Dave Ramsey Review: Frequent Generalizations

I am in the process of writing a series on my thoughts regarding Dave Ramsey.  Dave Ramsey is an extremely popular adviser and personality because his advice is rock solid.  However, today I want us to be sure that when we listen to or read Dave Ramsey we keep our thinking caps on.  Dave has created an almost ‘cult like’ audience.  His words are often taken from a perspective of infallibility.  I suspect Dave would be the first to say that is not true – that we should not take his advice as such.  In fact he often says, “Don’t do something just because I told you.”  But, when we listen to a trusted friend, as Ramsey has become for many, we often stop thinking and we just start doing.  We adopt the thinking – “Dave says it.  That settles it.”

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Here are some of Dave Ramsey’s generalizations you will hear him repeat on a regular basis:

Invest 15% of your income into retirement.

Spread your investment evenly across four types of mutual funds– growth, growth and income, aggressive growth, and international.

Always pay the bill with the lowest payoff balance first.

Credit cards are stupid.  Cut them up.

Get term insurance because life insurance is dumb.

There is never a valid reason to keep a home mortgage if you have the money to pay it off.

If your employer matches your contributions fund that first up to the matching about then invest in a Roth IRA.

Never borrow money.

House payments (including taxes and insurance) should be no more than 25% of your take home pay.

The total value of your toys – vehicles, boats, … – should add up to no more than 1/2 your annual income.

When you turn 60 you need long term care insurance, but not before.

Now that is a bunch of great advice.  I agree with and practice many of those things, but not all.  My circumstance has made me believe that there are some exceptions to the rules above.  However, I practice many of the generalizations because they are right for me and my situation.  I do not do anything because a voice on the radio instructed me to do so.  Any time we try to outsource our financial responsibility, our financial plan will begin to unravel.

The problem is that there is no one-size-fits all financial advice.  In my article on how to personalize your investing plan I said the most important first step in investing is to “know thy self.”  You as a person are unique.  Your situation is different.  Your investment should be tailored to your self knowledge.  As a result, your investment strategy might slightly or greatly differ from the suggested 25% across four types of mutual funds.

While I mostly agree with the above points, it is because of my situation.

It is a dangerous financial decision to do what any financial adviser says.  Financial advice should instead be a starting place.

Why do we love generalized financial advice?

1. Lazy or indifferent. We would rather someone else read about it and analyze it so they can tell us what to do.  We think it is a way to manage our time.  This is useful only after you have a foundational knowledge on the topic.
2. A self defeating mentality.  We think surely we don’t know enough to figure it out.  Besides, if I did read and research, surely I couldn’t come up with anything better myself.  If this Dave Ramsey guy is on the radio and has all these listeners, he must be right.
3. We don’t ultimately want to be responsible for our decisions.  It is easier to do what someone else said than to make our own informed decisions.

Dave Ramsey is generally right.  Dave Ramsey’s advice generally makes sense.  But you are the only person who can decide if it makes sense for you.

Here is how you can use these Dave Ramsey generalizations to your advantage:

1. Review the generalizations listed above.
2. Consider them as starting suggestions for your consideration, not final edicts.
3. Ask why would he suggest that?  Every good piece of advice answers the “why” question.
4. Read one article that agrees with Dave and one that disagrees.  It will be hard to know exactly where to get your hands on good resources, but start with those that you trust – books and websites.  Google will give a of suggestions.  Perhaps you can either ask a friend, or as always you can email me at mhforc [at] gmail.com and ask for a suggested article on a given topic.
5. Have a discussion with your spouse.  Especially if you disagree with something, be sure to list the reasons why you favor that decision.

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