Many of the complaints against my mathematically-based critique of Dave Ramsey’s financial advice can be summed up like so: “Mike, you’re a mean person and you shouldn’t say anything bad about Dave because he’s nice and loves God.” Shame on me for not extending amnesty of accountability against bad math. Maybe I should reconsider this amnesty proposition. I love God and people generally like me, so 4+4=44.
Earlier this year, I wrote about Dave’s poor advice toward callers with student loans. Poor advice, by the way, is the natural outcome of living in a world of blanket statements. These blanket statements mostly apply, but when they don’t you look like Will Ferrell hugging the mall Santa in ELF.
But I digress. While watching different show clips about Dave and student loans, I came across one about a guy named Sid. Sid and his fiancée are both newly practicing attorneys and they’ve accumulated $225,000 in student loans. The bad advice Dave gives to Sid isn’t about math; it’s about principles.
I’ve been told by Ramsonites many times that the bad math doesn’t matter. Dave gets people to save and gets people to give, and the math is meant to be inspirational. To which I say: Be careful with blanket statements.
In this example, Dave tells Sid, “You have an obligation to the two of you to clean this mess up, so that later you can be charitable …” Before I continue the quote, we have to stop here. I’ve been yelled at, I’ve been sent anonymous mail (which, in case you’re wondering, didn’t say “nice work”) and I’ve had angry followers call my office telling me Dave tells EVERYONE to give. I’ve been told that giving is Dave’s “step zero,” though oddly enough, I’ve never found a step zero in his seven baby steps to getting out of debt. But the phrase “So that later you CAN be charitable” doesn’t lend to a philosophy of giving first (capitalization my own).
To Sid, Dave says, “You’re going to have to concentrate on one thing over the next five years and that’s making money.” He tells Sid to keep his lifestyle at $40,000 and then to apply ALL — yes ALL, or I could say the entirety, or the exact amount, or the increase, or the additional, or every freaking penny Sid makes above $40,000 — toward the student loans. This is where I was taken back a bit. Every penny? None towards, hmmm, gifting? Could it be that Dave said to save, spend down debt, save some more, invest, pay for college, pay off the house, and then give and live like no one else for a reason? Could it be that he meant his famous seven baby steps should be completed in chronological order?
All of the Ramsonites out there chant together: “Say it ain’t so …”
I’m not saying that Dave doesn’t believe in tithing or gifting. I’m just citing Mr. Ramsey himself. And, I’m saying that we should be careful taking advice from someone just because they’re entertaining and they love God. Todd Hoffman from The Discovery Channel’s “Gold Rush” is entertaining and he gives the glory to God, but I wouldn’t take his advice on how to extract gold from the mucky sands of South America. (Sorry, Todd! Love you, though.)
Before I go too much further, let me address the readers who were upset last time we talked about giving. If you believe that the act of giving — whether you define that as tithing, gifting, or giving — has nothing to do with personal finance and, as some respondents asserted, that it actually decreases the overall financial health of those who give — well, thanks for your opinion. I’m sorry the world you live in has given you this frame of mind. It might be best if you come back and join us next month.
Now back to Dave. Dave tells Sid, “You’re too broke to be charitable.” Too broke to be charitable? I’ve listened to this clip dozens of times. I think what he’s really trying to say here is that Sid shouldn’t do any sort of pro-bono work. For a minute, that sounds OK. But let’s put it into context. Sid and his fiancée make $80,000 per year. They’re able to pay their financial obligations and seem comfortable. How do I know these things? Broke people call in about being broke. Sid called in for affirmation that they should aggressively attack this debt. Are Sid and his fiancée really too broke to do some pro-bono work?
Dave tells Sid to tidy up his finances “so that later [he] can be charitable.” That’s like when a flight attendant tells you, “In the event of an unexpected loss of cabin pressure, please place your own oxygen mask before assisting others.” I don’t think that’s how gifting or tithing is supposed to work.
The flip side
To be fair, on October 22nd, 2015, Dave did suggest that a listener gift to the church. It’s another beautiful example of a Ramsey mathematical folly. The caller calls in to ask if she should pay off her student loan debt of $14,000. She’s recently married, and she and her spouse have a combined household income of $85,000.
Dave tells the caller that she’s in the 25-percent tax bracket. Nope. Wrong. Not correct, but thanks for playing. The caller and her partner are in the 15-percent tax bracket, but who cares about such small details? I mean, someone who doesn’t care about the differences in how to compute rates of return when the outcomes will vary by hundreds of thousands surely won’t care about a 10 percent difference in taxation.
Dave goes on to tell the caller that you can’t deduct the interest unless you’re itemizing. Dear Lord, please grant me patience. Seriously Dave? Student loan interest is something that’s referred to as an above the line deduction … therefore IT’S NOT INCLUDED ON SCHEDULE A.
Dave then tells the caller that if she really wants the deduction, she could pay the loan off and then gift what she would have paid in interest to the church. Now there’s a decent idea. At least it’s parallel to his stated belief of giving — but, sorry to say, you can ONLY deduct charitable gifts if you’re itemizing, which was one of the reasons Dave gave against maintaining the student loans.
In a previous column, I shared a startling example of Dave’s egregious misunderstanding of the tax system. A caller asked how to get the IRS to accept an offer in compromise on a previous year’s delinquent tax. He had under-reported his income and therefore owed back taxes, interest, and penalties. What did Dave tell him to do? File an amended return and then no taxes would be owed.
Wouldn’t that be a cool loophole? But then Obama would just close it at the 13th hour in some budget bill.
The benefits of giving
Is the advice Dave gave to Sid a one-time overlook of his principals and teachings? We’re talking about an isolated incident, like Ted Cruz’s slip-up with classified information or Hilary’s unintentional usage of a personal email server for classified emails. No, the omission of gifting due to the over-concentration on wiping out debt has happened before.
Do you remember Talisha and Patrick? We shared their story in a previous column. In short, Talisha called in to get advice on whether or not to buy a house. She was unprepared for the student loan debt lecture that proceeded despite their $160-200k household income. Dave told Talisha and Patrick to find a little old lady and offer to mow her yard in exchange for free rent. He then told Talisha that ALL — notice the consistency here — of their extra income should be applied to this debt.
We gave a breakdown of two alternative scenarios to Dave’s blanket statement plan. One of those alternatives bought a house and tithed. After seven years, the tithing scenario only trailed Dave’s plan by $10,000, although the couple was able to gift $134,000 more. During this time, they had more liquid cash for emergencies, they helped their community by ONE HUNDRED AND THIRTY FOUR THOUSAND DOLLARS, and it only had a $10,000 negative impact to their financial picture.
Now here’s where things really get interesting. If, in Talisha’s scenario, we use Dave’s 12 percent rate of return — which he spouts off with a level of confidence not seen since Al Gore was on the stage shooting “The Inconvenient Truth” — the plan with gifting eclipsed Dave’s advice by nearly $60,000. How cool is that? Give $134,000 MORE and, if Dave’s right about his rate of return, then your net worth is approximately $60,000 greater if you gift than it would have been if you followed in the footpath of the Debt Nazi. (He’s not right about his rate of return, of course, but you see my point.)
Some have said I’m anti-American because I want Dave’s constitutional right of free speech revoked. But free speech doesn’t mean you can call things truth that aren’t true, on a platform where your competence is assumed, and have no repercussions. Can four medical doctors, for a large endorsement, proclaim that cigarettes cure lung cancer, so that the cigarette company can say 4 out of 5 doctors agree? Would that be right? Would it be right for an insurance agent to tout a guaranteed 10 percent rate of return on a bonus annuity?
If we object to these types of misleading statements, are we removing their freedom of speech? No. We aren’t. It’s not enough to just work hard and mean well anymore. You have to be held accountable for the truth of what you say.
Here’s the last thing I’d like to say for the year:
Thank you for being blunt with people in a world that generally isn’t. Thank you for calling people’s rationalizations for stupid purchases and some debts ridiculous. Thank you for your genuine efforts to make people better.
But if you’re going to give financial advice professionally then you need to hold yourself to the same standards which we — actual test-taking, number-crunching, calculator polishers — are held to BY LAW. We’re fined if we make many of the mistakes you’re making. So go buy a calculator, print off the tax brackets, learn the difference between compounded growth rates and averages, learn the consequences of overlapping and stock intersections when utilizing only four mutual funds which are similar in purpose, learn why sometimes commission based investing is not appropriate, learn … you know what. Let’s make this simple: GO GET LICENSED. You’ll then be held accountable like the rest of our industry’s professionals.
Until then I’ll be listening, I’ll be writing, and I’ll definitely be coming up with snarky acronyms.