If you flip the equation, it will force you to think with your head, not with your heart.
Any loyal Dave Ramsey listener has heard this phrase hundreds of times. And I agree: Your head judges on facts and truths. Your heart perverts reality and reshapes the truth to be parallel to your emotions.
So let’s flip the equation and look at Ramsey’s advice with our heads and not our hearts.
Imagine a couple named Bob and Mary. They’re close friends of yours with a good household income.
Recently, you watched them go from a $300,000 house to a one-bedroom apartment, and from newer, reasonably priced cars to a matching set of rusted out vans without any windows. You’re worried about Bob and Mary. So when Bob asks if you’d help them evaluate an idea, you’re eager to help.
Before you get started, you ask them to write down their monthly expenses. This is what they write:
- Rent: $1,000
- Gas: $250
- Utilities: $150
- Cell: $100
- Food: $250
“How much does that leave you,” you ask.
Mary, looking embarrassed, responds: “$577.”
That amount, you say, is a decent starting place for setting up a financial plan. Then Bob interrupts you.
“We have $577 left per year, not per month.”
Stunned, you ask: “Where does the rest go?”
Before Bob answers, you do some LQM (lightning quick math), and figure out they’re living on $21,577 per year. You know that can’t be right. “What’s your annual income?” you ask both of them.
“About $140,000 gross,” Mary replies.
“Why are you living on $21,577 per year then?”
Mary shares with you that after taxes, they’re left with about $100,000. Then they live on about $20,000 and use the rest, $80,000 per year for the next five years, to fund a permanent cash value life insurance policy, which protects them against market downside.
Let’s pause here. Game offffffff.
If you’re a Ramsey loyalist, then you’re screaming with emotion (heart), “What are you DOING? Permanent life insurance is a scam, and it’s a terrible investment!” If we use reason (head), we’re still dumbfounded over this decision. This is too aggressive, because $577 leftover for the year leaves no room for error.
Okay, let’s go back to Bob and Mary.
“Guys, what are you going to do if you have an emergency?”
“Relax,” Mary says. “We’ve got $1,000 in the bank for emergencies, and if we need to, we can stop paying into the policy for a while and cash flow the expense. Or, worst case scenario, we could pull money out of the policy.”
Even with the ability to defer payments or pull money out, is this a smart plan?
Most of you reading this are probably thinking, heck no! Ignore your preconceived notions against permanent cash value life insurance based solely on suppositious evidence. Both logically and emotionally, this plan is unreasonable regardless of the product.