Money, Mathematics, and Personal Behavior – Dave Ramsey is Right!

January 9th, 2007 • Related • Filed Under • by admin

Dave Ramsey has had a great amount of success with his radio show that teaches good old fashioned common sense financial advice. He is certainly not without his detractors though. There are a lot of people who describe his advice as out of the main stream and mathematically incorrect. Both of these statements are true, but that is precisely why he has gotten so popular. Ramsey has made an observation that very few people have. Personal finance is much more about personal behavior than it is knowledge about money itself.

Ramsey is often criticized for teaching people to do things which technically defy mathematics. Recently one blog called Territory Michigan attacked Ramsey for suggesting that people pay off all their debt. The blogger gives an example in which a person with a low interest rate student loan can make more money in a money market and pocket the difference then pay the loan off payment by payment over the next decade.

This is where this blogger and many other of Ramsey’s critics get it wrong. Ramsey often makes the statement on his show that, “If we were doing mathematics, you wouldn’t have borrowed money in the first place!” Often people will ask him if they should pay off their debt largest interest rate to smallest, but he teaches that you should pay off your debts smallest principal balance to largest. The reason he teaches this is because personal finance is much more about behavior than any knowledge you know about finance. Paying off a few small debts first will give you some easy wins, making you feel that, hey, this plan really works, and will encourage you to continue!

People who criticize him often aren’t thinking straight, because they do not factor in risk which is a needed part to any financial calculation. You could go to Vegas and put all of your money on 28 black, but you know you wouldn’t do this because there’s so much risk of not winning, even though the rate of return would be enormous! Whenever you borrow money, there’s risk involved that somehow you will get behind because of a financial problem, or that the company will mess with you financially (it does happen!).

These critics often also use very unrealistic examples. The blogger at Territory Michigan uses an example of a 3% student loan, which almost no one has! Dave Ramsey’s mathematics may be incorrect, but they actually work! He has over 3 million listeners and is a multi-millionaire. His teachings have gotten hundreds of thousands of people out of debt, they work! Who are you going to listen to, a critic with a Weblog, or a guy with a lot of money and thousands of success stories?

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michelle

well, of course he's a multi millionaire... he's got HUNDREDS of THOUSANDS of listeners, that are doing what he says, and sending him 25.00 for a book that cost him 8.00 to produce.... so, let's. see... that's a 17.00 profit on each book, sold to hundreds of thousands of listeners, plus all of the people handing over hard earned money to go to a seminar to hear common sense (don't live above your means!), and buying even MORE products out in the lobby, no doubt... of COURSE he's a multi millionaire! what does he do other than (with passion, obviously) tell people things they SHOULD already know...? does he have a job that he goes to, or is his fortune all from people that just did exactly what he told them NOT to do... spend money on something they really didn't need? (and thusly putting that money in HIS pocket... the guy that DOESN'T need the money.)