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Dave Ramsey Confuses me

A week ago I wrote Dave Ramsey Scares me, for the fact that he forecasts the US stock market to grow at 12% as far as the eye can see and I think his disciples are ill-served by such prognostications. Over the past week, I thought some more on this. This is the same guy that talks about being debt free, paying the mortgage off as though it were a deal with devil. But wait a second, Dave, if I can borrow at 5% but get a 12% return on my money, why not just let that mortgage be, and start investing sooner? Let’s see what would happen if we did that.

I tried to keep the numbers simple here. A 5% mortgage even though rates are actually lower right now. A $250,000 starting balance. Simple means I ignore the mortgage tax deduction, I don’t need it to prove the point. If we do the math, we find the difference in payments between the 15 year and the 30 year terms to be just under $635. If you go with the 30 year mortgage, you’ll still have a balance after 15 years of $169,709.77. This is simply the nature of mortgages, the balance is not linear, it can’t be. The interesting thing is that if you invest that $635 and get an annual return of 5%, after 15 years you’d have exactly $169,709.77, the exact amount remaining on the mortgage. Dave however, believes 12% is the norm, so let’s skip right to that line on the chart. At 12%, you have over $317,000 in your account. This isn’t just more than the remaining mortgage balance, it’s so much greater that if you withdraw just the amount due on the mortgage, it’s still growing faster than the withdrawals. Of course, 12% per year is 1% per month, and 1% of this balance is $3,170 against a payment due of $1342.05. (Note – I also showed the account balance if the market only does 6,8, or 10% vs Dave’s 12. Still, some impressive numbers.)

I know there’s a reason Dave doesn’t recommend this approach, I just don’t know what it is. I continued to do the math, no more money out of your checking account to pay this mortgage, it all comes from the saving that $634. After another 15 years, you’d have just over $1.2 million sacked away. I’d really like to know the flip side of this, how one can reconcile a 12%/yr forecast and the maniacal payback of this low interest debt.

  • Ross @ Go Be Rich June 7, 2011, 8:03 pm

    I think you have to consider Dave Ramsey’s intended audience. If you listen to the show, a good half of the people that call in know nothing more about money than the fact that it’s something they get every payday. I think that the no-debt mindset is important for these people to develop because a lot of that mindset is what’s required to invest, such as disciplining one’s self to invest money at all as opposed to spending it on consumer products, to be disciplined enough to ride out the bad times in their investing strategies, and simply living within their means enough to have money left over to invest.

    I agree though, it’s almost counter-intuitive to keep paying off some of that debt when you could get the kind of returns Dave talks about.

  • Sun June 8, 2011, 4:01 am

    Investment returns are not guaranteed.

    Dave also mentions getting rid of all debt besides home mortgage. Not sure if he means if we have a mortgage already to pay that down last, or it is okay to mortgage a home.

  • Greg June 8, 2011, 9:21 am

    Where is the consideration of risk in your mathematics? There is risk in holding debt. Remove the debt and you significantly lower the amount of risk in your life. That is Dave’s message. And for the record, he actually does recommend your approach. Baby step 4 is to invest 15% of household income. This comes before baby step 6: pay off home early.

    The use of “12%” as the talking point is fair. The rest of your argument shows ignorance about what his program is.

  • Bill June 8, 2011, 9:53 am

    This actually comes up on his show several times a week. He would answer that you are leaving out ‘beta’ or risk. If you factor in risk and taxes you are dealing with a lot smaller margins. Granted right now with rates hovering around 5% the chances are better than normal of making some money.

    Dave likes to quote little sayings over and over and 2 that apply here are:
    ‘I have done extensive research and 100% of foreclosures happen on houses with a mortgage.’

    ‘If you pay off your mortgage and end up hating it, you can always go get another mortgage.’

    I have followed Dave’s advice and have paid off all my debt, 15% to retirement, kids 529’s are on track and I should be paying off my mortgage. I’m not however, I’m piling up the money in my brokerage account. When I have enough to write a check to pay it off I might but that is several years away.

    My thinking is that paying down on the principal in no way reduces short term risk. If I loose my job, next months payment isn’t reduced because I’ve been paying extra to principle for 5 years. Verses taking those 5 years of extra principle payments and having them in the bank. So if I loose my job and the mortgage needs paid I have 20-30k available over and above my emergency fund.

    I’ve done the math with my best guesses and paying directly on the principle has a guaranteed return and in most cases is a better deal than the way I’m doing it, but over the 5 more years I think it will take to save the money it will only be 3-5k difference and to me that is worth it.

  • Evan June 8, 2011, 1:04 pm

    I don’t listen to his show but for the other commenters that mention risk – does he talk about the risk needed to actually get 12%/yr?

  • JOE June 8, 2011, 3:11 pm

    I do understand risk. There’s more risk in having 3 years left on a mortgage and being unemployed than to have 20 years left, but an account than can float you for the next 2 years.
    There’s more risk in a shorter investing horizon. Dave writes off the lost decade by referencing the reversion to the mean. So in my example, if you fund the stock portfolio and achieve 12%, that’s great, but if it’s a lost decade, the next one will likely make up for it. If we consider “an investing life” to be 40 years, aggressive prepayment cuts that back to 25.

  • Kevin S. June 8, 2011, 5:47 pm


    A week ago I wrote Dave Ramsey Scares me, for the fact that he forecasts the US stock market to grow at 12% as far as the eye can see and I think his disciples are ill-served by such prognostications.


    actually he says it takes some research but there are some good growth mutual funds that historically have averaged 12%. He has also mentioned on the show that some years will be down and some years will be up and there is no guarantee for the future results. However, it is doing your homework to find that 12% or better average and only on funds that have been around at least 5 years and preferably with at least 10 years. You want a good track record. You do not want something that has only been around 1-2 years.

    When you compare everything he says then it makes sense.

  • JOE June 8, 2011, 9:19 pm

    Kevin, “past performance is no guarantee of future results.” Looking up track records of funds doesn’t really pass as research. In real life, no planner worth his salt will use such a number to forecast his client’s future worth.

  • Barb Friedberg June 12, 2011, 3:31 pm

    In what universe is a 12% stock market return viable? The historical stock market returns are 9% and most economists suggest that going forward, returns will be lower. As a country’s growth(GDP) slows, so will its stock market returns. The only place 12% stock returns might be possible would be in the emerging markets as their growth will be brisker than those developed economies.

  • JOE June 12, 2011, 3:46 pm

    Exactly!! Dave not only states the 12%, but stands his ground that’s what his disciples should expect…..

  • Credit Card Processing August 1, 2011, 8:37 am

    A discussion of Dave Ramsey’s approach to paying off one’s low interest mortgage while stating the stock market is forecast to grow 12%. This doesn’t add up.

  • JOE August 1, 2011, 8:51 am

    Exactly my point. Dave forecasts the 12% return and at the same time suggests paying mortgage as fast as you can.

  • Mobile Credit Card Processing October 13, 2011, 3:24 pm

    I’ve done the math with my best guesses and paying directly on the principle has a guaranteed return and in most cases is a better deal than the way I’m doing it, but over the 5 more years I think it will take to save the money it will only be 3-5k difference and to me that is worth it.

  • Smigrobustus November 26, 2012, 5:25 pm

    While I LOTHE coupling religion with money making, what the hell is so bad with DR telling millions of lower income people to live within their means, lowering debt, giving when u can, and investing, when you truly can? Most listeners will probably never have a ton of cash, so involved money strategies will never be important? It’s like working out…..the workout schedule for a world class athlete IS NOT the schedule that most of us will use or SHOULD use.

    Now, I don’t buy his mantra of ” living like no one else so you can live like no one else” cause I think many listeners will equate that with meaning you will live like HIM, which 99.99% never will. AND I find it hard to believe that someone who lives for TOMORROW for years and years will, all of a sudden, switch and start spending to enjoy luxuries.

    But, while involved, intricate investments will always claim victims, HIS plan will ALWAYS leave people better off than when they started…..and that’s a pretty amazing claim.

  • JOE November 27, 2012, 11:52 am

    In this article, I only address what I see as a contradiction that Dave focuses so strongly on debt repayment, including low cost mortgages, yet claims a 12% long term stock market return. In the big picture, I agree that Dave’s message is a good thing, no one can argue with “live within your means.”

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