About a year ago, I was sitting by myself at the back of a bus filled with advisors and insurance agents. A few rows ahead of me, a guy proclaimed to the group: “I love math!” Someone else, taking up the challenge, threw out two numbers and said, “Multiply these…”
Now, I’m not always a social person. I’m often a quiet listener and keep to myself. But I love math, too. So I couldn’t help but perk up during this exchange.
The math lover in question quickly and confidently provided an answer to the multiplication challenge, albeit, not a very good one. Those around were visually and audibly impressed, despite the fact that his answer wasn’t even close! Then it happened again. He was given another two numbers. Again he answered confidently — and incorrectly.
By the third or fourth go around, I couldn’t keep quiet any longer. He gave his answer and from behind, I provided a meek retort: “No.”
Sometimes, the simplest language is the best. From there, this guy and I engaged in a ‘math off,’ if you will. It was fun!
Confidence has caveats
Confidence is one thing that author and media personality Dave Ramsey never lacked. He’ll be the first to tell you: He’s the smartest math nerd out there.
Why, then, do I continue to correct Dave Ramsey’s fallacious mathematical follies?
His opinions about personal finance are golden to some people. But this isn’t about opinions, it’s about bad math. Bad math leads to bad advice, and bad advice hurts people. Dave Ramsey hurts people, as I’ll show you. Not with opinions, but with math.
Dave Ramsey’s skeptics assert that the media personality should do more diligent fact-finding before doling out personal finance advice. (Photo: iStock)
Recently, on the radio…
On June 7, during hour two of “The Dave Ramsey Show,” Leanne from Wichita, Kansas called in. Leanne explained that she and her husband have four kids, all age 7 or under, and live in a 900-square-foot home. They’ve got a gross household income of $160,000. They owe $61,000 on their home, which is valued at about $129,000. They’ve got an emergency fund plus an additional savings of $20,000.
Naturally, they are avid Dave Ramsey fans. Listeners can hear Leanne’s childish, ‘fan girl’ giggles during the show. (Check it out for yourself; I gave you the air date above.)
Leanne wants to know what to do with their extra savings. So she asks Dave: “Do we invest it, put it down on a new house that would be bigger, or do we put it down on our current house to pay down our loan and try to work really hard on paying off our mortgage?”
Leanne added that her husband would like to buy a foreclosure house and rent something else in the meantime. Dave’s advice? Rent for a few years. Save the money. Then pay cash for a $200,000 home. Dave apparently believes that this couple can save $60,000 or even $70,000 per year. (Not a chance, but we’ll get back to that.)
Leanne also asked whether she should ignore “the naysayers.” She said she’s been advised by family members to avoid ruining her equity. Dave gave a quick answer, and confidently oozed his opinionated misguidance.
“I don’t care what they think,” Ramsey replied. “They’re not making $160,000 a year.”
You see, in Dave’s world, the factuality of opinions increases with income. Ergo, the opinions and beliefs of the mega rich (think Madonna, Jay Z and Beyoncé, or Matt Groening) are all more valid than his, since, according to celebritynetworth.com, they all have a net worth that’s roughly 10 times that of Mr. Ramsey.
But does all that money really make their opinions 10 times better?
In a move devoid of real math, Ramsey proceeded to tell Leanne that she can pay cash for a $200,000 house in two years. His thinking: They already have $20,000 in savings. They can add that to $80,000 of equity in their current home, then save about $60,000 per year for 2 years.
Sounds simple, right? Well, I dated a girl who spent eight years in college. Apparently, you can go to school that long and NOT be a doctor.
Be careful of simple math and simple assumptions.
Ramsey’s advice to callers can lack details about taxes or insurance benefits. (Photo: iStock)
Let’s look at the numbers
I assume Ramsonites are tired of my verbal assault. So it’s time to revisit my secret weapon: Math done right.
The couple now makes $160,000 annually. But Leanne tells us her husband was laid off for three months a year ago. Prior to that, they were making the same income for approximately three years. Since the three months of unemployment, they’ve recouped their savings, replenished their emergency fund, and managed to save an additional $20,000. Dave praised them, and thanked them for living the way they do.
It is fun to live without logic. But is it healthy?
It’s easy to figure out how little this young couple spends, or maybe more accurately, how much they spend. First, let’s assume their employers don’t match 401(k) contributions or simply doesn’t offer one. In such a case, avid Ramsey followers tend to invest the max amount in Roth IRAs ($5,500 each).
Dave believes Roth IRAs are a million-dollar idea. He’s told people to convert enough IRA money into a Roth IRA in one year, despite the enormous tax consequences it can create.