Dave Ramsey, underneath the scrutiny of financial regulation, has knowingly or intentionally unknowingly altered, tainted or ignored math to support his beliefs and claims. Like Lance “I use other people’s blood” Armstrong, Ramsey has mislead the American public about his work. I know this sounds harsh. It is. I want it to be. The holidays are a time for giving. My gift to you is truth and reason.

For those who like, love, or dare I say… adore Dave Ramsey, you have two choices:

1. You can stop reading here and email my editor all of the reasons why this piece and the author are distasteful and wrong. Her email address is ejefferson@alm.com.

OR

2. You can continue to read and learn how Dave Ramsey is nothing more than a slick salesman who preys on the desperation of broke people.

Myths and Truths only today. I’m not going to give you opinions, nor objections, I’m just going to give you Myths and Truths. Facts not theories, show Ramsey has no clue. 

Myth No. 8:

All debt is bad.

The Truth:

All debt is not bad. I know many wealthy individuals who use credit cards responsibly. They use points to obtain free rewards like cash back and airline miles.

I’ve also got many clients who used mortgages on investment properties without subjecting themselves to too much risk by over-leveraging. 

What about student loans? Are all student loans bad? We’ll get to this later.

See also:

4 more Dave Ramsey myths, debunked

Dave Ramsey: Negligent, incompetent or simply naive?

Contrary to Dave Ramsey, this columnist argues that not all debt is bad. (Photo: iStock)Contrary to Dave Ramsey, this columnist argues that not all debt is bad. (Photo: iStock)

Myth No. 7:

Debt led to Dave Ramsey’s bankruptcy.

The Truth:

Dave Ramsey was a debt-aholic. 

        • He purchased a rental home by maxing out several credit cards.
        • A local banker suggested he was over-leveraged (i.e., had borrowed too much) so he withdrew $10,000 in the form of a cashier’s check. He put on a suit, jumped into his Jaguar and drove to another bank. He parked in front of the bank president’s window, walked in, handed over his financials and the $10,000 cashier’s check. He walked out with a new $100,000 line of credit.
        • Dave Ramsey borrowed money for everything and anything. He took loans for trips, cars, and boats. He even borrowed millions in high-risk callable notes, which meant the lender could demand, at any time for any reason, the balance be paid in full within 30 days. 

During the biographical documentary, “Like No One Else: Dave Ramsey’s Story,” the entertainer recounts his rise and fall, and he divulges how those loans caused his bankruptcy. 

Alcohol doesn’t kill the liver of an alcoholic, the quantity consumed does. Like an alcoholic, Dave Ramsey enjoyed his vice in excess, at dangerous levels, and he could not and cannot be trusted with this vice. 

Myth No. 6:

You’ll spend more when you use credit cards.

The Truth:

Dave Ramsey and his legion of loyal, no back-talk, no gossipers will never concede that his staff has incorrectly cited a study that indicated people spend 14 percent more when using a credit card.

Interesting.

I went ahead and conducted an in-depth scientific study of my own over the last 12 months. I paid for fuel using cash and credit. Shockingly, unlike Dave, my car isn’t a debt-aholic and it did not consume 14 percent more fuel when I paid with a credit card.

Myth No. 5:

If you pay cash for a car, and save the monthly payment, you will be a millionaire.

The Truth:

On his website, Ramsey says the average car payment is $475 per month. And I can buy that. However, Ramsey says, if you start with a $2,000 car and upgrade every-so often, then eventually you’re driving a nice car and have no monthly payment. He says investing the $475 per month will give you $1.6 million in 30 years at 12 percent interest.

Ramsey forgets only part of the $475 payment is interest. The other portion is the principal amount. His followers need to set aside the principal amount each month in their old, ratty, coffee-stained envelopes so they can pay cash for their next vehicle.

Here’s the math: A $26,000 vehicle financed at 4 percent interest for 60 months results in a monthly payment of $478.83. This loan will cost the about $2,700 in interest over 60 months.

To simplify the calculations, I used the median monthly interest at one year intervals. The median interest paid monthly in years one, two, three, four and five is $80, $64, $47, $29, and $11 respectively.

I did subtract 5 percent for commissions for these reasons:

          • This is the number Dave uses.
          • Ramsey suggests funds with an upfront commission are generally the least expensive over time.

On a side note, within the blog sections on his website, Ramsey falsely justifies this cost for others since he too pays it. We’ll revisit this later. 

Input these numbers into our fancy, nerd tool, which is what Ramsey calls a financial calculator, and we get $3,941. Hmm… I don’t think that’s going to have the distance. (Yes, that’s a quote from Major League. It’s a great movie.  Don’t judge me!)

Ramsey says that after 30 years of no car payments, you’ll have $1.6 million.

This is where we will use our ally and Dave’s arch-nemesis: Math. 

The Ramsey estimate is not even close. (Come on. Does it even sound logical?) If the borrower always has a loan, and the interest payments are invested at 12 percent for 25 years — Remember, it’s already been accumulating for 5 years.  — that person will have an investment balance of $170,841. Dave says, us math nerds get lost in the paralysis of the analysis. So I ignored taxes and fees, which are in addition to commission.

If car purchases are only once every 10 years, four years longer than the current average, then the balance of this childish fantasy is a mere $827,349 less than the $1,600,000 promised by Ramsey. Nearly $800,000 off despite unrealistic assumptions like a 12 percent rate of return, no fees, no taxes, and vehicle ownership 4 years greater than normal.

See also: 4 myths Dave Ramsey is spreading about fixed annuities

According to this columnist, Ramsey's math is especially fuzzy when it comes to calculating commissions. (Photo: iStock)According to this columnist, Ramsey’s math is especially fuzzy when it comes to calculating commissions. (Photo: iStock)

Myth No. 4:

Dave still pays upfront commissions when he buys mutual funds from his ELP in Tennessee.

The Truth:

This was a great way of selling his ELP (Endorsed Local Provider) services. It’s nothing more than a brilliant sales pitch. Would you expect anything different from a salesman?

He says it’s better to pay 5 percent in commissions than pay higher annual fees.

          • That would be true if these were inclusive of each other, but they’re not.
          • You can have low cost and no commissions, but let’s not get ahead of ourselves.

How does Ramsey justify commissions? What’s good for the goose is good for the gander. If he can pay them and get good returns, then so can everyone else.

But…

Ramsey’s investment wealth, is by his own admission, well into the millions. On his site, within the blogs and “Ask Dave” sections, Ramsey has said he owns fewer than 25 different mutual funds, and even said it might be fewer than 10. 

Given standard break points and the millions Ramsey invests in obviously few funds and therefore few fund families, Ramsey likely pays nothing in loads (commissions) to purchase mutual funds. 

There’s a reason why we have fee-based compensation models and commission-based. They each make sense for different situations.

Ramsey saying commissions are always better isn’t math based. It’s just a sales pitch.

Myth No. 3:

Roth IRAs save you in taxes because the growth is 100 percent tax-free.

The Truth:

A Roth IRA will save you in taxes if and only if you’re in a higher tax bracket when you pull out the money. 

Ramsey says a Roth IRA will save you $300,000 out of every $1 million, give or take.

Nope.

Ramsey assumes if you can contribute $10,000 a year to an IRA or other tax deferred vehicles, then you could also contribute $10,000 to a Roth IRA. Sure, this seems to make sense. But the Roth contribution increases your current tax bill. In other words, if you contribute $10,000 to a Roth rather than an IRA, you’ll owe about $2,000 more in taxes, assuming 15 percent and 5 percent income tax for federal and state respectively.

However, I can just hear the Ramsey argument now: Investors can cover the tax bill with cash flow … Hmm.

Contributing $10,000 and paying the additional $2,000 in tax is $12,000. Contributing $15,000 to tax deferred plans, after the $3,000 in tax savings is also $12,000. Let’s compare the math.

If each grow over time by a multiplier of 100, then the Roth will have a $1 million balance ($10,000 x 100) and the Traditional IRA will have a $1.5 million balance. The Roth is tax free and the Traditional IRA is taxable. 

A married couple with $40,000 of annual Social Security benefits could withdraw about $60,000 from the $1.5 million tax deferred account with a 20 percent tax liability (federal and state). This encompasses the taxes owed on the Social Security benefits. 

Thus the $1.5 million balance would still be $1.2 million. Not to mention, interest earned on $1.5 million is always greater than interest earned on only $1 million.

But who cares about interest and wealth? Clearly not Ramsey.

See also: Two great Dave Ramsey myths, debunked

With regards to Dave Ramsey's qualifications as a financial advisor: "I’ve been driving a car for decades. That doesn’t mean I’m qualified to be a NASCAR driver," columnist Michael Markey writes. (Photo: iStock)With regards to Dave Ramsey’s qualifications as a financial advisor: “I’ve been driving a car for decades. That doesn’t mean I’m qualified to be a NASCAR driver,” columnist Michael Markey writes. (Photo: iStock)

Myth No. 2:

Millionaires don’t become millionaires by using debt.

The Truth:

On the “Millionaire Hour” segment on the Dave Ramsey Show, Dave always asks: “How much of your wealth was created by debt?”

The most common answer: “None.”

He then asks: “How much of this wealth is due to inheritance?”

Again, the most common answer: “None.” 

Many of these millionaires’ stories recount how and when they paid off their student loans. But wait a minute! I thought none of their wealth came from debt?

Much of the income, which was used to pay their expenses fund their investments came from employment. Employment was initially gained thanks to education and training. Therefore, despite Ramsey’s attempt to disguise debt as anything but evil, it can be used for good.

Myth No. 1:

Although Dave Ramsey holds no professional investment, insurance or finance licenses, he’s so well educated in the school of hard knocks that he’s more than qualified to help people.

The Truth:

I’ve been driving a car for decades. That doesn’t mean I’m qualified to be a NASCAR driver. 

What’s more, Dave consistently displays his basic failure at fundamental product knowledge. Here are some examples:

With regards to annuities: On his website, Ramsey claims variable annuities protect your investment “against a downturn in the market.” 

Wait… What?  I guess I haven’t seen these kind of variable annuities.

With regards to Social Security: Dave tells someone to take Social Security at 62 as long as you “invest it all,” because “whatever nest egg it creates, your family gets that when you die. When you die with Social Security, they get nothing.”

Dave’s advice ignores common Social Security pitfalls such as the earnings test, widow’s benefits, and taxation of benefits.

You see, those who take benefits early are subject to an earnings test. This test recaptures benefits for those who make more than about $16,000 per year. 

Furthermore, taking benefits early will reduce the widow’s benefit. This advice, when accounting for cost-of-living adjustments, will lower future monthly benefits by 30-40 percent. 

Lastly, even if we ignore the two points above, suggesting everyone take benefits early will reduce their monthly benefit by a minimum of 25 percent and thus increase the need for other sources of income. In turn, likely increasing the probability that the household social security benefits will become taxed… further lowering the net benefits. With regards to mutual funds and ETFs: Ramsey says “the main reason to do an ETF is that it allows you to trade your stocks or trade your mutual funds easily and often.” 

No the main reason you use ETFs is for the lower fee structure and the elimination of sales commissions. 

Dave uses the S&P 500’s long-term “average” return to justify why everyone should invest in the market and why everyone can become a millionaire. Yet there are S&P 500 index ETFs, which would lower fees and eliminate commissions.  So why wouldn’t he recommend these? His current answer does not answer that question.

Look I’m not saying all debt is good or that everyone should go get a visa card. Dave Ramsey, while hopefully well intentioned, is hurting people. Having no debt, generally won’t hurt people. Robbing people of hope and trust will.

When people find out sacrificing their pride and driving a crud mobile doesn’t create the wealth Ramsey promised, they lose hope and they lose trust. When people find out they’ve paid unnecessary taxes by following their hero Ramsey’s advice, they lose hope and they lose trust. When people find out they could’ve followed Dave’s advice but saved tens of thousands in fees and commissions, they lose hope and they lose trust.

Here’s to the end of another great year and to the beginning of so much more to come. Bad math, leads to bad advice, and bad advice does hurt people. It kills their hope and their trust.

Read more Michael Markey columns:

Let’s play a new game: Dave Ramsey Jenga®

The DOL may regulate entertainer Dave Ramsey, but should it?

3 false assumptions Dave Ramsey makes about term life insurance

A closer look at Dave Ramsey’s crusade against credit

The real reason Dave Ramsey should be regulated

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