“Ramsey is the pro bono financial adviser to millions of Americans who otherwise could never afford one.”
—Politico.com

dave ramsey reviewThere’s a gap in financial advice. Financial advisors, planners and money managers don’t typically do a good job of serving the working class. Many people are buried in consumer debt, living paycheck to paycheck. Many may never meet with a financial professional. After all—they lack funds to invest and it doesn’t make sense in their case to pay a fee for advice. These are people who have been largely neglected and forgotten by a financial industry that isn’t compensated to help them.

Enter Dave Ramsey. His Total Money Makeover is one of the best-selling personal books of all time. His radio program and podcast are heard by 14 million weekly. And over 5 million people have gone through his Financial Peace University program.

Advice, however, doesn’t have to be correct to be popular!

If you’ve ever been to a Truth Training with Todd Langford—a 3-day deep dive into using Truth Concepts financial calculators with my husband, who developed the calculators—you might know we’re not big Dave Ramsey fans. Dave’s advice doesn’t always make mathematical sense. His recommendations about some products and strategies such as whole life insurance are flat-out flawed.

And yet… it’s hard to throw a stone in a crowd without hitting at least one Dave Ramsey fan. (But please—don’t throw stones!)

Today, we review the pros and cons of Ramsey and his advice. And while we admit there’s plenty to criticize, there’s a lot to appreciate as well.

Dave Ramsey’s Best Advice: The Pros

dave ramsey pro conHere are ways Ramsey truly helps his audience:

Dave is a debt-busting critic of consumer lifestyles. In Dave’s Total Money Makeover, he writes, “We buy things we don’t need with money we don’t have to impress people we don’t like.” The futility of keeping up with the Joneses is a theme that Ramsey hammers home often, and it’s a point worth making.

While we can’t confirm the statement above originated with Ramsey, it’s spot on and painfully true. America’s consumer addiction is killing our future, and it’s a major reason why people aren’t saving more.

A bearer of bad news and purveyor of hope and motivator. Dave isn’t afraid to tell someone the tough truth about their financial self-sabotage. Dave won’t pull punches, but he’ll also give his listeners a light at the end of the tunnel. This radio show exchange quoted on Politico.com encapsulates Ramsey’s essence:

Chris, 28, is a truck driver and the family breadwinner; his wife is a stay-at-home mom. They have… $14,600 in credit card debt and have borrowed twice that much from their retirement account. They owe $59,000 on an SUV worth $46,000. His annual salary of $60,000 can’t buy a shovel big enough to dig out of the hole.

“The car is gone. It’s insanity… absolutely nuts. It owns you,” Ramsey says in his cigar-smoky southern drawl…. He orders Chris to sell the SUV and the couple’s other vehicle—a paid-off pickup truck with a value of $15,000. He then instructs Chris to take out a $5,000 loan for a clunker to drive while paying down other debts. “You guys are in such bad shape that I’m scared for ya,” Ramsey says. But, he adds encouragingly, all is not lost. “When I was your age, I was going broke and going bankrupt. And I had to start completely over, with little babies, and my marriage was hanging on by a thread. And I was so scared, I couldn’t breathe,” Ramsey says. “You can clean this up, dude, and I can show you how….”

A believer in self-reliance. Ramsey sees more Americans predisposed to economic dependence—and believes political promises are to blame. Ramsey warns that no political savior—Republican or Democrat—is going to solve all the economic problems or save people from themselves. “I now have to spend more time talking someone into believing they control their own destiny than I used to,” he says.

dave ramsey whole lifeDave will try to help anyone in any situation. For three hours every weekday, Dave Ramsey takes calls from people in all kinds of financial turmoil. He’s heard it all: debt collections, repossessions, bankruptcy, foreclosure—Dave will try his best to help absolutely anyone. And much of it is good advice:

  • Tell your bill collectors not to call you at work.
  • Get rid of the fancy truck you can’t afford.
  • Stop using credit to dine out.
  • Avoid racking up huge student loans.
  • Build your emergency fund.
  • Get a side hustle.
  • Take responsibility for your decisions.

An advocate for gratitude and contentment. One of Dave’s themes is that more “stuff” won’t make you or your family any happier—that you can choose to be happy now. “When you choose gratitude and seek contentment with what you have, you’ll be much happier. Plus, your family (and your bank account) will thank you later.” We’ve got no argument with that!

Dave teaches people to give. Ramsey teaches tithing and giving as a basic step of financial maturity. He inspires his followers to think beyond their own needs and become generous people.

Dave creates community. Ramsey followers come together to support each other in reaching goals and celebrating! Attendees of Financial Peace University, a 9-week course, can choose between attending online or finding a local group, typically hosted at a local church. Hashtags such as #DebtFreeCommunity draw together Ramsey fans online.

Dave gets people to take action. Countless people attribute Dave’s teachings, courses, books and/or community as the spark that led them to “do something” about their credit cards and/or student loans. His advice is clear, simple, and actionable. While many people languish for decades with consumer debt, Ramsey followers often tackle debt with an impressive vengeance.

He’s not boring! Let’s face it—it’s tough to get the average person to want to learn about personal finance. A recent poll of millennials found that most would rather go to the dentist than meet with a banker. Dave, however, has boomers and millennials flocking to his events. His strong personality and business acumen has made him a celebrity and brought the topic of money to many who may not have listened otherwise.

When it comes to inspiring middle and working class Americans to focus on their finances and eliminate consumer debt, Dave is a master. People who follow his advice are much better off than those who follow typical consumer habits. He has undoubtedly saved many from bankruptcy, divorce, and all kinds of suffering. And for that—we are grateful!

Dave Ramsey’s Bad Advice: The Cons

dave ramsey 12 percentOnce someone has dug themselves out of the proverbial hole, paid off their debts and established an emergency fund, Ramsey’s advice rapidly becomes less relevant. Speaking from his own experience rather than that of a trained advisor, there are concepts he misses or simply gets wrong.

“You’ll earn 12 percent in the stock market,” Ramsey is known to say. In spite of flack from many corners, including Forbes (“Dave Ramsey’s Plan for 12 Percent Returns is Not Achievable”), Investor Junkie (“Why Dave Ramsey’s 12% Isn’t Reality”), and USNews.com (“Why You Won’t Achieve 12 Percent Returns”), Ramsey has not backed down on his claim.

Dave has acknowledged that he is speaking of averaged returns, not actual returns—an important distinction that few of his followers would understand. (Read “Did Your Broker Mislead You?” for more on average returns vs actual or (Compound Annual Growth Rate). Yet all of his investment projections are calculated using 12 percent… something no financial advisor or planner with integrity would do. It gives investors false hope to tell them they can become millionaires investing $100 a month, as Ramsey claimed on one show.

High-fee mutual funds. Whatever you think of Dave Ramsey, he is a shrewd and savvy businessman. Not only does he motivate people to put all of their investments in mutual funds, but he has an army of advisors (“endorsed local providers”)—who pay him a fee for the privilege—ready and waiting to charge high fees for their recommendations.

Oh—and even if the market WAS delivering 12 percent returns? You would earn far less after paying mutual fund costs and fees to Ramsey’s recommended providers. Ramsey mysteriously does not recommend low-fee ETFs.

No asset allocation outside of the stock market. Most people own some stocks, which is fine—as long as they are balanced with other asset classes and especially non-correlated assets that won’t dive when the market does. Ramsey’s recommendation is to put ALL your investment eggs (aside from your emergency fund) in the mutual fund basket. He recommends four kinds of funds:

  • Growth
  • Growth & Income
  • Aggressive Growth
  • International

What’s missing? Everything else. Real estate, bridge loans, life settlements, private or peer lending, oil and gas, business partnerships, cash, perhaps a bit of gold as a hedge.

Unfortunately, when the stock market crashes—and it will—so will the investment portfolios of Ramsey followers.

Whole life insurance. Dave just flat out doesn’t understand how it works or why it would be a better place for long-term savings than the money market accounts or CDs he recommends for long-term savings. He pretends to be a truth teller about whole life, but he has said many inaccurate things about it, won’t acknowledge long-term rates of return, and has even given bad advice to liquidate healthy policies.

“Whole life insurance covers you throughout your entire life, which sounds pretty good, right? Wrong,” says Ramsey. “The truth is that you’ll spend a lot more throughout your lifetime on a high premium and may never even see the cash value.”

“Never see the cash value”!? Being that cash value is guaranteed AND guaranteed to increase every year, that statement makes no sense! Like many, Dave doesn’t understand that cash value is the liquid equity of a policy. The increasing cash value isn’t something you “lose” if you die. Rather, cash value continues to grow and build your death benefit, eventually equaling a policy’s face value (death benefit)—if you live long enough. In the meantime, the cash remains accessible.

Of course, whole life policies easily out-earn any guaranteed bank product over the long haul. Additionally, a policy’s face value with proper riders can be used for an insured’s terminal or chronic illness or long-term care bills, which makes whole life an ideal emergency fund and a fantastic way to get your dollars to do multiple jobs. (Oddly, Dave recommends long-term care insurance, which puts premium dollars at risk, rather than whole life with a long-term care rider—a more effective option.)

Ramsey is correct about one thing: life insurance is not an “investment.” Properly understood, it is a savings vehicle and a risk management tool. Though given Dave’s “mutual funds are all you need” investment philosophy, aggressive 12 percent return predictions, and admonition to use only term insurance, whole life would bring much-needed balance and stability to a portfolio.

Ramsey ignores opportunity cost. Ramsey’s shoot-from-the-hip advice often lacks mathematical integrity. One example is his neglect of lost opportunity cost. In a nutshell—when you use money for one purpose, you have to consider what else you might have done with it and what return it could have earned elsewhere.

Ramsey’s admonition to “pay off your mortgage early” (one of his 7 “baby steps”) is a perfect example of neglecting opportunity cost. If you believed you’d earn 12 percent in the stock market, why would you prepay a low-interest mortgage!? You wouldn’t! Even if you could earn 8 percent elsewhere, you would be wise to invest those extra principle payments in a side fund. Before you know it, you’ll have more in your side fund than you owe on your mortgage. (This strategy would actually allow you pay off your mortgage faster—IF that’s what you wanted.)

However… IF you understand opportunity cost—you wouldn’t prepay that mortgage! You would make minimum payments on your mortgage and focus on growing your investments instead of paying off your house. This is what we recommend and what financial calculators confirm… building assets rather than prepaying low-interest debt.

No differentiation between good and bad debt. To Dave Ramsey, there’s no such thing as “good debt.” Don’t bother challenging this assumption… you’ll be belittled and told that Dave and his associates “have all the data” and you shouldn’t listen to your “broke brother-in-law.” Never mind that none of Ramsey’s followers would have homes to pay off if it wasn’t for their mortgages!

Forget your credit score. Ramsey calls your credit score an “I love debt” score. He sees no use for an excellent credit score, since he sees no reason to use credit. His blog reads, “Once you’re out of debt and at peace with your finances, that credit score won’t matter anyway!”

Except when it does.

If you neglect your credit score, you could sabotage your chances of buying investment real estate or using credit cards to your advantage, for instance, paying off balances monthly and  racking up travel miles or cash back as you do.

Credit scores do matter. Without credit, you could even end up paying more for car insurance or be required to pay a utility security deposit.

Ramsey’s style isn’t for everyone. Dave sprinkles biblical references throughout his talks and uses the vocabulary of evangelical Christian circles. At the same time, it not uncommon for Ramsey to use name-calling or even belittle a caller. Between his bouts of financial and motivational advice, he labels people he disagrees with as “idiots” or “morons.” On occasion, his rants turn into harsh, bullying tirades.

The debt snowball can be inefficient. Mathematically, the most efficient way to pay down your debt is by paying off your highest interest debt first. Ramsey advocates paying off your smallest debt first, then adding what you were paying towards that debt to the payment for your next largest debt. In this way, you eliminate the number of debts you have at a faster rate (even if your total debts aren’t paid faster).

Since there is an important psychological benefit to the debt snowball, we’ll give Dave a pass on this one! Just be cautious if your biggest debt is also your highest interest… you wouldn’t want to delay paying that down.

Who does Dave Ramsey help the most?

If you ask what we think of Ramsey’s advice, we’d have to answer with a question… “For who?” While his investment advice can give people false hopes (the 12 percent myth), slow people down (neglect of opportunity cost), and leave them open to risk (no asset allocation), Ramsey provides genuine help and motivation to people living paycheck-to-paycheck, trying to break free from consumer debt.

The bottom line: Ramsey may have done as much as anyone else to motivate Americans to get out of debt and start saving. Ramsey’s advice makes for good radio, but that doesn’t make his investment advice solid. Any competent advisor or fee-based planner could poke holes in Ramsey’s recommendations. Perhaps The Balance says it best… while Ramsey’s talk radio show can provide some “good tips… investors would be wise to understand the difference between entertainment and sound investment practices.”

We agree with this Money.com headline: “Save like Dave Ramsey—just don’t invest like him!” After you DO get out of debt—call Partners for Prosperity. We can show you much more effective ways to save and invest!

What do you think? Do you agree with our review of Dave Ramsey? Leave a comment below!

—by Kim Butler and Kate Phillips