesn’t really want you to get screwed by us insurance people, so he’s trying to save you, even though he himself is perfectly willing to buy it and hold it, because he does see value in it or else he wouldn’t buy it, even after you get to the point of being self- insured.

Holly: I’m just going to say do your research.

Nate: Absolutely. This has been Dollars and Nonsense. If you follow the herd, you will get slaughtered.

Holly: For free transcripts and resources, please visit LivingWealth.com/e32.