Our past dictates our future.
We say Dave Ramsey’s past is why he is vehemently against debt. We say his opinions on this matter are valid, since he’s gone through the experience firsthand. But at what point do yesterday’s events stop dictating today’s behaviors? At what point are our past experiences demoted from juggernaut to faint memory?
I’m not sure of the answer, but I do believe the Dave Ramsey of the past would be disappointed with the Dave Ramsey of the present. Over the course of this man’s extraordinary rise to the top, he has forgotten many of the basics of finance.
The Dave Ramsey of the past realized that bad things happen to good people: people who save; people who live within their means; people with, dare I say it, “a reasonable amount of debt.” Back then, Dave was okay with maintaining some debt until a legitimate emergency fund was established. When he first started writing and speaking, Dave said that a $1,000 emergency fund wasn’t enough, while today he says it is. While the Dave of today may not believe in safer products like annuities with lifetime income guarantees or permanent life insurance, I believe the Dave of the past would have praised them.
The present Dave
Let’s look at some evidence that shows Dave’s current line of thinking. On February 11, 2016, a Financial Peace University (FPU) instructor called into the Dave Ramsey Show and relayed the following from one of his attendees:
Instructor: Last night I had an attendee ask if she should use $15,000 from her savings to pay off debts. She’s in between steps two and three. But she’s worried about cashing savings out in case something happens with the bumps in the economy.
Dave: There are no in-between steps. (Note that this is an important point for all those who tell me there are “implied” steps about gifting.) She should use all but $1,000 of her savings to get rid of debt. She will be nervous, but then will work her tail off to replenish her savings.
In contrast, the old Dave understood the importance of a safety net. In his first book, Financial Peace (Lampo Press, 1992) he advised that followers should have three to six months’ worth of expenses saved. Times change and so do opinions … but wait, not so fast. Don’t get into the habit of making blanket statements like our friend Mr. Ramsey.
Here’s another illustration of how Dave currently thinks. On December 10, 2015, Dave Ramsey spoke with a caller considering a guaranteed pension. Based on Dave’s math, the pension guaranteed a 7.8 percent payout per year. Dave told the caller to take the lump sum buyout. Here’s why:
Dave: My mutual funds have been making ten percent over the last twenty years and some have been at twelve percent. I haven’t taken any [money] out. I leave it alone. So if your money were in my account, it’d be much further ahead.
The past Dave
Above is a beautiful example of how the Dave of old, the common sense guru who put on jeans and got his knuckles greasy, died with the resurrection of success. This earlier Dave, the recovering spendaholic, understood that certain more conservative investments were beneficial when used correctly. When he wrote his first book he wasn’t down on ALL bonds, though he now says he’s never been a fan of them.
So, just how many Ramseys are there? First, we have the real estate mogul; second, we have the humbled husband and servant who recovered from bankruptcy; third, we have today’s Dave, the popular writer and radio show host.
Let’s take a closer look at Dave the real estate mogul. Below are the remorseful words Dave No. 2 used to describe his early behavior:
“If a banker would dare to indicate I might have too much debt, I would hunt another source. I have taken a $20,000 draw on a line of credit in a cashier’s check, walked out of that bank and into another [and] promised to be a customer, and in return they would give me a new $100,000 line of credit, plus every platinum card and personal line of credit they had.” (Financial Peace, pg. 3)
The early Dave Ramsey was a risk-taker; that much is clear. Now, let’s apply that knowledge to his present-day advice. In our first example, Dave tells the FPU instructor that there are no in-between steps: First you use all but $1,000 to pay off debts; next you save up 3–6 months’ worth of expenses. This line of thinking neglects the reality that a bad economy leads to lost jobs. Why? Because Dave Ramsey’s lack of recent financial failures — failures like being able to make your car payment or fill the tank with gas — has led him to forget that paying off debt doesn’t always work. Paying off debt doesn’t work when you lose your job. The Dave who went unexpectedly broke knew you must have 3–6 months’ worth of expenses saved because things happen. He knew there was some need for safety nets. We saw this knowledge reflected in his first book.
In the second example, Dave tells the caller he should invest the money. Take the lump sum rather than the 7.8 percent payout, he says, because his own personal rate of return has done better. In his words, he hasn’t had to touch the money, and some of it has even met the illustrious 12-percent growth rate he often touts.
Which Dave does this second piece of advice sound like it’s coming from? The Dave who would go from bank to bank, who had a Jaguar financed to the hilt, who leveraged everything despite the risk? Or the Dave who lost everything? Easy to answer, huh?
The problem with success
Now, which Dave is this? On January 21, 2016, a caller asks what to do about a $7,000 judgement from an attorney’s office. The original debt was only $2,700. The caller wants to get them to accept less. What does Dave suggest?
Dave: If you only want to pay $2,000, then wait them out. Eventually they’ll come around. They can’t get anything else. Say, ‘We’re not going to talk about this. Let me know when you’re ready.’ [This last part is Dave’s suggested verbiage from caller to collection agency.]
I’ll bet you the old Dave Ramsey knew better than to give this advice. The old Dave Ramsey — the broke, humble Dave Ramsey — saw just about everything he owned repo-ed. Today’s Dave Ramsey is so far removed from failure, he’s like a townsperson in the book, The Giver. As the monotony of consistent success has strengthened, the variance of color has dimmed. How could a once-broken Dave forget that collection agencies are very good at one action: garnish and repo? This caller already has a judgement; if he doesn’t work things out, the garnishment will be for $7,000+++. The old Dave knew the pain of losing everything due to poor decisions and behaviors. I wish the old Dave had helped this caller instead of Dave 3.0.
Why guarantees matter
I honestly believe Dave Ramsey loves annuities with a lifetime income guarantee and permanent life insurance, although he won’t and can’t admit it at this point. I believe that, if he was honest, he would recognize their value, because Dave believes in financial stability. He has to, given the pain of his past experience with debt. A splinter of our past, even when colorless and nearly forgotten, never quite leaves us.
Let’s look at another example: On January 22, 2016, Eric from Idaho asks if he should pay down his mortgage by pulling money out of his business. There’s one thing Dave Ramsey will never forget: watching a sheriff’s sale on his house, which capped a 3+-year fight to mend years of poor financial decisions. The memory of this pain and fear lures Dave to give Eric bad advice. Here are the particulars:
- Eric’s business gross income is $1.4M.
- Eric’s business net income is about $300,000-$400,000, of which he used $135,000 between salary and draws (presumably taxed as an S-Corp).
- Eric’s business operating costs are roughly $1M.
- The business has $240,000 in cash.
- Eric has a personal home mortgage of $400,000.
- Eric’s taxes haven’t been filed or prepared.
- 2015 was a big growth year for Eric’s business.
- Eric wants to know if he should use money from the business to pay down his mortgage.
Dave suggests Eric “bonus” himself $150,000 of the $240,000 and apply this to his mortgage. Problems? There are many. This isn’t a difference of opinion; these are mathematical facts.
The first problem is that Eric’s taxes have not been calculated yet. Eric mentioned that he took home $135,000. If taken equally and systematically, then that’s $11,250 per month. Assuming he had 30 percent withheld for deductions, Eric’s paying $3,375 per month or $40,500 annually towards his taxable liabilities. And if Dave’s projected income, confirmed by Eric, is correct (say $350,000) then Eric has a total taxable liability of nearly $90,000. So Eric doesn’t have $250,000 in the bank. He really has $200,000 after accounting for the remaining 2015 taxable liability.
Problem No. 2: Even if Eric has managed to pay ALL of his taxable liability, which means he had nearly two-thirds of his income withheld each month, Dave’s advice still reduces his cash to less than two months of operating income. The business’s 2015 operating costs were approximately $1 million, or around $83,000 per month. Some of those are most likely variable costs. How many, who the heck knows because Mr. Ramsey was so concerned with pushing his own agenda that pertinent details needed for proper assessment were never asked. Or maybe they weren’t thought of, in which case we’d label that as incompetence. Nevertheless, moving on.
Problem No. 3: The business experienced a lot of growth in 2015. Why are we assuming 2016 will be just as fruitful? And if I am correct and additional taxes are yet to be paid, then Eric will be left with MUCH less than two months of operating income. Greater growth often leads to greater fixed costs, such as a larger office, more equipment, increased staff, etc. The old Dave understood the pain of over-leveraging.
Time for a recap: In our first example, Dave Ramsey thinks the FPU attendee should use all but $1,000 of her savings to pay off debts. In our second example, he tells the caller to take a lump sum buyout rather than a monthly check. In our third example, he tells the caller not to worry about a judgement, but instead to be tough and they’ll bow down. In our fourth and final example, he instructs Eric to pay down his mortgage even though many details remain unknown.
We can see a trend here: Take risk. It’s the oldest Dave coming out, the one who was so offended when one bank suggested he reign in spending that he took his business to another bank and, through omission, painted a picture of success that had long been untrue.
Let’s add more fuel to the fire. I received this Dave Ramsey audio clip from one of our readers:
Here are the caller details:
- Just retired
- Million or more in retirement savings
- 4.75 percent mortgage
- More than enough cash to pay the mortgage off
The caller had read Dave’s Total Money Makeover and wanted help justifying paying off a mortgage when he could be investing the money in the market, earning, in his words, 10–11 percent returns. Dave responds that the formula the caller is using is naïve to two things:
- The taxation of his income
He goes on to say, “Things occur when you do finally become debt-free that you cannot quantify with math. There’s a sense of peace and a sense of solid foundation under you that changes and generally leads to more prosperity because you’ve taken a risk element out of your life.” He finishes by saying, “You measure risk with your heart and math with your brain … factor in risk and taxes and you’re not making a spread … you make different moves because you’re on solid ground.”
Perhaps without realizing it, Dave is harkening back to his old self here. This is the very reason the old Dave Ramsey would have loved the permanent life insurance and annuities with lifetime income benefits that exist today. Both take a risk element out of your life. Both provide a sense of peace, and both provide a foundation.
The old Dave disliked permanent life insurance because it had a cash value element, which was a “poor investment.” But today, we can eliminate the investment piece of this with policies whose premiums are guaranteed to never increase and whose benefits are guaranteed to never decrease, all without generating any significant cash value. They’re not designed to be borrowed against. They’re not designed to provide living benefits. They’re designed to do one thing, and one thing well: provide peace of mind that this money will be there, whether a small amount is needed, say for burial, or a large amount is required to replace a lost income. (Lost income can happen after retirement, of course.)
Now onto annuities with a lifetime income benefit. Today, Dave Ramsey still knows there’s something that changes within us when we know our home is safe. The same can be said when we know our income is safe, right? Dave says he was OK in 2008 because he had no debt and therefore wasn’t worried about the financial mess. In fact, he invested MORE in 2008 and is happy he did so. But I ask you this: Imagine for a minute that the Dodd-Frank Act had eliminated the viability of Ramsey Solutions through legislative changes, therefore eliminating Dave’s entire income stream. Would he have been the fearless knight he proclaims to have been? Hasn’t the consistent success of Ramsey Solutions, coupled with the elimination of debt, created this sense of peace and comfort? The old Dave Ramsey had never heard of lifetime income benefits because they simply did not exist. If they had existed, I have to believe he would have supported them without reservation.
Today’s Dave Ramsey says fixed annuities are too conservative. They don’t make enough. But our current Dave still remembers a lesson he learned before the last transformation: Don’t risk your home! Even though Dave strongly believes in double-digit long-term growth rates when invested in good growth stock mutual funds, and admits mortgage rates are in the lower single digits, he cannot condone mortgage debt in favor of investing. He says that when you factor in the risk and taxes, there isn’t a spread. In other words, take care of your foundation first, and never risk it.
Annuities with a lifetime income benefit are the only tool that can lessen the risk of longevity and provide the peace of consistent, reliable income. Yes, they are likely —in fact, designed — to underperform the return of the stock market, but when you factor in the lack of risk, they become a very attractive option.
Real financial peace
The Dave Ramsey of the present asked the caller who was pondering paying off his mortgage to consider this: “Let’s flip the situation around. Say you have a paid-for house and someone suggested you take out a mortgage to invest into the stock market for the possibility of gain. Would you do it?”
The caller and Dave unanimously agreed that would be an unlikely outcome. OK, let’s do the same. I ask you this: “Let’s flip the situation around. Say you have a paid-for benefit through Social Security and you’ve started to receive your benefits. Would you take a lump sum buyout and invest those dollars into the stock market for the possibility of gain?”
The answer? Of course not. The same is true with paid-up life insurance or guaranteed income benefits provided by annuities. Why is this? Because financial peace isn’t achieved by the size of your nest egg or the extinction of debt, but rather by the net difference between the monthly checks coming in versus the monthly checks going out. It’s a simple equation all three of our Daves should understand: Life is good when accounts receivable is greater than accounts payable. Flip it around and it’s like a divorce in Tennessee and a tornado in Texas: Someone’s going to lose a mobile home.