As a Financial Advisor I have an obligation to confront this and tell you the truth. If you are a Dave Ramsey follower please read the whole blog and don’t jump to conclusions. I have met some of his followers and their attitude is if Dave says it then it’s always the truth and the only truth. This becomes a problem for me. Having said that I have no problem with Dave Ramsey the person and much of his advice is great. However there is some of his advice that I believe is off base.
Dave’s business and marketing plan has been a great success. If you think of all the people that sign up for his Financial Peace University every single month I think we can agree it’s a very profitable business plan. This does not count the books, tapes and live events that he sells out all the time. I think we can agree he has done a great job marketing his business. I admire him for this success.
Let’s take a look at what Dave teaches and break it down. His advice for getting out of debt is right on and he is great at motivating people to get out of debt and stay out of debt. He calls his teachings the 7 baby steps.
1. Build a $1000 emergency fund
2. Pay of non-mortgage debt
3.Build a full emergency fund
4. Save 15% into tax advantaged accounts
5. College Funding for Children
6.Pay off Home
7. Build Wealth and Give
This is all good advice. My problem with his advice is that it’s general advice and everyone has different circumstances. For example he says that you should payoff student loans before contributing to a retirement fund with a match. So if your student loan rate is 4% and you have an employer that matches 50% of 6% of your contributions then you are leaving money on the table. This makes no sense at all.
My next problem is with credit cards. He says everyone should not use credit cards. Again you cannot just give out general advice because it does not apply to everyone the same. Some people payoff their credit cards each month and get all kinds of benefits and cash back.
Then there’s the advice about investing. This is where Dave’s advice really makes no sense and is can be a recipe for disaster. First of all he says that you should invest into growth stock mutual funds and you will earn 12% on average. If you look at that category there are over 700 funds in that category and over the last 10 years only 1 is above 10% which is CGM Focus Fund. After loads come out this fund is below 10%. The 2nd best drops down to a little over 7%. Then it drops to 4%. The category average is a negative return over the last 10 years. Worst than the 12% return that Dave says you can get, is that he says you can draw out 8% at retirement. This is the most ridiculous advice he gives and it is just plain dangerous. Based upon the history of the stock market you have an 83% chance of failure using this advice of pulling out 8%.
Finally Dave advises to use loaded funs which usually charge a 5-6% load or commission the 1st year you buy the fund. Dave says “Instead of investing by himself he chooses to go with a pro.” These are called ELP’s. Endorsed Local Providers. This is another place Dave’s business makes money. ELP’s pay Dave to be listed and in return get referrals from Dave.
The last thing I will talk about is Dave saying to always buy term life insurance. Life Insurance is one of the best estate planning tools available to heirs of large estates. Life Insurance and Roth IRAs are the only thing left to put money into that is paid out income TAX FREE. Most people do not understand the true power of using Advanced Strategy Life Insurance for their estate. Obviously Dave does not understand these strategies either. Dave endorses certain companies that sell term insurance and guess what this is another way Dave makes money. I wonder how many estate plans have been blown up because people cashed in their Tax Free Life Insurance plan because they heard Dave mention that permanent life insurance is not good.This is sad and since Dave himself or Lampo Group his company is not licensed as an investment advisor (that I can find after much research) then the advice is not regulated.
In summary Dave is a great motivational speaker, radio host and helps people everyday get out of debt. However Dave’s advice is very general at times and does not apply to everyone. Then his investment advice is just plain dangerous and makes no sense at all. Finally Dave owns a great business and continues to market that business very well thru churches, radio, books and live events. In addition his name is so powerful that companies and ELP’s can have him endorse them and people will buy because Dave put his stamp of approval on it.
I hope everyone that reads this blog will consider the whole blog and not just pick out the things that I have a problem with. My advice is to be smart and remember every single person is unique and has different goals and plans for the future. Get advice from someone that knows your individual situation and will take the time to listen to your concerns. If you are a Dave Ramsey follower, remember much of his advice is really good so NO need to bash what I’m saying just because I have a problem with a few of the things that Dave says.