FollowDave Ramsey is wildly popular with people seeking financial advice, but is that advice sound? Many sources weigh in on the question, and the answer depends upon what kind of advice is being discussed. So, who is Dave Ramsey, and how much can people trust his counsel?
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Who He Is
Dave Ramsey is a financial adviser and a radio and podcast personality. His advice is usually given from a Christian perspective. At one time, he was the third most popular radio celebrity, right behind Rush Limbaugh and Sean Hannity. Ramsey is the author of several books and is a sought-after public speaker. He is also the voice at the center of the Financial Peace University which features, he says, “ Biblically-based curriculum that teaches people how to handle money God’s ways.” His current net worth is estimated at $55 million.
What He Says
Ramsey’s credo can be summed up in a few steps. First, he advocates paying down debts, beginning with the smallest. That is contrary to most theories of shrinking debt, but Ramsey says that small victories motivate people to stay with his format. He tells his followers to make budgets, cut up credit cards and begin living on a cash-only basis. Monthly expenses are set aside in designated envelopes. The first step in this program is to save $1,000 as an emergency fund. Next, he counsels people to use the “Debt Snowball” method that means paying as much as possible on the smallest debt while making the minimum payments on all other debts except the house payment. As soon as the smallest debt is paid off, people should apply that freed-up money to pay on the next-smallest debt. The third step is saving three-to-six months of emergency funds, the fourth is investing 15 percent of the household income into a retirement fund. Then, Ramsey says, people should put money into their children’s college funds and pay their house off early. The last step is investing and donating. That is where the controversy surrounding Ramsey comes in.
The Nay-Sayers
The first thing criticized about Ramsey’s program is the figure he gives as an expected return on those investments. While Dave Ramsey says people can expect a return of 12 percent using his investment strategies, Forbes Magazine and Reuters say investors can expect far lower returns, perhaps four-to-eight percent. Another tenet is that retirees should take out eight percent of their retirement income every year. Critics estimate that in order to live on $30,000 a year, retirees must have a retirement account of at least $375,000. Even then, they say, more than half of retirees would run out of money. Still, those who criticize Ramsey’s investment advice applaud his counsel for getting out of debt and saving. Ramsey’s followers, they say, are not investors anyway. They are working-class people. Only a few will ever invest even $10,000. The envelope method of following a budget is easy and it works; paying off debts one-by-one motivates most people to stick with the plan. Ramsey’s net worth is either a testimony to his methods or it is proof of his marketing skills. In 2010, he built a lavish new home and was criticized for it. His response was that the home was paid for in cash and represented little of his monthly income. Besides, he said, it had already been used to hold fundraisers for charities and other ministries. That is the last part of the Ramsey method. Once debt is gone and savings are established, Ramsey followers are advised to be generous givers.
The financial guru has almost a cult following among Christians and others. His celebrity brings him even more followers. There are many professionals who criticize his formula for investments. Most, however, admit that the advice Dave Ramsey gives about saving money and paying off debt is rock-solid.
