Dave Ramsey is a radio talk show host and probably the best-known financial guru in America. His book Complete Guide to Money (2011) serves as the handbook to his Financial Peace University, a biblically-based video seminar given to thousands of people each year. In the book’s introductory chapter and its Afterword, plus several times in between, Ramsey asserts that “personal finance is only 20% head knowledge. The other 80% is behavior. This book gives you the head knowledge, but no book alone can do much to change behavior.”
I disagree with Ramsey on both counts. The book is woefully weak with respect to head knowledge, with many half-baked ideas and bromides that can’t withstand scrutiny. A discerning, disciplined reader would be much better off reading Scott Burn, a nationally-known financial columnist who actually understands financial math.
But the book is strong with respect to changing behavior. Wikipedia characterizes Ramsey as a motivational speaker, and the book obviously was drafted to motivate conduct that an undiscerning, undisciplined person might be able to adopt.
The book is filled with Ramsey’s insights:
- Differences between a man and his wife add spice to life, but the couple need to have an understanding on religion, in-laws, parenting, and money.
- Parents need to teach their kids to work (money comes from work, not other people), save, spend, and give.
- Whenever someone asks for financial help, consider whether this will truly help or will it be giving a drunk a drink.
- By developing a budget and agreeing to live according to it, a couple can automatically remove those continual money fights that plague many marriages.
- Too often, young adults want to fast-track themselves into the standard of living that their parents spent 20 years achieving, and they do this by accumulating debt.
- When in the process of paying off all debts, pay off the smaller balances first, not the balances with the higher interest rates, because it is important to achieve quick wins to sustain behavior modification. (Crazy!)
- Paying off debt should take priority over saving for retirement, even with a 401k with an employer match. (Crazy!)
- “You should always – always – roll your company-sponsored retirement plan into an IRA when you leave the company.” Ramsey suggests this because a regular IRA gives more options, but he fails to consider that some company plans (mine) have much lower expense ratios than even the best IRAs, like Vanguard’s. (Crazy!)
- A 401k should be rolled into a Roth IRA if you have saved more than $700k and you have adequate existing liquidity to pay the taxes. (Crazy because most other financial agree that deciding between Roth and non-Roth is subjective, not automatic.)
- The Pinnacle is the point in your life when your savings and investments make more money for you in a year than your salary does. I remember a time when my co-workers and I, later in our careers, would get monthly 401k statements that exceeded our wages, and once we might have even received a quarterly statement that exceeded our wages, but none of us ever pulled that off for an entire year. An interesting concept, nonetheless.
- Never use prepaid tuition. (Crazy because Ramsey assumes that tuition inflation is no greater than the COLA when in fact it has far exceeded the COLA for decades.)
- Avoid mobile homes and timeshares because neither can ever be sold on the secondary market. (Crazy.)
- Never do a reverse mortgage because it merely gives a person who has paid off debt the chance to go back into debt. (Crazy because selling off you equity does not place you in debt.)
Bottom line – as a guide to modifying the behavior of people who are heretofore unsuccessful in dealing with their personal finances, this book probably works. But it is not appropriate for successful people wanting to fine-tune their financial game.