Let me start with this: I like Dave Ramsey. I think he gets a lot right. I’ve taught his curriculum, Financial Peace University (FPU), many times over and believe that it is the best tool out there for those with limited financial knowledge or who are struggling with debt. Whenever I teach the class, however, I will cringe during certain lessons. I find myself qualifying the teachings by sharing my own opinions with the class.
If you’ve taken the FPU training you should feel good about it. If you’re following his principles then you’re likely on the path towards a better financial future. If you’ve been to FPU, however, you should also keep reading to learn the seven things I think Dave gets wrong.
Fallacy #1 - The ‘Seven Baby Steps’ are the Only Way
Dave puts forth his seven step method as the end all solution for everyone. While I agree that it’s a good process for many, it’s far from a one-size fits all. For example, step two involves listing all debts in order of balance due, ignoring interest rates, and paying them off one by one in order from small to large. Conversely, I’ll almost always suggest looking at the full context of each debt; not just current interest rate. How the debt is collateralized, what the tax implications are, and the outlook the debt has for refinancing or restructuring are some of the other important aspects to consideration.
There are many credible sources that outline strategies to shut down debt. Different styles and approaches can fit different circumstances and personalities. Dave Ramsey is not the final authority on managing personal finances, because only the Bible is this authority.
Fallacy #2 - Everyone Should Have the Same Investment Strategy
Dave recommends that everyone split their retirement account investment allocations evenly between four actively managed stock mutual fund categories: Growth, Growth & Income, Aggressive Growth, and International.
This recommendation is off base for two reasons. (1) There is a lot to consider when deciding how to allocate investments: age, risk-aversion, and the economy, to name a few. (2) Placing 100% of your investments into the stock market is a flat out bad idea for almost everyone – regardless of age and income level! It’s an especially bad idea for someone who is planning to withdraw from their account in the near term.
Fallacy #3 - Investors should Plan to get a 12% Annual Return
A financial plan with a 12% return on investments is motivating, which is exactly why Dave uses it in his materials. The reality is that this is a very high bar to set and one that will likely leave investors disappointed. Ironically, if 12% was a safe rate of return to assume then I’d be advising my clients not to pay off their debt in favor of investing with far more regularity. I recommend instead assuming a 5-8% return depending on goals, objectives, and risk tolerance – although even this percentage is not guaranteed.
Fallacy #4 - You should Never Invest Until all Debt is Paid Off
While I agree that limiting and paying down debt is an important principle, there can be rationale for investing over paying debt down faster. For example, I am more than 10 years out of college and just finished paying off my 2.8% student loans. I have prioritized investing into my Roth IRA account up to the yearly maximum, instead, because I had a relatively low interest rate on my student loans. Another clear case is when an employer match is available in a work retirement plan. If an employer match isn’t utilized then “free” money is being left on the table. Often a match is the equivalent of an immediate return on investment of 25%, 50%, and sometimes even more!
Fallacy #5 - Work with a Commission-based Financial Advisor
Dave recommends hiring a financial advisor who is part of his Smartvestor Pro program. He gives the facade that each advisor has been thoroughly vetted and will undoubtedly have your best interest in mind.
In reality, however, most of these advisors are commission-based, are not fiduciaries, and are only on the Smartvestor Pro network because of a substantial monthly fee they pay to Dave Ramsey. A better way to find a financial planner is to use the XY Planning Network, and then use these questions to interview advisors until you find the right fit for you.
Fallacy #6 – Credit Cards are Inherently Bad
Data shows that around 40% of Americans carry credit card balances from month-to-month, racking up interest debt along the way. Destroying credit cards and not looking back is sound advice for this group.
On the flip side, there can be many great benefits to credit cards for those that can use them responsibly. The biggest, perhaps, is building a strong credit score, a very important thing for anyone wanting a mortgage or to apply for a job.
Fallacy #7 – The Pursuit of Earthly Riches is a Worthy Focus
The final fallacy is more nuanced because it's not something that Dave would explicitly state. I'm including it, however, because I'm concerned it’s an underlying tone of the curriculum that unnoticeably impacts the heart.
This tone is most obvious in Dave's most famous saying, "live like no one else, so later you can live like no one else."
On the surface, there is a lot of wisdom in this statement– if you make good decisions today you will be rewarded in the future. However, my concern is that what Dave is really communicating is that living carefully, sacrificially, and wisely today will earn you a lavish life once you get your financial house in order. He seems to be implying that the ultimate goal for our financial lives is to become wealthy so that we cannot just give generously, but also do and buy whatever we want.
This is similar to the mindset I warned about in my blog post about retirement, whereas it is critical to be aware of and honest about selfishness and pride creeping into our motivation. Don’t mishear me. I’m not condemning wealth. In fact, one of the primary indicators of a sound financial plan is seeing net worth grow over time. I actually track this on a regular basis for each of my clients. The key is to view building wealth as a byproduct of making wise decisions, not the main focus of a financial plan.
The reason for this comes from scripture. In Paul’s first letter to Timothy he issues a warning that isn’t about wealth itself, but the pursuit of wealth.
“But those who desire to be rich fall into temptation, into a snare, into many senseless and harmful desires that plunge people into ruin and destruction. For the love of money is a root of all kinds of evils. It is through this craving that some have wandered away from the faith and pierced themselves with many pangs.” -1 Timothy 6:9-10 ESV
The other issue I have with Dave’s motto is that it encourages his audience to compare themselves to others. His teaching suggests that good decisions today will make us better off in comparison to others. We’ll be able to look around and see that our frugality and smart decisions earlier in life have put us in a position to live a “better” life than others. This is especially dangerous because this kind of pride can cause us to look down on others who aren’t as wealthy. This is in direct contradiction to the gospel, where we know everyone is equal, standing before the cross and relying totally on the grace of God.
Later in 1 Timothy Chapter 6, Paul charges those who are rich to do good, be rich in good works, to be generous and ready to share, and to set their hopes on God who richly provides us with everything to enjoy. Perhaps a better motto for a Christian is, therefore, to “live like no one else so that you can honor God and give generously to those in need.”
Again, I like Dave Ramsey. He has helped millions of people get out of debt and more wisely steward their finances. I simply urge you to keep these points in mind as you listen, watch, and read his material.
About Guide Financial Planning
Guide Financial Planning (formerly Wacek Financial Planning) is led by founder Ben Wacek, who is a Christian fee-only Certified Financial Planner™ and Certified Kingdom Advisor®. He has a passion to help people of all income levels make wise financial decisions and steward their resources from an eternal perspective using Biblical principles. Based in Minneapolis, MN, he works with clients both locally and virtually throughout the country and abroad. You can follow the links to learn more about Guide Financial Planning and our team and the services we offer.