Is Dave Ramsey Right?

I often get asked about what I think about Dave Ramsey.  If you don't know who Dave Ramsey is, he is the evangelical, bombastic, personal finance radio celebrity.  His show has become widely popular, even appearing on the famed CBS news show Sixty Minutes. His show is taped delayed in Birmingham on a popular AM station. 

Clearly people are listening and he is known to take his show on the road, often meeting in large churches, charging admission to hear his rant against credit cards, debt, and ridiculous financial behavior.  He also sells his books, CDs, subscription services and church programs like Financial Peace University.

So what do I think? 

First, what is right about Ramsey.  When talking about basics, he entertainingly speaks about what should be common sense.  Stuff like, you can't spend more than you make.  Wow, now that is novel!  I also find some of his counsel regarding debt management to be helpful.  I don't subscribe to his "All debt is evil" philosophy and his biblical proof texting is disconcerting, but clearly many American's have some real debt issues and he does have something to say to that issue. I often agree with his assessment of the American fascination with the automobile.  My opinion is that automobile purchasing can be one of the most detrimental obstacles to achieving financial independent for middle income folk. So while, he is over the top, there are some snippets of truth in his advice. 

But beyond that, I have some real problems with Ramsey, including, what I consider to be a hypocritical, inconsistent philosophy with regards to many other things regarding personal finance.  After all there are other financial concerns beyond debt ratios and savings rates. 

The thing to remember is that Dave Ramsey is all about DAVE RAMSEY. You don't have to listen through more than one segment of the show to realize that this joker is a salesman, not a financial professional, which his is discreetly disclosed in an obligatory statement concluding his show. He is a marketing extradionairre and is willing, in my opinion, to compromise consistent financial practice in order to increase his network of advertisers and ELPs (endorsed local providers).  By the way, in case you are wondering, his endorsements are for sale, and it is not cheap. 

His investment philosophy is goofy at best and harmful at worst.  Ask him and he will tell you to just go out and buy growth stock mutual funds, but he rarely says more. Is he speaking of growth as an asset class? Large Cap or Small Cap?  What about value funds, which outperform growth historically? And how do you choose which fund of 17,000+ funds that are out there. He doesn't elaborate, but he doesn't mind telling  you over and over that his funds (which he never names) average 17-18%!  This is just irresponsible, particularly considering that his audience is often desperate and take his words as gospel.  A year to year expected return of 17-18% is not realistic over a time horizon of any length. 

His asset allocation of 25% aggressive growth, 25% growth, 25% small cap and 25% international that he often lauds, is not good advice either.  He has no concept of risk tolerance and if he thinks that the above mentioned asset allocation classifies as diversification, well he is wrong.  Folks, risk is real and is as important as return.  To chase return with no regard for risk is irresponsible and would get any real investment adviser sued in a heartbeat. 

Another real concern is his unwillingness to speak to the inherent conflicts of interests that exist with commissioned and/or fee-based financial advisers.  This does not seem to match his persona of being a champion of the people.  I have looked at some of his ELPs and I can tell you that I would not get close to some of them with my money.  He wants to bash the insurance agent, but those same problematic practices exist in commissioned/ sales based investment products.  But guess what, to speak about to those issues would cost him money.  It is a double standard, wrong, and borders on the unethical. 

Finally, the fact that he markets heavily in the church is a problem for me.  Many adherents of faith communities will indiscriminately accept his advice because for them it has become legitimized  because they heard it in their church house or faith community. 

Does Dave do some good?  Yes.   But  I would advise you not to stand too close to the sheep, because there are some wolves nearby.

Comments

[Steve Herman]

I have a similar opinion of Dave.

Steve Herman
www.financialadvantages.com

[Aubrey - Hunstville, AL]

No secret revealed here. Of course he is a salesman, he proclaims it every he gets a chance. Common sense wrapped up in a motivational package.... and he makes millions. But you know what, I don't mind. I think its great that he can make a great living while helping folks. Is there a problem with "ranting" against credit cards, the crack cocaine of the lending industry? I think more folks should be ranting.

Although I am uncomfortable with Big Church Business in America and the "Six Flags over Jesus" approach to worship these days, I think it's great that many churches offer the financial peace classes. And while I don't particularly subscribe to his Southern Baptist type theology, I do think that he uses sound, applicable bible verses to back up his financial principles for living in this time world.

I won't accuse your opinions of being false, but I do recognize that many of your statements seem exaggerated or somewhat out of context. For example, he's never said that debt was evil. He does say that debt is dumb... and I can't argue with that. Please, just read or listen a little more carefully next time. You're correct in that he does routinely speak against cash value and supplemental insurance policies, but the only insurance salesmen he's ever bashed are those that relentlessly push cash value polices. If I'm not mistaken, you oppose these type products as well. Well, maybe I am a mindless sheep. But I am a sheep with $56k less debt than I had two years ago... And it didn't cost me a penny. I didn't have to buy a thing. No "system" or scheme, I just listened. And do we really want to fault him for selling his wares?

And what is Steve (above) selling? I assume a multi-level marketing org with expensive software and a magic heloc.... gimmie a break.

[Libertarian Kevin]

I tuned into Dave on the advice of a young couple I know who are poor, debt free, and insanely in love and happy. Dave Ramsey's "system" of common sense and no-debt helped them. Like me, they are realistic -- they know Dave Ramsey sells the ELPs, life insurance, mortgages, etc. They cherry pick the information and advice they need to help themselves budget, plan, spend wisely, and be generous when and how best suits them.

Are there mindless automatons out there? Sure, but if they are debt free AND giving Dave some of their hard earned money, what is that to you or me? Would we rather have them IN debt, without a budget, without a plan, and without a prayer?

A debt-free America would be one amazing and profound event -- and politics as usual would be dumped on its head! Money is power -- period. If you want to give your money, and your power, away -- go ahead, I'd like to keep mine and THANK Dave Ramsey for helping me.

[Edwin]

His investment advice is crap. You're absolutely correct -- value funds, particularly small cap value, have been among the best performers over an 80 time span.

He is now telling people that a good mutual fund generates 11-13% annual. I have yet to see more than a handful of funds that can reliably do this over a 10 year period net of fees.

The best portfolio available to most is the Fundadvice.com 100% equity portfolio that has about an 11% backtested return.

If you want a great one, check out some portfolios based on DFA. They're exceptional. Maybe getting about a 12% return over 80 years.

So in other words, listen to him for entertainment, but not investing advise. He knows not what he talks of. He constantly pimps the real estate as an investment, but bashes REITs. Makes no sense.

[Mbrown1010]

Dave is giving advice to the average over spending debt carrying American. Grounded in common sense, not overly complicated. In a society thats want to appear more financially sophisticated I'm impressed that Dave has a kept it simple stupid approach.
Make no mistake The Dave Ramsey Show is a for profit business (I'm ok with that)! We still live in America right?