Dave Ramsey, underneath the scrutiny of financial regulation, has knowingly or intentionally unknowingly altered, tainted or ignored math to support his beliefs and claims. Like Lance "I use other people's blood" Armstrong, Ramsey has mislead the American public about his work. I know this sounds harsh. It is. I want it to be. The holidays are a time for giving. My gift to you is truth and reason.
For those who like, love, or dare I say… adore Dave Ramsey, you have two choices:
1. You can stop reading here and email my editor all of the reasons why this piece and the author are distasteful and wrong. Her email address is [email protected].
OR
2. You can continue to read and learn how Dave Ramsey is nothing more than a slick salesman who preys on the desperation of broke people.
Myths and Truths only today. I'm not going to give you opinions, nor objections, I'm just going to give you Myths and Truths. Facts not theories, show Ramsey has no clue.
Myth No. 8:
All debt is bad.
The Truth:
All debt is not bad. I know many wealthy individuals who use credit cards responsibly. They use points to obtain free rewards like cash back and airline miles.
I've also got many clients who used mortgages on investment properties without subjecting themselves to too much risk by over-leveraging.
What about student loans? Are all student loans bad? We'll get to this later.
See also:
Contrary to Dave Ramsey, this columnist argues that not all debt is bad. (Photo: iStock)
Myth No. 7:
Debt led to Dave Ramsey's bankruptcy.
The Truth:
Dave Ramsey was a debt-aholic.
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- He purchased a rental home by maxing out several credit cards.
- A local banker suggested he was over-leveraged (i.e., had borrowed too much) so he withdrew $10,000 in the form of a cashier's check. He put on a suit, jumped into his Jaguar and drove to another bank. He parked in front of the bank president's window, walked in, handed over his financials and the $10,000 cashier's check. He walked out with a new $100,000 line of credit.
- Dave Ramsey borrowed money for everything and anything. He took loans for trips, cars, and boats. He even borrowed millions in high-risk callable notes, which meant the lender could demand, at any time for any reason, the balance be paid in full within 30 days.
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During the biographical documentary, "Like No One Else: Dave Ramsey's Story," the entertainer recounts his rise and fall, and he divulges how those loans caused his bankruptcy.
Alcohol doesn't kill the liver of an alcoholic, the quantity consumed does. Like an alcoholic, Dave Ramsey enjoyed his vice in excess, at dangerous levels, and he could not and cannot be trusted with this vice.
Myth No. 6:
You'll spend more when you use credit cards.
The Truth:
Dave Ramsey and his legion of loyal, no back-talk, no gossipers will never concede that his staff has incorrectly cited a study that indicated people spend 14 percent more when using a credit card.
Interesting.
I went ahead and conducted an in-depth scientific study of my own over the last 12 months. I paid for fuel using cash and credit. Shockingly, unlike Dave, my car isn't a debt-aholic and it did not consume 14 percent more fuel when I paid with a credit card.
Myth No. 5:
If you pay cash for a car, and save the monthly payment, you will be a millionaire.
The Truth:
On his website, Ramsey says the average car payment is $475 per month. And I can buy that. However, Ramsey says, if you start with a $2,000 car and upgrade every-so often, then eventually you're driving a nice car and have no monthly payment. He says investing the $475 per month will give you $1.6 million in 30 years at 12 percent interest.
Ramsey forgets only part of the $475 payment is interest. The other portion is the principal amount. His followers need to set aside the principal amount each month in their old, ratty, coffee-stained envelopes so they can pay cash for their next vehicle.
Here's the math: A $26,000 vehicle financed at 4 percent interest for 60 months results in a monthly payment of $478.83. This loan will cost the about $2,700 in interest over 60 months.
To simplify the calculations, I used the median monthly interest at one year intervals. The median interest paid monthly in years one, two, three, four and five is $80, $64, $47, $29, and $11 respectively.
I did subtract 5 percent for commissions for these reasons:
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- This is the number Dave uses.
- Ramsey suggests funds with an upfront commission are generally the least expensive over time.
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On a side note, within the blog sections on his website, Ramsey falsely justifies this cost for others since he too pays it. We'll revisit this later.
Input these numbers into our fancy, nerd tool, which is what Ramsey calls a financial calculator, and we get $3,941. Hmm… I don't think that's going to have the distance. (Yes, that's a quote from Major League. It's a great movie. Don't judge me!)
Ramsey says that after 30 years of no car payments, you'll have $1.6 million.
This is where we will use our ally and Dave's arch-nemesis: Math.
The Ramsey estimate is not even close. (Come on. Does it even sound logical?) If the borrower always has a loan, and the interest payments are invested at 12 percent for 25 years — Remember, it's already been accumulating for 5 years. — that person will have an investment balance of $170,841. Dave says, us math nerds get lost in the paralysis of the analysis. So I ignored taxes and fees, which are in addition to commission.
If car purchases are only once every 10 years, four years longer than the current average, then the balance of this childish fantasy is a mere $827,349 less than the $1,600,000 promised by Ramsey. Nearly $800,000 off despite unrealistic assumptions like a 12 percent rate of return, no fees, no taxes, and vehicle ownership 4 years greater than normal.
According to this columnist, Ramsey's math is especially fuzzy when it comes to calculating commissions. (Photo: iStock)
Myth No. 4:
Dave still pays upfront commissions when he buys mutual funds from his ELP in Tennessee.
The Truth:
This was a great way of selling his ELP (Endorsed Local Provider) services. It's nothing more than a brilliant sales pitch. Would you expect anything different from a salesman?
He says it's better to pay 5 percent in commissions than pay higher annual fees.
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- That would be true if these were inclusive of each other, but they're not.
- You can have low cost and no commissions, but let's not get ahead of ourselves.
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How does Ramsey justify commissions? What's good for the goose is good for the gander. If he can pay them and get good returns, then so can everyone else.
But…
Ramsey's investment wealth, is by his own admission, well into the millions. On his site, within the blogs and "Ask Dave" sections, Ramsey has said he owns fewer than 25 different mutual funds, and even said it might be fewer than 10.
Given standard break points and the millions Ramsey invests in obviously few funds and therefore few fund families, Ramsey likely pays nothing in loads (commissions) to purchase mutual funds.
There's a reason why we have fee-based compensation models and commission-based. They each make sense for different situations.
Ramsey saying commissions are always better isn't math based. It's just a sales pitch.
With regards to Dave Ramsey's qualifications as a financial advisor: "I've been driving a car for decades. That doesn't mean I'm qualified to be a NASCAR driver," columnist Michael Markey writes. (Photo: iStock)
