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Why does Dave Ramsey tell people untruths? February 18, 2009

Posted by shaferfinancial in Finance, mutual funds, Uncategorized.
Tags: , ,

Check out this video from Dave Ramsey from U-tube.

Now I am with Mr. Ramsey at first.  He makes some great points about buying expensive cars and financing them over years.  You are much better off buying inexpensive cars with cash and leveraging that with savings to buy better cars over time.  But where does he get a 12% return from mutual funds?  Really, why does he do that?   He knows, or at least he should know that no mutual funds have returned 12% over the long term (20 years or longer).  And he knows or should know that actual individual returns from mutual funds over the last 20 years was 4.4% according to the most recent Dalbar Inc. study.  So why use a unbelievable 12% return?  I suspect he has painted himself into a corner with his investment strategies, which require him to claim almost triple the return actually found.  If he uses real numbers his strategies fall apart rapidly and what is left is a near broke family at retirement.  Debt free, but nearly broke and dependent upon the government.  Pretty hard to sell that as the result of your advice, right!  Then he makes another “mistake.”  He doesn’t account for inflation.  His claim that you could buy a car with your excess in the mutual fund account every 5 years doesn’t account for the price of cars going up with inflation.  So that $17,000 car in today’s prices is really a $19,500 care in five years (assuming a very conservative 2.8% inflation rate) and a $22,500 car in 10 years.  His strategy would force you to by a cheaper and cheaper car as you go along. 

But wait there is more poor thinking.  Yep, regular readers will note that the strategy employed is to invest in a mutual fund that is not in an IRA or 401K, so not tax deferred.  All mutual funds, including index funds, trade.  Therefore they have short term and long term profits (hopefully), and pass the taxes on to the owners.  They also hold dividend paying stocks or interest paying bonds that also cause taxation which of course is passed on to the owners.  So the payment of taxes will lower your overall returns even more.

A quick review; doubles or triples the realistic returns, doesn’t account for inflation, and doesn’t account for taxation.  And if your overall return isn’t near that ridiculous 12% figure (and it won’t be), that car you could afford rapidly decreases to junk heap status.

And now you have proof that what many of Ramsey’s critics are saying about him is correct.  And you can look at the actual results for people retiring today to see the real world results of his thinking.



1. Randy - September 15, 2010

Chuck: Anyone can cherry-pick a list of top performers using a fund screener but can anyone consistently CHOOSE those top performers and then get out of them before they crash? Many of those listed top performers have very volatile performances – averages are OK for reports, but it is very difficult to SPEND an average. You spend when you need the money or the car or the whatever. DR does NOT deal with the sequence of return risk that is inherent during the spend-down period of anyone’s investment life. I’m an advisor and I would NEVER invest someone’s money in a diversified portfolio of stock mutual funds in order to buy a car 5 years from now — that is shear madness or at the very least, gambling.

2. Larry Email - January 17, 2011

This is supposed to be done outside of your retirement planning and is just an example as Dave has said in the past. It’s to get you thinking differently about car loans.

3. Mike - March 28, 2011

12% is a ridiculous statement, but what is more ridiculous is Dave advising that during (or near) retirement you should still be invested in a mutual fund that earns 12%, as if someone in retirement would take on risk like that. If he actually had clients, which he cannot because he is not a financial professional, he would be committing malpractice to the highest degree by implying that you will be “ok” if you earn 12% and draw 8% during retirement. Best of luck with that strategy, they guy does not account for unfavorable situations that we all know exist!

4. Alex Keeting - August 4, 2011

Let’s look at this in a different way. Forget the return rate. Forget the inflation. Forget taxes, etc. Americans have gone from buying “stuff” with cash in pocket, to borrowing or using credit cards for everything. Your bank debit card even has a visa or mastercard logo. While spending on “stuff” we can’t afford, we pay 15-30% in interest on credit cards and 5-10% on loans. Essentially, we pay an additional $13,000 on a car (over 6 years). No matter what logic you use, any leverage against borrowing so much (or any) is a savings. Even if you just continue to save the payments on a vehicle after it is paid off for 2 years, you would have $11,400. Don’t invest it. Just use that money the next time you buy a car. That reduces a 20,000 car loan to $8,600. Yeah yeah, add your inflation. Now it’s a $25,000 car and you still only have a $13,600 loan now. Use the savings payment to pay off that loan and repeat. Eventually, you WILL have enough to buy the car with cash. (BTW, I didn’t include the money from the sale of the cars) SO… Any return on an investment will just aid in attaining this goal sooner. I think the goal of Dave Ramsey, is to change the thinking of people to stop giving money to lenders and purchase only what you can afford. If you added up all the interest payments the average American will pay in their lifetime, you could easily retire just on this. Again, forget the nickle and dimes and look at the big picture.

shaferfinancial - August 4, 2011

Alex, did you read my commentary? I start off by saying I agree with the first part about buying inexpensive cars with cash. But, the hook in his strategy is that you can get a 12% average return every 5 or 6 years. You can’t depend upon that and as a result you can’t apply his strategy.

Thanks for pointing out that buying new and expensive cars and financing them for 5-7 years is a losers proposition. And yes, Ramsey does a good job telling the financially unsophisticated and the debt ridden folks what they are doing is wrong. He does a great service here in that matter. My question has always been why he needs to reach in his saving/investment advice???? He could have done a very good video just demonstrating to folks how saving and buying used cars will give you thousands of dollars in the bank every year!

5. Paul Rogers - August 27, 2011

The S&P 500 has returned roughly 0% over the past 13 years. Once you deduct taxes and inflation, it’s more like -2% annually. If you retired at age 65 in 1998 and began drawing 10% a year from your investments, you are virtually penniless now.

6. Smarterthanyou - November 5, 2011

Your the one telling the untruth. You must be a car salesman yourself trying to Make yourself feel better about the fact that you drive a car with a payment that takes up half your monthly income and have nothing in savings and therefore nothing to retire with. All of Dave’s tax records are public. If he was lying about his strategies he would have been sued, shut down, and thrown out years ago. Just because the average return is less than 5% doesn’t mean someone can’t make 12%. You sir need to take his class and learn for yourself.

shaferfinancial - November 5, 2011

Your funny! If you had read my words a little more carefully you would have noted I have no issue with the car buying side. Buy a used car for cash is sound advice. It is the “save money by purchasing mutual funds for five years” side that is off the wall stupid. Imagine if you had taken his advice 5 years ago and dutifully made monthly mutual fund purchases. Now you want to buy that used car and you find that not only do you not have enough money for a decent, dependable used car, but you actually lost money in that mutual fund. How would you feel at that point about the advice? So instead of attacking me, you might want to look at historic mutual fund returns over 5 year periods. That will raise the hair on your head and point you in the right direction for attack.

7. Rebekah Ashton Cooper - December 13, 2011

IRA Passbook – minimum deposit to open is $100
Tier 1 $100 – $9,999 0.30% 0.30% Daily/Quarterly
Tier 2 $10,000 – 49,999 0.35% 0.35% Daily/Quarterly
Tier 3 $25,000 & Over 0.40% 0.40% Daily/Quarterly

This above chart is take straight from my credit unions website. The % is compounded DAILY and POSTED quarterly. if you take 0.4% x 30 days of a month that is a RETURN RATE of 12%. NO starting out it will not be that much but as the money compounds the rate increases

shaferfinancial - December 13, 2011

Uh….no….you need some math help

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