Why Dave Ramsey is a huckster.
If Wes Anderson made a horror film…
Who’s Ronan’s daddy?
I had no idea Ramsey was saying you could average 12% returns in the market.
Dave Ramsey sounds scary. I prefer David Chilton’s “The Wealthy Barber” if I’m going to read someone’s folksy financial advice – http://www.wealthybarber.com/
Hey, did you read the xkcd on rewriting headlines for historical events to maximize clicks? (I’m teasing) Ramsey is not by any means my people, but I don’t think anything in the article proved that he’s a “huckster.” The analysis on the economic cost-effectiveness of paying of higher interest debt first v the behavioral incentive to pay off smaller debts first is case in point. First, the author attacks Ramsey for giving the economically irrational advice but then admits that in practice, it’s the behavioral economics that win out in whether people actually pay off their debts.
I disagree with Ramsey because I do think there are a group of people who simply cannot sustain their families on the work that they can get (the McDonald’s budget proves that to me). But, I think his advice is meaningful to those who are simply living beyond their means (the couple they started with, who owns a camper and a boat and has significant debt, which they pay off, only to see “debts they can’t even remember” crop up).
Did you read the whole thing on Ramsey? He’s suggesting that certain investment professionals, ones who pay him money, can help you average stock market returns of 12%. If that’s not hucksterism, it’s only on the technicality that he’s smart enough not to specifically promise those returns.
The Standard & Poor’s 500 index is up 24.8% for the year today. http://us.spindices.com/indices/equity/sp-500
On September 4th, it was up 12.13%.
So, if the investment professionals advised readers to buy index funds based on the S & P 500, his suggestions would be true–this year.
Bonds are down, as in, a negative return. http://seekingalpha.com/data/bonds
They’re talking about saving for retirement. Anybody who suggests to you that your retirement fund is going to average 12% returns is trying to deceive you.
10% is not unreasonable, though, long-term.
DR has a couple of very good reasons to have a list of endorsed investment people, namely that his personal finance plan is fairly specific and there are a lot of shady practitioners. 1) Many “investment planners” are just poorly disguised insurance salesmen selling terrible financial products (whole life insurance, bad annuities, etc.). 2) A lot of brokers are more than willing to sell stocks to people with substantial debt. 3) Worse yet, (at least pre-2008 crash) one frequently encounters brokers who encourage clients to borrow against their houses or not pay off their houses, just so they have more money available to put in the stock market.
DR’s Endorsed Local Providers are required to take even very small investors. DR encourages listeners to look for financial professionals “with the heart of a teacher.” He says don’t invest in anything you don’t understand. He also discourages listeners from investing in single stocks and timing the market.
DR deals with a lot of people with very limited means. It would be awful if he were to tell listeners to invest 15% of income for retirement, give no further instructions, and then have them wind up falling into the hands of a Bernie Madoff.
A 10% stock market return long term is less unreasonable, but hugely different from 10%. If you put away $1,000/year for 30 years, 10% gets you $181,000 and 12% gets you $270,000.
Also, leaving leaving 100% of your retirement funds in stocks for the whole time is dangerous. 2008 should be on peoples’ minds, especially as they get close to 60.
Yes, I agree that recommending investment professionals who are going to help you gain average stock market returns of 12% is hucksterism. But I didn’t it in the article (are people referencing something else)?
It’s in there. Just CNTL+F for “12″.
I can’t access the names of local endorsed professionals on the Dave Ramsey site, because I’m not giving them my personal info. I’m not willing to trust the article writer’s opinion of the precise promised returns. There’s a difference between opining that it is possible to achieve a 12% return, long term, in the stock market (which DR seems to have stated at times), and promising to achieve that return to a fee-paying customer.
Where one stands on this article reflects one’s own opinions about finances. The writer seems to believe that declaring bankruptcy and/or walking away from an underwater mortgage might be a good step. I’ve certainly seen financial writers in the press pushing this idea. I don’t think it’s good advice, if one can pay a mortgage. Some people are finding this out now: http://www.marketwatch.com/story/foreclosures-dog-even-wealthiest-home-buyers-2013-10-18.
Oddly, declaring bankruptcy might make sense if one followed Dave Ramsey’s advice, and never borrowed again. In that case, you would not care that no one would lend to you, or that you were paying higher interest rates than people with better credit scores.
I think, per what Amy has said earlier, the Ramsey allows limited borrowing to buy a house. And I don’t see anything in the article suggesting that people who can service their debt should stop doing so.
We have an account we like to use for rate of return calculations, in real life, as opposed to hypothetical calculations (a retirement fund, with both a government bond and a S&P style fund, to which we do not add funds, so the raw numbers give you yield). Over the last 14 years (averaged), the stock fund has averaged a yearly rate of return of 3.8%, while the bond fund has averaged a 3.6% rate of return. The stock fund has gyrated wildly, with individual years yielding rates of return of -15% to +25% (depends on which month you start the calculation, and there could be worse and better years).
I think the standard number used for rate of return for stocks is 7% (unless you’re a pension fund trying to make up for losses by estimating unrealistic yields). My suspicion though, is that 7% is an overestimate going into he future. I’ve read at least one article arguing that the changes in financial markets are skewing the stock market in offering less of a premium for the risk.
Our back of the envelope fund calculation is an anecdote in support of that hypothesis — right now, we’re getting nearly no (.2%) risk premium in return for the stock market volatility. We expect that money will stay there for a while, so we’ll be able to see what the yields are in the long term, up close and personal.
I do not believe any investment adviser will, on average, produce 10% yields (let alone 12%) and I’ve always hated hypothetical calculations on the VALUE OF COMPOUNDING!!!!! that rely on those unrealistic yields.
Ronan should also do morphs of Mia Ronan & Mia Frank v Woody. It would be fun.
Without the Mia input we can’t really judge, but I vote for Frank based on the pictures (except that I think that Ronan doesn’t look exactly like that picture, which has been refined, photographically).
I feel like Helaine Olen doesn’t really “get” Dave Ramsey as a phenomenon.
Megan McArdle wrote a very good piece here that is a corrective to Olen’s:
I’m going to write more later about the Olen piece itself, but here for the moment is my testimony.
Starting from the time my husband and I got married in 1998 until around 2006, I was a complete financial moron. I believed that all we had to do was make a little bit more money and we’d be OK, and nothing I did right now mattered, because we’d have higher income later and anyway, we really NEEDED the thing I wanted. We were in residence on campus from 2003-2007, and hence had no housing expenses at all (no rent, no utilities, no maintenance). Theoretically, we should have been able to save for a downpayment for a house during those four years. This was not the case. In fact, at some point toward the end of my nearly decade-long spree, I was spending $500 a month more than we were taking in. When my husband asked me, can I get a new electronic widget, I always said yes, because I had no idea where we were. We also did not start my husband’s retirement savings until about 4 or 5 years into his first real job. Toward the end of our time in residence, when we were starting to think about our next location, I started to wake up. I realized that my husband was making good money, more than I’d ever dreamed of, and we somehow had debt and no downpayment and were no closer to buying a house than we had been when we arrived in DC. Meanwhile, house prices had gone up 20% a year and we now had two kids. A close relative (who had made some huge financial mistakes in his time) turned me on to Dave Ramsey in 2006. I started listening to DR’s radio show and read his book The Total Money Makeover, which explains the Baby Steps.
During that year, we used my husband’s extra hobby programming money to pay off credit card debt. We moved to Texas in 2007 and started the Baby Steps in earnest. Our income had risen substantially, but so had our expenses–we had $2,000 a month in new expenses to deal with, due to rent, utilities and private school for our oldest. Also, we bought our very first car. On arrival in Texas, we started the debt snowball.
I went to Financial Peace University at a local church (the pastor who led the class had put his kids’ college on credit cards). From 2007 to the present, we started giving 10% of our net income to charity, finished paying off our credit cards, paid off our car, paid off my student loan, saved about 3 months in emergency funds, continued contributing to retirement, moved three times, saved a downpayment, bought a house, and bought a little furniture and did some minor repairs, all in cash. As of now, we have 25% equity in the house we bought five months ago (half of that was a gift from grandparents and half we saved over the course of half a decade) and we have accomplished a six figure shift in net worth over the course of six years. Barring the unthinkable, I will never pay payments again. We are currently plotting the purchase of a minivan, and we are going to pay cash.
The outstanding mortgage is less than 2X our household income and it’s on a 20-year note. I hope we will pay it off rather quicker than that.
I get that most of the people who listen to Ramsey are coming from a very different place than Olen (who I assume is a financial journalist), but that sort of makes the hints of 12% returns even more problematic.
Frankly, I think the rate of return is kind of academic. If you’re doing what Dave Ramsey says and putting 15% of income into retirement, it doesn’t really matter if he’s off by quite a bit on the actual rate of return. Given that the average 401(k) balance is around $80k, anybody who gets into mid-six figures is doing really, really well.
Retirement planners tend to want to see you have a million or two or three, but really, how many retired people (even comfortably retired people) do we all know who have that much in investments? An estate of that size is unusual.
(That article says that the average 401(k) balance for over 55s is now $255k, which I think is really good. The small print on that is that they were only counting over 55s who have been at their employer for 10 years or more, which I think means only counting people who have particularly charmed lives, so I think that it’s an interesting number, but not a particularly useful one.)
I put this stuff about the rate of return in the same category as DR’s stuff a few years back on it being a great time to buy a house. I was a big housing bear at the time, and it made a shiver go down my spine to hear him say that, but when you consider the context (that he wanted people to first pay off ALL debt, save a substantial emergency fund, and only then buy a house on a 15 year note that consumes no more than a quarter of household income), it was a relatively harmless thing to say. If you meet all of those qualifications, you could pretty much have your house be destroyed in an event that you weren’t insured for, and still do OK.
The rate of return is academic, if an academic says it. Or your uncle or the guy at the bar. I agree that getting people to save at all is often a challenge. However, for a person who presents themselves as working for you (i.e. he takes your money for a class) and recommending somebody who pays him for the endorsement, I think it matters greatly that the claims are strictly accurate. In fact, I think it is dubious just to be doing both at the same time regardless.
“However, for a person who presents themselves as working for you (i.e. he takes your money for a class) and recommending somebody who pays him for the endorsement, I think it matters greatly that the claims are strictly accurate. In fact, I think it is dubious just to be doing both at the same time regardless.”
I can’t quite recall, but I don’t think that DR mentions his endorsed local providers (which are also CPAs, insurance people, etc.) in the Financial Peace University Course. In any case, they do not feature prominently and the retirement class is just one of the sessions. Here’s the schedule for the new class:
I’ve listened to him for 7 years on the radio, and it really isn’t like what Olen is saying. I guarantee you, he does not say, if you use one of my endorsed providers, you’ll make 12%. I have never, ever, ever, ever heard him say that. At separate times, he will recommend his local providers or say that a good mutual fund will have a better return, but he never combines the two in the same sentence. If we had a somewhat different legal climate, I think DR would have an excellent case against Olen for defamation and libel.
Here are verbatim quotes from the Total Money Makeover book (2003 edition), which is the primary book for doing the Baby Steps:
“The stock market has averaged just below 12 percent return on investments throughout its history.”
“I select mutual funds that have had a good track record of winning for more than five years, preferably for more than ten years. I don’t look at their one-year or three-year track records because I think long term. I spread my retirement investing evenly across four types of funds. Growth and Income funds get 25 percent percent of….[blah, blah, blah--no mention of endorsed local providers]…For a full discussion of what mutual funds are and why I use this mix, go to daveramsey.com and visit MyTMMMO.”
“The invested 15 percent of your income should take advantage of all the matching and tax advantages available to you.”
As a matter of fact, I’m not even sure that the Endorsed Local Providers feature at all in the retirement chapter of the Total Money Makeover, which is where you would expect to see them. I was looking at it casually, and nothing like that jumped out. There certainly isn’t a paragraph devoted to them that I’m seeing (although I admit I’m drinking decaf this morning).
DR’s advice is “unconventional” in the financial world, so he probably just got sick of having clients come back to him and say, “My CPA told me not to pay off my house because of the tax write off” or “My broker told me to take out a home equity loan and invest the money with him” or “My insurance guy told me to take out a whole life policy.” It’s presumably fairly resource-intensive to vet financial professionals, so it’s not unreasonable to have there be a fee for doing so. Also, I seem to vaguely recall that his investment people are fee-based, rather than commission-based, which is a very good thing.
The financial world is so very shady that DR doesn’t really peg the Shadyometer.
Anyway, if you want to see what McArdle thinks about retirement fund returns, her piece last week on about public sector pensions last week is something good to keep in mind even if it isn’t directly on target.
Taking a different tack, I gather investing comes after paying off debts, tithing, paying in cash, and accumulating an emergency fund. Just doing that would put them ahead of many (most?) Americans.
One in seven people earning between $50,000 and $75,000 have no emergency funds and less than 50% of Americans earning above $75,000 have adequate savings.
Jeremy Siegel suggests (i) that an 8% real return (which would equate to about 11% nominal) is a fair summary of the stock market’s past performance over 200 years and (ii) that substantially all your retirement money should be in stocks. Now, I know that there are always a bunch of cranks out there (people like Arnold Kling, or many of the commenters at Crooked Timber) who insist that the professors at places like Harvard and Wharton are hucksters and charlatans, but I am a very conventional thinker, who generally relies on what highly-credentialed academics tell me.
Ramsey’s advice on college seems to be about the same as Laura’s.
Keynes was a professor at Cambridge. Just saying.
Keynes was a genius. Maybe cranks like Rand Paul or Arnold Kling don’t like him, but I have never said a bad word about him. As a matter of fact, I kind of thought that Obama’s tax increases this year, when the economy is still so weak, were a bad idea.
If I am remembering my Jane Austen correctly, those English gentry families were getting 5% return on their capital. So, an heiress with 10,000 pounds in her fortune would have an income of 500 pounds a year. The inflation rate would make the difference, though, between that being miserable and quite respectable.
I think I get where Dave Ramsey is coming from, especially in a time of easy credit, the time that shaped his thinking and frames his advice. I think his advice to get out of consumer debt is on point for many people, who are indeed frittering away what income they have in search of cheap consumer goods. I think, on the other hand, that a class of people simply cannot make their budgets balance on what they can earn (if balance means paying for food, housing, health care, education, . . . .). For them, the exercise in finding ways to spend less is a recipe for doing the impossible. But those people are only a subset of those who can’t make their budgets balance; there are some who are making unwise decisions and his advice will help them.
I first started reading financial planning books in the 80′s. Not sure why, exactly, since I was in grad school, but the books I found (which were probably out of date at the time) were focused on decision making in a time of high inflation (where decisions about debt are different than they should be now). Ramsey’s advice reflects the last set of years, a time of easy credit and low inflation.
There’s a subset of DR’s advice (particularly on the radio, rather than in the books), which is designed for extreme hard luck cases. He’s where I’ve learned a lot of stuff I really, really hope never to use. DR will teach you how to deal with debt collectors (know your rights under the Federal Fair Debt Collection Practices Act, no electronic access for creditors, save up and make an offer of a lump sum, settlement deals must be in writing, be very sure that your creditor is not also your banker, you’re not going to jail just because you wrote a hot check at a payday loan place–that is their business model). He also has a method called “the four walls,” for dealing with situations where your income is not sufficient for covering your bills. Here’s his explanation of his “four walls” system:
“Here’s your order of events. You need to take care of what we call the four walls. The four walls of your home have to be protected first. This comes from, “Take care of your own household first.” What do we do? Food—buy your family food. That’s the very first thing you do. The next thing you do is keep the lights and water on—utilities. The next thing you do is take care of shelter. Then you take care of transportation, and then you take care of basic needs clothing. We pay the house payment and the car payment, we eat, and we keep the lights on before we do anything else.
“Do not be behind on your home and current on your MasterCard and your student loan. If you’re going to be behind on something, if you have to choose to be behind on something—and I’m not recommending being behind—choose to be behind on things that don’t matter as much. They’re called unsecured creditors—creditors that don’t have any security. They don’t have a lien on anything. They’re not going to take away basic necessities of your life.”
A credit card collector is never going to tell you, you buy your kids groceries–I’ll wait. Their job is to get you to send them your kids’ grocery money, which is pretty horrifying.
(By the way, some people are always yammering about the unbanked poor. I have a secret for anybody who is wondering why poor people don’t have bank accounts. One of the reasons that they don’t have bank accounts is that they have outstanding debts, and if they keep money in the bank, they run the risk of having their accounts tapped by creditors. It’s safer for them not to have an account.)
For my personal financial planning, I use a 5% rate of return, on a good day. On a bad day, I assume that we will earn every dollar we save, with no rate of return at all.
5% is Bogle of Vanguard’s number, who goes on to say that he thinks that the world, including pension funds, needs to adjust to this new rate of return. Bill Gross says he thinks equity returns will match GDP growth, at about 3.5%.
I like this NYT graphic on rates of return over different year spans.
The NYT graphic shows returns after taxes, which will vary a lot by individual. If you are Rockefeller in 1935, you face a 91% tax rate, but you also you have a lot of tax shelters available. In contrast, if you are a middle-class person today investing in a 401(k) and then planning on living on $40,000 a year in retirement, you won’t ever pay much in income taxes on your investment income. So any “after-tax” figure should be examined carefully, and may not be that relevant to Ramsey’s audience.
OK, now I have some time to go through the Helaine Olen piece.
“Millions of people follow his biblically inspired advice. It goes like this: 1. Purge yourself of debt; 2. Live on cash; 3. Pretend economic trends don’t affect you; 4. Blame yourself when they do.”
3 and 4 come straight from Olen’s (or her editor’s) imagination. Admittedly, DR does not pay a lot of attention to economic trends, but that’s because his advice works just as well in good times and bad. Actually, his advice works even better in bad times. In good times, you can borrow money, make a bundle, and look like a genius. In bad times, you wind up with half a dozen underwater rental houses in bad neighborhoods that you can’t sell and can only rent out to ne’er-do-wells who pay late, don’t pay, and rip up your property before they leave.
“Anger at predatory lenders and disgust with the indentured servitude of debt have been a huge part of America’s public consciousness since the financial crisis of 2008. They have fired the politics of Occupy Wall Street and the careers of financial reformers like Elizabeth Warren, who are calling for greater financial regulation, a stronger safety net, and efforts to reverse decades of increasing wealth inequality.
Ramsey takes the disgust with debt in a different direction.”
This is where Olen gets both Dave Ramsey and Elizabeth Warren wrong. Dave Ramsey has often spoken very warmly of Elizabeth Warren’s work, and he has very harsh language about Bank of America, American Express, etc. (Did you know, for instance, that if you have a corporate Amex card and your company fails, Amex will hold you, the employee, personally responsible for the bad company debt? It’s true.) He explains their legal rights as debtors to callers, explains the various dark arts used by collection agencies, and routinely tells besieged debtors to use an air horn on harassing collectors.
Likewise, Elizabeth Warren has written a well-known personal finance book entitled “All Your Worth.” She teaches a 50/30/20 budget, with 50% of income being spent on needs/fixed costs, 30% on wants, and 20% on savings. (I don’t follow that plan, but it’s a good system, because it means that if your income is cut in half, you still have enough money to cover needs.)
There is substantial common ground between Dave Ramsey and Elizabeth Warren, which Olen would realize if she were more familiar with her subject.
“Ever since the Ackleys discovered Ramsey four or five years ago, they have been slowly, methodically, and painfully paying down their bills while refusing to take on new debts.”
A harder working writer would have found a horror story to insert here, but all Olen can come up with is a family that is successfully working the plan.
“And no bailouts: In all but the most extreme cases, Ramsey abjures bankruptcy—the one legal avenue Americans have for debt forgiveness.”
I’m starting to get the feeling that Helaine Olen is unqualified to be a personal finance writer.
If she had spent any time listening to Dave Ramsey’s show, she would know that he often coaches callers through the debt settlement process. Bankruptcy is not “the one legal avenue Americans have for debt forgiveness.” It is often possible to offer a settlement and have creditors forgive bad debt without going through bankruptcy. Borrowers settle bad loans for a fraction of face value every day. (Consumer Credit Counseling does this sort of thing, but it’s even better to do it yourself.)
Also, Chapter 13 bankruptcy (which is where higher earners tend to wind up) is very restrictive and unpleasant. There’s very little benefit to doing a Chapter 13 bankruptcy rather than settlement.
“The problem is one of interest rates. Let’s say you have two major debts: a $5,000 bill charging 10 percent interest and a $6,000 bill at 20 percent interest. Imagine you can only pay them down by a few hundred dollars every month. Following Ramsey’s advice to pay down the smaller bill first would lead to a significantly larger long-term tab.”
The problem with this argument is that with the “gazelle intensity” that DR preaches, there is not going to be a “long-term tab.” It would not be unusual for a DR listener to pay off both loans in the course of a single year.
“But he argues that it’s more important for people to start feeling positive feedback by closing accounts.”
I remember when we first started paying off our credit cards. It was a huge relief to pay off the little store credit card balances, because as I discovered when they were gone, they had been causing me a lot of stress.
“If you talk to personal finance and bankruptcy experts, you’ll discover they believe many people wait too long to declare bankruptcy, and cause themselves unnecessary financial harm in the process. “What happens is they take money that would be protected [in a bankruptcy filing], like home equity or retirement accounts, and keep throwing it at unpayable bills,” personal finance columnist Liz Weston told me.”
That’s a goofy thing to blame Dave Ramsey for. He tells people what their rights are with regard to creditors and does not encourage borrowing money from either home equity or retirement accounts. I think he makes an exception for retirement accounts if it can prevent a bankruptcy, but in the situation Weston is discussing, it’s not preventing a bankruptcy, just delaying one.
““Bankruptcy, despite what you hear in the popular press, is still very stigmatized,” says Pamela Foohey, a visiting professor at the University of Illinois’ College of Law. “You don’t want to believe you are a financial failure.” People are looking for ways to avoid declaring it, even if it’s clearly the best course.”
A lot of people are being encouraged to file bankruptcy under inappropriate circumstances. A shady bankruptcy attorney will tell you to file on $10k in debt and people often call DR wanting to file bankruptcy when 1) a lot of the debt is on things they plan to keep (like cars or houses) and/or 2) the debt is the kind that cannot be gotten rid of through bankruptcy (i.e. student loans, child support, back taxes, etc. DR often reminds people that they can’t declare bankruptcy on debt and expect to keep the stuff that the debt is attached to (i.e. cars and houses).
I don’t know how you find statistics on whether people are under- or over- filing for bankruptcy. I don’t suppose it’s easy enough to define.
You are financially solid now, Amy P, not because of your frugality (which is commendable), but because your husband made more money. A 1,000 word post is coming. Give me 30 minutes.
1,000 words for free.
Sigh. What would Dave Ramsey say?
You forgot to add that we also moved to a less expensive area. Paying no more than $1,000 a month for rent our first four years in Texas was extremely helpful.
I was more than capable of spending my husband’s extra earnings. Really, truly. Just like we (OK, I) blew the opportunity to save money when we lived in residence and had free housing and utilities worth easily $2,000 a month (probably $3k, actually, given location) and overspent that by $500 a month on a bad month, I could have blown my husband’s software money and I could have blown the raises. My particularly bad years were after we moved to DC and were suddenly making way more money than we had ever made before. I felt like we ought to be rich (remember, I never had anything as a kid). What I did not realize at the time, though, was that financially speaking, it was a horizontal move from being a grad couple in Pittsburgh to being a junior faculty couple in DC. And starting a family meant that our disposable income was suddenly much lower than it had been when we lived in Pittsburgh. What helped me was stomping on the idea that someday we’ll make more money, so it doesn’t matter what I spend now. I started thinking, this is probably the best we’ll ever do, so let’s plan on living on this income.
I have a seriously pink kitchen and acres of dirty mauve carpet in our new house. This is what we’re going to live with until our kids are set for college and until we have cash to renovate. We are not going to borrow a dime either to buy a new car or to fix up our house. It is all going to happen in cash, or it’s not going to happen. You may think, well you’ve got a good income, which is true, but it’s just as true that I could spend that income and much, much more with very little effort.
It may be difficult for you to understand, but it is possible to simply not intuitively understand money or debt. If you don’t have a plan and you’re a natural spender (like I am), the money just evaporates. It’s like sending a kid to Chuck E. Cheese with a bag of quarters.
Making more money does not necessarily make people more financially solid. I’ve known many people who make lots of money and don’t have two nickels and whose every pay raise evanesces, leaving them baffled each time.
“There is substantial common ground between Dave Ramsey and Elizabeth Warren, which Olen would realize if she were more familiar with her subject.”
Yes. In “All Your Worth,” Warren’s financial recommendations (most of which are very good, and strongly resemble Ramsey’s!) also assume a 12% annual return from the stock market, which was the historical average at the time the book was written.