Dave Ramsey: Financial Advice to Critically Evaluate

It pays to be discerning when it comes to exaggerated financial advice.

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Key points

• No one gets it right 100% of the time.
• Depending on more than one source for financial advice may be the best bet.

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Whether you love him, loathe him, or have never heard his name, Dave Ramsey does have followers, adherents who cling to his every word. Some of what Ramsey says makes a lot of sense. After all, debt suffocates financial dreams, and living beyond your means typically leads to trouble. However, there are some Ramseyism's we cannot get behind.

READ MORE: How to Pay off Debt

Pay off your mortgage early

The idea of living without a mortgage is pure bliss, and that alone may be worth something. But if your mortgage interest rate is considerably lower than the amount you could be earning on investments, why in the world would you choose to pay your house off instead of invest?

To get an idea of how off the mark Ramsey might be with this nugget, we looked at the average fixed 30-year mortgage rate in January of each year from 2000 to 2020. When we averaged those years, we came up with 4.67%. We wanted to include the years in and around the Great Recession because the interest rates were pretty crummy for a while there.

We also took a look at how the S&P 500 performed between 2000 and 2020. After adjusting for inflation, the S&P 500 earned an annual average of 6.76%.

Let's assume that someone purchased a $300,000 home in 2000, took out a 30-year mortgage, and had an extra $300 each month to either pay down their mortgage or invest in the S&P 500. How do those two monthly investments compare?

Financial Focus	Monthly Investment	Interest Rate	Outcome After 20 Years
Pay Off House Early	$300	4.67%	Home scheduled to be paid off 8 years, 7 months early, for a total savings of $83,320
Invest in Market	$300	6.76%	Adjusted for inflation, earnings of $143,773

The beauty of making regular house payments and investing the extra $300? Even if the value of the home purchased in 2000 has gone through the roof over 20 years, the homeowner still benefits from the extra equity, whether the home is paid in full or not.

We're not saying that no one should pay a mortgage off early. The point is that it's not the right choice for everyone. Investing is historically a better bet for anyone looking to supersize their retirement account.

READ MORE: How to Open a Brokerage Account: A Step-by-Step Guide

And speaking of returns

Ramsey loves to tell folks they'll earn 12% in the stock market. To that, we ask, "When? Who? And How?" There are so many things wrong with Ramsey's promise to his followers that we'll have to break them down.

Average annual returns are a small part of the picture

Let's imagine that someone inherited $1,000 and decided to open a brokerage account and invest the money. The first year was excellent, and the investment earned 100%. The following year was rough, and the investment lost 50%. A little simple math indicates the average annual return over those two years was 25%.

It was not 25%, and here's why: The first year, the investment grew by 100%, making it $2,000. The following year, it lost 50%, taking it back to $1,000. In other words, the investor was right back where they started two years earlier, with $1,000. In any book, that's an overall annual return of 0%.

Ramsey was using some old numbers and (too) simple math

According to Ramsey's website, his promise of 12% earnings is based on the average annual return of the S&P 500 from 1928 through 2020 (that raw percentage is actually around 11.64%). Although it sounds pretty impressive, this average does not account for volatility, hefty fees charged by some brokers, and inflation.

Remember our illustration comparing paying a house off early to investing in the S&P 500? There's a reason we used 6.76% instead of 11.64%. It's because 6.76% reflects actual growth after all other factors, fees, and disruptions are figured in. Being realistic about what you can expect to earn can prevent you from making big mistakes, like being overly optimistic or under-funding your investments.

No human being is all right or all wrong, and on occasion, we catch a piece of Ramsey's advice that is right on the money. That said, putting all your trust in one person – particularly when that person is top dog at his company and may or may not have anyone to tell him when he's off-base – is an unsafe practice.