How Dave Ramsey May Be Leading You Astray

I should start this post off by saying I really enjoy listening to Dave Ramsey.  He’s on the radio every weeknight for 3 hours so I often listen to him coming or going from a shift.  He is far better than the other two “gurus” on local radio, one of which sells his advisory services and the other of which is selling permanent life insurance.  I think he is a fantastic motivator at getting people out of debt and keeping them from screwing up the big things, like using credit cards for credit, spending more than you earn etc.  You can do far worse than following his “baby steps” out of debt and toward financial independence.
I also like the advice he gives people about money and relationships.  He does a great job advising those being hounded by creditors and facing possible bankruptcy.  In fact, the worse the shape of your finances, the better Dave’s advice is.  His investing advice, however, leaves a lot to be desired.  But first, let’s discuss a little about the downsides of debt aversion.

The Cost of Debt Aversion

Many people have a problem with Dave’s absolutely rabid anti-debt stances.  For Ramsey, there is basically no good debt.  Dave’s approach leans a little too far toward the behaviorally correct thing to do, and too far away from the mathematically correct thing to do.  For instance, it’s nice to have no house payment, and no risk of losing your house to the bank if you lose your job.  So Dave recommends paying off your mortgage as soon as possible.  Behaviorally, that might be the right answer.  But mathematically, it often isn’t.  Consider a 3% mortgage, 2% after the mortgage interest tax break.  If inflation is 3%, the bank is basically paying you to borrow money after inflation.  Even if you only expect 5% out of your investment portfolio, you’re still far better off (mathematically) directing new money into the portfolio than toward paying down the mortgage early.

There are still lots of benefits to paying down the mortgage (less risk of losing home, ability to cut back at work, the feeling of being debt-free, improved cash flow etc), but you should probably calculate how much those benefits are likely to cost you before making that decision.  Consider $100K in your pocket that you can either pay down your mortgage with, or put in your investment portfolio.  Say the mortgage is costing you 2% after tax, and the portfolio (while riskier) returns 8% after tax and expenses.  Over the next 10 years, putting that $100K toward the mortgage will save you something in the neighborhood of $94,000.  I might be able to live with a little debt for a decade for $94K.  You might too.

Endorsed Local Provider List

Dave continually pushes his “endorsed local providers” for investing (as well as insurance, real estate etc.)  Most of these, unfortunately, are commissioned salesmen who sell you loaded mutual funds.  My local ELP says he discloses his fees and commissions to clients, but he doesn’t do so on his website.  He does, at least, recommend against permanent life insurance as an investing product.  Dave’s attitude toward loads is that they don’t matter over the long run.  I disagree.  I don’t see any reason to pay a commission when commission-free products are available.  Even if you view that as a way to pay for “good advice”, you should realize you are introducing a serious conflict of interest for the adviser, and likely getting crappier investments, even ignoring the load.

Good Growth Stock Mutual Funds

Dave often recommends you go out and get yourself some “good growth stock mutual funds” that will return you 12% a year.  No mention of bond funds or any other type of diversification.  Apparently 3 or 4 growth stock funds will do you.  Never mind that is exactly the type of portfolio you are most likely to bail out of in the event of a market downturn.  For someone who is so concerned about the behavioral aspects of debt, he seems to ignore them in investing.

12% is an extremely optimistic long term expected return, especially after paying the high ERs and loads you’re likely to get from Dave’s ELPs.  The long-term return of the S&P 500 (good growth stocks) is on the order of 9-10%, and the return for the ultra-low-cost Vanguard Growth Index Fund is only 8% over the last 20 years.  How likely do you think 12% is going forward?

The 8% Safe Withdrawal Rate

Dave often mentions that you should be able to spend 8% of your portfolio a year in retirement.  Never mind that all the best minds in academia recommend a safe withdrawal rate between 3 and 5%.  In fact, the updated Trinity Study suggests that a withdrawal rate of 8% on a 50/50 portfolio has less than a 50% chance of lasting 20 years.  Even if you stick with Dave’s recommended asset allocation of 100% stocks throughout your retirement, you still have a 1 in 4 chance of running out of money in 15 years.  That’s hardly a safe withdrawal rate.

The Real Danger of Following Dave’s Investing Advice

The problem with throwing these numbers out- “12% returns” and “8% a year withdrawals” is that if you really run the numbers, you’ll arrive at the wrong amount to save.  Consider someone who wants to live on $100K a year in retirement in today’s dollars.  If you assume a relatively standard 4% withdrawal rate, and a portfolio that returns 5% real a year (some people would argue even these numbers are optimistic), you need a portfolio worth $2.5 Million at retirement.  Assuming you acquired that over 30 years, you would need to save about $36,000  per year.  If you followed Dave’s advice, and assumed a return of 9% real (let’s make a big leap and assume Dave’s listeners can adjust for inflation) and an 8% withdrawal rate, you’d need to save $1.25 Million in today’s dollars at retirement, and could somehow magically do that by only putting away $8500 a year.  There’s an awfully big difference between $8500 and $36,000 a year.  The truth is that someone following Ramsey’s advice is not only highly likely to run out of money in retirement, but to be far short of his projected nest egg at retirement time.

So, while I like how Dave recommends eating “Rice and Beans, Beans and Rice” until you’re out of debt (similar to my recommendation to live like a resident for a few years after graduating), I’d be very cautious taking investing advice from him or his endorsed local providers.


How Dave Ramsey May Be Leading You Astray — 94 Comments

  1. If you are a poor young doctor in america, you can not go far wrong with listening to dave ramsey. 
    His advice is at least based on thousands of ‘case reports’. 
    However it is our view in Australia, that there needs to be more
    prospective peer reviewed unbiased robust scientific research on wealth creation and doctors. 
    Here in Australia,  we are therefore thinking of undertaking and publishing research which will include not just anecdotal case reports, historical data, but also large cohort studies and randomised controlled trials on doctors and wealth. It is envisaged there may also be international  collaboration. 
    To this end, a journal for financial health for doctors and a university  is being designed under the auspicious working-title of ‘ GET RICH QUACK’.

    However, other suggestions for the title are welcomed!
    If any one is interested in contributing please get in touch

  2. Thanks for making me feel better about not paying off my student loans (2.75) and new refi (3.0) early. I think for many undisciplined folks out there, Dave’s baby steps are great. But for those of us who can balance the books and keep income well ahead of expenses, there is certainly no benefit to paying off low-interest loans early. If i die before my student loans do, I wont be all that upset (except of course for the dying part!). Thats why I have life insurance. I still feel like I’m letting Dave down somehow though:)….

  3. I really enjoy your blog , even though I’m not a doctor or a high income person. I too also like to listen to Dave Ramsey. However, I will quibble with a couple of your criticisms, though I agree that his investing advice is a bit naive.

    Not paying down a mortgage is only “mathematically correct” if you ignore risk. It is a safer “return” (the interest rate of the mortgage) than any investment (even U.S. T-bills), because it’s a guaranteed return by definition in what you save. Safe investments today pay next to nothing without even considering inflation. To me that as silly as saying junk bonds are mathematically a better investment than EE savings bonds. And even then my place of living is not at risk, though my principle would be. I doubt the numerous people foreclosed on take comfort in being “mathematically correct.”

    Even so, Dave does not suggest stopping retirement or investing to pay down a house, as the post implies. He says that after 15% is being saved for retirement, to then concurrently pay down the house (along with saving for kids’ college). And after that build wealth. He claims that people on his plan pay off their house in around 7 years, I think, which is less than the 10 years in your calculations. After that period they would be able to save more and be more aggressive investing with no mortgage payment. Which to be fair, we should consider, since investing is more than a 10 year proposition. In 5-7 years (when a Ramseyite pays off his house) I don’t think we can assume any investment return with confidence. Though 20+ year out I agree with you more than Ramsey.

    15% retirement savings plus whatever other investing, is not likely to put someone in “real danger,” in fact it would be quite good for the average Joe. Maybe not a doctor. He doesn’t extrapolate from the 12% investment return to a savings rate—that is fixed by him at 15%.

    Where Ramsey is right on behavior trumping the math is that even mathematicians, engineers, and doctors can do the financial math, but usually do stupid things with money. Someone really following his plan, not that that’s the only way to build wealth, will not come out significantly different than someone like you. It is not interest rate knowledge or math skills that people lack but sacrifice, discipline, and focus—which paying off a mortgage fast takes.

    Thanks again for you blog.

    best regards,

  4. I agree with most of what you said about Ramsey. For a large part of the public, he is a welcome respite from the spend spend spend credit card debt mentality. But often, his advise is inappropriate.

    I’m a fee-only financial planner. Years ago, a new client couple comes in. They are both young attorneys, Ivy League Law School graduates and Dave Ramsey devotees. They are making, lets say about $140k (in today’s dollars) each. They are driving 20 year old cars and living in a rat infested (not exaggerating) apartment. All this while paying off their hundreds of thousands of dollars worth of government subsidized low interest student loans much faster than required. I felt like the first few meetings was spent reprogramming the brainwashed. Finally, I got them to stop paying down these absurdly low interest loans faster than required, save/invest some money, and look to buy a small house. The most important thing to this client should have been to protect their cash flow, not pay down student loans.

  5. Dave Ramsey is great if your financial goal is security. The average American would do well listening to him. However, if your goal is wealth and financial freedom, I would not listen to Dave Ramsey.

    First off, WCI is right about mortgages. Why would you pay that off at today’s interest rates. Additionally, there is a school of thought that says as long as interest rates are low, you keep debt on your house for asset protection reasons. Unfortunately, most states do not have unlimited homestead laws like Texas and Florida. So if you pay down a large mortgage on your house, that large sum is available to go after. For example, if you have a $775,000 home in Southern California, and you get in a car wreck and kill someone, that person’s family can go after your home if it is paid off (minus $75,000…that is the homestead limit in CA).

    My biggest problem with Dave is that he does not like people to take debt to buy real estate investments. He seems to hate the concept of leverage. While I agree that leverage can be harmful if used incorrectly, it can also create large sums of wealth for those who use it wisely. The majority of the Forbes 400 wealthiest individuals made or retain their money in business and or real estate……not mutual funds.

  6. Yes but tons of people lose their shirts in real estate and business. Most Americans can’t take on that risk successfully. It isn’t surprising that the wealthiest made their money this way. If we listed the top 400 based on amounts lost it likely would also be business and real estate.

    Ramsey is great for the poor. He is a great motivator out of debt. The problem with being good at something is that people think you will be good at other areas especially if they seem similar. That just isn’t true and Ramsey’s investing ideas won’t work for most doctors.

  7. Could someone explain the “Consider a 3% mortgage, 2% after the mortgage tax rate” comment. I’m not sure what the mortgage tax rate is? Is that some type of adjustment of your real interest rate after you factor in a tax deduction for your mortgage interest?

    Great post WCI. I have to attribute my getting interested in the financial world and getting out of debt to listening to Dave Ramsey starting in my last year of medical school. I think he is great for the people that call into his show and have really ended up in a bad situation because of stupid mistakes. Being a Christian, I also appreciate his incorporation of Biblical teachings into a lot of what he teaches in his books/radio program/seminars, etc. I have noticed a lot of the holes in his philosophy, especially with investing, that you mentioned in the post and tend to take more of a Boglehead approach with investing (major props to WCI to introducing me to that!).

  8. Yes it’s just considering the deduction.

    Of course it’s nice to get a standard deduction once you don’t have any deductions.

  9. Rex, I agree with many of your comments. I also agree that many people shouldn’t own real estate. However, this is a doctor blog and I do believe that all of us should have some real estate in our portfolio. It’s a hedge against inflation and quantitative easing makes inflation a near guarantee. I also would respectfully disagree with your characterization of risk. First, shelter is a basic need. Second, population cycles are favorable for renters. Lastly, the fact that banks will lend 70% – 80% of the money for a property lends to the safety profile of apartment investing. You’d never get a bank to loan for stock. There are ways to buy on the margin, but nowhere near 70% – 80%. Assuming a person knows how to find a good real estate deal (big assumption I realize), the risk lies in the day-to-day operations of that property. For that reason I will agree that most doctors should not manage their own real estate.

  10. Most doctors own a sizeable home to begin with. thus they have some real estate in their portfolio.

    Bank lending doesn’t reduce your risk. Banks like to loan to doctors to reduce their risk. Since most of us are easily employable they can come after our wages if necessary.

    Basic shelter isn’t the typical investment and if that is the only market you are looking at then it’s a tough crowd to work with at times.

    Currently I’m vacationing in a home that was purchased in foreclosure and was previously owned by an oral surgeon. I imagine he never dreamed he could lose money.

    With that said, I’ll look at adding some additional once our house is closer to being paid off. I don’t believe excessively leveraging is wise even though I might be able to make more money doing so. I’ll probably be looking at rentable vacation homes but might consider closer to basic shelter situations.

  11. James-

    You don’t need life insurance to cover student loans. They disappear with your death (but not your bankruptcy.)


    I’m not sure it’s even possible to do controlled financial studies as you “envisage.” I’d be interested to see what you come up with though.


    Keep in mind I’m not saying don’t do as Dave Ramsey suggests (i.e. make paying down low interest debt a priority.) I’m saying calculate the likely (but not guaranteed, as paying down debt is indeed risk free) cost to you of doing so and make a conscious decision about it. And you are correct that Dave does say put 15% toward retirement before paying down the mortgage early. I should have mentioned that earlier.


    I often recommend “living like a resident” for a few years. But you are correct that moderation in all things is key. You should feel absolutely no guilt about spending 80% of what you make. Thanks for sharing the great example.

    Dennis and Rex-

    I have mixed thoughts about using leverage for investment properties. There are definitely pluses and minuses both ways. Dave recommends buying them out right, but your expected return is obviously quite a bit lower doing it that way. I suspect a good way to do it is the middle way, neither debt free nor highly leveraged. It seems to me that at about a loan to value ratio of 70% or so you start getting a cash flow positive property. That seems like a reasonable cushion to me. Most docs don’t need this “second job” though. I don’t know that I have a strong opinion either way on the “basic shelter vs vacation property” debate. I suspect the price you buy at matters far more than what type of property it is.

    RB- Sorry for the confusion. Should have read “mortgage interest tax break.” (I fixed it.) I enjoy Dave’s “ministry” as well.

  12. WCI….Thanks for the input and the article. Your blog is great. You and Rex are two smart guys and I’m sure you two have done far better than me in paper assets….I very much agree that we doctor’s shouldn’t be managing our real estate holdings. Let me take your 70% loan-to-value leverage scenario and show you why I like real estate so much. For ease of numbers, lets use a $1,000,000 asset that returns 6% a year.

    Asset Value $1 million $1 million
    (unleveraged, stock, MF, etc.) (leveraged real estate)

    Cost to Investor $1 million $300,000 (non-recourse loan)

    Risk (Exposure $1 million $300,000
    to Potential Loss)

    6% Annual Return $60,000 $60,000

    Return on Investment 6% 20%

    Liquidity Event 15% cap gains 1031 exchange (tax deferred)
    Cost tax Refinance (tax free)

    There are many more benefits to real estate like depreciation, accelerated depreciation, principal paydown by renters, appreciation through optimization of operations, etc. etc. etc.

  13. Sorry, the posting didn’t turn out as I had hoped…….There should be spacing, but the first number is an unleveraged asset and the second number is leveraged real estate. Its hard to read as it posted without my spacing.

  14. I see your point, despite the formatting. But you also have to run it both ways… it with a negative 6% annual return. :) Leverage cuts both ways.

  15. You are absolutely right. Leverage is a tool that in the wrong hands can be destructive. That is why finding a good deal is not good enough. First one has to find the right market and then the right submarket within that market. Going to places that have consistent population growth and employment growth is a good start. However, there is a whole science to market and submarket selection that include dozens of different variables. Your point is well taken.

  16. All those variables you mention aren’t exactly a science that you can study and accurately predict. I have no doubt big money could be made but you seem to trivialize the risks involved with leveraging. Many people have felt housing was bulletproof until the last few years. Few states are non recourse.

  17. Rex, you are correct and that is my fault for not clarifying. It is rare to get non-recourse lending for residential properties (1-4 units). I’m not speaking about residential. I invest as a fractional owner in large apartments (100 – 250 units). We only take non-recourse loans which is the standard in commercial investing. One of the many reasons I don’t like residential is that you cannot take advantage of economies of scale. You also cannot utilize the best properties managers, so you are stuck with all of the headaches of operating.

    Sorry I had not clarified earlier……Hope you are enjoying your vacation.

  18. WCI –

    Thank you for sharing this information with your readers. I hadn’t heard of Dave Ramsey or Clark Howard prior to establishing my firm and unfortunately, their names come up far too often in initial client conversations. I refuse to listen to them and continue to be surprised by the intelligent, high-earning professionals who reference them in my office. Their brand of advice is akin to me spending several months reading as much material as I could on webMD then establishing a radio show to give medical advice. Is there any difference?

    Why spend any time at all listening to Ramsey and Howard when there are thousands of CFPs working at fee-only firms? Many of them share your belief in passive investing and don’t charge AUM fees. I implore prospective clients to find a CFP for their financial planning needs and a CFA for their investment needs. It’s that simple. I would have more respect for Ramsey and Howard if they at least got the CFP.

  19. Ramsey and Howard give great advice compared to most of the hooligans on the radio.

    Those thousands of CFPs working at fee-only firms don’t have free radio shows I can listen to while commuting. I suspect Dave Ramsey will have 1000 times more impact on the finances of Americans than a typical CFP working in a fee-only office.

    And financial advisors aren’t physicians. Using the “you wouldn’t do your own surgery so why would you do your own finances” argument sounds really dumb when it becomes “you wouldn’t do your own surgery so why would you do your own lawn?”

    All that said, I do recommend physicians looking to hire a financial advisor hire one with at least one of the more respectable credentials- CFP, CFA, ChFC.

  20. WCI –

    I agree that Ramsey and Howard have a larger impact on Americans than advisors who have been trained in financial planning and investments. The question is whether that is a good thing. I would argue that for a portion of the population Ramsey and Howard serve a useful function but for another segment, they do not.

    I used to work at The Motley Fool. Since my time there, I’ve become programmed to be respectful when communicating online. There’s a thin line between “really dumb argument” and “you’re really dumb for making that argument.” Unsubstantiated, flawed, illogical, weak, erroneous are a few replacements for dumb. Moving on…

    I didn’t realize there was a body of knowledge associated with mowing lawns. Assuming there is, I would certainly prefer to have someone with the CLM designation (Certifed Lawn Mower) than someone who neglected to endure the rigors of that grueling examination.

    And though “you wouldn’t do your own surgery so why would you do your own lawn” sounds silly so does “you wouldn’t repair your own transmission so why would you do your own lawn” or “you wouldn’t
    sell your own house so why would you do your own lawn” or “you wouldn’t defend yourself in court so why would you do your own lawn.” Implicit in your tone is a lack of appreciation for the financial profession. Aside from being off-putting to many of us who work hard to be knowledgeable and serve our clients, it is overly simplistic. You’re better than that.

    It also seems contradictory that personal finance is so simple but you always have new material for your site. One might argue your site’s very existence – or at least the dynamic, ongoing nature of it – undermines that premise. You can’t have it both ways, right?

    I’m curious…how does the ChFC meet your stringent criteria when it does not require a comprehensive exam? Why not the PFS which does require an exam? I would think exams would matter to you.

  21. Are you suggesting I have a lack of appreciation for the financial profession?

    Guilty as charged. :)

    There are many things in life that are reasonable to do yourself. Managing your finances is one of them. Major surgery is not. That’s just the way it is. Doesn’t mean a financial advisor can’t be useful, but I certainly don’t think everyone has to have one.

    As I understand the ChFC designation, it actually requires more coursework than the CFP. Correct me if I’m wrong. Take a look at this link:

    Don’t you think it’s odd that the highest credentials the financial advisory profession offers can be acquired in less than 4 months for less than $5400? Why would you expect people to consider that comparable to a CPA, a JD, an MD or other Master’s and Doctorate level degrees? They don’t and they shouldn’t. I’m not saying you and other advisors like you wouldn’t get some higher designation if there was one, I’m just saying there isn’t and there should be.

    Why not submit a guest post on why you think the CFP is the best designation to look for in an advisor rather than making all these comments on various threads on the site? I’m likely to publish it.

  22. WCI –

    Let’s do better with the analogies. All doctors aren’t surgeons. I think general practitioners and psychiatrists would be a better comparison. Many individuals may choose to do their own research and rely on other sources to make a diagnosis instead of consulting a general practitioner or engaging a psychiatrist. I might equate surgeons to the institutional side of the financial business. Bill Gates and the Harvard Endowment aren’t going to spend much time consulting with the local broker who cold calls them.

    If you find just ONE financial advisor who will publicly state that he/she believes the ChFC is a “more challenging credential to obtain” than the CFP, I will lay out a case. You need to do more research in this area.

    I’m not discussing comparability or whether the CFP is more difficult than the CFA or CPA or JD, etc. My argument is simply this: I think you should permanently replace financial advisor with CFP. To me, this isn’t a case of semantics but one of changing the financial services lexicon. This is a very basic screen I suspect the vast majority of your readers would be able to apply. Slightly adjusting the verbiage explicitly acknowledges your readers’ options.

  23. I’m not going to do it so quit asking. There are plenty of good advisors without the CFP credential. You may submit a guest post arguing your point as I previously suggested.

    Those who hold the ChFC say the same stuff you do….our credential is better. If you want to find one to argue about it with feel free to do so. You might start looking here.

  24. [Rude comments deleted] I looked into the ChFC a bit and will ask around to get feedback from advisors with both credentials. I never said the CFP was better, just more difficult to obtain; I thought that might resonate with you. You seem to have a modicum of respect for the CFA which I attribute to the difficulty of the exams.

    From my understanding, since I’m a CFP I could get the ChFC after taking just 3 of the 9 courses. There are short exams at the end of each module just like the CFP but no comprehensive exam.

    I’ll get a guest post to you soon. Hopefully, you won’t quell a dissident voice. [Not if it’s civil.]

  25. I have plenty of respect for the CFA, CFP, and ChFC. I think they’re all top level designations in the field. I’d like to see a higher one, but will take what I can get.

  26. [Rude comments deleted]
    Here’s some feedback from an advisor with the CFP and ChFC.

    Me: “How would you compare the CFP and the ChFC in terms of difficulty and the breadth of the material? I was having a discussion with someone recently and want to be sure I’m being fair in how I describe the two.”

    CFP, ChFC: “The biggest differences are that the CFP has a final exam and the public is less familiar with the ChFC, which makes the ChFC designation less valuable. I got the ChFC because I used the courses to fulfill my continuing education – I figured I might as well get something out of the CE. I would recommend the CFP hands down and believe it will do more to prepare you and reinforce financial planning skills.”

  27. Very good article… especially the mention of the 12% idea. When you study the history of the market never has a “good growth stock mutual fund” returned 12% over a consistent period of time. In fact, the only time we’ve ever seen that time of growth in the market was from 1980-1999; the reason was two-fold – getting off of the gold standard in 1971 (this allowed us to begin printing money like it was going out of style) and the introduction of the 401(k) in 1980. The implementation of the 401(k) introduced most working Americans to the stock market which began to artificially inflate the value of stocks. (Think of basic supply and demand.)

    “In 1950 less than 2% of Americans owned a common stock.” – John Bogle

    What percentage of Americans own stock today?

  28. Also, these posts are very entertaining! The ChFC is 9 fairly difficult exams. After one has passed all 9 he or she can sit for the CFP.

    Many people can pass a test(s). It about continually learning after you’ve taken the test. I’ve found that many MD’s, DDS’s, ChFC’s, CFA’s, CPA’s, CFP’s, and so on pass the test (or series of boards in the case of physicians) and think they’ve made it when, in fact, the most successful professionals are continually learning. They never stop.

  29. AuthorofTheWealthyPhysician –

    You’re right…those posts were extremely entertaining. Still can’t believe I was censored but there’s a first for everything.

    I disagree with the 2 reasons you offered being the primary causes of the bull market we experienced in the 80’s and 90’s. If you have some research to back it up, I’d be interested in taking a look. I’d argue that beginning at single digit PE’s in the early 80’s and topping out at PE’s north of 40 (based on Shiller’s CAPE – explained the vast majority of the robust returns we saw during the period. And stocks have been about flat over the past decade despite contributions to 401k plans likely being some multiple higher than where they were back in the 80’s and 90’s.

    And, yes, many people can pass tests. But, it’s been my experience that those of us who demonstrated the commitment to passing those tests also seem to be more likely to continually educate ourselves. My doctor, dentist and Ph.D. clients appreciate that I have obtained the most respected credentials in the field – though admittedly, not as rigorous as theirs. The conversation begins from a place of mutual respect.

  30. I enjoy Ramsey on the radio.

    He talks as if he knows everything though, which is annoying. He has made many statements about mortgages and origination that are absolutely inconsistent with the truth.

    His committment to us all being able to snatch up the 12% mutual funds is hollow. I have listened for him to name one of his good funds that do this every single time the subject comes up…. I’m still waiting. I’d bet the farm that people have called in asking, and they certainly were given a dial tone.

  31. You got some really good points, but I still choose to follow Dave’s advice.

    Dave calls his product line “Financial Peace University” and the word “Peace” plays such an important part in his teaching. The fact that we have all read this article above menas we are all money-minded people and we can all do the math, but math isn’t always the solution. If math were the solution, nobody would ever carry a balance on a credit card or take out a car loan (and how many americans actually have both?). The debt-free lifestyle brings you so much peace and that’s not what your math can bring. The fact that the house is paid off means way more than the possibility of being able to make a better return with this money; it anchors you and that’s simply priceless.

    I’m debt-free as of now and my house will be paid off as well in 3-4 months. You know what? That means I have choices now. Maybe I can choose not to work? If you have payments, you always will be stressed one way or another. If you have payments, you always, like it or not, have to hang on to your job.

    Financial peace; financial peace. Can’t put a return rate on peace! Dave Ramsey rocks!!

  32. Kool-aid anyone? :)

    Nothing wrong with living debt-free, just realize some people choose not to do so and still feel “at peace” with their decision.

    Would you rather have a paid off $300K home or a $300K home on which you owe $200K and $400K in the bank? That’s the question those who invest instead of paying off low interest debt ask themselves. Even Dave Ramsey is quick to point out you should invest prior to paying off a mortgage. Don’t believe me? Which Baby Step is paying off the mortgage? Step 6. Which is investing 15% of your income toward retirement? Step 4. There you go. Perhaps Dave isn’t quite as rabidly anti-debt as he at first appears.

  33. On his show for February 7/2013, a caller tells that years ago a payroll deduction was set for her to buy EE bonds. Now she got more interested in investments, but says she does not know anything about EE bonds, and asks Dave Ramsey what should she do with those EE bonds. Dave Ramsey says that EE bonds are cute, like a CD, paying only 2 or 3%, but she should cash them in to “invest in good mutual funds”.

    Good grief. EE bonds are a super-safe investment that will pay 3.5% — if you keep them 20 years. Where else can one get that very safe return? If the person wants to invest in something more risky, fine, don’t buy any more EE bonds, but keep them, because if she cashes them now she’s getting no return whatsoever.

  34. I agree too with others who say this review is fair – but I would not call it un-biased, as you base many of your assumptions about what may happen in a particular investors lifetime. Let me explain.

    First, I just retired last year, and I have always done my own investing, and never even heard of the name Dave Ramsey before 2010, but despite all that I have done quite well, mostly by unknowingly following a few of Dave’s principals, like staying out of debt, and investing 10-15% of my salary every year – at least from age 30. Before that — well not so much.

    I survived the late 1990’s when everybody was shooting for 20% gains, and the drop that followed. I survived 2008, at least to realize, that yes I can still retire at 60 as I had planned. All with no bonds whatsoever, mostly by learning to not always believe what someone says right out of the box, but test and verify and if it can’t be verified – like future projections, then the truth of that item is yet to be determined. Much like whether an investor is apt to earn 12% or not over their lifetime, which generally I agree the odds are against them, HOWEVER, anyone who reads Malkiel, or even Bogle, knows there are at least a few 25 year periods in history where the returns of the market have been north of 15% (Malkiel puts the top of that bar chart at just above 17%.)

    Now, I certainly would not tell an investor that they can expect to earn 12% on their investments over time, as I try to deal more closely in what I perceive are the facts, depending on the type of asset allocation the investor has and the fact that we can’t predict the future anyway.

    However, if an investor starts at a young age putting 15% or more of their salary into retirement funds, do you really think they are going to be hurt thinking that they could earn 12% on their money and will quit working at age 50 just because they saved their first $500k and only need a $40k income. Day after day on the DR forum I read posts by individuals that are excited about the day they are going to, or have started, investing. IF you know anything about the statistics of the US investor you will understand that just getting started is 80% of the battle. If it takes some radio talk show host yelling “SHOW ME THE MONEY” to do so, how can we be to critical.

    In the two years that I have been following DR and trying to push my version of the “facts,” he has come, at least in my opinion, to parse what he says a little carefully. During 2010 & 2011 and even early 2012 he learned that a couple of his darling American Funds could no longer be quoted as specifically earning greater than 12% over their lifetime, so it was more of an “about 12%” quote. Unfortunately 2013 is not really helping the “under 12%” fund enthusiast, as they are all over my Morningstar portfolios that I track in the 10 year and 15 year columns. One of the reasons I am hoping for a big market meltdown soon. :-)

    Not really@!


    • Are you suggesting that 12% is reasonably accurate? We’re now at the head of a 4 year bull market. Vanguard’s mutual fund screener shows 3823 stock funds, 868 of which have a 10 year return over 10%, and only 92 with a 10 year return over 15%. Of those 92, there are only 2 funds with a 20 year return greater than 12% a year. T Rowe Price Media and Telecommunications Fund and Fidelity Selected Chemicals Portfolio. That’s after a 4 year bull market which as you know biases everything upward, and doesn’t account for all the funds that have disappeared from the market in the last 20 years. The denominator is probably closer to 6000+ funds we’re talking about. 2 funds out of 6000! That seems like an easy chore to you?

      Sure, if your idea of a diversified buy and hold stock portfolio 20 years ago was 1/2 Telecommunications companies and 1/2 chemical companies, I suppose 12% is a reasonable number. Otherwise, better lower your sights a bit.

      These numbers, of course, are arithmetic returns, not geometric returns (the only kind that count) which are a little lower.

      They also don’t account for inflation. Real returns, again the only ones that count, are even lower.

      I’d love for future returns to be 12%. It would be very helpful to my retirement plans. But I think it is grossly optimistic and I think Dave does a disservice to his listeners when he uses that number. I don’t even think I’d criticize 10%, although I think that’s probably too high even for a 100% stock portfolio going forward, but 12% from a “good growth stock mutual fund”? The screener shows 5 total funds with a 12%+ return since inception, none of which have a 12% return in the last 10 years. It shows 8 with 12% returns in the last 10 years, none of which have a 12% return since inception. The data seems pretty darn clear to me.

  35. Not sure where you got that idea – here is what I said about 12%:

    “Now, I certainly would not tell an investor that they can expect to earn 12% on their investments over time, as I try to deal more closely in what I perceive are the facts, depending on the type of asset allocation the investor has and the fact that we can’t predict the future anyway.”

    Let’s not get off on a tangent of “real adjusted returns” because that is not what we are talking about here. While I agree they matter over time, but only to the effect that MY OWN income or expenses is affected by inflation — which of course you have no earthly idea. I buy items with the money in my account and my bank doesn’t seem to care what the “inflation adjusted” value of it is. In fact there are a number of ways to “buy items for less” especially when you are retired like I am.

    As far as funds with returns larger than 12%, I suggest you check on AGTHX, which has a return from inception (1973) of 13.3%. Maybe just take a quick look at the list of 31+ American Funds, as there are other examples – though I am sure you will argue these numbers are on a non-load adjusted basis, but we know that DR does not pay a load, and there are certainly ways for anyone to cut down the load fees, especially if they are investing in a 401k, which normally waives the fees, or at least reduces them.

    FYI, I am not recommending Load Funds either – just using them as an example, as they are SOME of what DR invests in.


      • I agree. In the last couple of years, I think I and others have given him much grief about quoting statistics that are not true. So now what he says it that you can find good funds that have a return of 12% or better from their inception. Specifically, in the podcast he did recently, he was quoting his 12% funds over 50, 70, or 20 years.

        What I DO NOT agree with in the podcast is that the scope of his funds have done 12% over the time he has owned them.

        As you might know, whether any investor pays a load or not is dependent on both how much money they already have in the funds and whether the load fee is waived – such as in a 401k.


  36. Ah youth! Old school medicine says we respect the opinions of other Doctors – we do not openly disrespect them. Caution to all who read any investing advice on White Coat: Get a second opinion, Doctor.

  37. WCI doesn’t get everything right, Dave Ramsey doesn’t get everything right, Bogleheads don’t get every thing right. The discussion in this thread is excellent, though. Lots of people coming at the various topics from their own unique angle.

    This is helpful.

    (I’ve read most of D. Ramsey’s books, and just re-read “the Millionaire next door”, which I highly recommend)

  38. Concerning the authors first point…it is a valid point. However, re-phrased, I wonder if the author would advise me to go out and borrow a couple of hundred thousand just to invest? That is what you are doing by diverting money away from paying off your mortgage and investing it. Looking at it from the re-phrased point of view, the risk becomes more apparent.

  39. White Coat,
    Good point. I am happy not to pay extra on my mortgage as my investing account does 20%. I am also happy to know if the landscape changes I can pay off the mortgage I have left at any time.

    Though investing is never a given, there is nothing in history at least to this point, that suggests real estate is a better investment – unless you use the leverage of a mortgage!

    By the way, seems to me like just investing in your own personal REIT.


  40. I have been looking into debt consolidation/management companies. Our debt is pretty simple, I feel – two credit cards with upwards of 7k (combined) debt with very high interest rates – 20%. We do not qualify for any lower interest rate, and need these simply paid down. I just want to cancel the cards, lower the interest rate and the monthly payment – and pay them off sooner. I did receive a quote from one debt management company that can do this, but they want $40/month for the service. I’m not sure if this is high compared to other companies or not, and every company has to do a complete work-up of your finances – if I can help it, I do not want to spend several hours and several credit checks getting a quote from every company. Can somebody out there tell me if this is high or not? I have already done the appropriate research on how this will effect my credit, etc. – I do not need advice in that direction. I just simply need to know if this is a high monthly recurring charge, or if there are other companies out there that can do the same for less. Does anybody out there know? Thank you.

    • I find it interesting that “you have been looking into debt consolidation/management companies” yet your email address and website are for a debt management company. That’s some of the best written Spam I’ve seen in a while, so I’ll leave it up.

  41. 11/23/2013

    Hey everyone, sorry I am a bit late to the party. I am no expert, no insurance person, and certainly no adviser but I have done my research on this particular subject for a long, long time.

    First off, full disclosure here, I am a huge fan of Dave Ramsey. I think he is correct on most all of what he says. He has a great ministry, great business, and has really good advice for most average people. Does he go too far sometimes? Yes. Why? I think human behavior, he knows if he tells you to save $1,000; you’ll get to $950 and think, ah that’s good enough. So he knows if he tells you that some debt is ok, it will come back to haunt him and you. After all, he is selling his advise and books.

    I think he is absolutely right on paying off ALL your debt. Mortgage, student loans, all of it. No debt. Aside from the great security it gives you, why would you willingly give away your money to a bank? The average person in 2005 paid $13,500 in mortgage interest (US Dept of Comm). $13,500!! And the average total US consumer interest (mtg, cars, credit cards) was $16,900.00, that is 36.7% of the average US salary that year ($46,000). That said, what investment do you KNOW that will make you $16,900 year, guaranteed? Nothing. Instead of throwing away $16,900 a year, you keep it! You just had a 100% return because you now don’t have a 100% loss on that money.

    Keep in mind that your mortgage, if paid in full, at 4.5% is a -100% return, yes negative. At 6.5% it is a -200% return. And please don’t spout the non-sense about a tax write off—you’re paying a bank $13,500 a year to reduce your taxes by $2,025? That is a terrible trade! Keep your money. Instead of being out $13,500 in interest paid from cash you would have $11,475 in cash. I like that trade better. Moving on…

    I said all that to say this: I think that Dave is wrong about investments for the average, retail person. NOTHING FITS EVERYBODY. But the buy term and invest the difference (BTID)? I have no idea where his average 12% mutual fund return number comes from. There is no magic fund. No magic market. A 100 year average is just that, a 100 year average. If you haven’t been in the market for 100 years, you won’t get that. In fact, I just read a Dalbar study that said the average 20 year return on a mutual fund is only 3.8%. 3.8%??!! All that risk for that tiny return. And that doesn’t even account for taxes and inflation over time you have to pay. The markets have returned about 9.6% since 1928 BEFORE inflation, after, its only about 6.2% (USA Today).

    I also found where an average joe stock trader only gets, on average, about 2% back in the equities when losses are accounted for (can’t remember where I saw this right off). Remember that is average, half of yall did better, but half are thinking, I wish I had that return! What causes the 2%? My guess, again, human behavior. If the average guy has control, he is influenced by news and friends. Selling low and buying high.

    I simply don’t think the average normal guy can really beat the markets nor match them. The information he is supposedly legally entitled to, that the pros get, he gets late or never at all, the big wig fat cats that control the markets have already tanked the stock and your money is gone. I have tried the markets and most of my good gains eventually get (at least partially) wiped by losses. Do you realize a 15% gain one year is totally erased PLUS some of your principal with a 14% loss the next year? Do you realize a fund can have a positive return average and you can make $0 or even loose money?!?

    Now, I don’t know a lot about insurance and stocks but I know this: There are two things sure in life, death and taxes (Ben Franklin, 1817). I have knowledge of a tool that I can cash in on death and avoid taxes. That is whole life, when used correctly. Everyone who has ever lived has died. So why would you NOT want to buy a policy that is SURE to PAYOUT? Yes it costs money but so do all investments. Lastly, there are few things in this life that carry guaranteed returns or guaranteed anything for that matter. Whole life is guaranteed; if you pay the premium. I know no other investment that carries a guarantee. On top of that, if you have paid off all your debt, my attitude is that you don’t need the risk of the markets. Take the guarantee and keep what you’ve got. Build guaranteed value slowly. There is no way to get rich quick. Take it for what its worth, I have nothing to gain or loose in this.

    That guaranteed value, guaranteed return, and the ability of being able to know I will leave a legacy to my children is worth something, at least to me anyway. What’s it worth? That is up to you.

    • It is actually surprisingly easy to match the market’s return. Yes, I realize a fund can make money and you can lose money due to the timing of your inflows and outflows. Yes, I realize losses count more than gains, both mathematically and behaviorally. I do not, however, find either of those as a reason to invest in whole life insurance. A vague reference to death and taxes in no way justifies choosing such a poor investment. If your ability to invest in stocks is such that whole life will provide you superior returns, then I agree that is perhaps the best way for you to invest, but I think most people will get more bang for their buck by fixing the way they invest in stocks.

      You also seem to misunderstand the mathematical advantage of borrowing at a low rate and then investing at a high rate. There is a real arbitrage opportunity there, especially when both the borrowing and the investing are tax-advantaged. The difficult thing is playing that out against the behavioral aspects of carrying debt. But saying the math is wrong is just being ignorant, because it isn’t. “Giving all your money to the bank” isn’t very accurate. It should be described as paying the bank a fair fee to use the bank’s money. What you do with that money and how much you pay for it is what determines your eventual financial outcome.

      Don’t get me wrong. I like Dave. I dislike debt far more than the average American, physician or even investor. But math is math, and it’s not up for debate.

      • With all due respect, I have run the numbers (many times) and they work. Again, I have nothing to gain but I hope people understand what this method really is. If you were like me, you are tired of the market risk and want something safe but that grows and protects your money. There is so much dis-information and just bad info out there. I’m sorry, I do not find paying a bank 4.5% interest on what I borrow from them and them paying me 0.1% on what they borrow from me “fair” I believe you put it. Especially considering risk. I can have 1 payment left on my mortgage and the bank can take it if I don’t pay. Again, I believe it benefits you to not pay any interest at all. Pay off all your debt, then invest. Why not pay a bank 0% interest and the bank PAY YOU 0% interest? I guess, invest in yourself, pay your stuff off, then gamble in the market casinos or take the safe whole life path. Remember, risk nothing you can’t afford to loose. Also remember that you carry all the risk in a 401k until you retire and almost no risk in a whole life policy. No risk of loss with guaranteed returns. Also, as your investments grow with mutual funds in a 401k or SEP, your loads and taxes get higher—not so with whole life.

        In fairness, a bit of clarification is probably warranted here, when I refer to “Whole Life” (WL) I am speaking of a good, solid, 100+ year WL policy company with someone like Northwestern Mutual, Mass Mutual, etc that pays dividends, not a public stock traded company. Not state farm or nationwide, etc. Not that they are bad. And you NEED help. Get lots of opinions, meet with lots of advisors.

        I am speaking here NOT about your average whole life policy, I agree that 95% of those policies are terrible and won’t work with this model and that probably 97% of those policies sold were not needed. That said, good mutual companies build cash slowly. You won’t get rich overnight but you will save your money and earn steady, good interest. Think of this as a high powered savings account with a death benefit. Remember too, insurance companies ARE banks.

        And what I mean about this a 30 or 40 year plan is this (very crudely) —how it works: lets go with a WL policy from Northwestern Mutual that carries a $12,000 yearly premium for a $1,000,000 benefit (which is a real premium for a 33yo nonsmoking female, just checked for my wife). In year one (1) I pay my premium PLUS another $36,000. That $36,000 goes straight to cash. I can borrower from that immediately and it starts earning interest at 5.75% immediately. The next year, I do the same, and repeat. My yearly payment next year (year 2) of $48,000, almost all of that, about 90% goes to cash. (and you can change these numbers, I just used them because I had them) Year 3 ALL of my payment goes to cash and so on. (you do have to be careful you don’t MEC the policy) So, by year 3, I already have saved up about $127,000 of MY money that is earning interest AND dividends with NO RISK of loss. I can also take all that $127k back out immediately or borrow portions and keep the policy in place.

        Now also keep in mind that I don’t ‘need’ a term policy in this 30 year period, that would have total a cost of about $13,500 in today’s dollars. You do need insurance, I think—but I never buy as much as I am told I “need” by salesmen.

        Believe me, I understand borrowing low and then earning higher interest, I do also known as “lost opportunity cost”. I get it. (you actually do this in the policy later in life which is why you don’t pay back the loans you take for income).

        While I have considered the “potential” lost opportunity cost, if any, of no debt and have looked at it too, there is also a lot of risk—as shown in 2000, 2008 and 2009—, I am simply (and totally for the sake of being able to post this) speaking in averages that we can look at. That said, and with all due respect, I see little lost opportunity for the “average” investor in the last, say, 10 years (because I can’t see 10 years into the future) in borrowing, for example, $250,000 against their house to invest in the markets as opposed to keeping the mortgage paid off and investing the surplus cash earned later.

        For example, say a person inherits (gets a bonus, earns…whatever) the amount of $250,000.00. And say they can either pay off their mortgage on their home/condo or keep their mortgage and invest the $250,000 in equities.

        Keep in mind average and that we don’t know the future so I’ll base this on a 2003 thru 2013 look-back/back test. Now, full disclosure, I know people who make a lot of money in real estate, of course, I know people who have lost a lot also. Again, nothing fits everybody and no investment is guaranteed (except the whole life argument I made). Remember, if you would have invested a lump sum in the markets in December of 1999 you would still be waiting to get your money back! (a -1.7% loss after inflation and BEFORE TAXES-S&P500)

        If we look at the S&P 500 returns and invested on December 1, 2003 (10 years ago), our average annualized return is about 5.38% through today (12/16/13). Now remember that we must base the interest rate on the 2003 rates (not today’s 3.5%) which were about 6%. We have to account for taxes and inflation too. Basic math tells us that if you had invested that $250,000 in the markets and gotten the average return of 5.38%, you would have LOST money.

        The interest you would have paid would be $102,229 on that money for the last 10 years with an adjusted net rate of 4.5% (6.0% mtg rate minus 1.5% tax deduction for mortgage interest yearly, makes the effective net mortgage rate 4.5% for this example). The 10 year gain at 5.38% downwardly adjusted for inflation of 3.5% makes our real rate of return only 1.88%. So, our net adjusted gain would have only been $49,841. Income taxes would take another $13,955 of our inflation adjusted gains (at 28% for that $125,000 tax bracket, more if you hit the 45% bracket) and we actually loose -$66,343. Again, all that risk and you still LOOSE money!

        Now could this be different? Of course! Some investors could have done MUCH better but some did a lot worse too. Remember average is just that, 50% did WORSE and 50% did BETTER. When you consider inflation, risk, and taxes, I (personally) can’t see any lost opportunity.

        But! Even if we hypothesize in the future with what you said, our equation still isn’t that great when we consider the risk. Remember cash into a good mutual company’s whole life with dividends carries a guaranteed, no loss return…if we pay the premiums, which we have to assume we do, since we assume we paid all $250,000 into the market.

        For our future equation, again based on what you said, assuming 4.5% interest over 30 years. Assuming the average market return (after inflation adjust) since 1928 of 6.2% minus our mortgage interest 4.5% = 1.7%, now add back in the mortgage interest tax write off of 1.5% = 3.2% average net rate of return but remember we now have to back out our taxes of 28%, makes our real rate of return 2.3%. BUT this hypothesizes things in a straight line with no deviations. Life and real investments don’t run in a straight line and are never perfect. You could do a lot worse—or better. There are no guarantees with this method. If you do loose more money, you now owe for the mortgage and the losses in the investment. Even the averaged 2.3% doesn’t beat the whole life method making say 4% or 5% because taxes, interest costs, and term insurance costs eat all your gains. Maybe some people are smarter than me and can consistently get higher returns, I don’t know any of them.

        Again, I agree a person has to commit and stick with it, whichever method you choose. I invest over 30 years, not 30 days. That said, I still like a good whole life dividend mutual return with guarantees instead of the risk. Might I sacrifice some opportunity in exchange for the guarantee? Maybe yes, maybe no. If yes, that is the cost of something guaranteed, if no, it is the more sound method. Again, it is a gamble that you will make more money in the market. There are only 4 outcomes: 1. Life Ins. with guaranteed amount. 2. Market returns same amount as Life Ins. 3. Market returns less. 4. Market returns more.

        If I go with the market, 2 of the 3 possible market outcomes don’t beat the guaranteed Life Ins. method, that is a 66% failure rate and only a 33% chance of success in the market method but that 3% return is still less than the whole life average return NOT including our risk and the lack of insurance factors. 3 of 4 (75%) of my choices return the same or less. That is a 25% chance of success. That is why I like my returns and dividends on the whole life.

        Remember too, that using the mortgage method, you still have to buy term life insurance to get the equations closer in death risk which raises the mortgage method losses because you must expend capital on the insurance needed and, if you really want to get it seriously complicated, look at the tax advantages of the money building inside the policy compared to the taxes owed on the investments. The money you first pull out of your policy is not taxed because you paid it in and unless you cancel the policy you withdraw the rest through loans TAX FREE that are practically 0% or 0.5% net interest.

        Absolutely no offense meant but I prefer the no debt method because I can also draw back if I loose my income and have no risk of loosing my house to a debt taken on for risk (if I have a disability rider, which I do, I can even get disabled with the whole life method and come out better because I keep my income and the insurance company keeps paying into the policy so my investment still grows AND my house is paid for).

        Here’s a scenario to also consider, what about the opposite?: in both options, after 10 years, what if you loose your job AND the markets decline? If you took the mortgage method, you loose your house and your your investment looses money. If you paid off your house, you keep your house and the worst is the policy might not make as much if it has to self fund for a year or two.

        Also, what about this: the money inside your whole life policy is protected from creditors and asset disclosures in most states. What if you get sued for malpractice and the hospital hangs you out to dry and the patient comes after you personally and wants to take your 401k? What if you E&O carrier tries to burn you and doesn’t cover you? They can’t get to your WL cash value because you don’t own it, the insurance company does. Creditors can’t get it.

        And if there is anything I can tell you, if there is anything I have learned in this life, it is that you had better plan for things to go wrong in life. If you’re a doctor, you see everyday. Always plan for the worst. If you do that, you will be fine. If you don’t plan for the worst, life will punch you in the face, take your lunch money, and laugh at you. Cancer happens. People die. Kids get sick. Houses burn. Car accidents will change your life. You can’t control it all. You’d better be prepared. It is a lot easier to loose money than to make it. Something guaranteed? For me, it’s a no brainer.

        • That’s quite a comment.

          First, let’s establish for readers whether or not you have anything to gain. You don’t mention what you do for a living, but like most people who post lengthy comments about whole life, I suspect you sell it for a living. If so, then you do have something to gain.

          Second, proponents of whole life like to discuss how whole life avoids market risk. While this isn’t entirely true (since the insurance company must also invest in the market), it also isn’t the most important risk that investors face. That risk is the risk of not meeting their goals due to their money growing too slowly. This is the main risk of investing in whole life insurance. It is discussed, along with many of the other tired arguments you bring up, in a recent series I did on whole life insurance starting here:

          Third, I agree that the vast majority of whole life policies sold are terrible policies AND are sold inappropriately.

          Fourth, I’ve written about the pluses and minuses of the Bank on Yourself/Infinite Banking theory here:

          I’m not going to repeat the arguments again. If you wish to live your life this way, there are far worse things you can do financially, so feel free to do so. But don’t pretend it’s some magical fountain of money.

          Fifth, there is plenty of lost opportunity cost in the last ten years. The average ten year returns for several Vanguard funds I’ve been investing in for the last decade range from 7.5-12% per year. The lost decade argument wasn’t particularly good 3 years ago, and it’s terrible now. You use a figure of 5.38% for the S&P 500 for the last 10 years. I see over 7.5%. Perhaps that’s the effect of changing the period by just 11 months. Perhaps you didn’t include dividends. I don’t know. Either way, I find your figure misleading. Your example about money invested in the market in 1999 still not being back to normal (after inflation) is so incredibly cherry picked that it is nonsensical. Why not use a 3 year period starting in October 1929 instead? How about money invested in late 2002 or March 2009? Or perhaps use small value stocks or some other asset class besides large cap US stocks? Oh, that wouldn’t make your point, would it.

          Sixth, whole life dividends are only guaranteed at the guaranteed scale, which is generally less than the rate of inflation. Even that guarantee is only as good as the company backing it (plus some possible assistance for a low amount of cash value from the state guaranty association.)

          Seventh, if you’re investing in an S&P 500 index fund you’re not paying taxes at short term capital gains rates. If you’re going to use examples to make your argument, at least try to be reasonably accurate about tax cost.

          Eighth, if you don’t think you can choose investments that will average better than 4-5% per year, after tax and expenses, over 50 years, then I agree you’d be better off investing in whole life insurance. Personally, I have found that to be relatively trivial. In fact, just buying all the stocks in the world without regard to to which ones are good and which are bad, using low cost index funds in a retirement account, has bested that figure by 4-7% historically. The difference in compounding your money at 4% (1% real) and 10% (7% real) is astounding. I agree there are only four outcomes, however they are not all equally likely over a long period of time. If you really think the returns of aggressive, long-term investments like stocks and real estate are going to do worse than 4-5% per year over the next 50 years, then it is unlikely that an insurance company will provide anything more than their guaranteed scale, if they can even do that.

          Ninth, one problem with buying whole life insurance is that you don’t need life insurance your whole life, so you are paying for something you don’t need.

          Tenth, I’m not sure you understand how malpractice insurance nor asset protection works. I addressed the issue of whole life as an asset protection scheme here:

          If you would like to talk more about this subject, let’s do it in the comments section of that post.

          Finally, guarantees aren’t free. They have real costs, and when the costs outweigh the benefits they should be passed on. This is generally the case with using whole life insurance as an investing strategy.

  42. @ jim levenstein- I actually think anyone can match “the market” (minus a tiny fraction of a percent), using low-cost index funds. Few people are able to beat the market, and very few do so consistently. Whole life doesn’t get you around investing in the market. the insurance companies invest their assets in the market and can not pay returns that are any greater than market returns (usually returns of intermediate-term, high quality bonds), and in fact must be much less than market returns for the insurance company to make a profit. the fees associated with whole life are also horrific when compared with even the most expensive mutual funds.

    • @ jim levenstein
      I am also a little unsure how the WL death guarantee is going to help you in retirement, unless you are somehow going to cash out the cash value for less than the guarantee, thus invalidating the guarantee entirely.

      • Again, I am telling you only what I have learned, so I don’t know it all.

        Essentially, you build your cash value inside the policy, it grows tax free to some amount, then, when you retire, you take out what you need, if needed but also, a mutual company pays you dividends each year, mine will be around $50,000 (minimum) yearly by year 25 and my policy will only be $21,000 yearly, not including the interest gained each year.

        I simply take the growth out each year if I needed or take policy “loan” for anything above what I paid in. Since a loan is not taxable, no income taxes.

        When I die, say I had $2,000,000 total cash value, I took out $500,000 in retirement to live, I still have $1,500,000 cash value inside the policy PLUS whatever the death benefit is (say another $1,500,000) that all goes to the kids and/or wife (total to heirs $3,000,000). In retirement, if needed, I could cash out the policy (unlikely) or simply take its growth from interest and dividends to live off of and maintain the principal amount.

        There is no risk of loss, unless the earth burns up. My money I have earned never looses value.

        • So, say I have gotten the cash value to the $2,000,000 mark. The dividend paid to me by the Ins. Co. is $50,000 and my yearly interest is $100,000 yearly (5% interest for example). The policy costs me $21,000 yearly to keep in place. So, I can take my $150,000 in growth, pay my $21,000 premium and keep $129,000 each year to live on. Cash value doesn’t change. If I die, family gets the cash value and the death benefit insurance amount, $3,000,000.

          Remember, very important here, you want a policy where the death benefits GOES UP every year and with every overpayment of your premium. In other words, a $1,000,000 policy today, after 30 years, may have a death benefit of $4,200,000. I think that is missed a lot. The death benefit goes up every year.

          • The death benefit isn’t guaranteed to go up at all, much less every year. Will it probably go up? Yes, probably. But if we’re going to talk about what’s probably going to happen, you’re probably going to be better off investing in something besides whole life insurance.

        • Loans may be tax-free, but they are not interest free.

          Again, as mentioned earlier, you don’t get the cash value AND the death benefit. That is simply false. You get one or the other.

          There is risk of loss without the earth burning up, especially for a policy the size of yours (premiums of $21K per year.) Have you looked into how much cash value your state guaranty association actually insures? Have you looked into the asset protection benefits for cash value life insurance in YOUR state? They might not be as high as you think.

        • @Jim,
          Surely, you should not be posting about how WL insurance policies work if you don’t even know the most basic facts, such as you will not get both the cash value and the death benefit, you will only get the death benefit.

          • Furthermore,
            Taking out money from the cash value will affect how much the death benefit can increase each year — so it is not a win-win, in that you can’t take money out and still see the same increases.

  43. Dave recommends paying off the smallest amount as opposed to the highest interest rate debt. There is sound reasoning. Most everything that most humans do is behavior related and not brain related as far as finances. If you pay off the smallest amount, your number of debts goes down by one and you feel a sense of accomplishment. On the other hand if you start with a high interest debt and start paying extra on that you may not get much leverage because of all the interest, After a few months, the debt is still close to the original amount and the person feels like “why bother” and quits. Now the same person who was doing the smallest amount may have already knocked out debt number two and feels like there is hope. Based on your total amount of debt and the amount that you will pay in the long run, the difference in the total won’t be much whether you start with the lowest amount or the highest interest rate. Dave has explained this on more than one occasion on his show. The only people that would benefit from starting with the high interest debts would be those already motivated and with some sort of math understanding.

    • The only people that would benefit from starting with the high interest debts would be those already motivated and with some sort of math understanding.

      You mean like doctors? :)

      I agree that difference may not be very big for most and that for most people behavior trumps math on this issue, especially when the debt is consumer loans, but even when it is student loans. But consider a physician couple who emailed me today.

      $800K in loans. Let’s say $500K at 8.5% and 300K at 6.8%. First, Dave wouldn’t recommend refinancing, he would instead recommend “Gazelle intensity.” “You don’t get out of debt with debt”, he would say. In this case, I disagree. These debts should be refinanced whenever possible, not to lower payments, but to lower the total amount of interest paid and shorten the term of the loan. DRB’s variable rate loan is currently at 2.76%. Prior to refinance, those loans generate up to 8.5%*500K + 6.8%*300K = $62,900 in interest per year. If you refinance at that lower rate, the interest due each year would be up to $22,080. (Not 100% accurate as I’m ignoring amortization). So you’re looking at an extra $40K per year you can put toward the principal by refinancing. You don’t think you can get out of debt faster with an extra $40K a year to throw at it? Now that’s Gazelle Intensity.

      Second, assuming no refinancing, Dave would recommend against paying off the larger loan first. But in this case, the difference is thousands of dollars over a 5-10 year period.

      If you just pay both loans off over 10 years with the minimum payments, then you’d pay $244K in interest on the 8.5%/$500K one and $114K in interest on the 6.8%/$300K loan. Total interest paid is $358K.

      Let’s say you want to get out of debt sooner, so you put an extra $2000 into each monthly payment. How much interest do you save and how much sooner do you get out of debt if you pay off the smaller, lower interest rate loan first?

      You pay off the first loan in 67 months, paying a total of $61K interest. The $2K plus the payment for the first loan then goes toward the second loan. You end up being out of debt in 90 total months, having paid a total of $61K+$211K in interest, for a total of $271K, a savings of $87K in interest.

      Now what happens if you put that $2K toward the larger, higher interest loan?

      You pay off the larger loan in 81 months, having paid a total of $157K in interest. The $2K plus the payment for the larger loan now go toward the smaller, lower interest rate loan. You get out of debt in 88 total months and pay a total of $260K in interest.

      Dave might not think $11K is much money, but it’s better than a kick in the teeth. It pays for a couple of nice trips to Europe.

      How much faster do you get out of debt if you refinance AND put an extra $2K toward the loan each month? You get out of debt in 75 months and end up paying only $72K in interest.

      The moral of the story is you can take Dave’s approach, get out of debt in 89 months and “feel good” about it, or you can do a couple of math problems, maintain a little discipline (far less than it takes to get into, much less through medical school) and get out of debt over a year sooner paying $200K less in essentially non-deductible interest. I don’t know about you, but I can think of a lot of things to do with $200K.

    • @ Diane-
      This makes no sense at all. I have never heard Dave Ramsey speak, but I’m not sure I want to, if this is his approach. To use a medical analogy, this is like advising an emergency physician to completely address the runny nose first in a patient who is having both a runny nose and a heart attack.

  44. I disagree with the author; I think Dave Ramsey is right on. He motivates his listeners to annihilate all debt. I got charged up after listening to his show and became determined to “kill off” those med school loans, once and for all. About 14 months later I did that – and my student loans are now GONE and I feel FREE.

    I never have to worry about taking a bad job that features student loan payoff. I made that mistake when I started off. I was accepted into the NIH Loan Repayment Program in fellowship. I genuinely wanted to go into medical research at the time. I took my first job at the University with 32k a year in loan pay off, but I my salary was half of what it would be in private practice. My academic career floundered and I was miserable; however, there was no way out of the NIH LRP. When the NIH LRP ended for me, I resigned from the university several months later. I started working as an independent contractor, worked extra shifts, and paid off those loans! There is no reason to keep those loans around for 25 years. Pay off your high interest debt first then pay off your student loans. Move on with your life !!

    • I can’t figure out from your comment which part of what the author wrote you disagree with.

      Congratulations on becoming free of your student loans. The author has been free of his student loans for years and agrees it really opens up a lot of options personally and financially.

  45. I don’t agree with “For Ramsey, there is basically no good debt. Dave’s approach leans a little too far toward the behaviorally correct thing to do, and too far away from the mathematically correct thing to do.” I don’t think that people should hang on to this debt for 20 years. We should be focused on being successful and happy, rather than being tempted to sign up a bad loan forgiveness deal. As long as one hangs on to student debt, they could be tempted to sign up for a bad loan forgiveness deal. Work extra shifts, pay the stupid things off, and move with your life.

  46. My point is that being debt-free is a state of mind. It makes you feel rich because you can live your life how you want, and not feel enslaved to debtors.

  47. Sorry, I don’t agree and maybe I missed something here. Dave has given a plan, all I see you doing is critisizing his plan. If you’re going to be critical, show me your plan and let me decide, otherwise your just blowing your own horn.

    • It’s unclear to me what you don’t agree with. Do you not agree that paying down low interest debt instead of investing in an investment with much higher expected rates of return may not be wise? Do you not agree that commissioned salesmen don’t make for good advisers? Do you not agree that active management is a loser’s game? Do you not agree that the stock market is unlikely to give you an annualized return of 12% over your investing horizon? do you not agree that 8% is far too high of a safe withdrawal rate? What exactly do you disagree with in this post.

      All of that is relatively easily proven with simple mathematics or a cursory glance at the historical data. It’s pretty tough for a financially educated person to disagree with any of that.

      “My plan” is easily found on the website and the book. It’s quite basic. But you don’t need to follow my plan. You can follow Dave’s. Just realize that he’s simply wrong about a few of the things he says. If you adjust his plan for those, it should work just fine for you.

  48. The mortgage interest tax deduction is not guaranteed. If you borrow (or make) too little money, it’s not worth anything; your standard deduction is higher. People who live in states without state income tax, in particular, have a hard time exceeding their standard deduction through itemizing, since a major source of itemized deductions (state income tax) is unavailable. Conversely, if you make too much money, the AMT kicks in, which limits the scope of the deduction (e.g. cash-out refinancing not used for home improvements no longer qualifies). There are also various weird situations, such as working in a foreign country, where you would no longer get the benefit of the deduction since the other country doesn’t offer it. One even hears semi-serious talk of Congress changing the law in the future to eliminate the deduction. In light of the uncertainties, I think the deduction should certainly be a part of your planning, but it is not a good idea to rely on it always being there.

    What you should really do is compare your mortgage with your other investment options. Paying off your mortgage gives you a 3.8%, risk-free, tax-free return. As far as I know, there is absolutely no savings vehicle on the planet able to match that rate of risk-free return in today’s interest rate environment.

  49. Sorry, need to comment. Right off the bat you recommend against the paydown of mortgage debt that Dave recommends. He does not do this.

    Step 4 is to put aside 15% for retirement. It is before step 5 which, if you have children, is to set aside money for education for children. Then is step 6 which is to pay off your mortgage .

    The 15% in step 4 is considered even by him to be a minimum, but enough to build the foundation of a retirement. The word foundation is important because it’s not the end all. He doesn’t recommend you put paying down your house before investing.

    I also find it important to note that he recommends pay down of mortgage for most people because of volatility of jobs. When approached with people who have known stable jobs, he typically eases back on things like the extend of an emergency fund and pay down of mortgage. But he can’t afford to cover every case and treats the majority of his audience as the victims of their own debt. He HAS to educate this way to not confuse those who have been made victims by their misunderstanding of reality and following of the majority.

    Then you mention in your section on investing:
    “Never mind that is exactly the type of portfolio you are most likely to bail out of in the event of a market downturn. ”
    If you’re bailing out, you’re doing yourself a disservice because these are the ones you want to be in WHEN the market downturns because they will recover the best. If you’re bailing out during volatility and slipping into more conservative portfolios, you will never recover what you’ve lost. Track record has a lot to do with this too and you should be picking ones that recover. You have a great time period to look at too over the last 10-15 years to see which ones did recover well from a significant market downturn.

    I agree that 12% is likely a pipe-dream, but it should be a goal. You want 7-8% growth with a sizable nestegg so you can regularly withdraw enough to compete with inflation, taxes and draw enough to match your salary prior to retirement.

    Your wanting to live on $100k is unrealistic too. Consider the average family lives on $45k a year before taxes to support a full family. You can live on far less. You don’t need to have as much aside as you claim.

    At least he presents a plan that most people can understand, and does it relatively for free if you’re willing to listen to a free radio show and put together the pieces. That’s more than most people try to do and more than you’re doing.

    • I agree, Dave recommends 15% for retirement (plus college) before paying down mortgage. But Dave also recommends paying down debt no matter what the interest rate is, even if it is 0% or less than inflation. That’s the point of the debt section.

      I agree you shouldn’t bail out, but people DO bail out, particularly people who are 100% equities.

      You have no idea how much I need to have set aside. Remember, it’s a site written FOR DOCTORS BY A DOCTOR. The average physician income in this country is $200K. Living on $45K a year is likely to be quite a change, particularly for a higher earning doctor or one whose spouse is working. Set aside enough for whatever income you personally desire, and I’ll do the same.

      Would you like my free plan? Here you go- Don’t use credit cards for credit. Don’t borrow to buy cars or an undergraduate education. Live like a resident for 2-5 years after medical school to jump start your retirement savings and pay off your medical school loans. Save 20% of your income toward retirement and invest it in a reasonably diversified, low-cost manner either on your own or with an adviser who offers good advice at a fair price. That plan is both free, simple, and easy. If you don’t like my site, don’t read it. You’re welcome to go to Dave’s. Just don’t expect any good investing advice and expect the advice to be particularly terrible for you if you are a high earner who has no issues with consumer debt.

  50. I do like Dave Ramsey’s motivational approach and I followed his get out of debt program. Now debt free, with retirement and moving forward! I guess the big turn off was that when I looked at the ELP real estate agent for my area, I realized that it is well known fact in town that the “ELP” is up to their eye balls in debt and they are well known to be a dead beat payer!! A top seller yes, a financially responsible steward, NO. So, I now ask myself is it about “helping” others or who pays the most for advertising in Dave’s world? I would have to say that Dave lost a lot of credibility on this one!!!

  51. So we should take your advice??

    No thanks. I like to balance quantitative and qualitative analysis. Along with values and principles.

    Oh and by the way, your “keep debt costing 2% while getting an 8% return” has some assumptions that you can’t guarantee.

    What if, since you like debt so much, that one gets upside down and the market turns and they can’t pay the mortgage?

    [Ad hominem attack deleted. These types of comments aren’t permitted here. If you continue, your comments will be blocked.]

    On Mr. Ramsey’s retirement examples. There are assumptions, just like your assumptions, and under his annual 12% return and 8% withdraw, the math works. Now the question might be “is 12% too high to expect?” Maybe but I have seen his programs also suggest putting your own numbers in. Maybe 8% return and 5% withdraw.

  52. I would also like to point out that they are many stock funds that beat the market. Just looking at Morningstar’s Fantastic 48 and it’s strict criteria including manager tenure and manager investment into the fund of $500,000, there are 19 funds that have averaged 11% or better and 10 of those 12% and better.

    BTW – I’ve had 4 of those funds for over 20 years. My average return has been 12.4%

    It is possible and yes with a simple 6-8 fund portfolio. Just get the right ones. I have Large, Mid, Small cap and some global/International. Good families, tenured managers, low fees, mild turnover and better than average bear market performance.

    I have seen many brokers who average 5-6% a year with all their expert knowledge. LOL

    No thanks. Dave Ramsey’s advice is just fine and works. As long as you don’t knit pick the crap out of it and get the overall message.

    • Congratulations on your success. I think you minimize the difficulty of selecting outperforming actively managed mutual funds. There’s a reason mutual funds are required to post the disclaimer that past performance is not indicative of future performance-its actually true. However, I do agree that if you’re going to attempt it, picking a fund with low-fees and turnover is a good idea, since that seems to be the best indicator of future performance. I’ll stick with guaranteeing market performance and never having to monitor my managers.

    • I also think that classifying “many” as 20 out of over 7000, is a bit optimistic. While it’s a good thing that you have picked 4 of the winners, I am more interested in the 10 to 20 other investments you have owned in the last 20 years. It would really tell a better story than just picking out 4 of them.


  53. I listen to Dave Ramsey once a week, as he only seems to be on the air where I am on Sunday evenings. I agree with getting out of debt as much as possible. I paid off my own mortgage on a $400,000 home about 10 years ago now, but that is something I only expected of myself and not of others. But by way of warning, I would recommend starting to pull out of the mutual fund scene and invest in physical gold and silver coins and store them on your own property. With Obama in the White House and so much NO GOOD going on in the world economy, the US dollar will be collapsing even as soon as the end of 2015. Your mutual funds, stocks and bonds will be worthless and it will happen sooner than later.

    • It’ll be fun to check back on your prediction in a few more months. I find it interesting that Obama has been in the White House for 7 years already and there has been “so much NO GOOD” in the world economy for, well, centuries, that only now is the US dollar going to collapse and take stocks and bonds with it. Do you listen to Coast to Coast after Dave Ramsey is over or something?

  54. I have agreed with your review so far, but did I read your comment right that you shouldn’t borrow for an undergraduate education? What exactly would one do if their parents don’t front the bill? My state school was just under $10k a year; I was lucky enough to receive scholarships to cover it, but I still had to borrow to eat. Cheaper college options exist, but getting into medical school is much more difficult from an Ivy tech or similar. The idea of foregoing a year of physician pay for a year at minimum wage saving up for college is obviously as nonsensical as some of Dave Ramseys.

    Perhaps that advice would work for some people, but I don’t think it’s universally a good idea. Much like paying a low interest mortgage off early…

    • You couldn’t make enough money during the summers and during the school year to eat? Not to mention most people academically capable of getting into medical school should be academically capable of getting a tuition scholarship somewhere. And this assumes zero help from parents.

      • Hi again! Awesome that you keep up with comment threads in old posts. Tuition scholarships cover just that — tuition. It’s pretty hard to cover room and board from scholarships. Room and board alone at most places runs at least $10k, more likely $15k/yr. You can work that off while studying, but that level of employment WILL adversely impact your studies (remember, we’re talking full-time school here). My summers in college were dedicated to side projects and low-paying internships that helped me get ahead in my career; the latter in particular is pretty standard in most fields (it’s not until at least professional school that you can expect high-paying summer jobs). You can forgo career preparation for summer jobs, but it puts you behind your peers, and represents a substantial tradeoff.

        Plus, even if you’re right about everything and there’s no need to borrow for school, you won’t be right for very long. Have you noticed the annual rate at which college costs are increasing? It’s been going up at a pretty solid clip of 5% per year for *decades*. This rate far outstrips annual inflation, or wage increases, or anything else really other than the stock market; and unfortunately incomes don’t grow at stock market rates unless you work in finance. So even if you can work your way through college today (which I doubt), you definitely won’t be able to do so in 20 years.

        • I find it interesting to run into people who say it can’t be done when there are plenty of people out there doing it.

          One of the main issues is people don’t choose a college based on what they can afford, nor the city the college is in for its cost of living. Instead, they go to BU ($47K tuition) in one of the most expensive cities in America and wonder why they have to borrow. Meanwhile, tuition at my local community college is $3600 and you can live at home.

          I mean, if your parents saved up $300K for you to go to school, then sure, go to BU. But if you’re like most….you’ll be better off with a degree from a less prestigious school and $200K less in debt.

          But I doubt I’ll be able to convince you it is possible. But in the 1990s when I was in college I could make $13K in the summer and another $500+ a month during the year. That works out to about $17K. I lived on $5K. Tuition was $3-4K, but like you, I had a full tuition scholarship.

          If you think you’ll get ahead by borrowing to go to undergrad, then feel free to do so. I don’t buy it though. I think way too many undergrads borrow because they think that’s what they’re supposed to do, rather than thinking outside the box a bit to try to figure out a way to avoid it. Here’s how to avoid it:

          1) Pick a school in a low cost of living area
          2) Pick a school you have a scholarship to or at which tuition is very cheap
          3) Get any help from parents you can
          4) Work. In the summers, and during the year.
          5) Get roommates.
          6) Don’t get a car.

          One great benefit of working your way through school is you do it as fast as you can because you don’t like living that way.

    • CMB,
      I’m not sure what attracted you to this Dave Ramsey thread, but if you had read his most popular book “Total Money Makeover” you would already know the answer to this question. He tells the story of a high school girl who spent her summer working writing 1000 scholarship applications from a database of 300,000 possibilities. While she got 970 rejections that left 30 scholarships to the tune of $38,000 which was enough for her to go to her school for free while her next door neighbor whined that no money was available for school. So to think no money is available and that you can’t “downsize” your wishes to go to a less expensive institution is to give up before even trying.


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