Let me state at the outset I am a fan of Dave Ramsey. He has helped hundreds of thousands of people stay out of debt and build wealth. For those of you who don’t know who Dave Ramsey is he is a financial counselor with a nation-wide radio talk show. He has the third largest radio talk show in the USA. Dave takes calls from various places around the country about people who have questions regarding debt, real estate, investing, being good Christians with money, etc. Dave professes that he was once rich, became stupid about debt, went bankrupt and broke, and vowed never to borrow money again. He has built his career on trying to teach people to stay out of debt, pay it off as quickly as possible, and build wealth. I respect that quite a bit. I think it is great because debt is such a huge burden for many families, particularly because of high credit card, student loan, and mortgage debt. In fact Americans are in debt to the tune of about 14 trillion dollars (including all of the previous stuff on debt…mostly mortgages).
In order to pay off debt, Mr. Ramsey recommends you follow the baby steps. In my own quest to pay off debt I have followed the first two with slight modifications. Here is where I disagree with Mr. Ramsey. I totally agree with Mr. Ramsey about paying off your debts in order get them done as fast as possible. Where I disagree with him is that he tells everyone to stop their contributions to their retirement plans. In my case I am mandated to contribute about 15% of my income to a pension plan or an Optional Retirement Plan (like a 401k). I took the 401k, but I must still contribute. I disagree with Mr. Ramsey b/c while most of his clients pay off their debt with a couple of years, some may take longer who have more debts (such as myself). I want to start to build my retirement now and if I wait I lose valuable attempts at compound interest. I am not saying that my plan works better than Mr. Ramsey, but considering that my contributions are compulsory I think that I can be an exception. Moreover, many 401ks have matching contributions. If you stop your 401k contributions you, in essence, lose free money. Even it is for a couple of years, a few thousand dollars can mean a lot in the future of compound interest. Thus, that would be another reason, even if I wasn’t mandated by my job, where I would at least save my contribution up to the max and then throw money at the debt I have.
A second area I disagree with Mr. Ramsey about is his advice on mutual funds. Dave recommends: Growth, Growth and Income, Aggressive Growth, and International Mutual funds. I believe he tweets what specific funds he recommends on his Twitter account, although I have not seen those recommendations, nor does he mention it on his radio show. Dave suggests that if you invest in these kinds of funds (and you MUST do your research ahead of time) that you can earn an average rate of return of 12%). For those of you know who are familiar with investing that is an incredible rate of return and perhaps somewhat unrealistic. To his credit, Mr. Ramsey suggests that you ONLY buy mutual funds with LONG track records (at least 10 years or more). And there are a number of funds out there that do attest to Mr. Ramsey’s suggestion that you can get a 12% return.
My problem with Mr. Ramsey is: 1) He never discusses the differences between the kinds of funds he lays out (e.g. what is the difference between larger and mid-cap growth, etc); 2) more importantly, Mr. Ramsey seems to suggest that these funds should be the only ones that exist in your portfolio for LIFE! My question is what happens as you get older. The advice that most give is that you become a bit more conservative as you get older, conserve the principles of your investments b/c you will need them in retirement. The above funds are much more susceptible to market volatility and if we have a bad market (e.g. 2007-2009) your principle can be gone. I am not suggesting we abandon those kinds of funds as we get older (I have many of them). However, to suggest those are the only funds should have as you get closer to retirement seems a bit dangerous to me because of the volatility, because of the risk. I guess I would think that someone should have growth, but also get into a bit more conservative investments so that they can have a balance throughout their portfolio.
People can do what they want, but I try to have a bit more diversity in my portfolio. I have primarily good growth stock funds which are separated in different categories, but I also have balance funds and a bond fund or two. I don’t have a problem with market volatility, but as I get older I am sure where I stick my investments will become a bit more conservative.
Ultimately, I agree with Mr. Ramsey on a number of things, but I tweak it to match my situation. The great thing is that he has gotten tens of thousands of Americans to get out and stay out of debt and save and give along the way. My disagreements with him are in no way a condemnation of his overall message to live within your means, save as much as you can, and give as much as you can as well. It is a great message. I wish more people, including myself, would be/will be much more true to it.