Many of you are familiar with the popular radio talk show host Dave Ramsey. Dave is well known for helping people get out of debt. Dave Ramsey heavily markets his “Financial Peace University” course and products through evangelical churches. Dave Ramsey should be given credit for his work in educating people about the devastating effects of debt. That horrible thing that requires you to pay back others with interest. However, when his focus shifts from becoming debt free to capital accumulation, he is often just plain wrong.
I (David) encourage you to not take my word for it. Do your own research. Much of what Dave Ramsey advocates when it comes to wealth accumulation can be proven wrong with math. Just one example from his book is below.
A Quote From Dave Ramsey’s book.
“A Government Gift?”
“Billionaire J. Paul Getty says that one of the keys to building wealth is not to pay taxes on money until you use it. So you shouldn’t pay taxes on retirement dollars until you use them. You should always invest long term with pretax dollars. What if I gave you $2,000 each year and these were the conditions: You can earn all the interest you want on that $2,000 – and keep it – but you have to give the $2,000 for each year back to me when you are seventy years old. If you were thirty-five years old and we did that for thirty-five years at 12 percent, you would have $863,326. You do have to give me back $2,000 x 35 years or $70,000, but you still net $793,326. If you save $6,700 per year in a pretax investment like a 401(k) or SEPP (Simplified Employee Pension Plan), the above scenario would have occurred. If you bring that $6,700 per year home, it turns into $4,700 by the time Uncle Congress gets his greedy cut, so $2,000 of that money is Uncle Congress’s – which, if we invest pretax, we get to keep for free all those years. What a deal!
I have heard the ridiculous pitch that it is better to pay your taxes today because tax rates may be higher by the time you get to retirement. The only people who believe that argument do not understand the power of the present value of dollars or are life insurance salesmen.”
~(Dave Ramsey, Financial Peace Revisited, Penguin Group, page 154-155)
First, do you really believe the government only takes that which you put in? Do you really believe that the government will allow you to contribute $2,000, pay no tax on that $2,000, let it grow, and then only pay them back the $2,000 when it’s time to take it out? The truth is that the government gets to confiscate as much as it wants of your full account balance. How? The government gets to decide what tax bracket you’ll be in at the time of withdrawal.
FACT: If all things are equal meaning the rate at which you are taxed are the same today, and when you retired, THERE IS NO DIFFERENCE between pre-tax and after tax contributions. You will end up with the EXACT same amount of money. This is a mathematical certainty.
Think about it. If you postpone paying your taxes to a later date, essentially you are subject to a future unknown tax calculation that you have no control over. Only the government decides how much they are going to take. Take a look at USDebtClock.org and decide for yourself if you think taxes are going up, staying the same or going down in the future. If you believe that taxes are going up in the future, then deferring your taxes to a later date is a bad thing.
In future shows we will break down some more factually inaccurate teachings of Dave Ramsey. You may ask yourself, how can you claim that some of what D.R. is teaching people is not true.? Well, it can be disproved with Math. We encourage you to be a critical thinker. Just because someone writes something in a book, or markets their products to you in your church doesn’t make it the gospel (no pun intended). Be a critical thinker. Think for yourself.
Tune in, Listen and Learn……