It seems there are two groups when it comes to the subject of Dave Ramsey’s financial advice.
Group 1 are staunch advocates of Dave’s. They love him and his advice to death. They defend him in all circumstances. They are rabid fans, not afraid to share what they’ve learned and spread the gospel according to Dave.
It’s worth noting that many of these people have either seen tremendous positive financial impacts from following Dave’s advice or are in the process of seeing that change, so they have reasons to support him.
Group 2 are naysayers who say Dave’s advice is too simplistic, ignores basic math, and has some concepts (like no credit cards) that are simply too “out there.” These people are generally the mainstream media, financial journalists, some bloggers, and general web trolls.
It’s worth noting that many of these people have a couple things in common: they are broke and they don’t know much themselves about managing money. Yet they see themselves as good judges of those who are. I simply call these people “not experts“.
Maybe that’s an over-simplification of the situation, but I think it’s pretty close to being true. I could be wrong, of course, but that’s my perception of how things stand.
I’m in the middle of the two, but mostly with group 1. In general I think Dave’s advice is good and there’s no arguing with his results. I have not used his system so I have no personal ties to him, but I know many people who have and they’ve had great results. I especially like his thoughts on college (the value of it and paying for it), how debt is a killer, and the fact that if you live like no one else, you can eventually live like no one else.
That said, I don’t agree with everything he says. For instance, the credit card thing. I’ve been using credit cards for years and have earned quite a nice chunk of change doing so.
Probably my biggest complaint about Dave is his style. He’s a bit braggy, very loud, and often so huckster-ish that he almost comes off as a clown. That said, maybe people in debt need a dad to get in their face and be a bit crazy.
But overall, Dave and I are on the same page. In fact, I plan to feature one of his books in an upcoming piece I’m writing on money books.
That said, there are two numbers Dave uses that make me wonder what he’s really thinking. Today I’m going to talk about these.
12% Annual Investment Returns
I recently listened to an audio version of The Total Money Makeover. I thought the book covered many topics (like budgeting, debt, etc.) that others didn’t and I wanted to confirm this. (I did confirm it and the book delivered.)
In the book Dave quoted his standard 12% average annual investment returns number that has received so much bad press online.
In fact, he’s received so much flack that’s the reason (I’m guessing) he addresses the subject before the book even gets started — in a post-introduction but pre-chapter one explanation of various issues/feedback he’s received that are less than positive.
Here’s how he addresses the 12% issue:
There are several people in our country today who are ignorant on the returns offered by investing well. Ignorance is not lack of intelligence; it is simply “not knowing.” Sadly, many intelligent but ignorant people seem to think that making a 12 percent rate of return on their money in a long-term investment is impossible. And that if I state that there is a 12 percent rate of return available, then I have lied to them or misled them.
I recommend good growth-stock mutual funds in this book as a long-term investment and dare to state that you should make 12 percent on your money over time. The supporting data for that bold statement can be found by looking at the historical averages of the Standard and Poor’s 500 index. Widely regarded as the best single gauge of the U.S. equities market, the S&P 500 is an index fund with five hundred of the largest companies in leading industries of the US economy. the S&P 500 has averaged 11.69 percent per year for the last eighty-plus years, as of this writing. This includes some pretty significant recession periods.
Most experts and anyone who has had even one finance class agree that the S&P 500 is a great statistical measure of stock market returns. This is such a standard, or bellwether, that virtually every stock fund will show you its returns in comparison to the S&P 500. And again, the lifetime average of the S&P 500 is just under 12 percent. That’s why I use it in my examples. It’s not a magic number. It’s just part of the conversation about investing.
Before I get into my thoughts on 12%, I’d like to share some thoughts from others on this subject — both pro and con.
We’ll begin with Dave’s site and this article titled Return on Investment; the 12% Reality. It basically covers what’s above, but also includes this tidbit that I found especially insightful:
Don’t let your opinion about whether or not you think a 12% return is possible keep you from investing.
Wise advice IMO.
And just to round out Dave’s position on the issue, here’s a similar piece titled Why Do We Use 12% in Our Investing Examples? from Dave’s Financial Peace University.
That’s Dave’s point of view. Now let’s hear what others think of it, starting with those who agree with him.
We’ll begin with Seeking Alpha, a highly regarded investment site. In Dave Ramsey’s 12% Return Strategy Is Replicable they say:
The S&P 500 did not start in 1926, but rather in 1923. The index, as we know it, did not have its inception until 1957.
Regardless, the average for the index has been around 10% since those time periods. One just has to analyze Robert Shiller’s data to verify that fact.
Based on this, not only is the 12% claim optimistic, it is simply wrong. Ramsey has been known to double down on his misstatements by saying the S&P 500 is the, “…500 largest companies on the New York Stock Exchange.” When he says things like this, he shows a level of naïveté that is actually charming. Regardless, it is the 12% number that so many find troubling.
Now to defend Dave. If one listens to him carefully, he often refers to a mutual fund that has averaged 12% since 1934. All of my conversations with professionals in the field leads one to conclude that he is talking about American Funds’ Investment Company of America (MUTF:AIVSX).
Started in 1934, the ICA has averaged a 12.13% annual return since inception. When Dave says there is a mutual fund that has averaged 12% since 1934, he is telling the truth. To validate his claim, the Pioneer Fund (MUTF:PIODX) has averaged 11.88% since 1928, so there is evidence to prove Dave’s thesis.
So where does that leave us? One has to distinguish between Truths versus Validity. Truth is where something is factually correct. Validity is where the one’s argument is logically sound. Now, here is the quirky thing about validity; if the premises are false, but the conclusion is true, then the argument can still be valid if it follows a proper construct.
Dave’s premises are wrong about the S&P 500. The index has only averaged 10% since the mid-1920s, and only 9% since 1871. This is far short of his 12%. However, there really is a mutual fund that has averaged 12% since 1934. There are others that have averaged a similar return over the same time period.
Given that, should one still invest some money? The answer is, “Yes,” or as Dave says it, “Invest some freaking money.” It does not matter whether one yields 9% or 18%, they are still better than zero, which is the growth rate when one invests nothing.
They also address the topic in Dave Ramsey’s 12% Returns: Not Quite As Crazy As They Seem At First Blush where they start with this summary:
From 1926 to 2015, the “average” return has been right around 7.7 percent.
The CAGR (compound annual growth rate), however, is around 5.8 percent.
When an investor puts their money to work matters.
Dividends are the “secret sauce” that brings the average and the CAGR up to 12.02 and 10.04 percent, respectively, between 1926 and 2015.
Then make these conclusions to add details:
Dave Ramsey makes a controversial claim that investors can expect to earn a 12 percent return on average when putting their money to work. This is widely contested, but when adding dividends into the returns, the number is not radically off when looking at the average returns.
However, the CAGR makes the argument a bit less favorable and brings the return to around 10 percent. Furthermore, those who invest at a market high will see lower returns over the long term, while those who dollar cost average over a medium to longer period of time will see better returns as they are able to take advantage of stocks that are on sale.
It’s generally not advisable to try and time the market, but investing when the market is booming is generally not the best way to make money. Dividends that are reinvested can also prove to be the “secret sauce” that can bring investment returns up and improve gains.
Now you may or may not think these articles support Dave’s claims, but this is the best I could find from a valid source at least semi-supporting him.
There are many more who disagree completely. Here are two examples that basically summarize what everyone else says…
From the New York Times:
The problem, financial advisers say, is that not all investments track the S&P 500, and using average annual returns is misleading.
Knowledgeable investment advisers use “annualized” returns, also called the compound annual growth rate, to measure investments. That formula smooths out the swings in the market and shows what you’ve actually earned on your investment.
On a compounded basis, the S&P 500’s return from 1926 through 2010 is just under 10 percent, about 2 percentage points less than the figure Mr. Ramsey points to. That might not sound like a lot, but over time the impact on your investment is enormous.
From US News:
The calculation is misleading. The use of “average annual returns” for the S&P 500 has raised eyebrows because average annual returns are not what investors actually receive.
For example, imagine investing $10,000 for two years. In year one the investment earns 100 percent, and in the second year it loses 50 percent. The average annual return over these two years is 25 percent. But the investment didn’t earn a 25 percent return. It earned absolutely nothing. In the first year the 100 percent return took the balance to $20,000. In the second year the 50 percent loss brought it back down to its original $10,000.
So, while the S&P 500 produced an average return of 11.69 percent from 1926 to 2011, what investors actually earned was just shy of 10 percent. The average return does not account for volatility. As volatility increases, the gap between average returns and annualized returns widens.
What do I think of this? Several thoughts:
- 12% average is correct, but misleading. Technically, 12% is the average return, but that’s not what investors earn. They receive the CAGR and that’s at 10%, not 12%. So he’s factually right, but practically wrong.
- Just because something has happened once or twice, doesn’t mean it’s replicable. You can’t take an outlier return (the funds discussed above) and say just because it happened once that it’s “likely”, “average”, or “expected”. Again, this is misleading and wrong on a practical level.
- Past performance is no guarantee of future results. Ever heard this phrase? It’s from Investing 101. Banking on past results to be replicated in the future is tough. It’s almost impossibly tough when you take the best-case scenario and present that as normal.
- Dave doesn’t factor in fees. I didn’t investigate this but I did run into a few articles saying that Dave’s number is a gross number — and since he recommends mutual funds with loads (fees) that the actual returns would be much lower even if his funds did hit 12%.
- I prefer to be conservative and have a margin of safety. I believe 10% is the correct “average” investment number and thus I use 8% to be conservative. If your numbers work at 8%, they certainly will at 10%. Why not be a bit safe in your planning? We all know that road bumps come up so it’s best to plan for them in advance IMO.
In the end, I’m disappointed in Dave for using 12% and wonder why he does it. Is it because his numbers/recommendations look better at 12% than at 10%? Who knows?
But I do agree with him that no one should “let their opinion about whether or not they think a 12% return is possible keep them from investing.”
Those are my thoughts on Dave’s use of 12%? What do you think?
What number do you use when estimating investment returns? Why do you use that number?
8% Retirement Withdrawal Rate
The 12% issue has been hashed out online over and over, but something I noticed for the first time in The Total Money Makeover was Dave’s comment about retirement as follows:
You are secure and will leave a nice inheritance when you can live off 8 percent of your nest egg per year.
Wait. What? Is he recommending an 8% withdrawal rate in retirement as safe? I guess he is if he thinks it’s not only enough for the retiree but also allows them to “leave a nice inheritance.”
He goes on to elaborate:
If you make 12 percent and only pull out 8 percent, you grow your nest egg by 4 percent per year. That 4 percent keeps your nest egg, and therefore your income, ahead of inflation ’til death do you part. If you can live with dignity on $40,000, you need a nest egg of only $500,000.
Ok, I guess this is a thing. Before I get to my thoughts, let’s see what others say.
We begin with Seeking Alpha who says:
Ultimately, one can do whatever they want with their money. Ramsey suggests a 100% stock market allocation. While I personally don’t recommend that, one can do it if they choose. They are not wrong when they do; I just disagree.
If one wants to withdraw 8% each year from their retirement portfolio, they can do that too, and never run out of money. If, however, one wants to make sure their basic expenses are covered, it would be a prudent fiduciary responsibility to suggest a different strategy. I certainly do. I guess most of use will just have to agree to disagree.
The article again says that Ramsey is technically correct that 8% has examples where it works, but generally it’s not prudent as there are many cases when it implodes.
Moving on, here’s a take from the Motley Fool:
One could argue that even if Ramsey is wrong, he’s getting people to save, which is good. That’s fair, but I think it’s also a blatant form of false hope, and sets people up for a cruel reality check as they get closer to retirement.
But there’s a much more dangerous result of Ramsey’s claim. Because he says you can safely assume you’ll get 12% per year, and because he recommends keeping 100% of your portfolio invested in stocks in retirement, he says it’s safe to withdraw 8% of your nest egg in Year One of retirement, and adjust that number up for inflation every year.
That number is twice what most retirement professionals say is safe. How does Ramsey get that number? From his website:
You’re going to keep your nest egg invested and averaging 12% growth. We’re estimating inflation at 4%. So, to maintain your nest egg and break even with inflation, you will live on 8% income from your nest egg.
That is an extremely dangerous assumption. In fact, I went back and ran the numbers: Using Ramsey’s 8% withdrawal rule, you have a 50% chance of exhausting your nest egg by age 90. In fact, someone who retired in 2000 and followed this advice would have been out of money by just 2009!
I’m not sure why Ramsey harps on this 12% figure while not offering any solid numbers to back it up. His followers would be well served to dial down their assumptions before adjusting their retirement planning process, and making sure they are taking out much less from their nest eggs if they want them to be around when they reach 90.
From US News:
Ramsey uses the average annual return of roughly 12 percent to justify an 8 percent withdrawal rate in retirement. However, numerous studies have calculated that a safer withdrawal rate is 4 percent to 5 percent for a typical 30-year retirement. Some people even argue that a 3 percent withdrawal rate is more accurate. Withdrawing 8 percent a year with the expectation of an overall 12 percent return will significantly increase the chances that your money runs out before you do.
Like with the 12% number, it seems most people don’t buy it.
I have several thoughts as follows:
- I am/was surprised at the 8% number. I’ve never seen anything even close to this suggested. 8% simply seems grossly high and risky.
- Even more than in investing, you want to be very conservative with your retirement withdrawal rates. This is because you don’t have as many backup options if things go south. You’ve left your career and are getting older, two things that make over-estimating how much you can withdrawal very dangerous.
- This ignores margins of safety…again. Why not be a bit conservative when you jump off a financial cliff?
- The 4% rule has become the “norm” but even it can seem high. In Your Complete Guide to a Successful & Secure Retirement they note:
If you do not have access to a Monte Carlo simulator, are recently retired, or near retirement, we recommend that at age 65 you consider withdrawing just 3 percent a year from your portfolio, adjusting that each year by the inflation rate.
You could increase that to 4 percent if you have options that you would be willing and able to exercise that would cut expenses should the portfolio be severely damaged by a bear market.
If you are older than 65, the safe withdrawal rate increases as the portfolio does not have to support as many years of spending. At age 70, you can increase the safe withdrawal rate to 3.5 percent, at age 75 to 4.5 percent, and at age 80 to 6 percent.
- The lower amount you can withdraw, the better. I personally wouldn’t go higher than 4% and would shoot for 3% if I needed to withdraw from my assets.
- Has Dave ever heard of sequence of returns risk? If not, he better check it out. The market does not return 12% every year (something he says in his book but seems to ignore here). So a few years below 12% at the beginning of retirement while withdrawing 8% will KILL a nest egg.
To me, this number is even worse than the 12% one since it’s way more risky.
What’s your take on an 8% withdrawal rate and Dave’s use of it? What rate do you plan to use (or are using in you’re retired) and why?
As I wrap up, I do want to reiterate that much of Dave’s advice is solid and effective. And he’s helped millions. Which makes using these two numbers all the more perplexing.
I’m hoping some of you can help me figure out the “why” here. 😉
Xrayvsn says
Dave Ramsey has capitalized on financial advise and built a multimillion dollar franchise from it. But sometimes I get the feeling that he has gone a little bit to the darkside by really commercializing it (hawks his preferred partners etc that include front loaded mutual fund providers).
There are great bits of information you can get from his books but as you pointed out there are also things that mislead you and cause you great harm if you truly believe everything he says.
The 12% return and 8% withdrawal are the most egregious and likely to harm the most if people truly use that to calculate for retirement. One bad SORR and your nest egg could evaporate in single digit years, not decades.
I am like you in that I like to build several layers of safety. I usually put 5-6% returns in my calculators and shoot for a 3-3.25% annual withdrawal rate. If the scenarios work with these numbers then I think my portfolio could survive a lot of unexpected events.
Colorado Sarah says
As I read your post I realized we are completely aligned on this topic. I listen to Dave Ramsey driving the car and walking the dogs and truly believe he’s “been a blessing” (his words) to so many Americans are who clueless about money management and accept debt as a fact of life.
But the minute he switches from earning and saving to investing, I cringe. When he tells a 30 year old couple with 3 kids who just paid off their student loans and make a combined $65k a year they’re on their way to being multi-millionaires, or tells a 68 year old with no pension and a $250k 401k they’re fine to retire because that money will “throw off” $20, $25k a year…I cringe.
I love his tough love, the wisdom he shares and the plain simplicity of giving people steps to follow to literally find financial peace. He really is an asset to our national community. I just wish he’d dial-down his investment advice to be more in-line with conventional wisdom and more cautious to guard the unsophisticated individual.
Nate says
These are the two things I’ve always questioned about his advice. I think your article accurately describes the problems with his numbers. I’d much rather lean to the side of safety and have money left over. The other thing he’ll slide into his 12% is “If I’m half wrong you’ve still got X number of millions so shut up!” I get where he’s coming from but I think it’s dangerous to claim it. However 6% is more realistic than his 12% assumptions.
Michael Hambrick says
Completely agree with everything you’ve said here. Overall, I also think his advice is solid. When it comes to Ramsey, I’ve always thought that Baby Step 1 should be to contribute enough to your 401(k) to at least get the company match, and then start building up your $1k emergency fund. The company match is the closest thing you’ll get to free money so I feel like it should be first to allow compound growth to really work its magic while you move through the other steps.
Bernd Doss says
You asked for help from “someone ” to figure out the why here. There is no rationale to explain why some would follow 8%, 4%, or whatever suits their specific circumstances . Mr. Ramsey’s points of view merely provide a suggested course of action for the uninitiated to begin their financisl education and journey, same as many other gurus of weslth accumulation. I believe that the principles, ESI, if applied judiciously, can be used to create an environment that will provide a formulae to meet requirements that will sustain your desired needs. Who is right or wrong, like beauty is in the eye of the beholder.
getagrip says
Sorry, IMHO your point of no rationale for percentages and “suggested” course of action is wrong. People have a reason for assuming investments can earn 10 or 12%. Even Ramsey provides his “reasons” so there IS rationale. This rationale is however for general use, not specific circumstances, since he claims to a wide audience his program works for anyone. The problem is when you generally tell people something is okay but base it on specific circumstances you are putting them at risk. For example, if I were professional driver with a Porsche 911 in top condition and on dry pavement I may be able to routinely drive around a tight turn on a public roadway at 80 mph. But putting up signs encouraging just anyone driving any kind of vehicle to take that turn at 80 mph based on my specific circumstances is reckless and puts them at real risk, especially if I don’t mention I did it with a specific car and having specific training under specific conditions. That is the equivalent of what Dave is doing when he touts you’ll get 12% and can withdraw 8% as if those are guaranteed numbers for everyone in all circumstances when they are actually unlikely for almost everyone in most circumstances.
I like his advice about getting out of debt and generally about control of your finances, but these points just harm his credibility in my opinion.
Happy1 says
I have not read any Dave Ramsey books in years. I do listen regularly to his radio show. He does state on his show that he is not an investment advisor. He usually refers the caller to his SmartVestor Pros who “have a heart of a teacher.” The biggest disagreement I have with Dave Ramsey is he recommends saving 15% of income for retirement. I think that amount is low base on the age of the individual. Also he advocates not ever using credits cards. I think you should pay off your monthly credit card balance.
The no says
Another great article. Keep it up! I love your conservative view on these topics, 8% instead of 12% for instance.
Ellen Mitchell says
^^^I’m in agreement with all these responses.
I often click over to the calculator on his website to plug in my current investment numbers so I can play around with retirement scenarios-very user friendly for a non-business type like myself. But I CRINGE when I see his note on there about an average return of 12%! My own 403(b) has averaged +9% over 6 years, but I generally look at scenarios given 5-6% because I am cautious and very aware of how previous recessions affected things.
I also agree that 4% would be a max withdrawal rate and 8% really unthinkable.
LT says
Great article! I also agree with most of the things Dave teaches, but believe his advice regarding the amount of house (<25% of take home pay on a 15 year fixed mortgage) one can buy is a bit too conservative, particularly in HCOL markets.
Dave says
I would like to begin with saying that I love the ESI site and enjoy all the reads. Great job. I also must admit I’m a huge Dave Ramsey fan so I am inclined to stick up for the guy. I still take everything the show offers with a grain of salt. It is entertainment afterall. I will say though that I have applied numerous principles from the Dave Ramsey concept and love that my net worth has quickly grown to over the million dollar level. This is something I never thought about achieving before finding the Ramsey show. I think my work 401k was getting something like 5% even during these great market years and charging me the highest fees on top of it. Hearing the Ramsey concept got me to look at those investment picks and change my portfolio. Something I never would have thought to do prior with my limited knowledge base. I think the whole 12‰ idea comes with marketing and generating excitement with his show. The idea is the market is returning 15-16% this year which offsets the 7-8% years. He does even qualify that by saying you might need to pull less out on a down year. I know the true calculations don’t work like that since there is no steady balance in the stocks and the 15%you get after a 7%loss doesn’t equal out. I think a lot of the debate is semantics and the ideas are solid though and I hope most people understand they can’t expect to live with a certain, highly hopeful return rate. Earn, save, invest and don’t spend more than you have. Side note – There are quite a few new studies coming out now that most retirees are actually growing wealth in retirement instead of spending down so maybe that 4% rule isn’t written in stone. Regardless, I do my retirement calculations with a 6% withdrawal rate but will probably be afraid to touch any of it when the time comes 🙂
Of course, we are all investment genius millionaires right now with the market doing so well so let’s see what we’re are saying in a few years – ha!
Richard says
I started listening to Dave early, a valuable but often offensive voice . . . if you understand the company he keeps, so to speak, it makes more sense. I’ve always thought 12% seems lofty, rare, must be padded gross; 7-8% seems more reasonable. As for drawing down, I go a little further back to the real old ways, as in NO drawing down, or as little as possible, living off of interest alone, SS, possibly other sources. Then there’s the actual case or reality, of course, but that is the plan. Worked for father super well, just under a million. Beyond that, I think estates and monies should only pass to loved ones and direct descendants. I also believe tithing, church attendance, and giving cash (or kind) to strangers is a patently bad set of behaviors, financially, if not socially, culturally or emotionally. When it comes to that sort of noise I prefer Joel Osteen’s riffage, some of that PMA and prosperity gospel, only for being exotic, rare, and alien to this gothic household (lol). But we’re all down with money and the good life, right?
Richard says
Zander insurance, by the way, is a nightmare . . . I found incompetence galore, and sketchy quotes. He swears by them. As it turns out, we’re all suspect on some front, just part of the human condition. Lots of people out there hustling, just trying to make it, faking it as they go. Buyer beware.
Mitch says
How are you doing ESI community? Better than you deserve? Haha! I agree with everything you said especially “He’s a bit braggy, very loud, and often so huckster-ish that he almost comes off as a clown.” He has gotten more political as of late which I can do without. However, I also agree with you that there is more good being served than bad. My son who is 13 listens to him with me but grows tired quickly of his voice and repetitive nature. I think he has become so successful because he speaks to American’s that are in the highest percentile group. What I mean by that is that most people shouldn’t have credit cards because they will not treat them responsibly. You and I can have credit cards and enjoy all the perks and pay them off monthly and not overspend ONLY because we are in the minority. If everyone operated like we do credit cards would be a losing proposition instead of the multi billion dollar industry it is today. I have read some of the books and taken FPU and have seen it work miracles for people and that is what needs to happen. Hopefully that start will then lead people to finding there way to ESI or other more dialed-in financial sites and communities.
Tex-Mex says
Recommending 8% is really giving people bad advice. Safe Withdrawal Rate (SWR) is carefully researched and explained in the Big ERN blog series. Now at 32 entries and still growing. There is a powerful EXCEL/Google type calculator in Entry #28 so you can input your own data. As to SWR for Early Retirement (with 40 to 60 years until death), even 4% is risky. Better to go with 3.25% to 3.5%. Exact calculations available at ERN site.
Ken@thehumblepenny says
“What number do you use when estimating investment returns? Why do you use that number?”
I use 6% net but always keep an eye on sensitivities at 4% and 5%.
Reason: Prudence. Plus sensible equity premium.
SWR of between 3% and 4%.
Phillip says
ERN does a good job of describing what are realistic returns are over the long-term. He’s a solid academic with a practical bent and one of my favorite bloggers (along with ESI). He addresses Ramsey’s 12% head-on.
https://earlyretirementnow.com/2019/05/22/how-to-lie-with-personal-finance/
Concise summary … over the long-run, your inflation adjusted ROI in the market is around 6.6%. It’s hard to debate Big ERN.
ESI says
I met Big ERN at FinCon and we had a great lunch together!
I’m trying to coax him into doing a guest post here. 😉
117 says
Agree with most.. but I have a credit card and will keep it. Debt is bad. But I think overall his advice is sound. You shouldn’t throw out the baby with the bath water.
That being said I’m appalled at the financial ‘scammers’ out there. This annoys the hell out of me!
I agree with: “The calculation is misleading. The use of “average annual returns” for the S&P 500 has raised eyebrows because average annual returns are not what investors actually receive.” Yes- That is complete garbage and completely misleading and it’s easy to misunderstand returns looking at that junk. That example of the 100% YR1 then -50% YR2 is crystal clear.
Furthermore if you are looking at “returns” IMO of course you should assume reinvesting of dividends/splits, etc.
I think the industry as a whole is misleading people. All I want to know is if I invest X I’ll end up with Y- assuming reinvestments and fees. I don’t care if a fund’s fees are 2% if the net returns to me is 10% for example.
Figuring out returns should be straight forward but some many ‘people’ mislead us to achieve certain objectives.
Sorry for the ramble but people just manipulate data and it shouldn’t be accepted.
Nancy Jones says
It’s important to remember that most of his listeners are people who are not financially disciplined. Rate of return on any investment is not nearly as important as getting spending under control. Once people learn to live with discipline, they can make smart decisions about investing, and once they get to where they aren’t burdened by debt and have some money to invest, that’s the time when they should get some professional advice about it.
Maca says
Everything I know about Dave Ramsey I learned from this post. Based on your comments, I wouldn’t recommend him to my kids. ESI’s shortlist of 2 books is all one needs.
I’ve always been skeptical of the financial industry guidelines too, like the 4% rule. Their recommendations, often seem self-serving (build up their assets under management).
It just doesn’t seem that complicated to me. You’ll be alright if you can accumulate enough assets to throw off income that combined with SS, you can live on. Be conservative on your expected return (I’m going to use 5%), and you’ll likely leave an estate.
Observing my grandparents and my parents, their spending went down significantly as they aged. They all paid off their homes before retiring (my parents inherited their parent’s homes). They traveled when they were still active and interested. And then they coasted home and spent well below their retirement income in their later years.
These were middle-income people – at best. My mom was the first to become a millionaire, around age 80. In the past 5 years, she’s lived off SS and the MRD from her IRA. Her net worth will likely double in her 80’s! She still lives in the house I grew up in and is approaching a $2m nw already.
Not hard (well, other than insurance). But then again, if you’re on this site, you know that already!
steve says
His numbers may or may not be off, but these numbers are “created” by wall street marketing anyway. All for fees and AUM.
Ramsey is however good for 1 thing. Only 1 thing maybe but an enormous thing.
He teaches people self control over money.
Same as people controlling their weight or going sober from drugs/alcohol.
That’s huge. Enormous.
Once the spending is under control, God knows what’s good, but without it there is no future in anything anyway.
Sunny Shah says
I think Dave and views on debt are fantastic. If you listen to his show most of the people are in terrible financial shape and need a but kicking and a financial cheerleader who gets people pumped up to save, control, spending, and invest. We regularly visit financial blogs like ESI and others, frankly most of us are probably not in his target audience. I talk to a lot of people most have no clue about budgeting or finances.
If his show and books help people more power to him. I think getting hung up on a rate of return is silly, at the end of the day a rate of return used in a excel calculation is a guess anyway. I think as you get more comfortable with it all the investor needs to make that choice and not rely on other people. I’ll keep saying it, his view on debt is awesome and his financial advice can be used with index funds.
I’ve recently decided to stop using credit cards and go full debit (Even though the balance was paid in full each month I think I over spent by 20% most months. Its only been two weeks but so far so good. Maybe I can squeeze out some more savings and go beyond my 50K wall.
Lastly, for those that have determined that they won’t take his advice based on a blog- I say listen for a few days on youtube directly from the man himself and then make your decision. At a time where making money and investing is vilified, I absolutely love that he’s unapologetic about making money and doing well.
Tom says
Great advise for 20-30 year olds.
TROY ADAM HASELIP says
Holy crap!! I don’t know Dave personally but for a guy that YOU stated helps millions of people you sure are degrading his character. Not only are YOU degrading his character and integrity but you are encouraging others to do so. This is freekin crazy!! Dave encourages folks to get out of debt, be responsible with their money, retire with dignity and GIVE as much as they can!! Now, I understand if you dont like his delivery but to publicly degrade him seems wrong to me. You have to ask yourself, did I do anything positive here? Did I honor God, my family and the people that follow my blog? Or did I cause judgment, whether warranted or not, is not up to us do publicly. I’m very biased here because I have personally seen ALOT of people who have changed their financial life and also saved their marriage by following the simple principles Dave introduced to them. Regardless, the guy tries to tell folks to do right by others by shopping smart and local to help out our community and most of what I read on financial blogs is to look out for only #1, which is sad. I hope you are at least conflicted by what you have wrote and caused in other’s hearts. God bless you anyway.
Tink says
Wow. I didn’t interpret his post to be degrading. Seems like an honest review and I learned from it which is the point.
ESI says
I’m pointing out what I see as flaws in his recommendations.
Perhaps you’re suggesting we’re all to accept everyone’s advice without critique? If so, it won’t go well with your finances…
Kevin says
Exactly. Not that you need any cheerleaders 🙂
Its a good post and everyone is subject to criticism. Some of what Dave does is about marketing and appeals to the lowest common denominator and he has made a lot of money doing what he does..
One of the issues I have with replying to comments here is that it’s not always obvious what comment a reply is being made to. This is in response to ESI ‘s response.
troy says
I guess you can’t take criticism. You are welcome to criticize but you can’t take it yourself. That’s fine, I don’t much like it myself but I’m certainly man enough to admit when I’m wrong. You have a bunch of fans and I was one of them until you degraded someone who helps a ton of people and is a man of God. The article was unfair IMO and for you to suggest my finances “won’t go wel” is ridiculous. My wife and I are doing just fine as a matter of fact you could interview us if we decided that was important. Maybe I’m wrong but someone should take up for a guy who has done so much good.
Kevin says
Really? That’s what you took from a very debate like format? I think you need to do some introspection on your Bias because that’s what I take from your response.
Apex says
TROY:
ESI’s post was very respectful and positive towards Dave Ramsey, offering points of view from both positive and negative sides on a couple topics that people have taken issue with Dave on in the past. He then offered his own opinion of those issues to give a financial perspective on how those numbers seem higher than justified, and closed with a statement that still recommends Dave’s advice.
Some people could be very turned off by some of the questions people have raised about Dave using some inaccurate numbers. This post could convince some of those people that even though those numbers appear to be too high, that Dave still gives very valuable advice.
Your comment is laced with accusatory and judgemental language about ESI, yelling YOU at him and accusing him of publicly degrading Dave’s character and integrity as if he was on a vendetta. His post doesn’t come off that way at all, but unfortunately your comment does.
I will simply leave you with your own words:
“You have to ask yourself, did I do anything positive here? Did I honor God, my family and the people that follow my blog? Or did I cause judgment, whether warranted or not, is not up to us do publicly. … I hope you are at least conflicted by what you have wrote and caused in other’s hearts. God bless you anyway.”
Richard says
Lord knows I’ve been judged by others, sometimes fairly, sometimes not. I personally don’t believe in sacred cows; he’s out there making a lot of noise, let’s take a hard look, separate the wheat from the chaff. Early on I find him incredibly helpful, until I came up with identical or better solution as his radio show droned on, also skipping the random abuse, calling this or that ‘stupid, just stupid’ with some repetition as well. Hey, no one’s perfect (lol) . . . he does a lot of good nevertheless. I’m in newer lands now; to expand on an earlier comment, I’ve abandoned all use of credit cards for now, just the debit. I have wanted one of those 3% cash back cards around for all my regular shopping, to pay off in full with that extra juice. After a serious gander, I noticed a local bank was offering an online banking/debit/checking option with precisely those terms; next month I’ll pull the 1k emergency fund out of vanilla savings connected to credit union checking, transfer it to the new debit at the other bank, then really get on with things. That way I let my credit union debit card sit, just a distribution account for all the others, then stop using so much cash, or exclusively, swipe all my regular purchases for interest instead, meanwhile walking around with 1000+ ready for any roadside emergency or situation, for some more interest as it sits–this opposed to hundreds stacked in the wallet and so on, which personally makes me nervous. Just a little thing to some of you heavy hitters, but it sounds like a lifestyle upgrade down here (lol). Anyway, Dave is alright; on the road, he’s my brother.
Richard says
Another use or boost will be having a second online account, so when my high-yield savings/education fund account needs to be spent, I can easily transfer it to that new debit/emergency fund account, immediately use it for a larger online purchase, or for more interest should it sit a few weeks–as opposed to ever linking my high-yield account (or any other) with the credit union debit, which I have NOT done; using it online at all beyond Amazon makes me nervous, so there’s a baby cure. So for the most part, risking little more than the 1k parked within, making bank, more funds once in a blue moon, in both cases better than the whole farm for almost nothing. Little strategies, but bottom line, for the extra juice and smooth versatility . . . mission accomplished, next month or sooner.
Gerry says
To harp on his 12% (which is his personal return over 30+ years) return when he always follows it up with “or use a number your comfortable with” is nitpicking. He also very clearly says he is not an investment advisor, he recommends you use a professional with the heart of a teacher. Seems to me your just slightly jealous of his success and fortune.
ESI says
Does he “always” follow it up with a qualifier? I don’t think so.
As for the other, I already have more than enough success and fortune, so why would I be jealous?
The greater issue you should consider is what is the price for following someone’s advice blindly? I think you’ll find out if you bank on 12% returns and an 8% withdrawal rate…
Mel says
Great at getting out if debt.
Good on earning
Good on saving
Poor on investing.
Telling you to expect 12% and SWR of 8% will put you at high risk of running out of money before running out of life.
Richard says
The scratched record moments for me were basically skipping any 401(k) free money/match while still in debt, his side hustle rhetoric (not exactly inspiring), then that 12%. And the tone, yeah, kind of a dark side to Southern hospitality. But at no point has that 12% figure seemed right; I suppose he sees virtue in drawing some kind of line and holding . . . as with promoting Zander. Both Achilles’ heels by my lights. Still, all that edginess and tough love, perhaps necessary an astonishing number of lost, financially-numb, mindless Americans, drifting around between crises and circumstance without even a clue.
Richard says
Here’s an unnecessary add-on: he reminds me of exactly why I remain opposed to tithing or associating with any sort of religious entities. Great marketing platform for him, but they are the worst hypocrites, parking their generous rears in sterile churches for more retread of same ol’, meanwhile hating on the world, about the same as it always was, looking down the nose at any other competing belief systems, likewise untaxed and sketchy, while nevertheless congratulating themselves for . . . thinking they know what no one possibly can? You actually give money to these people, to use at their discretion?! Perfect example, though, of riffage I’d better leave out should I start advising. Instead, say ‘I believe charity begins at home . . . one should negotiate and project outward from a position of strength.’ That I can get behind, till the cows come home.
Rich says
I think your analysis is spot on.
Yes, Dave Ramsey has done a lot of good for people in need of financial education and discipline. But, because many in his audience are not financially savvy, it’s all the more important that he provides accurate, safe guidance. Even if that means admitting he was overly-optimistic all these years, and now providing more realistic advice.
I would hate to think he’s providing the 12% rate of return and 8% safe withdrawal rate because he’s developed a big ego where he can’t admit he’s ever wrong. Or worse, he’s hitched his wagon to financial sponsors … but that may be the case. He pushes certain providers and it’s pretty easy to spot that he is being compensated by them. I really hope he hasn’t sold his integrity for 30 pieces of silver.
Susan says
Because of Dave Ramsey we were able to get out of debt and help both our children graduate college with no student loans. I think he has a lot to offer to those who need help figuring out the basics of personal finance. We don’t always agree with everything he says, but then we don’t always agree with everything that other financial bloggers say either. You have to decide for yourself what works for you.
bob r. says
Dave Ramsey is a cheerleader, and as such, he has to shout “Go, team, go! Beat the other guys!” But even when the team has no shot at beating the other guys, the cheerleaders have to keep cheer us on, because that is what motivates us (in the stands).
Okay, too much of a sports analogy, but I think you get my point; the man makes bigger claims that push the bounds of “everyone can do it”, but he isn’t really talking to you and me today. He is talking to us ten years ago, which is where most of America is right now.
Listening to Ramsey back then is what pushed me through to the point of eliminating debt, taking care of family and friends, and accumulating wealth ($1.5M and counting). His numbers helped me dream beyond my own issues to the point where motivation kicked in. I’m not going to hold the cheerleaders at fault when my team loses a game, and when the team wins, it was the cheerleaders who made me feel more a part of it than before.
Apex says
Over the years when experience teaches me something enough times for me to recognize the pattern I create a life rule for it.
One of those rules is the following:
“What works is more important than what is true.”
Not all of Dave Ramsey’s advice is true, but for 90% of people, if they follow it they will be vastly better off.
I am not personally a big fan of his advice because it is not optimal for my circumstances. However I have come to realize that different people need different kinds of advice, and Dave’s advice is exactly what the doctor order for many people.
1. He preaches the debt snowball, but the debt avalanche is superior.
2. He preaches no credit cards, but they are better financial tools for the fiscally responsible than a debit card.
3. He preaches no debt, but there are instances where debt is financially superior to cash.
4. He uses 12% investment returns, but history and most advisers indicate that is too high.
Not everything Dave Ramsey preaches about finances is true, but it does work.
Which is more important, what is true or what works?
Mr. SR @ Semi-Retire Plan says
Very interesting post, ESI. I’m a former Ramsey follower. These claims were familiar to me, but I appreciated your thoughtful analysis and dialogue about each one.
Ultimately, I agree with you. 8% SWR is aggressive if not borderline irresponsible. I agree with most of Ramsey’s teaching, but I do have some reservations about a few of them — including this one.
Thanks for sharing your thoughts and adding value to these conversations!
troy says
ESI I owe you an apology. I came off exactly the way you came off to me, a bit judgmental. I wasn’t trying to judge you, it just kind of happened. I’m sorry for that. My purpose was to convict your heart to take it easy on a brother and it came off wrong. Conviction and judgment are very different and one of your fans convicted my heart so here I am. I believe in what you’re doing with this blog and don’t always agree but read it anyways without commenting. This time I felt it needed a comment and I didn’t choose my words wisely and for that I am sorry. God bless
ESI says
It’s ok…
Dave says
Awesome post and really in-depth. I think Dave’s numbers are definitely exaggerated and optimistic. Where he succeeds most (in my opinion) is getting the initiation to action out of people. Not everyone has a deep understanding of finances (which is probably how they ended up in a bad situation). They need someone to give them easy to follow and concrete advice.
That is where he succeeds. For financial bloggers like us, it is a little too simplistic. We prefer being in the weeds, breaking down returns on various forms of investment down to the smallest percentile.
He’s not my cup of tea, personally. But I realize what he does and how many people he has helped. Kudos has to be expressed for that.
FullTimeFinance says
You know I often wonder if these numbers are used by Dave as a bit of hyperbola to get the people in debt through the doors. Ie if you make the path after debt seem easier then they’ll start. I see his stuff targeted at a specific audience, one that’s in debt crawling out of it. Once they get to these other areas perhaps the assumption is they’ve moved onto other sources. Benefit of a doubt here.
Getting Minted says
What number do you use when estimating investment returns? Why do you use that number?
I would use 8% based on my own historic returns in the UK from 1985 to 2018.
What rate do you plan to use (or are using if you’re retired) and why?
4% is reasonable for planning purposes, based on the US research, but in actual draw down I use the natural dividend yield which is about 4.5% in the UK at present.
Africa says
Although I agree that he’s dangerously off, I don’t worry much about Mr Ramsey’s numbers for two reasons.
Firstly, even through flawed statics, he does a great job helping people out of debt and setting them up for financial Peace, as he calls it.
Secondly, very few (and am being diplomatic) would follow his 8% rule after building a worthwhile nest egg using his strategy. By the time you reach such goals, one is, financially speaking, literate enough to adopt planning strategies that are ‘sounder’ than the 12% rule – let alone the 8% one.