Monday, November 9, 2015

Debt, Retirement, and The Problem With Dave Ramsey

This writer points out flaws with advice from the extremely popular faith-based financial guru, Dave Ramsey: http://frugalvagabond.com/2015/10/12/dave-ramseys-awful-advice/

If you watch the video, you'll notice how quickly he casts doubt on the motives of the person 
who's asking a perfectly legitimate question. This is not the behavior of somebody who is being honest! 
Remember, Dave, Jesus said: "No good tree bears bad fruit."

I actually disagree with Frugal Vagabond on the following points:

1) Frugal Vagabond writes that Ramsey's "debt snowball" method (paying off the smallest debt first to get a 'psychological win') is inefficient and prolongs debt. Mathematically, this is perfectly correct.

But psychologically, the cleverly-named "debt snowball" may actually be the most helpful. After all, the best mathematical approach of paying off the highest-interest debt first is only useful if you stick with it. And, often, people don't stick with things that are unpleasant but necessary. After all, why face reality when you can continue buying what you can't afford?

2) Frugal Vagabond and Dave Ramsey both agree that debt is poison. To a large extent, they're right: too much debt can be disastrous.

However, a loan (i.e. debt) can sometimes be used as leverage to buy or begin an income-producing asset. If you take out a loan to buy manufacturing equipment so that you can start a farm equipment manufacturing company, you're making constructive use of that money. That's leverage! If you take out a mortgage to buy a second house that you'll rent out to tenants, you're using that debt as leverage.

Debt is bad when it's used to buy a BMW so you can show off to your friends. But debt is good when it's used toward an income-generating asset. As always, advice never holds 100% of the time!
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Now, for my own observations on Ramsey's advice: I went to a Dave Ramsey Financial Peace University seminar at my local church almost a year ago. They showed a video in which Dave gave some good advice.

But then, at the end of the video, he really pushed term life insurance with an urgent, high-pressure sales pitch. Ramsey's partner is a website that doesn't always give you the best deal, and in which Dave has a significant advertising interest.

Gallingly, he used a couple vivid case studies and other techniques to play on your emotions and manipulate you into wanting to get term life to "protect your family" and guard against a worst-case scenario in which you can't work anymore.

This isn't to say that term life insurance is always a bad deal, or that he's only recommending it because it gets him commissions and advertising revenue--but to give this blanket advice to everyone is misguided at best, and dishonest at worst (especially considering that he benefits from it!).

I was shocked at the manipulative tactics he used to influence people, especially since Dave bills himself as a "faith-based" financial advisor. A Christian man would surely never use his faith to manipulate others to benefit himself financially, right?! RIGHT?!

Perhaps Dave missed Bible verses like this onethis onethis one, this one, this one, this one, and this one...

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There is some good (though not very specific) advice on how to get rich at this link with terrible grammar: http://www.youwillgetrich.com/money/getrich

You CAN get rich quickly, if you're willing to take huge risks and invest countless hours into making your startup company succeed, if you're trying to break into a quickly-expanding market at just the right time, if your competitors are weak or nonexistent, and if a few lucky breaks go your way.

But, of course, it's highly likely that all your hard work, risk, and dedication will not result in you creating the next Microsoft. So try to get rich quick at your own risk...

Having multiple income streams (like rent, dividend payments, a full-time job, and an Internet storefront) will ameliorate your risk. That's a less risky (but very difficult-to-achieve) way to earn a lot of money in short order.

Getting rich quick is possible! Getting rich easy isn't.

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I love this description of why your goal needs to be financial independence, rather than retirement per se: http://momanddadmoney.com/financial-independence/

Retirement conjures images of feeble old people who lack the energy to keep going. But if you're financially independent, you can continue to work. Or you can volunteer. Or you can start a business. Or you can homeschool your children. Or you can travel to Nepal in search of spiritual enlightenment. Or some combination of all the above!

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If you're already in debt and feeling hopeless, understanding how compound interest works against you is helpful: http://www.enchumbao.com/a-shockingly-simple-but-overlooked-method-for-getting-rid-of-debt/

Remember that YOU have the power to make debt, and you ALSO have the power to eliminate it! Start now, and after making a bit of progress, you will feel much more empowered! :)