Why Does Something So Bad Feel So Good?
We have several friends who have been following the Dave Ramsey approach to get out of debt. Ramsey is one of the biggest names in personal finance. Dave’s basic message is one of personal responsibility, getting out of debt as quickly as possible and avoiding all future debt. All of this sounds great around here. We observed the excitement and feeling of empowerment our friends had upon reaching this goal. They credit Dave and his principles. We witnessed their success just as we were kicking off this blog. So I wanted to see what this massively successful person was teaching and try to figure out what made him so popular.
After taking a few minutes to look at the Dave Ramsey website, I was left scratching my head. His advice ranges from standard conventional wisdom, broad generalizations and absolute rules. He uses mathematic assumptions that are flat out wrong. So how did Dave become a financial “guru”? Why do so many people feel so good while following advice that is often times so bad?
The point of this whole post is not to bash Dave Ramsey. He has helped millions of Americans, including our friends, by motivating them to take action to take control of their lives by eliminating debt. His core message is a very positive one. I am also not trying to be insulting or condescending to anyone who has followed Dave’s advice (or used any other method) to overcome large debts. You have done something truly special by taking control of your financial lives. You should feel very good about yourselves! Congratulations!
The point is to warn you of the dangers of following ANY specific advisor, guru or system blindly and to encourage you to question everything. Blindly following someone else’s system or plan will make them rich, but it will likely leave you with conventional results (or worse). We learned this ourselves, blindly following the advice of our financial advisor for years without gaining a full understanding of the decisions we were making with our money.
Everyone’s situation is unique. That’s why this is called PERSONAL finance. There is no one size fits all solution in personal finance. You need to learn both the math and psychology behind making good financial decisions. You need to develop appropriate risk management strategies. You need to understand tax regulations as they relate to your situation. You need to develop a plan specific to you, and you must follow it. Unfortunately, there are no shortcuts. You must continuously learn and evolve to gain the best results.
Let’s compare our advice to Dave Ramsey’s advice. Dave loves to use broad absolute rules. Everyone should use a financial advisor, purchase term life insurance and long term disability insurance. Nobody should use credit cards. Sorry but at this blog we don’t accept much of anything as absolute, and we differ with his opinions on all of these points.
Dave emphasizes psychology over math in developing his principles. His calling card is using the “debt snowball” to get out of debt. By paying off small loans first you begin to see results quickly and begin to develop some momentum. However, the math behind this can be very wrong. Depending on the size of debts and the difference in interest rates, this advice could cost a person thousands of dollars and months or years of extra payments. I certainly understand that psychology is often as important, or even more important, than math in obtaining financial results. However, you can’t just ignore the math and hope it will go away.
Math is even more important in investing where small errors will be compounded over long periods of time. Let’s look at Dave’s investment philosophy. His advice is to invest in front loaded mutual funds paying 5-6% of each purchase in commissions, avoid cheap and tax efficient ETFs and always use a financial advisor. We’ve done exactly what Dave suggests when we started investing (I’m not blaming Dave Ramsey – this is pretty standard conventional wisdom). I have explained how bad this advice is in a series of posts beginning here. Dave assumes that you should be able to withdrawl 8-10% of investments annually without consuming the original investment amount. This is at least twice the amount suggested by current research. Almost across the board, his math assumptions are WAY off.
In defense of Dave and anyone else who is trying to educate others, I believe they have good intentions. They are looking to develop a universal system to help many people. Many Americans are addicted to cheap credit and live paycheck to paycheck. Therefore, just by starting to pay attention and take some action you will likely end up doing better than this majority who does nothing. Just realize, this is only the first step to living a life of prosperity and financial freedom.
As in all areas of life, you will get out of this journey to financial independence exactly what you put into it. If you blindly follow conventional wisdom as pushed by the media and financial industry you will most likely end up with conventional results. This most likely will include working until age 65 or later to possibly reach a secure retirement (or maybe never achieving this).
Here at this blog, we are encouraging everyone to reach a bit higher. We are looking for solutions to achieve financial independence in as short a time as possible, allowing us to pursue whatever it is in life that we want.
We also encourage you to question EVERYTHING that you read and hear. In fact, we would love it if you would start here today.
***Since having our “Dirtbag Millionaires” post featured on the Rock Star Finance site last week, we’ve had a huge boost in our site traffic and number of followers (Thank You Jay$). However, very few of you are leaving comments. If you think we have oversimplified an issue, made it confusing, or are flat out wrong, let us know. We’d love to start a discussion. If you have found a way of doing things better than we have, we’d love to hear about it. We are learning every day, both on the finance and blogging side of this adventure. If you have a topic that you would like to see covered, send us a note. We look forward to hearing from you!
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