SHOULD YOU LISTEN TO DAVE RAMSEY??? A FEW THINGS YOU SHOULD KNOW
Dave. We’re not mad at you…we’re disappointed.
Dave Ramsey has been on the scene for nearly thirty years providing incredible resources and lessons to people who are looking to improve their financial situation. He has helped so many people over the years.
They say you should listen to people who are where you want to be and have been where you are now. Can we say that’s true for Dave Ramsey? Sure he’s where we want to be but has he lost touch?
He says to save six months worth of expenses before saving for retirement. Ramsey was broke when he started to build his empire. When you have no money you are motivated to do more to improve your situation.
He says that you need to stay in and make all of your meals. No eating out. When was the last time Dave Ramsey had to prepare his own meal with a net worth of +$200 million?
Just some food for thought
Dave Ramsey has repeatedly insisted that you can expect to make a 12% return on your investments. He claims this is based on the “historic average annual return of the S&P 500.”
Here’s the problem. This 12% figure is based on the simple average return of the S&P market between 1926 and 2019 — not the Compound Annual Growth Rate (CAGR). While this may sound technical, here’s what it means.
Let’s say a $10,000 investment went up 25% one year and down 25% the next year. The simple average return would be 0%. But, in reality, your investment would’ve been down around 6.25%. Here’s why:
- $10,000 + 25% of $10,000 = $12,500
- $12,500–25% of $12,500 = $9,375
Dave’s use of the simple average return of the S&P 500 makes it appear there was a 12.1% average annual return on the S&P because it doesn’t take into account the actual annual growth of your money. Instead, the CAGR for that period, which is a better measure of how an investment actually grows over time, is 10.2% for the S&P 500.
Unfortunately, if you base your retirement projections around Dave’s assumption that you’ll earn 12% per year instead of around 10% over time, you could find yourself with far less money than you expect. In fact, investing $5,000 per year for 30 years with an average annual gain of 12% would give you $1.21 million while investing the same amount at a 10% average annual gain would leave you with just $833,470.
You can’t afford to make an overly rosy assumption about how investments will perform when you’re setting savings goals.
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