I was asked the other day: “What’s more important? …Getting your message out, or getting paid?”

Without question or hesitation, I answered, the message.

I think Dave Ramsey could’ve said the same at one point in his past. But I wonder if he could honestly say this today. Money can change everything, can’t it?

Consider Bernie Madoff. Was he always a cheat? Probably not. I wonder if he remembers the day, the moment, the exact instance when he rationalized a wrong-doing due to its relatively benign significance.

Does he remember the day his moral compass broke?  

If you’re one of the trusty Ramsonites who under no circumstance will admit that Dave Ramsey can be wrong or that his motives may be money-driven, then you might as well leave now.

The purpose of this column is to give readers, who are mostly advisors, mathematical examples of why the people they serve should get individualized advice from qualified representatives rather than a nationally-syndicated radio show host.

With that in mind, let’s have some fun.

An average middle-class caller

On July 12, 2016 at around 7 p.m. EST, I was listening to “The Dave Ramsey Show.” Dave’s caller was a middle-aged married woman who said she is house poor. She said she and her husband have about $20,000 in an emergency fund, and about $60,000 in mutual funds, which are not in a retirement account. She wants to discuss whether they should refinance their house.

Here were her financial details:

  1. Current mortgage balance is $207,000
  2. Approximately 25 years remaining on a 30-year fixed rate mortgage
  3. 4.75 percent interest rate
  4. Mortgage equals about 40 percent of take home pay
  5. The question: Should this caller use her $80,000 savings to pay down principal and then refinance?

This caller, like the rest, apparently thought she was talking to a trustworthy, qualified financial expert.

Dave told her to take the $80,000 and apply all of it to her mortgage. Not most of it. Not some of it. He told her to put all of the family savings toward the mortgage, then refinance to a term where the monthly payment is less than 25 percent of the household’s take-home pay. “Yes, this all makes sense,” Dave concluded.

When I heard this, I thought of my 3-year-old daughter. Anytime we play a game and she’s losing, she tries to change the rules. If I question her about it, she says just about the same thing that Dave told this caller: “It makes sense!”

See also:

3 false assumptions Dave Ramsey makes about term life insurance

3 exciting unintended consequences of the DOL rule

Dave Ramsey: Negligent, incompetent or simply naive?

Talk show host and author Dave Ramsey. (Photo: AP Images)

Let’s do the math

The problem with Dave’s advice in this case is that opinions without fact —or this case, without math — are dangerous. Remember, we’re talking about the guy who apparently still believes that everyone can retire a millionaire.

It’s fun to say, but dangerous to preach.

With hopes that this particular message reaches the caller I heard on the radio that night, bear with me while I address her directly for a moment.   

Dear Caller,

Since Dave Ramsey won’t do the math with you, I will.  First and foremost, do not give up your emergency cushion. Dave Ramsey, when he was motivated by the message and not the money, would have never told someone to take this much risk. It is very risky to spend down all of your savings. Before fame and fortune, Dave believed everyone should have at least three to six months’ worth of expenses in their savings. See for yourself by finding an original copy of “Financial Peace” on Amazon, just like I did.

I wish I had more information about this caller that would allow me to make fewer assumptions. But, as I’ve previously pointed out in this column, Dave Ramey has a notoriously bad habit of asking too few questions and using too little math.

From the call, I know that the caller is about 5 years into a 30-year mortgage. Given the remaining balance and interest rate she provided, I can figure out her monthly payment. Utilizing a simple mortgage calculator — I like bankrate.com — I determined the caller’s approximate principal and interest payments to be $1,180 per month.  She said her payment is 40 percent of her take-home pay. So I’ve estimated that the caller’s take-home pay is $2,950 per month ($1,180/ .40).

I understand her mortgage might have the taxes and insurance escrowed, but due to poor fact-finding, again, I’m left in the dark.

I know the caller wanted advice, but Dave doesn’t actually provide financial advice. Instead, he carefully dances around an issue. Generally, his advice only works in Ramsey World, not in the real world.

I created this chart to help explain the difference:

Ramsey World

Real World

Use all of your savings to pay down your mortgage and then refinance the lower amount.

Never use all of your savings to pay down a mortgage.  This is far too dangerous.

Ignore ALL taxes and closing costs.

Withdraw $3,000 from emergency fund to cover closing costs.

Ignore risks such as: Loss of employment, health care costs, and other general unforeseen emergencies because in Ramsey world nothing can’t be either paid off with the $1,000 emergency fund or cash flowed.

Maintain your emergency fund because in the real world unexpected items cost more than $1,000.  The $450/ mo. extra income due to a lower mortgage payment isn’t capable of “cash flowing” most emergencies.

Take out a 20-year fixed rate mortgage since the monthly obligation of a 15-year mortgage still exceeds 25% of your net take home pay.

Refinance your mortgage to a new 30-year fixed rate.  This will bring both your APR and your monthly payments down. 

New Payment is $736.22 (20 YR 3.5%).  This is a savings of about $450 per month.

New payment is $958.65 (30 YR 4.0%).  This is a savings of about $230 per month.

Go back to Baby Step 3 which save 3-6 months’ worth of expenses.   

Use the savings of $230 per month to bolster your budget so you’re no longer house poor.

Upon completion of Step 3 move onto Step 4 which is invest 15% of income.

No additional investing there’s not enough income.  In Ramsey world, the caller can’t hit 15% either.  I’ll explain below.

Related:

A closer look at Dave Ramsey’s crusade against credit

The real reason Dave Ramsey should be regulated

Why Dave Ramsey’s investment advice sounds more logical than it really is

Dave Ramsey’s unjust war on whole life insurance

Dave Ramsey: Negligent, incompetent or simply naive?

Responsible financial advisors engage in thorough client fact-finding. (Photo: iStock)

The devil is in the details

In the past, some people have told me that I tend to go too heavy on details. So let’s just see how Ramsey World compares to the Real World in, say, 15 years.

If the caller’s house is currently worth $250,000, then in 15 years, at rate of 1.5 percent inflation, her home will be worth $313,036. 

In Ramsey World, the 20-year mortgage will still have a balance of $44,465. In Ramsey World, Dave assumes everyone can do anything with gazelle-like intensity. So this caller will have managed to save the entire difference between the new mortgage and the old mortgage (about $450 per month). Thus, it will take about 22 months to replenish her emergency savings.   

But in reality, for the next 158 months, the caller would invest $212 per month rather than $450. Why not $450?  Because she’s broke, remember. I’m assuming $50 per week of new discretionary income, or $7 a day? Give me a break!

Again, the math:

$50 per week times 4.35 weeks per month minus the standard upfront sales charge associated with the mutual funds that Dave Ramsey recommends means that the caller can invest $212 per month. 

At a 6 percent compounded annual growth rate, net of taxes or and fees, her investments will be worth $60,740 at the end of the 15 years. But since we’re operating in Ramsey World, let’s go with Ramsey’s belief in a 12 percent rate of return.  At that rate, she’d have $80,290 in 15 years.

Sounds good, right?

Before you drink the Ramsey Kool-Aid, let’s come back to the real world.

In the real world, we still lowered the caller’s monthly mortgage payment. And the savings per month still equals about the $50 per week. Of course, the real world includes financial hiccups, problems and emergencies. But don’t worry, this plan left the caller’s $17,000 fund untouched.

In 15 years, the caller will still owe $118,429 on her house. If we use the same future value of $313,036, then she’ll have $194,067 of equity.

In the real world, the caller won’t have any additional funds to invest. In fact, presumably she’ll have to dip into her emergency fund here and there. We’ll assume that when she does, she’ll temporarily change her spending until the savings is replenished.

So all we have investment-wise is the original $60,000. The $60,000 multiplied by 6 percent compounded plus net of fees and taxes is $147,245 in 15 years. Thus, we get a net balance of $358,852.

Wait, you noticed $147,000 + $194,000 doesn’t equal $358,000?

Of course it doesn’t. But the caller still has the $17,000 left alone in her emergency fund.

Here’s a summary:

PLAN after 15 years

Ramsey 6% Interest

Ramsey 12% Interest

Real World 6% Interest

Home Equity

$268,386

$268,386

$194,067

Emergency Fund AT

Beg/ 1 Yr/ 2 YR

$0/ $5,400/ $9,900

$0/ $5,400/ $9,900

$17,000 ALL periods

Investment Balance

$60,740

$80,290

$147,245

Total Net Worth

$329,126

$348,676

$358,852

 

The math is simple, and the outcome is clear. Dave Ramsey was wrong… again.

Dave either was incompetent, negligent, or knowingly misleading.

See also:

Will the real Dave Ramsey please step up? Why Dave should actually love annuities and permanent life insurance

Can you imagine averaging 18% returns? That’s what early Dave Ramsey followers were told to expect

The dangerous lie Dave Ramsey tells about cash value life insurance

Dave Ramsey: Negligent, incompetent or simply naive?

It can be difficult for listeners to decipher the motive behind Dave Ramsey’s on-air financial advice. (Photo: iStock)

Putting money before the message

A few weeks ago, I was once again enjoying an episode of “The Dave Ramsey Show.” This time, of the people Ramsey like to call part of his team, were on the air. They were discussing a new tool, smartdollar.com. Of course, I had to navigate over to www.smartdollar.com and take a look.

Within the terms of service, I found this:

The service provided through the site is intended as an investment educational tool as defined by U.S. Department of Labor Interpretive Bulletin 96-1. The program does not provide any individualized investment advice to you nor does it take into account your particular investment objectives, financial situation, or needs and is not intended as recommendations appropriate for you.

Most people probably don’t read terms of service agreements, like yours truly. Those people would more likely be drawn to these more prominent message on the website:

“SmartDollar walks your employees step-by-step through the money maze to the lasting behavior change that will lead them to success.”

“Independent, Unbiased Advice: After more than two decades of helping people with their money issues, Dave has heard it all. Your employees can get Dave’s expert advice on their real-life money questions.”

“Personalization: Just like each of your employees has unique talents, they also have unique money situations. SmartDollar provides the advice and tools they need whether they are paying off debt, saving for their kids’ college, or investing for retirement.”

Reading these statements brought me back to pondering whether Bernie Madoff can remember the very act that infected his morality?

I also wondered whether Dave Ramsey is negligent or incompetent when it comes to financial advice, or if he’s knowingly misleading.

See also:

Dave Ramsey’s unwitting attack on charitable giving

4 more Dave Ramsey myths, debunked

What if Dave Ramsey were held to a fiduciary standard?

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