The Dave Ramsey Show – live from financial peace plaza… you know the rest!

Yes, you are right. That, right there, is modern art.

Being involved in the personal finance world, it is impossible to avoid mentions of Dave Ramsey. He is the host of the Dave Ramsey radio show, described on his website as follows:

“Millions listen to The Dave Ramsey Show every day for common-sense talk on money. Listeners are also tuning in to hear real callers share real stories about their lives and families. They call the show in desperate need of help. They call to celebrate. And if you listen closely enough, you’ll hear a story much like yours. Hope has a home on the radio—and now it has a home online. Tune in today! “

He is also the author of many books, the most popular of which is the #1 bestseller “Total Money Makeover”.

At time of writing, he had 456,560 twitter followers and almost 1.7 million likes on Facebook.

So, this guy must be good, right? Right…?

 

The radio show

People often have mixed views around Dave Ramsey. He seems to really divide opinion. A lot of people (clearly from the stats above) love him. Many, on the other hand, find him difficult to swallow. Therefore, I decided it was time that I listened to a couple of podcasts to reach my own opinion.

So, I started with a review of a couple of podcasts from mid-October.

Dave opens the show with Baker Street in the background (good start) and welcomes listeners with the introduction of “Live from financial peace plaza, its the Dave Ramsey show, where debt is dumb, cash is king and the paid off home mortgage has taken the place of the BMW as the status symbol of choice”. Good start, good principles and a catchy opening. This is looking promising.

 

Meg from New York – aka “The Confused ‘Business’ Woman”

The first call comes from Meg in New York. She summarizes her position as follows:

• Paid off mortgage in February
• No credit card debt (paid off in full each month)
• Car loan (0% interest) of $20,000
• Owns a business (owe $30,000 on business)
• Want to buy a retirement home or investment property

Dave first enquires why Meg paid off her mortgage. Fair question. Her response “I dunno”.

Then came a fairly confusing conversation. Meg actually paid down her mortgage and then took out a “home equity loan” – essentially a mortgage – to start her business. Dave again was right to correct this point.

However, he then instantly offered the following advice:

Dave Ramsey: “Write a cheque and pay of the business and write a cheque and pay off the loan on the car today”.

Meg: “Even if it is 0% interest”.

Dave Ramsey: “Yes. Cos I wanna be debt free. For all the reasons you wanted your house to be debt free”.
Hmmm. This raised my first concern about this show. This is extremely generic advice to be offering. We have no knowledge of the amount of cash Meg has. We have no idea of her income. We have no idea about what the business does, what revenues it earns, etc.

Furthermore, the reasoning for being debt free is given as being the same of the mortgage. A quick think back and the reason was “I dunno”.

Now, maybe it is a good idea to pay down the business loan. The rates may be very high, the business may be hugely profitable and have no need for any capital. However, summarizing an issue as complex as optimal debt/equity ratios in business in this way seems a little generic and dangerous in my opinion.

Then we come to the car loan. “Pay it off” is Dave’s advice. Firstly, I completely agree with Dave correcting the caller by saying that this isn’t 0% interest, because the “interest” has already been paid in buying a new car and incurring the horrendous depreciation etc etc. All good points.

However, to now compound that mistake by paying down the 0% car loan when this cash could be earning interest elsewhere seems not to be the best advice in this situation. The reasoning behind paying it off is “risk”. There is no consideration of reward, however, and how these two items are intrinsinctly linked.

Thereafter followed some more discussion about the business loan and the home loan and there being no difference between personal debt and business debt. This is not quite true. We probably shouldn’t be ignoring tax issues here, for example.

From this call, I start to notice that Dave hugely simplifies advice to listeners to just say pay off all your debt whatever you do, regardless of ROI.

Therefore, I don’t think that Dave offered terrible advice to Meg, but it certainly wasn’t sufficient for her situation.

 

Julie from Denver – aka “The Spoiled Brat”

The next show has another caller. Quick summary:

• Borrowed $200,00 from her parents over course of 10 years
• Borrowed to fund two college educations, study abroad, car & living expenses
• How should I pay them back?

Obviously more information is needed from Julie. And Dave delves in.

We then find out she is 28 with a bachelors of Psychology and a bachelors of nursing. She is currently a first year nurse earning $47,200 per year. Dave immediately states that this is low for a first year nurse, especially in the Denver market.

In reality, “the registered nurses who are more experienced can have higher salaries as compared to the fresh RNs. Drexel University states that those RNs who have less than one years of work experience earn an average of about $49,863”. Another piece of research says that “the lowest 10% (ie those in their first year) earn less than $43,410.”

Well, Dave, kudos. That’s some pretty good knowledge of regional starting salaries to notice that she was being paid around 5% less than average first year nurse. I guess that is what 20 years in the industry does for you!

Dave’s advice to improve this – pick up some overtime. Makes sense. But, then he takes it a little too far in my opinion. His advice extends to “make $100k-$150k by working 6 E.R.s and work 24/7 and pay them back in 3 years…be the RN who does nothing who works and goes crazy”.

Now, for someone who advocates debt snowball method over avalanche because it is easier mentally advising someone to work until it almost kills them seems a little much. Furthermore, it won’t just almost kill her, but also will probably almost kill all of her patients as well.

Ok, I’ll put this down to another piece of advice being overexaggerated for the benefit of entertainment on the radio.

Next.

Kathy from Dallas – aka “Liar, liar, pants on fire”

In this show, Kathy fills the “I have paid down my debt and am no longer a sucker. Everyone, look at me!”  part of the show.

Dave Ramsey: How much have you paid off?

Kathy: $60,000 in about 2 years.

Dave Ramsey: And how much were you earning over that time?

Kathy: I was an intern at start making $20,000 and $45,000 in the second year.  And even better, I’m getting married next weekend.

 

No, you did not Kathy. At least not without the significant charity of others.

You paid down $60,000 in two years. Let’s assume all this debt was at a really low interest rate (4% say). Interest over that period would have cost around £2,500 in interest.

So, let’s imagine the tax man just let you off your taxes because you were being such a good citizen and paying down your debt.

You earned $65,000 and paid down $62,500 in debt and interest all by yourself. You lived your life over the past two years at $100 per month (including rent, utilities, food, groceries…). Oh, and you paid for a wedding? Awesome!

Cut her off Dave.

But no, this is a “great story” for Dave, whether it is true or not and through it goes to the cheesy “I’m debt free” scream.

Rubbish.

 

Rachel from Charlotte – aka “My last listen”

So, I have reached my conclusion. This man should not be giving financial advice on the radio. Its dangerous to give such generic responses for people to base their financial futures on. And just as I was about to write this post displaying my anger with his ignorance, I listened to another caller, and suddenly I got it.

Dave Ramsey is no fool. Dave Ramsey knows his audience very well. Dave Ramsey, bless his soul, is forced to take calls from people such as Rachel from Charlotte. And this shows exactly why he gives the advice he does. Not sensible, specific advice around risk/reward considerations for Meg, not considered additional earning earning advice for Julie (together with advice around maintaining strong relationships with the parents in this matter), and not discussing the morality issues involved with lying on national radio for Kathy.

Rachel made me realize that this is not what the show is about. Its about people who are phoning in who are complete and utter beginners. I’m not even sure some of them would know what an interest rate is, never mind how to calculate interest payments as a result. And so the specific, detailed and educational advice would be lost on these callers. Moreover, it would be lost on the listeners and the show would not be the undoubted success it is today.

 

So, Rachel’s summary (this is painful):

• 16 month baby boy
• Trying to work the debt snowball method
• Listens to the podcast in the gym
• Owes $290,000 on home mortgage (moved in 3 years ago).
• $54,000 in student loan debt
• $19,000 on car finance
• $11,000 on one credit card

 

Oh my, what a dire situation this lady is in. I’m not sure how Dave is going to deal with this one with his generic advice of pay cash for everything, never take on debt, pay all your debt off now etc etc.

I feel sorry for Rachel. She is at the bottom of a deep pit, which I don’t know how she is going to get out of. She sounds genuinely distressed – “so stressed, crying about, keeping faith that it will be okay, I just don’t’ know what to do…”.

Rachel is over $375,000 in debt. Wow – bad times.

Rachel goes on: “We have got 4 rental properties, 2 are paid off, 1 we are under contract getting ready to sell it and the other we have around $28,000 left to pay on”.

Oh come on. Instantly, I have a new found respect for Dave for not telling Rachel to just stop being such an idiot! What could Rachel possibly have been thinking? “I have got $54k in student debt loans, $19k in car finance, $11k on credit cards. What do I need? Rental property. Obviously.”

Rachel explains that she has equity in one of the properties of $100k, $75k on another. Unfortunately, Dave cuts her off before she details the other two. Let’s assume the others are also at $75k, which means they have $325k in equity, and the $28k she owes has yet to be included in these equity figures. Therefore, we’ll say that she has $300k in rental property.

Assuming that Rachel has a 20% down on her residential property, this means that the cost of her house (assuming absolute no capital repayments since) was around $363k. Average house properties have increased in Charlotte, NC, in the past 3 years by around 3.16% making the house worth around $376k.

So, $320k in rental property, $376k on residential property, -$290k on home mortgage, -$54k in student debts and -$30k in consumer debt.

Rachel, your net worth (very crudely calculated) is around $320k.

Boo-f’ing-hoo! Quit your crying!

 

The Dave Ramsey Show – conclusion

So, what’s my conclusion? Well, at first I was going to advise that you did not listen to this podcast because of the generic and potentially damaging advice that Dave Ramsey dishes out willy-nilly. This may or may not have been my advice just so I could use “willy-nilly”.

However, my final thought is that he is not that bad at all. In fact, he’s quite good and he certainly knows his audience. However, I still don’t think that you should listen to this show. Its got nothing to do with its host. Its because if you listen long enough, I fear you might catch the stupid from the listeners. Either this or Dave Ramsey is going to become even more famous (even more infamous) when he carries out a massacre on a financially inept America borne out of pure frustration.

You have been warned!