Dave Ramsey's Total Money Makeover, the FWF review

Dave Ramsey's Total Money Makeover, the FWF review

Chapters 1 and 2 cover standard introduction and the feeling of discovering "Oh no, I'm in debt". Fortunately, these are over in only 16 pages.

Chapter 3 "Debt is (Not) a Tool" Dave looks at "Myths" versus "Truths". He actually gets some right here: Don't lend $ to relatives, buy a used car, debt consolidation doesn't treat the spending patterns that produced the debt. Unfortunately, he's already begun the attack on credit. "Myth: If you pay off your credit card every month, you get the free use of someone else's money. Truth: Cardtrak says that 60% of people don't pay off their credit cards every month" I fail to see how the Truth has anything to do with the Myth here. If you pay your card in full, you are getting free use of someone else's $ (and if you're a good FWF'er, you're getting CashBack on top of it). Anyway, Debt is Bad, MMkay? Nevermind that debt makes me personally thousands of $ a year through schemes like AOR. Debt is BAD, MMkay? Even 0% interest debt invested in government backed accounts earning over 5%, it's bad, terrible, did I tell you how you have no self control and you'll inevitably spend it all on hookers and blow and lotto tickets?

Chapter 4, The (non) Secrets of the Rich. More of the Myth Vs. Truth here, and mostly right, you're not going to get rich quick, Lotteries are a bad investment idea, there are some types of insurance you need (but cash value and whole life are bad ideas), get a will.
Chapter 5, Don't try to keep up with the Jones', it costs too much, live frugally. Not much FWF argument there.

Chapter 6. Now we've reached the real beginning of this book. Dave is ready to lay out his plan. Chapter 6 is step 1. Chapter 6 says you need a $1000 emergency fund, and no, buying Christmas gifts is not an emergency. I'm going to go along with him here, most people need to step up and build some emergency cash so they don't start bouncing checks. The problem is you're supposed to keep it separated from the rest of your $, and you should draw the $ from your checking account to have the $ in a savings account. Well, so much for not bouncing checks, you're still going to do that.

Chapter 7. Step 2, "The Debt Snowball". Otherwise known as the first chapter where FWF'ers are really going to go crazy. Dave's plan is to list your debts by amount, from smallest to largest regardless of interest rate (for those of you listening, this is what drives us FWFers nuts). Dave advocates paying debt by starting with the smallest amount, make minimum payments on the rest. Once the smallest is paid, move on to the next smallest. Dave actually ADMITS this isn't the optimal financial solution, "we are more concerned with modifying behavior than correct mathematics.... I have learned that the math does need to work, but sometimes motivation is more important than math. This is one of those times." Here's his first real self contradictory problem. Dave is focused on the debtor having "Gazelle intensity" to attack his debt, if you have it you can do it. The problem with this lies in the fact that if you truly have "Gazelle intensity", you have the willpower to follow the mathematically (and thus financially) correct path of organizing your debt by highest to lowest interest rate, and attacking in that order. For the math inclined, you can work out reasonable situations where Dave's plan is a total disaster compared to the mathematically optimum plan (I encourage you to do so in your own posts).

Chapter 8, I've paid off my debt, now what? Step 3. Build up the emergency fund to cover 3 to 6 months of expenses. Keep that amount in a savings account. If you have funds in investment accounts with no penalty for withdrawal, withdraw them to help build up the account. Why didn't you withdraw to pay down debt in step 2? Anyway, all Dave Ramsey investment money earns 12% (we'll get to that later, but it does, he states it over and over). From a normal financial advice column, 3-6 months of cash is a good idea. We've discussed it some here on FWF, having minimal cash reserves. Anyway, since we're making 12% on our investments with no withdrawal penalty, why cash them out to make local B&M bank interest rates? We're kicking ourselves in the foot again.

Chapter 9, I've paid off everything except the mortgage, now what? Step 4, 15% of your gross income into retirement plans. What to invest in? "25% into Growth and Income (or Blue Chip) funds... 25% into Growth (or mid cap) funds... 25% International funds... 25% aggressive growth (or small cap or Emerging market) funds. He does advocate the correct max out match, then Roth, then more 401k ladder. This mix will return 12% indefinitely, and there is no adjusting this mix for age or retirement.

Now comes living off dog food in your retirement. According to Dave, you can withdraw 8% of principal every year. Since you make 12% on your investments, combined with 4% inflation, 8% of principal can be withdrawn each year. I don't know any other advisor that thinks you can get away with drawing 8% of principal a year. Of course with your 12% guaranteed returns, you have guaranteed your standard of living.

Chapter 10, Step 5, save for the kids college. Invest outside retirement areas here. More 12% mutual funds for you. Prepaying tuition is bad, because tuition doesn't rise at 12%, but your funds will. Not so bad, but once again Dave ignores the need to change the investment mix as the big day approaches. Of course, since you always get 12% on your mutual funds, there is no need to do so.

Chapter 11. Step 6. Pay off the mortgage. Another chapter to drive the FWFers crazy. Debt is BAD, MMkay? Remember chapter 3. Debt is the worst thing ever. First, if you can't buy a home with cash, you want the 15 year loan. And the fact that you earn 12% on your investments and pay 6% on your mortgage (whose interest is tax deductible) doesn't matter. Let's do the math shall we? Most FWFers head will explode here. Which would you rather have, a paid off mortgage, or a mortgage and an investment account with more $ in it than would take to pay the mortgage. Would someone in the audience like to run the numbers on a 200k house at 15 years at 6% versus year 15 of a 30 year with the difference invested at 12%? And oh yes, you're house will appreciate at 6%, which you continue to make 12% on investment $. So those numbers after 30 years? And oh yes, ARMS are bad BTW, and HELOC's are a bad emergency fund.

Chapter 12 and 13, now you're rich, have fun! Well, that's certainly good advice. Fortunately, by following Dave's advice, I'm a lot less rich, and a lot slower, than by following FWF's advice. Thanks Dave!

Copyright Kamalktk, all rights reserved and other legal mumbo jumbo.

and for the record, I really did read this book, got it from the library for the express purpose of a review.

So the basis of his entire post-dungeons-of-debt strategy is an assured 12% return on market investments, with a consistent allocation across risk tiers throughout the investing period?

Innnnnnnnnteresting. I've heard lots about the magic number 12, but this certainly kicks it up a notch.

Thanks for taking the time to review that, KTK. Prepaaaaaaaare for the Ramsites' descendance upon your thread...

PS:
Can't get that damned Tony Little Gazelle image out of my mind since you mentioned "gazelle-like intensity". Grrrr...

kamalktk said: The whole "gazelle intensity" thing. If you have that, you don't need Ramsey. The encouragement is good, and the plan will work for people because it's so simple it can be shouted at them (except for that whole withdraw 8% in retirement thing, that's just bad). It's just not optimal by a long shot, and if you truly have "gazelle intensity" (he used that phrase 100 times or so), you have the desire to do it the best way.

Agreed. As simple as this plan is, wish I'd thought of shouting it out too - could have made a tidy sum for myself . For those that don't have the "gazelle intensity" (Good grief, that term is getting annoying...)...it should at least keep them from becoming dependent on government handouts (or lack thereof) later in life.

The debt snowball, although not optimal - does work quite easily. The rest of the financial advice can be fine tuned for improvement. I too used to be one that thought paying off your mortgage quickly was a good thing.

kamalktk said: Dave advocates paying debt by starting with the smallest amount, make minimum payments on the rest. Once the smallest is paid, move on to the next smallest... For the math inclined, you can work out reasonable situations where Dave's plan is a total disaster...
Right, like if you're trying to pay back these two debts on a fixed budget of $100/month.

1. your eeevil credit card bill - $100 @ 0% monthly interest
2. your friendly loan shark Vinnie - $150 @ 50% monthly interest

Dave suggests: Small steps for small minds - pay that small debt first! If you spend the first month paying off your credit card, you'll have let your loan shark's balance grow to $225. At this point, since 50% of $225 = $112, the interest on this debt is greater than your monthly income. You better get another job (or another financial advisor) or you'll never be able to pay off Vinnie.

FWF suggests: High interest rates first! Your debt to Vinnie drops slowly to $125, $88, $32, and finally $0 with 3.5 months of payments. Another month and you're credit card debt is gone too, with half a paycheck to spare.

This public service announcement brought to you by the American Mathematical Society.

I'm fascinated with the 8% withdrawal nonsense. Assuming a 12% FIXED return it makes perfect sense; unfortunately though, the stock market doesn't work that way...even if you averaged 12% over the long run, it is VERY different than if you're getting a fixed 12. Managing market volatility is the key to taking systematic withdrawals in retirement. Market fluctuations are compounded by the fact that you're taking a withdrawal on top of a loss. Over 10 years you could average a 12% return, but if in year 1 your portfolio dips by 15% for example and you take out 8% on top of it, you will be depleting your assets to maintain that 8% withdrawal rate--assuming you're withdrawing 8% of your initial investment indefinitely.

Apparently the Personal Finance for Dummies title was already taken. Seriously.

Clearly Ramsey's book is for those with poor impulse control. Nice summary.

I agree with pretty much everything the OP wrote. Two things, though:

1. I would say that Mr. Ramsey was wayyyy in debt at one point in his life -- in a typical out-of-control American way, not a FWF AOR way -- and so I can understand his aversion to debt. Since most Americans are in debt in a bad way, I think his advice to work on getting out of debt isn't bad for a lot of people.

2. I did like Dave's idea of a seven-step plan and focusing on one step at a time. I have adapted his approach for myself and feel like prioritizing my goals and focusing on the most important ones first is helpful for me. I ended up with 18 goals myself, but 11 of them are currently on track, so I'm focusing on seven of them. Paying off bad debt is #4 on my list, but paying off all debt is actually goal #18 and has a question mark after it.

2Cor521

SecondCor521 said: I would say that Mr. Ramsey was wayyyy in debt at one point in his life -- in a typical out-of-control American way, not a FWF AOR way -- and so I can understand his aversion to debt.Agreed. Many financial "gurus" project their own problems onto their solutions for others.

Recent case in point: Madame Suze Orman, who reveals that she's the 55-year-old virgin: Please, click me! Hard!

Explains a lot, eh?

xerty said: kamalktk said: Dave advocates paying debt by starting with the smallest amount, make minimum payments on the rest. Once the smallest is paid, move on to the next smallest... For the math inclined, you can work out reasonable situations where Dave's plan is a total disaster...
Right, like if you're trying to pay back these two debts on a fixed budget of $100/month.

1. your eeevil credit card bill - $100 @ 0% monthly interest
2. your friendly loan shark Vinnie - $150 @ 50% monthly interest

Dave suggests: Small steps for small minds - pay that small debt first! If you spend the first month paying off your credit card, you'll have let your loan shark's balance grow to $225. At this point, since 50% of $225 = $112, the interest on this debt is greater than your monthly income. You better get another job (or another financial advisor) or you'll never be able to pay off Vinnie.

FWF suggests: High interest rates first! Your debt to Vinnie drops slowly to $125, $88, $32, and finally $0 with 3.5 months of payments. Another month and you're credit card debt is gone too, with half a paycheck to spare.

This public service announcement brought to you by the American Mathematical Society.
Real world:
The debt-challenged probably have six to ten credit cards. Some bank cards, a bunch of department store cards, so on. They are all maxed out or nearly maxed out. They are paying a $29 a month overlimit fee on most of them. (If they make the minimum payment and get a little below the limit, the overlimit fee plus late fee plus next month's interest puts them back over.) Plus we have the "you expect me to pay EVERY month!!! How am I supposed to keep track of that?" syndrome, which causes a $29 late fee to be added every month to most of the cards. So you have a bunch of credit cards with $1000 balances that are accruing $25 in interest plus $58 in fees every month.

Every credit card you get paid off and closed saves you a potential $58 monthly fee.

I can't find it right now, but somebody recently posted an article in this forum about some group accusing Capital One of deliberately issuing multiple credit cards with small credit limits (rather than one card with a larger limit) to sub-prime borrowers in the hopes of generating more late and overlimit fees from them. Business Week Article.

I don't know if that's true, but believe me, the phenomenon of people over their heads in debt running up $58 monthly fees per card is real.

Now, whether Dave Ramsey knew this when he made up the advice is a different question.

SecondCor521 said: I agree with pretty much everything the OP wrote. Two things, though:

1. I would say that Mr. Ramsey was wayyyy in debt at one point in his life -- in a typical out-of-control American way, not a FWF AOR way -- and so I can understand his aversion to debt. Since most Americans are in debt in a bad way, I think his advice to work on getting out of debt isn't bad for a lot of people.

Dave states on page 2-3 that at age 26 he held $4 million in real estate (with commensurate mortgages apparently), but over the next three years he was sued, foreclosed on, and "we were bankrupt" (He doesn't state he "filed" bankruptcy, which would be different).

SUCKISSTAPLES said: There seems to be a lot of comparisons between Dave Ramsey's past and Casey Serin (the Iamfacingforeclosure.com guy) .

I thought of Casey too.

I'm liking this 12% no problem return thing.

WIth a guaranteed return like that, I think he should advocate taking out all the money you can from those evil credit cards and putting it into this "chariot of chocolate and feathers" investment vehicle. After 40 years, 50K is now a cool 4.7 million.

mhesidence said: Apparently the Personal Finance for Dummies title was already taken. Seriously.

Clearly Ramsey's book is for those with poor impulse control. Nice summary.

Personal Finance for Dummies is a well written book.

Nice review, kamalktk

What strikes me as really odd, even dangerous, about DR's approach is that first, he advocates extremely conservative attitudes about having debt, then second, he swings way in the other direction proposing a 8% withdrawal of investment accounts for retirement. That is insane, and will undoubtedly lead to financial trauma for anyone following his advice.

There is such a wealth of data that shows 4% is a safe withdrawal rate, I am amazed he doubles that without blinking an eye.

SUCKISSTAPLES said: doerrb said: Suze Orman, who reveals that she's the 55-year-old virgin: Please, click me! Hard!

Explains a lot, eh?

It was so obvious. Ive stated it many times in this forum, and it accounts for a lot of the reason she encourages women to dump their "deadbeat" men.

I always guessed she was a dike, lol.

I think he does more good than harm, kind of like people who go to church. There are people who would NEVER even understand FWF and don't think of money as math. These people need mental help before financial. Then they need some simple spoon feed economics and budgeting. When I say some people I mean most people these days. Those on FWF are a small minority, though many get better returns and truely understand how money works. The people who need Dave's advice are the ones typically living in a trailer or in a interest only mortgaged home, with a car they can't afford, cash value life ins., timeshares, and all their furniture from rent to own and using payday loans. These people are not on fatwallet, but are a lot of people in the US.

Wizard83 said:
Dave does tend to preach NO DEBT
Not just no debt, he preaches god and uses scripture as his arguments half the time.

kamalktk said: jmz668 said: Wizard83 said:
Dave does tend to preach NO DEBT
Not just no debt, he preaches god and uses scripture as his arguments half the time.
I don't know about the radio show, but in the book, he is quite low key about this. I didn't find it to be a problem at all.
edit: I'm not a Christian either.
The few times I have heard his show, his argument for getting rid of the mortgage tax deduction (by paying it off) is to tithe.
Nevermind that paying that mortgage and keeping the interest deduction adds on to the tithe deduction.

tooshy said: chevauchee said: I can't resist the mortgage challenge, so here goes.

Assuming $150,000 financed (probably too much for Dave, but I live in CA and that might be enough to buy me a 40 year old single-wide), a 15 year mortgage at 5.75% (PenFed's current fixed, no points) is $1245.62/month. Same amount financed over 30 years at 6.00% (again, PenFed's rate w/o points) is $899.33 a month, giving us a difference of $346.29/month. The 15 year mortgage buyer owns his home free and clear at the end of year 15, of course. Meanwhile, the 30 year mortgage buyer still owes $102,052.78, but probably sleeps well at night anyway, since his $346.29 invested per month over the last 15 years, earning 12%, has grown to $172,999.63. This is, of course, ignoring taxes, since they don't exist in Dave's scenarios.

"But wait," the loyal Ramseyite would say, "what if I am disciplined and invest my mortgage payment of $1245.62 each month after I pay off my house? Then I shall surely come out ahead of those fools who don't understand the evil of debt and take a 30 year mortgage, ha!" Well, $1245.62/month invested at Dave's trusty 12% does grow to a fairly impresive $622,287.09, sure. But let's assume our 30 year buyer also continues to be disciplined with his $346.29/month contributions. He now, at year 30, also owns his home free and clear, but he has $1,210,271.13 in his brokerage account.

For those who are curious how the money breaks down, at the end of year 30:
Both homeowners have paid off $150,000 in principal.
15 year owner paid $74,210.52 in interest while the 30 year owner paid $173,757.28 in interest.
15 year owner invested $224,211.60 (36% of year 30 investment total) vs. 30 year owner's $124,644.60 (10%).

Taking a 30 year mortgage gives you an extra $100,000 in deductions and almost twice as much money in the brokerage account. I know which homeowner I'd rather be, what about you guys?


However, as much as I'm bagging on Ramsey here, I'd rather see someone who is hopeless with money join his cult than continue until total self-destruction. Yeah, the math doesn't work, but if it's the couple with $20K in debt and who are convinced they'll never dig out? They'd pay less if they pulled an IBJanky, but at least they'll get out of debt eventually.Are you sure about the "1 mil" in his brokerage account and owning his home free and clear for the 30 yr mortgage holder?

Being math challenged, I ran the numbers through Hughchou.org's calculator I assumed 150K mortgage @6% for the 30 yr holder, prepaying $346.39 monthly, no tax assumptions, and only 10% "long bull market" returns....but the answer I get is a savings of $44,648.67 for the 30 yr mortgage holder investing rather than prepaying, not 1 mil+...

The savings are proportionately smaller as the estimate for STEADY investment returns rachet downwards. I have yet to see a bull market last 15 years...but maybe this time is different!! If you can manage to tuck the savings in an IRA or 401 type fund then it may work out.

edit: to compare @ yr 30, 44K (@ yr 15) x 12% investment rate for the next 15yrs is $195972 (using Hugh's calculator). So still not sure how you get 1+ mil and owning the home free and clear @ yr 30. OK...found my error not quite 44K extrapolated since we're making the assumption that the 30 yr mortgagor is not prepaying ever during the entire mortgage term even when he has the investment funds to do so. Therefore, $149,773 investment balance @ yr 15 + $346.29/mo contribution for 15 additional years will grow to $810,483. However during this time the 15 yr mortgagor will have saved: $516,272 ($1245.62 @ 10% for the next 15 years). The difference in prepayment is $294,211 @ yr 30, and $44,648 @ yr 15. The difference between Hugh's calculations than yours is an extra 2% investment return (12% not listed in drop down box). Of course, garbage in/garbage out lol

My point is the difference is not all that great...and that is assuming some out of this world returns EVERY YEAR for 30 years. Not quite. Many things could go wrong, including bad years of negative returns since high yield = high risk. Also that's assuming the person not prepaying is disciplined enough. Furthermore, the toll of trying to beat your ownself is a bit self defeating....

Must also point out we're talking about investment returns TWICE the mortgage rate. We're lucky today to find safe fixed investments at 6% even...I think the bottomline is each person has to weigh the advantages/disadvantages for their situation and not presuppose. Using extreme examples make a fine point, but its only real purpose is to illustrate, not follow by prescription.

Try this compound interest calculator.. The 12% is Mr. Ramsey's assumption, since we're crtiquing his work that's only fair. I'll leave it to another time to argue that you don't need a 'long bull market' to achieve 10%, and that 10% is in no way 'out of this world returns'. Entering $0 starting capital, $4155 per year added, 12% compounded once per year, it comes up to a total of...$1,123,065.78. Compound it 12 times per year and you get....$1,222,232.64.

I noticed a local chruch had a Dave Ramsey seminar sign up. No doubt he'll get a warm welcome there. Credit is Eeeevil. Can I get an Amen?