Dave 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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My view is that there is no such thing as a money expert today.
Being an “expert” means that you have got it figured out. No one has all aspects of the money project figured out today.
The reason is that the role of money in our lives has changed dramatically in just a few decades. Before the 1930s, most middle-class people did not seek a financially secure retirement. We worked until we died. All of this money stuff is new. We haven’t yet had time to figure it all out.
The biggest thing holding us back is our desire to be able to tap into the wisdom of “experts.” Because money questions matter, we don’t like the idea of listening to advice from non-experts. So the people who put together the million-dollar marketing campaigns insist that the people focused on in those campaigns project an image of “expertise.” It’s an act. It’s the Wizard of Oz pulling levers and generating smoke and speaking through a megaphone to scare the children.
This game holds us back. Because of the need to pretend to expertise, lots of smart and good people are far too unwilling to admit mistakes. Because of the marketing need to project an image of “expertise,” lots of highly paid people continue to put forward crummy money advice long after they’ve learned it is crummy.
When we stop demanding expertise, the big names will stop pretending to possess more expertise than they really possess. Then we will all begin to make real progress on learning what works and what doesn’t.
Rob
Well said Rob. I think the most important lesson to learn today, not only in personal finance, but in life in general is to not just listen to one person on any subject.
Imagine if Fox News was our only source of news.
He’s definitely a motivational rather than financial guru; his firm is good at getting people to talk about him and his devotees seem So! Enthused! about being on team Ramsey, the process, the (apparent?) popularity of it in protestant churches. Personally I find the cult of Ramsey on some blogs I’ve stumbled on boring and odd and I found his show painful to listen to the once or twice I went to check him out. But I’m about as far from his target audience as I could be, so far be it from me to knock it if it works for other people.
I agree with your article. I’m neither a fan nor dislike Dave Ramsey.
I attended his video seminar at a local church with a friend. I liked the fact that it was Christian based, but not bang-you-over-the-head-with-it-christianity.
I think his approach is excellent for the majority of people in the U.S. today, both educated and under-educated. I believe most strive to outwardly show their successes in life by surrounding themselves with material possessions, and suddenly finding themselves swimming in debt…much like our government today.
If we just lived within our means, and planned a bit more for the future, we’d be less like the grasshopper, and more like the ant.
Guinness – I used to have a very low opinion of Ramsey and his followers but over time I realized that if his methods work then who am I to criticize? I still have a fairly low opinion of Ramsey but I have to admit I find his whole methodology/cult status quite interesting.
There will be more posts on the subject!
gazelle intensity?!
That’s hilarious.
Lemur vision.
Elephant dexterity.
Some times buzzwords sound good until you think about them. But gazelle intensity doesn’t even make sense right off the bat.
I’ve listened to Ramsey’s show a few times and enjoyed it for what it is. I definitely agree that the financial advisers he refers to is a big conflict of interest. Even his ads are kind of weird (he’ll tell people not to spend in his show, then pitch products in the ad segments).
Like yourself, I wouldn’t use his techniques (not making use of an employer match is nuts), but I’ve often thought he seems to work for some people, so who am I to judge (his approach is a lot less harmful than how many people approach their finances).
err… “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 credit card debt completely before paying any extra on the car loan”? Did you mean to switch the two?
I wouldn’t say he’s a financial expert… if you’re at the stage where you’re just learning still (how to live within your means, etc.) and he helps, awesome. But I can pretty much figure things out myself. And I wouldn’t call myself an expert either. Motivationalist is indeed a better term.
Elaine – yes, you are right. I fixed the article.
I have to give Dave credit where credit is due a lot of the work in getting yourself rightsized with finances or anything else for that matter is based on behaviour and discipline. FPU got my butt in gear and for that I will be forever greatful, whether or not I would use him for my direct investing advice that’s another story and you are right he over generalizes.
I do appreciate that he’s helping a lot of people from all walks of life get to where they want to go and he’s doing very well for it. I think at the heart he’s a salesman with some interesting life lessons that’s helped to shape his world view of personal finance. In the end what really constitutes an expert?
I wouldn’t be so quick to call out his tactics of drawing people in because arguably the Title of this post could be construed as the same
. It’s what got me here.
Yes, Dave Ramsey is a financial expert. While you state in the 2nd paragraph that the definition of financial expert “is pretty much impossible for one person”, you still post your opinions about why he is not one. But he has the formal education in finance, small business experience, and more life lessons dealing with the industry than most of us can claim – for himself and the clients he has helped over the past 20 years.
You did not share your exposure to Dave Ramsey or the Lampo Group – on what experience do you base your expertise on his qualifications? I would not classify myself as a financial “expert”, however I do have enough formal training, teaching classifications in FPU, seen his program work on couples, and have met the man himself to qualify my vote in the “yes” column – he is a financial expert.
However, your column is well written and you do highlight some of the best points about his program. I apologize if my comments appear as if it is discrediting your entire post. I will come back and read more.
I am going to say yes. If he isn’t an expert who is?
By definition an expert is ” A person with a high degree of skill in or knowledge of a certain subject.” and I would describe him as someone with a high degree of knowledge in the financial arena. His 20 years as a financial counselor alone probably qualifies him without considering education or outside research.
With that said, he does serve a broader group of the ‘average joe’ and his steps and policies are designed such that it is empowering and simple so that those who are horrible with finances can start to get control. Personal finance is personal and fuzzy and varies with people and situations, but that stuff is the opposite of motivating to most of the people. Once you get out of debt and get your income up and get your financial feet under you, the world starts to look a lot different. If you are too confused, overwhelmed, or distracted to actually get to a firm financial foundation you lose. All the best theories in the world don’t mean anything if real people can’t connect and implement them.
Happy Rock – I love the line “All the best theories in the world don’t mean anything if real people can’t connect and implement them.”
Paul – it’s good to hear about another success story.
Steve – you’re right – I do pretty much say that nobody can truly be an expert. But, I guess it depends on the definition of expert as well.
I’ve been listening to the Dave Ramsey podcast for the past coupla years … starting around the same time I started consuming all the PF blogs and blogging about same on my site … and now I skip over most of the show. I’m not in debt to begin with, so the get-outta-debt stuff is getting stale for me. The baby steps are a fine suggestion — I like that he makes a small emergency fund the top priority. But the theological bent still turns me off, and I’ve heard his advice so often that I can predict how he’d handle a call in the first place.
I’m not even sure why I still listen, as it’s been some time since I’ve learned anything new or insightful.
On top of that, he’s rabidly anti-socialist, which really grates on my Canadian nerves sometimes.
If the objective is to “be debt free” then Dave Ramsey is a genius … however, for most people, what does being debt free actually mean?
If you have an objective to become financially free, so that you no longer need to work and can maintain or improve your lifestyle, then being debt free will not be enough … go ahead, run some numbers and prove me wrong
What people need to do is:
1. Identify what and when their life’s purpose is? Is it to work until 65 then retire with the equivalent of $15k to $30k in today’s dollars? Or, would you like to retire younger, travel, become a musician, write some novels, volunteer in Africa, or ….?
2. Because most of these goals will require time (i.e. less or no time spent at work) and travel (just a wild guess!) then you will need: Passive Income. That means a lump sum sitting in the bank generating interest (or, sitting in Real-estate generating rent, or in stocks generating dividends, or …).
3. And, generating that kind of nest egg, that soon, definitely requires some debt: e.g. investing in rental properties, and so on.
So, why pay off cheap debt now just to enter into more expensive debt later? That’s why I submit that there is a third method (besides debt snowballs and debt avalanches), that I call the Cash Cascade:
http://7million7years.com/2008/12/09/the-cash-cascade-tm/
AJ – I couldn’t agree more. Financial planning is…financial planning. Getting rid of debt is only one aspect of it.
“This strategy is purely psychological… ”
I disagree with this assessment. Perhaps that is the way that Dave Ramsey pitches it, but there is an additional benefit of paying the smallest loans first, which is that it frees up cash flow. Under the snowball method, this doesn’t matter unless there is a disruption to the debt reduction, such as an emergency – job loss, car wreck, etc. In that case, it is very nice to have made room in the cash flow.
Emily – I stand corrected – that is a very good point about cash flow.
I agree that Dave’s plan does give you a beginning foundation and rough road map. But what I find particularly disappointing is that there is little meat on the bone.
Yes it great to save $1000 but HOW. What are the specific steps and choices you have to make (save on food, cellular service, car repair, gas, etc).
Its like telling someone that wants to get from NYC to LA to buy a map. Yes important but you’re not really telling me what I truly need to know to drive from New York to California.
What I find in his books and tapes are commonsense advice that you can find anywhere – he just happened to package them in a “system”.
Half way through listening to his Financial Freedom disc package I wanted to throw the CDs out the car window because he kept speaking in generalities – stating the obvious. Its great to get you started in the general direction but that’s about it.
So I guess for a certain portion of the population this is effective and in that since You could consider him a financial expert.
I just want a little more meat on my bone.
I, personally, am a big fan of Ramsey’s methodology, although I do agree that he may not exactly be what anyone should call an all-encompassing financial EXPERT. As for a 12% return – you can find it, you just have to look hard for it. It’s not common. Aside from that, take or leave what you like or don’t like. Just don’t throw the baby out with the bathwater.
Personally, I like the image of Gazelle-like intensity. I like it simply for the reason that it makes me picture a Gazelle running like HELL to get away from the hungry, pissed off cheetah that’s chasing it. If you’ve ever seen video of one of those things high-tailing it in the wild, they’re pretty dang fast. Actually, they’re the second or third fastest animal in the kingdom, running at speeds up to 50mph. Cheetahs are only slightly faster. Just a little FYI for those puzzled by the expression.
I’m not sure about the “it frees up cash flow” thing: isn’t the idea to pay AS MUCH AS YOU can to all of your debts until they’re paid off i.e. the same amount each week/month? Where the ’snowball’ comes into effect is that instead of paying, say $2,500 to 4 debts, eventually you are applying it all to just 3, then 2, then 1?
And, this applies whether you ’snowball’ or ‘avalanche’ … the only FINANCIAL difference is that you pay a little more total interest (hence, take a little more time at to pay everything off) on the former v the latter?
Since I ‘Cascade’ rather than Snowball or Avalanche, I pose this as a question ….
AJ – I interpreted the “cash flow” benefit as being that you will remove some of the minimum payments quickly from the smaller loans which should improve your cash flow in the sense that the mandatory payments are now smaller.
I’d say it’s more of a technical point than a practical one.
No, I don’t think you’ll understand ‘gazelle intensity’ until you’ve:
A> Watch a gazelle outrun a cheetah
B> Payed off a large amount of debt in a short period of time.
I have a blog responce to your post here.
My post today (click on my name to go right to it) was inspired by this Four Pillars article and two others. Dave’s advice regarding Low Balance vs High Rate, has a cost, which can be calculated, easily. Of course, it depends on a number of factors, total debt, as well as how it’s spread out, i.e. size of balance/rate for each debt. I don’t dismiss Dave as quickly as he dismisses any advice that not his. In finance, there are few absolutes. But when someone says “always” or “never,” I’m careful to look at their advice very carefully.
I think you may be wrong about him getting a fee for his endorsed local providers. At the very least he has stated on his show that he gets no renumeration for sending people to his ELPs. As I understand it his ELPs are just financial professionals who have agreed to (and been trained in) some core values that Dave preaches.
Gwerst – I’m afraid you are wrong about that:
From Dave’s website: http://www.daveramsey.com/etc/cms/index.cfm?intContentID=6795
Q: Do ELPs pay a fee?
A: Yes. For ELPs, the program is a form of local advertising. It’s a way for them to attract clients who love The Dave Ramsey Show just like they do. We use the fees to fund the large staff and technology required to operate the ELP program.
Dave Ramsey is a joke! If he is going to call himself an “expert” than he needs to be knowledgable on all financial topics that he discusses. I respect “experts” if, when they don’t know the answer to a question….they say, “I am sorry I don’t know for sure, but I will find out and get you the correct answer shortly.” However, Ramsey thinks he knows it all and just makes up some crap if he doesn’t know. Also, I am sorry to all those people who listen to every word Ramsey says (invest all your money in growth stocks). I am sure that everyone was extremely happy to see their investment account down 40-50% last year! The everyday investor doesn’t understand volatility and risk/reward. He makes his listeners think they will return 12% every year….Freaking JOKE! I hope he is saving his money because he will get sued big-time some day soon.
I never once heard that he was an “Expert”, but building up a multimillion dollar company with over 200 employees is pretty good for someone you would not call creditable. I have close friends who are experts and professionals in their field and only through the school of hard knocks.
Radio talk show host is his expertise. Which he states in the Understanding Insurance DVD of FPU, as far as investing goes I have applied his method and am doing quite well, then again I started right after the big crash in 2008, but he also states to you seek a personal certified financial planner as well with the heart a teacher. Take it for what it’s worth dish out the junk and do your best.
I wouldn’t call him a financial expert in any sense. Motivational yes. Good at developing budgets yes. However my biggest beef with him is like most who proport to be financial experts on tv and radio. He’s not licensed. If he was he couldn’t make the claims he makes. He’s actually held to a much lower standard because he’s not licensed. He can make general reccomendations for huge swaths of people (or every single person) without any consideration for suitability. That’s grounds for license revocation and being banned from the industry except he’s not licensed so he can’t be held in compliance to any state or federal securities or insurance law. What he is good at is selling books. And for that I congratulate him.