Is Dave Ramsey A “Financial Expert”

by Mike Holman

gazellesDave Ramsey is a fairly well known personal finance celebrity who is somewhat controversial for his methods. His fans love him and his detractors can’t find anything good to say about him.  He created the Dave Ramsey baby steps and if you really keen – you can attend the Dave Ramsey Financial Peace University. It seems there are large numbers of people either for him or against him.  One of the terms which is often applied (or self-applied) to Ramsey is that of “financial expert”.  This article will take a look at Ramsey’s various methods to determine if that title is accurate or not.

In short I would say that Dave Ramsey is definitely not a financial expert.  His main field of expertise is debt reduction motivation which is he very good at so maybe he should be called a “Debt Reduction Motivational Expert”.  This is not intended to be a criticism since the “financial expert” label implies a high level of knowledge of all things finance which is pretty much impossible for one person.

Dave Ramsey debt reduction snowball method

Ramsey’s “snowball” method is one of his most effective strategies as well as his most controversial.  Basically the idea is that if you have more than one loan – you should pay off the loans in order from smallest to largest in terms of the amount owing and ignore the various interest rates.  Someone who had a car loan of $5,000 at 7% and a credit card debt of $9,000 at 15% should pay off the smaller car loan completely before paying any extra on the credit card loan.
This strategy is purely psychological – it is quicker to pay off the smaller loan and the person trying to get out of debt will be able to experience some debt reduction success which will enable them to then tackle the larger loan.  If they try to pay off the larger loan first they have a higher chance of getting discouraged (because it’s taking longer) and giving up.
Logically the loans should be paid off in order of interest – highest to lowest regardless of the size of the loan.  To do differently will result in higher interest costs.
I’m a pretty numbers-oriented type of guy so there isn’t a chance in hell that I would pay more in interest just for the pleasure of paying of a smaller loan first, but Ramsey’s results speak for themselves – I’ve read about many people who were able to pay off or reduce their debts because of his methods.  Bottom line is that you have to do what works – if the end result is that the debts are paid off (and they stay off) then you’ve won the debt battle.  It’s as simple as that.

Dave Ramsey “gazelle intensity”

Another one of Ramsey’s methods is his attitude toward intensity – he says that if you are going to pay off debt then you have to hate debt and do everything you can to get rid of it.  He calls this “gazelle intensity“.  I didn’t know that gazelles were all that intense but that’s not important.
I can’t argue with this strategy – whether it’s reducing debt, cleaning your house, getting shape or just about anything that is difficult – there just isn’t anything wrong with making it a top priority and getting it done.  Of course you have to be reasonable – eating sub-standard cheap food to save money is not something that a self-respecting gazelle would likely do (intense or otherwise).

Dave Ramsey – “Pay off debt completely before investing”

This rule is so extreme that he even says don’t contribute to a 401k if you get an matching amount from your employer.  This might make sense for someone who is drowning in debt and every penny is important but most people should go for the 401k employer match even if they are trying to reduce their debt.  Once you get a handle on your debts then starting an investment plan is not a bad idea – if you are not quite ready for investing you should still spend some time learning about the basics of investing.

Some would argue that if expected equity returns are higher than your loan interest costs then you should invest before paying off the loan.  However they are ignoring the different risk characteristics of different asset classes (or comparing apples and oranges).  Paying off debt is a guaranteed return like investing in a high interest savings account.  Investing in equities or stocks has a higher risk.  There’s nothing wrong with either of those investment types but you have to consider your financial goals, investment time horizon and risk tolerance when choosing where to put your money.  The other thing to consider is that most unsecured debt probably has a higher interest rate than the expected equity returns anyways (I assume 7% for long term equity returns).

Investment knowledge

This is the area where Dave Ramsey is not very strong – he continues to say that equities will get 12% return which is not very realistic and he makes a lot of basic errors on his radio show.  Another problem is that he recommends using financial advisors who are paying him for the referrals so there is a conflict of interest.  For all the good that Dave does – investment advice is not part of it.

Is Dave Ramsey a financial expert?

Not really – but he has helped a ton of people to manage and reduce their debts so if you need help with debts then he’s a great option.  Just don’t listen to any of his investment advice.

If you want to learn more about Dave Ramsey then go check out Dave Ramsey – Financial guru review.

Photo credit to Durotriges

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{ 9 comments… read them below or add one }

1 Americansoldier

If Dave is not an expert yet his credentials fall into the exact definition of “Expert”, than I’m not sure what is. And as far as getting out of debt not being the only part of financial planning, if those of you that feel that way than you are ignorant to his teachings and should probably listen to his show for a few days or read his book. In doing that you will find that he teachs to have a “zero” budget plan, meaning every dollar has a name as he often says, where you would take a monthly income of 4,ooo (in rough estimate) and pay all expenses as far as basic bills, rent, food, utilities, etc. and then if you have lets say 2,000 left you then apply that towards debt, savings, investments, etc. depending on where you are in his babysteps.
And in response to JOETAXPAYER, I have like dave been at the top, made poor financial decisions and went bankrupt and now I am back on top due to his teachings, my hard work, and most of all doing exactly what he has preached. For example 6 years ago I spoke with him on investing, then he turned the phone over to an employee of his and I spoke with her for a short period of time, then in taking is advice and his employees advice I invested 3,000 into growth mutual, 5,000 in stocks that i intended to turn fast but it wound up being 3.5 years, I flipped the stock for 17,650 and re-invested, 6 months ago i placed 67,800 into my growth mutuals making less than 70k per year. My net worth far exceeds 650,000 which isn’t saying much, aside from the fact that I’m not yet 30 years old and have no debt, and I live in a lower middle class section of town with a paid for house, car, and 2 other pieces of property in which i just let sit. I live on 53% of my annual income (which includes my monthly “bill” of saving 850 for my emergency fund, and the rest is invested, saved, and given to local charities. Not to mention 40% of my savings is going to be going towards building a very nice home in the next 5 years with cash and sweat equity. Within pessimism is doubt, fear, envy, and lack of discipline. If the debt reduction is not the way you would do it than don’t, but it is very ignorant to sit there and say that what he teaches is either false or glorified to a level in which is false. As a 4 year soldier, father of 3, and someone who has more to learn, I think that i have had more of a handle on my finances than most, and I give Dave and his crew 60% of the credit, because once upon a time when i was’nt even 20 years old i invested in real estate and made more than 450,000 in 30 months, yet lost it all while making very ignorant and immature decisions 2 years into the USAF, then I was left with a salary of 24,000 roughly per year with a wife and new born baby. His teachings and advice helped me realize what was going wrong and where I needed to make changes. It is very hard yet rewarding, and if you aren’t willing to to sacrifice your precious credit score if need be ( which mine is currently 340 and I’m completely debt free) and live on the bare minimum for 2 years, than you won’t be the cream that rises to the top and you will take 3 times as long getting to where you want to be.
Sorry for any grammatical errors or criticism, This post is not to implement doubt or start an argument, but take my story which is very basic compared to most, and read into his book, or set up an audible account and use your one free download for his audio book and just listen, don’t look into his little quips about animals make you turn him down, thats foolish. Maybe the gazelle isn’t the best animal to use but why focus on that crap, he doesn’t make millions on selling that phrase so why even bring it up, look into the message and actually give his program a try, if it doesn’t work than you didn’t sacrifice something and in most cases it’s the car or the precious fico, which is insane due to the fact that when I started my snow ball, even while not being very wealthy I never got another loan because was able to better my family without paying out money every month that I didn’t have to if I did my budget right. In any regard good luck with your investing, debt reduction, and financial peace.

2 JoeTaxpayer

American Soldier – First, I tip my hat to you, I have the utmost respect for those who have put their lives at risk to protect this country.

I think that Dave, as your experience shows, has been helpful to many. It may seem petty, but those who are in the limelight set themselves up to be criticized. No different than the way overweight couch potatoes scream epithets at sport players on TV.

Dave has a “my way is the only way” approach that’s off-putting to many of us. To be clear, I have no issue, per se, with the debt snowball. My issue is when Dave answers the specific question – “how about if I pay from highest rate first?” – I understand and agree that his method provides the psychological boost of small wins upfront, but as a numbers guy, I can calculate, and referred readers to a (3rd party) spreadsheet to see if there’s a small difference with the two methods. Dave’s response that the reader’s high-rate approach is the wrong one is just wrong.

His other advice that I have issue with is the 12% return assumption allowing an 8% withdrawal each year. It’s not me, most advisors will agree this is simply wrong. 1980-1999 this was what the market appeared to support, but any other, earlier or later periods show otherwise.

3 Greg

OK, I clearly didn’t get the same message from Dave Ramsey’s Financial Peace University that you got, Mike. For starters, I never got that Dave did not want you to invest at all before all of your debt has been satisfied. He talked about investing 15% of your income to retirement, but I think we all can agree that on average, most companies match about 3%. So, that’s 6% being invested into your retirement. Leaves you 9% left. I think what Dave was getting at is that if you still have outstanding debt, it’s a lot better to take that 9% and pay off that debt, than to borrow that 9% from your retirement. Then again, maybe I’m wrong, but I’m only looking at this with common sense.

Secondly, the debt snowball. Again, I never heard that Ramsey said you should NEVER pay extra on that larger interest loan while you’re paying off the smaller loan. The point is to pay what you can on your monthly bills, and once one debt falls off, you combine that to the next, so forth and so on. But, he never said you must pay the minimum monthly payment on the larger loans or it won’t work. There is also the matter of negotiations with creditors for lower interest rates or some sort of payment plan. That works into the debt snowball as well. And while I know where assumption can lead us, I’m assuming that on average, your lower interest rate debt is normally going to be those larger debts. For example, one owes $3000 of credit card debt, owes $20k on a car, and $50k in student loans. Usually, the car loans and the student loans are not going to be equal or more than the credit card interest. So, by default, your highest interest debt is more than likely going to be the lowest debt to pay off. Sure, it’s not always like that, but the credit card debt normally is one in which the minimal monthly payment is going to increase because of the interest, where as the interest on the other two mentioned debt is a set interest and doesn’t fluctuate. Therefore, if you can afford to put $400 a month toward that credit card until it’s paid off, then you add $400 toward your monthly payment on the car…..that’s the way I understand it. I’m not financial expert at all, but I did stay at a Holiday Inn last night.

Gazelle intensity. Not worth arguing over. I think it’s a stupid point to even argue.

As far as the investment knowledge – the only ones who truly know what to invest in are our politicians who are privy to insider trading. Whether if Ramsey is on point with his investment assessment or not, he at least does a very good job in explaining the details of what stocks, bonds, and mutual funds are. Now, from what I understand, investments seem to change according to political climates, domestic, and foreign. With that said, it’s safe to say that investment advice can probably change from time to time, and if one truly wants to be hands on with investing, one should understand it’s not a one size fits all. The biggest point with Ramsey on this was diversification. I don’t believe any self-proclaimed financial expert as yourself would argue that your portfolio should not be diversified? Or am I completely wrong? Again, I’m not an expert, but common sense goes a long way.

Finally, Dave Ramsey actually went through being rich, going bankrupt, and being rich again. Whether if he is a financial expert or not is really a senseless argument. If the man has money in the bank, he must be doing something right.

4 Debtisdumb

I wonder if anyone of you even read ANY of Dave Ramsey’s books, from cover to cover, heard his show or his pod casts. Methinks-NO or very little.On gazelle intensity-has nothing to do with the animal.It has to do with THE PROVERBS.Dave teaches God’s way of handling money. Yes, he is a financial expert, there are many different ones out there, he is just one of them. I firmly believe that you CANNOT invest and service debt at the same time.What is the point in doing that? Unless you go into debt ,let it go bad and settle, and invest in the meantime.Some of us would like to remain wholesome and keep our integrity, and we believe owing money is not building integrity, rather the opposite.Financing CC companies so they can rip-off someone else is not my cup of tea. (F)Leasing a car is NOT my cup of tea either. It’s just a point of view, and I believe if you follow ANY plan to a T and be focused, most likely you will be OK. Gazelle intensity explanation : Also, his ELP are not anyone, they have to fit a very strict set of rules and cannot be just anyone that pays him to be endorsed.The ELP have to be DEBT FREE AND RUN THEIR BUSINESS WITH INTEGRITY. So Rip-Off Co. cannot be endorsed by DR even if they pay 5 times the endorsement amount. Yellow Pages will endorse whoever can pay,’nuff said. We paid off 66K in 18mths , because of Dave, and are now heavily investing.Also, you will be surprised how fast you pile up a 25%+ for a downpayment on a house when you are debt free and live below your means.And when you flash that cash in the Bank , they don’t give a crap about your credit score. They gave us the loan, gave us coffee and thanked us.

5 Bcoff

Dave is definitely a financial expert, and he’s anything but contradictory. He is very consistent, probably the most so in the financial world because he hasn’t changed his advice in 25 years. He doesn’t go for gimmicks, and relies heavily on scripture from 2000+ years ago.

You can argue numbers and paying off higher interest rates first, etc, and Dave will tell you himself he used to be that guy, but just because the numbers make sense on paper doesn’t mean it makes sense completely. Lets be honest, if it were all about numbers, no one would be in debt in the first place. S if you got into debt then you don’t really have a right to argue that your a math genius and your numbers are all right. Recent research suggests that Dave is dead on in his personal finance being only 20% head knowledge and 80% behavior. People in debt who try to only work the numbers end up quitting while those paying off smaller amount loans first, not higher interest rates have sme quick wins and carry over that motivation to finish the fight.

Dave has a real grip on “real” risk. It’s e risk that can never be perceived on paper. For someone who’s become a millionaire twice because he lost it all the first time when he wasn’t calculating the real risk involved, he’s dead on. You give up the match at work because if you lose your job and you weren’t using that money to go toward debt and you have to cash out your retirement to avoid bankruptcy, you lose almost 40% of your total 401k to penalties and taxes, so it makes complete sense to just pay off the debts that would cause you to go bankrupt first anyway.

Why does everyone not go out three mortgages on their paid off house since interest rates are 3% and go invest that in the market and make 12%?? Because of the risk involved. If you have the luxury of a paid off house there is a peace that comes with that that no return on investment could ever entice you out of. And Dave has been there and he has an accurate grip on reality and knows that slow and steady wins the race.

If you think your a numbers genius and can beat the system, go for it. But there is a psyhological human element to everything in life. We’re not robots and so human behavior factors heavily into the equation, and Dave is one of e few that accurately factor that into sir advice, making him a true personal finance expert. It takes experience and wisdom to be an expert. If we all had perfect behavior, then any monkey with a calculator could figure is stuff out, but with the number of payday loan shops on street corners, my money is on Dave and that hell be in business for a long time because its not so easy in the real world.

6 G.F

I have been a financial planner and advisor for ten years and I have been exposed to and examined many strategies when it comes to financial topics – From my experience in observing people and learning about their attitudes and behaviours, I can say that without a doubt most money problems or success stem from a person’s beliefs and early foundation around money. A strategy that works for one person may not resonate with another – An objective one person has will be different than another – This situation often occurs in the same household (married) – Most people have a very basic understanding of the importance of money but it is their deeper feelings and thoughts about self-worth that will color their overall net-worth – Someone once said that to some people money is not important enough, and for others it is too important – Money is tied to emotions and beliefs since all of us have grown up in a culture, be it a home, neighborhood, school, church, workplace, etc. that is steeped in comparisons and perceived expectations – It is not the absence nor the abundance of money that fosters the need for a sound financial plan or honest discussion, but the attitudes and beliefs of the person(s) at the heart of the money matter to begin with. In closing, as a mentor explained to me – be committed to what you are about, but always be open to change.

7 jack bossert

If You do your due diligence, and check out Dave Ramesys ELPs you will soon find out that very few of them are are actually licensed financial advisors and most clam credit for taking one Dave’s FPU classes or buying his books. They are not brokers either. If you look up the S and P 500 index history for the last 100 years it dose not pay out 12 % a year. It is a good idea to stay out of debt and manage your money. You can can do a simple check on these people at the SEC investment adviser public disclosure database, and your State database or on the other databases where you will find out if their even registered and what their rating is, do they even hold a license and so on.

8 nancy

He’ s a joker. appeals to sheeple and other non-critical thinkers. His “advice” is common sense. Are americans so stupid and/or naive that they need to listen to very basic info /common sense. What’s next ? Brush your teeth before bedtime, dont live above your means, wear comfortable socks, do not wear flip flops all the time? Sssheesh, it is like an imbecile parade.

9 Greg

There are so many things wrong with Ramsey’s “advice” it isn’t even funny.

A few:

1)Ramsey doesn’t even understand that the purpose of buying a car is TRANSPORTATION, not “holding value”. He also (deliberately, I suspect) ignores the fact that, as the saying goes: “when you buy someone else’s stuff, you’re buying someone else’s PROBLEMS with it”. Used cars typically are sold “as is”. Buying a new/certified reconditioned car brings with it a warranty that is very useful if the transmission goes out 2 weeks later.

2)Ramsey’s absolute detestation of all things credit/debt related blinds him to modern realities, such as the fact that increasingly your credit is run for things like renting a home/apartment, job applications, even cell phone service. Having no credit score makes that a problematic event at best.

3) Ramsey is a devote of the “myth of the self-made individual”. He advocates that ANY and ALL people who do as he says will automatically be successful, and that any failures are 100% due to their personal failings. He would tell you with a perfectly straight face that all those people who suffered from predatory lending in the run up to the Meltdown were responsible for their own condition because they somehow were expected to be self-taught finance experts who could spot the traps set by the lenders or understand the underlying and on-going fraud behind the entire mortgage/finance process.

4) Coincident with that, Ramsey is pitiless in asserting that the only method of improving personal success is individual effort. I personally heard him on his show tell a caller who was working 3 part-time jobs and still not making enough to live on that the solution was to spend less, get another job, and go to school for better skills. After the usual lecture about “personal choices” of course.

Then there’s this little gem, showcasing Ramsey’s employment ethics (or lack thereof):

In short, Ramsey is a Right Wing wingnut worshipper of the Absolute Capitalist system who knows more about propaganda than he does about economics. He also apparently knows a great deal about how to run a mini fascist state.

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