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Dave Ramsey Modern Day Snake Oil Salesman / Financial Guru

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Dave Ramsey Modern Day Snake Oil Salesman / Financial Guru

In my formative years my attention was easily captured by loud, on-air television and radio personalities.  If they had such platforms they must be the smartest people in their profession right?  After I made countless billions of dollars following Jim Cramer’s shenanigans on “Mad Money”, I then sought out personal financial advice beyond investing.  I changed the radio dial and found Dave Ramsey with his strong voice and superior attitude, plus he was rich so he must know the best way to manage money.

After further examination, I found many flaws in the Dame Ramsey logic and philosophy.  But he wrote a book, so he has to know the best way, right?  What do I know though, he has way more money than me.  I recommended my brother get a reward credit card with a lucrative signing bonus for spending rather than a debit card.  His question to me was, “Doesn’t Dave Ramsey say that people shouldn’t have a credit card and use cash or a debit card?”  I asked him to explain the difference between spending money on a credit card and paying it off every month and spending it on a debit card.   The only thing I know for certain is that the math that I use to make financial decisions must be different from the math used by the financial guru.

Advocating Luxury Spending

Budgeting can be as easy or as difficult as you want to make it.  You can break down every dollar spent for every category (Clothing Budget) including allocating expenses into subcategories (Cut-off Jean Shorts).  Most importantly to climb out of debt is to maximize the difference between income and expenses.  This means cutting out any luxury expenses.  Certainly Dave Ramsey demonizes many of the luxury expenses that I agree with cutting out.  However, he still advocates a 10% tithe to church and charitable donations (versus 5% for utilities).  Giving to charity is luxury afforded those who have met all other obligations.  If you are in debt and cannot adequately provide for your family then you should not be considering trying to support others.  I understand that giving money to charity is nice, but it is also a luxury.  This is one of those luxuries that does not seem luxurious, it just seems like the right thing to do.  However, if you are focusing on climbing out of debt your money could be put to better use.  Let’s assume that you make $48,000 a year and give $400 a month to church, that amounts to $4,800 a year.  Let’s assume you owe $10,000 on a credit card paying 12% interest, if you are currently trying to pay off the loan in 3 years you will pay $1,859 in interest over the 3 years.  Instead you could spend the extra $400 a month paying off the credit card and you would save $1,089 in interest ($1,857 vs. $768), and pay off the credit card 1.7 years sooner than under your current schedule (3 years vs. 1.2 years).  If you’re still set on giving the 10% away make an IOU and keep track of all the charity you did not give.  As you can afford it, you can increase the charitable donations.  This also has tax implications as well since it would be better for most tax filers to donate to charity in a lump sum.

No Credit Cards

Dave loves to talk about how bad credit cards are for consumers, but goes out of his way to point out good deals.  I absolutely agree that using a credit card to accrue tons of debt at 15% interest is a ridiculous notion.  However, banks also have enticing bonus offers.  Such as the Chase Slate card which offers a 0% introductory balance transfer for 15 months.  Using the same scenario as above you could apply for the card, transfer $10,000 to the Chase Slate card and pay $0 in interest plus if you paid $729 per month you would have your loan paid off sooner.  Although I have heard him say that he can allow a 0% balance transfer he needs to be telling everyone to reduce their interest rates immediately.

The first time I really questioned his advice was when I was buying a computer in college.  Best Buy was offering a 3 years interest free financing offer.  I needed a computer and was going to spend $1,500 on the computer I wanted with cash or credit.  I had the cash in the bank accruing interest (higher interest rates than now) so I decided to finance the purchase.  I paid it off $50 a month and paid it off ahead of time.  Never did I miss one payment, nor did the credit card companies lose my payments or force me to spend more.  I still had the cash available to earn interest and spend as needed.

Over the past few years I have used my Discover card and a gas, grocery and drugstore reward card to earn cashback on almost every purchase.  I earned 5% cashback in specific categories, but never did I overspend to earn money.  However, I did earn a few hundred dollars extra on money I was going to spend anyway.  Sure, it has not helped me retire early, but it did allow me to have a few hundred dollars extra to spend on my family.

More recently I have captured signing bonuses of $400,  50,000 airline points ($833 worth of airfares) and other offers from credit cards just for signing up and spending money as I normally would.  Studies may suggest that people spend more with credit cards, (as Mr. Ramsey loves to point out) but this really throws personal responsibility out the window.  If you are responsible and pay off your credit card every month you actually benefit quite greatly from a credit card.

Dave likes to say that he does not know any millionaires who got rich from credit card rewards, but that is hardly the point.  To me, these reward bonuses are extra unearned income.  I can take a trip using these airline points which will provide richer experiences for my family to share.  Otherwise we may have not been able to afford to fly for a vacation, even on Southwest.  Millionaires never worry about things like this because they can just buy their own plane tickets (or plane if they have enough millions).

Debt Snowball

For those people listening to Dave Ramsey to pull themselves out of debt he advocates the “Debt Snowball”  whereby the individual pays down the smallest debt most aggressively.  The theory is that as you pay off debt you can have a small moral victory.  From a psychological vantage point this makes a modicum of sense, but from a mathematical and fiscal sense this seems absolutely illogical.  Let’s imagine that someone has debts of $5,000 at 0% interest $8,000 at 3% interest and $10,000 at 12% interest.  Mr. Ramsey would suggest paying the minimum balance on the $8,000 and $10,000 debts then pay the rest toward the $5,000 debt.  Unless the 0% interest rate is about to expire and reverting to a higher rate there is no reason to be paying this amount at all.  If you pay down the higher interest rates you will save money over the long-term.  If you are paying off $500 a month over the 10 months it takes you to pay off the $5,000 debt your other debts will have accrued over $1,000 worth of interest.

I feel like Dave Ramsey has spent so much time being a part of the rich and elite that he does not value an extra $1,000.  Whether it’s from money saved on interest rates or rewards earned through the purchases you are already going to make Mr. Ramsey finds these methods undesirable.

Selling Services to Broke (Broken) People

I am not against the profit motive, but I do think that picking the targets of profit attainment is something else entirely.  Dave’s core audience seems to be people who do not need to spend a dime on incremental expenses.  These people usually need to even cut their fixed expenses.  Yet, Mr. Ramsey seems to be more than ready to constantly recommend to his adherents that they purchase his books or come to his conferences.  As an accountant I always loved making budgets, especially creating them for individuals is fun.  The problem with this is that a Catch-22 situation is created.  Most people who need a budget cannot afford to pay for a budget and most people who can pay you are pretty good with money and can set up their own financial policy.

10 Responses to Dave Ramsey Modern Day Snake Oil Salesman / Financial Guru

  1. Jim says:

    I think that Dave Ramsey makes some good points. Why is it so bad to tell people that they should save more money?

  2. DaveRamseyIsDangerous says:

    Dave Ramsey is bad at numbers. Plain and simple. He doesn’t care. He wants to use psychology, not math. It works for some poor saps who think it’s better to pay off their college loans early than to spread them out and potentially have some forgiven with IBR. It works for people who never should have a credit card anyway. Dave is not only a snake oil salesman…he is quite a dangerous one.

    • Vincent says:

      I don’t know that he is dangerous, but his advice is definitely flawed. I cannot even fathom telling people who are really in debt to give 10% to charity. You’re just exchanging one luxury you cannot afford for another. Ultimately that 10% represents a larger percentage of income because of additional interest accrued on loans. I would rather see him recommend that people budget 10% for a family vacation that might do well to create a psychological advantage.

  3. Jessica says:

    Dave Ramsey is for the paycheck-to-paycheck, debt up to your eyeballs, can’t even balance a checkbook person/family who has never done a budget in their entire life. His methods seem ridiculous to well-to-do people like yourself but they make a LOT of sense to the lower to middle income families who struggle to even pay their electricity bills or rent every month.

    I have tried for years to teach my mother how to budget, how to get out of debt, etc. She eventually filed for bankruptcy last year (for the 2nd time in her adult life) and as part of her debt counseling, she took a Dave Ramsey class. And finally, budgeting made sense to her. She didn’t like the giving 10% to charity so she left that out of her budget but she has been making great strides with making a budget and sticking to it. Her husband (my step-father) even had an emergency appendectomy earlier this year that left them with several thousand dollars in medical bills (after insurance) and she just finished paying them off.

    She used the debt snowball and it WORKED for her. She paid off the little bills like the ultrasound first. Then, she worked on the bigger bills like the anesthesiologist (whoa, they’re pricey). Finally, she paid off the biggest bill that came directly from the hospital. The principle of the debt snowball allows people to pay off the tiny bills first, thus freeing up money in their budget to throw at the bigger bills. Sure, they might lose some money in interest but they are much more likely to pay off the debt (and quicker too) than someone that attempts to “save money” by paying off the highest interest (which is often the biggest bill for people with bad credit). They get frustrated, annoyed and just plain tired of paying and paying. The debt snowball gives them quick “wins” that keep them motivated.

    Again, for someone who’s always had lots of money or who grew up in a family that had plenty of money, this probably makes no sense. But for someone who grew up in poverty (like myself) or someone who has never budgeted (like my mother when she was going through bankruptcy), it just makes sense.

    • Vincent says:

      I understand that I may not have done a great job in my biography, but I must address the following paragraph, “Again, for someone who’s always had lots of money or who grew up in a family that had plenty of money, this probably makes no sense. But for someone who grew up in poverty (like myself) or someone who has never budgeted (like my mother when she was going through bankruptcy), it just makes sense.”.

      I grew up as the oldest of 8 children. My mother was a full time mom and my dad worked 80 hours a week or the maximum he could. This was not a factory job that paid $25 an hour either, think closer to the current minimum wage rate. My parents did a great job making the finances work and that is where I forged many of my lessons and fiscal responsibilities. When they needed more money my dad would work more, even if this meant taking an extra $5 an hour job.

      I apologize to anyone that I have led to believe I grew up wealthy. The same thing applies to our current financial situation. I am far from wealthy, but my wife and I go to great lengths to invest any extra money we have and make the most of our money. I believe that maximizing value is important. If I am going to spend $500 paying off debt, I’m going to attack the debt that is most debilitating. I go out of my way to save $5 and shop around for even small purchases. Why then, would I pay down low interest options aggressively when this strategy is foolish and will end up costing me money.

  4. Jessica says:

    Oh and go check your math on the loan examples you gave. I used a calculator at http://unbury.me/ and the difference in interest using your examples was less than $100.

    • Jessica says:

      Okay well that calculator may be broken because I tried another one and got a ~$500 difference.

      I did want to comment on one more thing. You talk about Dave Ramsey pushing his products on poor/broke people. If you listen to his radio show on a regular basis, he actually mentions that if you can’t afford his products, go borrow one of his books from the library. He also makes almost everything he writes available for free on his website, including budget tools. Sure, he also pimps his paid products but he gives away a lot for free as well.

      I really don’t understand your grudge against Dave Ramsey. Is it because he’s religious? Or what? He has done a lot for the chronically broke and his radio show listeners collectively pay off something like $20 million in debt in a year – and that’s just counting the ones who call in. There are thousands of other people who pay off thousands of dollars just by following Dave Ramsey’s advice. And Dave Ramsey is a genuinely nice guy, his company has been voted one of the best companies to work for in Nashville for many years. You don’t get accolades like that from being what you call a “modern day snake oil salesman.”

      If you really want to expose people or get down to the nitty gritty, go chase down some of those “weight loss wrap” sales people. Now there’s where you’ll find your snake oil salesmen…

      And for the record, I am not a Dave Ramsey employee and I don’t get anything from talking about him. I’m a friend/former classmate of your wife’s. I just think it’s a little rude to tear down someone just because his methods don’t work for your goals. There are a lot of other financial gurus out there you can try.

    • Vincent says:

      Jessica, thank you very much for your feedback. When I make an error I do appreciate it being pointed out to me because my goal is to express my opinions in a manner that is beneficial to my readers. I assume that the loan scenario you refer to is, “Let’s imagine that someone has debts of $5,000 at 0% interest $8,000 at 3% interest and $10,000 at 12% interest”. I went on to say that after expenses you had $500 to attack the debt. Meaning that at 0% interest it would take 10 payments of $500 to pay off that loan. However, over the course of these 10 months your $8,000 and $10,000 amount would continue to accrue interest at 3% and 12% respectively.

      We calculate interest rates using the formula I=prt (Interest = principal x rate x time)

      So for the $8,000 amount Interest = $8,000 x .03 x .8333 = $200
      And for the $10,000 amount Interest = $10,000 x .12 x .8333 = $1,000

      The total interest accrued over the 10 months was $1,200, your $10,000 loan becomes an $11,000 loan and your $8,000 loan becomes an $8,200 loan.

      Paying $500 per month paying off the smallest debt first will cost $5,366 in interest and take 57 months vs. paying off the highest interest first will cost $1,750 in interest and take 50 months.

      Ultimately you must decide if you would rather pay off your debt 7 months earlier and save $3,600. However your point that “Sure, they might lose some money in interest but they are much more likely to pay off the debt (and quicker too) ” is incorrect, you pay your debt off nearly half a year faster.

      I would much rather have a big victory after 4 years with almost $4,000 extra in my pocket than to feel like I am doing great, but really be doing myself a disservice. If nothing else, you can look at the extra money you saved by paying off your debt faster and smarter and take a vacation with that money or you could send half of it to me in appreciation for the excellent advice.

  5. Steve says:

    You are right on target with your math!
    And you are right on target with your thinking!
    However, what you might have missed is … that other people don’t think like you do. If they did … they would act like you. So, the possibilities are … they have not been exposed to your thinking … or they CAN’T think like you. I have met both!
    There is something to the notion … “There is nothing blinder than those who just can’t see.”
    IMHO, Dave Ramsey works for those who CAN’T think and act like you. No disrespect intended to you or them.
    You have an issue with charity donation. I understand that. You are thinking math only.
    It would be better NOT to buy my wife a gift … I could spend that money on debt reduction. However, there are things that are more important that debt reduction … some things deserve honor right now … (I am thinking spouses, God, family, etc) those things take priority OVER the numbers and debt reduction.
    Pretty sure you agree with that principle. So, if some include God as a higher priority than the numbers … don’t attack them. Their pool of priorities is a little larger than yours. Have a great day!

    • Vincent says:

      My main point of contention was not against giving to charity. I think giving to charity is a great thing. However when you are in debt and trying to claw your way out the worst advice would be to advise someone to give away 10% of your money. Dave is the one who has advocated cutting expenses to very low levels. He even mentions limiting gifts for family. He wants you to sacrifice all your pleasures and joys to pay down debt. If your family income was 50,000a year that works out to $5,000 given away. That money would be better served paying down debt, thus saving interest so you could give more later. Or it gives a cushion of $5 Grand so you don’t have to live like you’re broke.

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