Money Magazine Takes on Dave Ramsey
I am a fan of Dave Ramsey. OK, he can be at times a bit too certain of his own “rightness” – but I find him to be a great entertainer, more often than not compassionate with his radio show callers, and on the whole accurate with the advice he gives. My wife and I actually met him briefly in Nashville a few years ago, and trained to become financial coaches under his local coaches program.
For those who don’t know Dave (www.daveramsey.com) he is an author and the incredibly successful host of a financial radio show. Dave is best known for preaching the gospel of debt free living. And preaching is an interesting term to use when talking about Dave, because he is also an unabashed evangelical Christian, who often uses biblical quotes to justify his financial advice. “The debtor is slave to the lender” “owe no one anything…” are common sayings on his program.
Well, Money magazine just did a write up (hatchet job?) on Dave and his followers, including several stories about how Dave motivated couples to take action to fix their financial lives and live debt free. (read the article here) The author acknowledged how Dave’s program resonates with young people in particular, but he was transparently hostile toward Dave, his “no nonsense” persona, and especially the financial advice Dave disseminates. He even seems to take issue with Dave on for being wildly successful. What? Money magazine is criticizing someone for working hard and becoming wealthy? Huh?
As a financial planner who helps solve all these kinds of financial problems in the real world, I will be the first to admit that Dave’s advice is simplistic. But simple is often good. And for people who are not well versed in the ways of money, complexity leads to procrastination. Simple solutions help ordinary people to take action. So here is Dave’s seven step program to achieving financial peace:
Step One: Set aside $1000 for emergencies. Cut out all unnecessary spending, take on extra jobs, do whatever it takes to put $1000 in the bank. I tell people that Dave does live in Tennessee, where emergencies (and property taxes) are a lot lower than here in New Jersey, so let’s make it $2500 here in the Northeast.
Step Two: Pay off all debt other than your mortgage. Credit cards, personal loans, car loans – they all get paid off. Until this step is complete, discretionary spending is cut to the bone. No vacations, eating out, etc. Take extra jobs if needed – Dave says attack it with the intensity and focus of a gazelle being chased by a cheetah.
Step Three. Beef up the Emergency Fund. Once the debt is gone, build up the emergency fund to hold 3-6 months worth of essential expenses for emergencies.
Step Four. Save 15% of your income for retirement. Is this overly simplistic? Of course it is! But it is good enough for a radio show. How many listeners will sit back and listen to a complex formula for basing your savings level on years to retirement, investment returns, etc. The point is – save for retirement, and do so aggressively.
Step Five: Save for College. Parents had better save for their kids college under Dave’s program because he is adamantly opposed to student borrowing. In fact, Money really took jabs at Dave over his college advice. “Work your way through” he chides. “Get a job”. The writer argues that this is IMPOSSIBLE due to today’s college costs. Impossible? The young lady who cuts may hair at the local Super Cuts would beg to differ. She graduated from Morris County Community College last year with a degree in computer science (or related field) with a 4.0 GPA. It cost her NOTHING as she took advantage of the NJ Stars program for high performing high school grads – but even if she paid full cost, the $5000/semester for books and tuition would probably have been achievable on what she made by cutting hair and living at home. She is now going to NJIT working toward a degree in Management Information Systems, still living at home, still cutting hair to pay the tuition that costs her about $11,000 per year (with a small discount for her academic performance). So Dave is closer to right than Money Magazine on this issue. Unless you insist that the only way to get a degree is to live on campus with $15,000 in room and board charges so as to partake fully in frat life and dorm parties, it actually IS still possible to work your way through college.
Step Six: Pay off your home early. Dave hates thirty year mortgages, and wants everyone free of mortgage debt before retirement. Debt free before the kids go to school would be even better. Possible if you don’t buy more house than you can afford with a 15 year mortgage! If you have a longer term mortgage, Dave would suggest paying extra toward principle to knock it out early.
Step Seven: Build Wealth and Give Generously. Dave believes it is important to our own spiritual and financial health to be generous with our money.
I think Money was very unfair with Dave. He is not, and does not pretend to be, a financial planner. He is an entertainer. The advice is simplistic, yes, but it fits well into the 2 or three minute slice of air time he has to explain a topic. As I already noted - most people want and need advice that is simple, straightforward, and built into an easy to follow formula – and Dave gives them exactly that. Bottom Line: Dave Ramsey helps people take action to improve their own lives for the better through his media empire – and I am all for anything that improves the financial health of ordinary people. More power to him.