Four Dave Ramsey Rules You Should Ignore

Understanding the Downside of Dave Ramsey's One Size Fits All Advice

When it comes to personal finance, Dave Ramsey has legions of followers. We’ve written previous blogs about why people should be cautious about blindly following Ramsey’s advice. We often say Ramsey is helpful for people who are bad with money (think people overwhelmed with debt), but harmful to people who are good with money. Here are four “Dave Ramsey Rules” we think most people who are good with money should ignore.

Dave Ramsey Rule #1: Retirees Can Safely Withdraw 8% Annually

Dave suggests withdrawing 8% annually from your retirement portfolio is a sustainable strategy. This advice is dangerous as lots of “nerds” (Dave’s description) have pointed out here and here.

The stock market has averaged about 10-11% annually over the last 75 years. However, Dave ignores sequence of return risk. The road to 11% long-term returns is filled with lots of ups and downs. A draw rate of 8% is a slow boat to poverty as the annual draw in inflation adjusted dollars gets less each year. Based on the scenario below, a retiree starting with a $1,000,000 portfolio would be drawing only $56,000 in their 20th year of retirement.

How We Create Sustainable Retirement Income

Our retirement planning projections model taking money from different accounts (taxable v. tax-deferred), comparing different Social Security claiming strategies, factoring different asset allocations, and projecting future tax liabilities to devise an optimal retirement cash flow for your specific situation.

Ramsey Rule #2: Expecting Double Digit Stock Market Returns

Dave claims his portfolio of mutual funds has averaged 12% annual returns. As my 7th grade math teacher said, “show your work.” But Dave isn’t a licensed financial advisor, he can say virtually anything and not be accountable. I suspect Dave’s math is subpar and that he’s confusing compound annual growth rate (CAGR) with simple average returns. Simple average returns might be easier to calculate but can often lead to incorrect assumptions about an investment's true performance.

We Take a Conservative Approach

Irrespective of Dave Ramsey’s math, as Certified Financial Planners we believe in taking a conservative approach to projected investment returns. While our portfolio returns have been in line with asset class returns, we would prefer our clients be prepared For example, our Large Cap equity returns have been about 12% annualized over the last 9 years, but we use 8% as the projected return for Large Cap in our financial planning software. We believe planning with conservative growth rates reduces the risk of falling short of your goals.

Ramsey Rule #3: Pay Off All Debt Before Investing

Dave Ramsey advises paying off all debt (except a mortgage) before investing. This advice can be counterproductive for many people. For example: If you have a 3% car loan or a 4% student loan, paying these off before investing, especially in a 401(k) with employer matching, isn’t the best strategy. If you fail to capture your employer’s 401(k) match to pay off low-interest debt you are effectively missing out on free money.

Financial Planning Isn’t One Size Fits All

At Ark Royal we think the path to financial security involves maximizing your 401(k) match from day one. We encourage paying off your credit card balance each month and paying down high-interest debt (greater than 8%) as soon as possible.

Ramsey Rule #4: All Debt is Bad

Dave Ramsey advocates for avoiding all debt except for a mortgage. This approach can be overly restrictive. Just a few examples where disciplined use of debt can be advantageous are:

Using debt to finance rental real estate properties.
Taking on debt for education (e.g., becoming a doctor or lawyer).
Wise use of debt to expand one’s business.

While Dave Ramsey’s admonition of avoiding debt is sound, it shouldn’t be taken as an absolute. Strategic and disciplined use of debt can provide opportunities for growth and financial stability.

Dave Ramsey's advice has undoubtedly helped many individuals escape debt and build better financial habits. However, his one-size-fits-all approach isn’t suitable for everyone, particularly those with higher incomes or more advanced financial goals.

The advantage of working with Ark Royal is that we create custom solutions tailored to your specific objectives, goals and resources. We invite you to learn how working with our team of professionals can help bring clarity to your financial life.

A Closer Look at the Dave Ramsey SmartVestor Program