A while back, I was in a job interview for a different role at my present employer. The interviewer, who knew of my personal finance writing background, concluded his round of questioning with this:
“So, what do you think about Dave Ramsey?”
The question caught me off guard and the clock was ticking for my response. In milliseconds, the following questions dashed through my head:
“Is he a Dave Ramsey fan?”
“Did Dave change his life for the better?”
“Has he read my Dave Ramsey Baby Steps improvements article or some of my previous thoughts on Dave?”
“Is he going to take it personally if I don’t praise Dave?”
“It’s a trap!!”
Less than a second later, I answered with the following:
“Well, I think Dave Ramsey is good for a lot of people as a starting point, but can only take you so far.”
Phew. OK, stayed true to my beliefs, but avoided offending a possible fan of Dave Ramsey. Success. Or so I thought… I didn’t get the job.
Rewind the clock 10 or so years earlier…
My first foray into the personal finance topic came in the form of a gifted book – The Wealthy Barber: The Common Sense Guide to Successful Financial Planning – which I promptly devoured in one day. The book, written by a David Chilton (a Canadian with universal health coverage, a good pension plan, and other social insurance upgrades) was revealed to be a fictional story about a wealthy barber who teaches his customers some dead simple rules for becoming rich. The primary takeaway of the book is “Invest ten percent of all you make for long term growth. Save 30 dollars a month from age 18 to age 65 at 15% annual return, and you’ll end up with 2 million dollars.” This 10% saving solution was lifted from another all-time personal finance best seller, The Richest Man in Babylon. 10% to $2 million?! Yeah, I can do that. We all could, with a little effort, right?
The book was first published in 1989 when 15% annual returns were considered commonplace. And 15% returns, on $30 monthly savings, wouldn’t have much of an impact until after the 40th year of compounding them… but never mind that! The book went on to sell over 2 million copies.
These days, just about everywhere you look, the mainstream personal finance gurus all uniformly recommend a 10% personal savings rate (Ramsey is at 15%), to the point where it has become a self-fulfilling prophecy. To recommend or save anything more than 10-15% would be considered “extreme”, in part, because it has become the standard. Everyone has something to sell, and when the average personal savings rate is 5%, 10% sells to the mainstream because it is attainable and convenient to present habits.
That’s all fine and dandy, BUT… 10% will never result in life changing money.
You may or may not (likely) be able to achieve a comfortable retirement at age 65 at 10%. There are a lot of other factors at play:
- when you start saving
- your investing discipline
- the expense ratios of your investment options
- any extended length of unemployment
- market returns
- how much you spend in retirement
10% might get you there if all of the following happens:
- you start saving at age 22 and don’t stop
- you always leave your investments in the market and don’t sell in panics
- you invest in passive funds with low expense ratios
- you don’t suffer unemployment for any extended length of time (or other financial setbacks)
- market returns average 10%+ over those 40+ years
- you spend notably less in retirement than you did in your wage earning years
- etc. stuff doesn’t happen
In other words, it leaves you with zero room for error, risk, and setbacks. Zero room to breath or let life happen to you.
In fact, if you simply put your savings in to a conservative bond that matches the inflation rate, you are only saving up one year of income for every 10 years you work. A 40-year career could result in just 4 years of income saved.
The only guarantee with the 10% plan is this: at most income levels, your savings will never result in life changing wealth.
You will be at high risk or huge setbacks. You will be dependent on Social Security. You will not be able to retire early or maybe at all. When you retire might not be your choice. You will not be able to take career risks or pauses. And your money won’t start showing the power of compound returns until the final few years prior to official retirement age.
Mainstream financial gurus don’t exist to guide you to taking life-changing actions, they exist to sell easily digestible cookie-cutter solutions to a huge audience that is close to universally awful at all things personal finance. 10% results in sold books, 12-step financial seminars, and convenient promises, but it won’t get you to where I believe most people want to go.
And it’s not just your personal savings rate – it’s everything! 3-6 months emergency savings, excessive life insurance, 2 used luxury cars, only 1-2 expensive international vacations per year. Mainstream personal finance gurus sell you what you want to hear – not what you need to hear. The second they go in to non-mainstream, uncharted advice territory, they are labeled as extremists and pushed out of the mainstream.
Time for an attempt at an analogy that hopefully doesn’t fall flat on its face…
If your personal finance level is akin to a toddler on a tricycle, mainstream personal finance gurus and their 10% rule can get you to 5-year old on a 16-inch Huffy w/training wheels, but they won’t get you to finely tuned long-distance cyclist on a carbon-framed Specialized road bike levels (or even single-speed granny cruiser levels for that matter).
So… I’ll let this question hang…
What do you want? The convenient mainstream path, at the same or marginally faster speeds, for the rest of your adult life? Or, path-changing, life-changing actions?
Mainstream may not get you there.
I started with a Dave Ramsey course a few years ago, and it left me wanting more, which is how a google search led me to your website. I very much agree with your earlier statement that DR is a good starting place but he oversimplifies a lot.
Thanks for all the research and diligent posting you have done over the years! You have certainly enriched my life and that of my family both intellectually and pragmatically.
I recently read an article on the “Art of Manliness” blog (yours and that one are my top 2) about giving money versus spending in terms of achieving happiness. It motivated me to give back (or forward) more, but poses an interesting question when you weigh charity with savings. I value both, and am curious how you weigh charity/philanthropy with savings, especially in the context of regular charity vs regular savings.
Thanks for the consistently excellent reads!
Thanks for the back-patting, Tom.
Philanthropy is an interesting topic. I’ve worked for a non-profit, I’ve volunteered at non-profits, and I’ve donated to non-profits. I don’t have a prescription for how much of savings people should give to philanthropic efforts. Everyone is at different stages in their personal savings rates and net worths, which have a large impact on what you can give to others. Personally, I have not been as philanthropic as I could/should be, however, that is an area that I intend to focus on intensely in the near future.
My goal is to save 50% or more of our income. Achieving this goal means not having super fancy cars, or buying super fancy clothes or the latest gadgets. However, I think that my husband and I have plenty. We don’t do without. If we ever want anything, we simply get it.
I’ve come to terms with not wanting to be a super saver. I’m not willing to give up some of the activities that some of the intense savers would definitely part with, and in turn, I realize that I’m not going to be retiring when I’m 50. That being said, I’m crushing that 10% number.
I like to think I’m somewhere between the Huffy and the carbon fiber road bike. I’m on a cruiser. I might not get there as fast as some, but my trip is comfortable and I’m enjoying the ride.
Everyone’s circumstances vary, but most of the readers here can probably crush 10%. 10% sets the bar very low.
I like the cruiser analogy. ;-)
Love the analogies G.E. per the usual.
The problem is that too many people still view saving, in any capacity but ESPECIALLY for retirement, as an option.
My company finally started auto-opting people in at 3% then raising it 1% a year until they get to 6% and are taking full advantage of the company’s 50% matching up to 6% (so you get 3% free).
Currently I’m saving 22% in 401K, $5500 in a roth, $3300 in a HSA, and any additional I’m getting in other things: Lending club, etc.
That all being said it is NOT easy for everyone to save that much but 10% is MUCH easier than most people think.
You really don’t even have to give up that much…just make choices. Once you start paring down your expenses / spending it gets easier and easier and easier until you start to enjoy things that cost nothing the same or more as the things that are expensive.
I don’t drink Milwaukee’s Best Ice any more but I’m not drinking Chimay every day either!
I would argue that the 10% rule is like a 5 year old on a Huffy w/training wheels…
It might more closely aligned with a 5 year old on a Huffy with NO Training wheels… If everything aligns the outcome will work, but a bump in the road a curb to go over, or a cross street to stop at will mostly result in a crash and some bruises…
In my opinion the first 5 years out of high school or college are the MOST critical. Low cost index investing and capital accumulation are important to get things rolling and start a little next egg that will accumulate for some years.. and your contributions will just help it along…
Saving for retirement is not about percentages or rates of return, it’s about looking at the situation and responding and planning. Historically, there have been many avenues to a successful retirement other than saving a specific percent for a certain number of years. Buying a house as soon as possible so that it would be paid off while one is young allowed a significant amount of money to be put away starting in middle age. If someone owned a business, retirement was often taken care of by the profit from selling the business. (Think of the old drive in theaters, that size lot became real valuable as the city developed in that area).
So, instead of boosting your savings rate, your suggested retirement plan is to buy a house early in life (and divert funds to a home instead of investing so that you earn less than inflation on home valuation increases) or start a business that by some small chance might succeed and get big and can be sold off?
Owning a house is not an investment, it is a reduction in living expenses, in much the same way as a paid off credit card reduces the money going out of your pocket (and the advice is always pay off the credit cards). All the suggestions that are given out, always have implied “all other things being equal”. So starting saving at 20 while paying rent compared to starting saving at 30 while paying rent. That’s much different than starting saving at 20 while paying rent and basically buying the property for the owner, compared to buying a property at 20 and paying it off as fast as possible and then saving at 30 when you own the property free and clear. By not paying any mortgage you can put both the normal savings and what was the mortgage into retirement.
It’s not that I’m saying that people should do things one way or another. To say that is to fall in the same trap that most “Advisers” do which is to create this ideal of people and their work and spending and finances and map everyone to that same pattern.
Different people have different habits. There are a significant number of people who are surviving retirement solely because they bought a house much larger than they needed. The higher mortgage payment left less money in their wallet to spend on expensive cars or more meals out or more vacations. After all, money put into a house that loses value to inflation is still worth much more than money that has no value due to being spent on cars, or vacations, or consumed in other ways.
Wanting to use the proceeds of selling a business as a retirement vehicle is not a bad plan. Most businesses that fail do so within a few years so a failed business would not keep someone from saving for retirement their whole work career. It has nothing to do with “getting big”. It is whether or not it’s the type of business that can be sold or not. You can sell a hardware store but you can’t sell a business where you are the computer consultant. It’s also about whether you spent 40 years leasing, therefore buying someone else’s land, building, and equipment or you own it yourself.
I think your answer at the interview was spot on, along with Tom’s response. I’m 24 and finished a course by Dave Ramsey about 2 years ago. It really helped me understand a lot of financial terminology and concepts that were new/unclear to me, or at least that I had never put into practice. Once it got me thinking along the right lines, I kept diving further on my own and “graduated” to following blogs like yours and MMM’s. Even though he may be oversimplify, one thing I think DR is good about is focusing on behavior more than the math in away that makes personal finance accessible, engaging, and effective (to those who struggle with debt in particular).
My husband and I are currently debt free with a ~50% (or more) monthly savings rate. (Most is retirement, but some is for a house so we can stop renting sooner, so we can redirect rent money towards retirement). We’re investigating building a tiny house. :-)
As for philanthropy, giving is very important to us (right now ~17% monthly). Even though this giving is technically slowing down our progress toward financial independence, we believe all we have is from God and want to honor that by giving back and helping others right off the bat. (You can’t take it with you!) In fact, for us, generosity is one of our main motivators for our whole financial independence journey (in addition to desire for flexibility and to be there for kids whenever we have them).
I like how you mentioned the variety of ways that you’ve interacted with non-profits. In the long term, we want to have the freedom to do any and/or all of those types of things by living simply and loving others with our time, energy, and money. And in that sense, I think that’s where I’d fall back to following DR’s “Seventh Baby Step” of managing money well so we can give generously.
Hey, by the way, keep up the good work!
The context you missed dramatically in your comparisons was inflation. Even if stock market returns continued at 15% annually like some years in the 80s, investor wasn’t gaining much ground since inflation was often double digits. Your returns after inflation (and taxes) are what’s important. Would you rather make 15% with 14% inflation or 6% with 1% inflation?
Inflation doesn’t impact my argument that mainstream actions and 10% savings is not adequate at all.
I think his point was that 10% wasn’t so much back in the 1980s either, not that we should not save more than 10% of our incomes if possible.
My first introduction to personal finance was the Wealthy Barber as well! It’s funny to think back and see how the ideas in that book seemed like the goal, and how blogs like this blow the cover off of financial independence concepts.
I think it comes down to redefining what’s “reasonable”, coming in cold and having the Wealthy Barber as your guide sets a much lower bar than what I know consider “reasonable”.
The majority of America is not even saving 10%…. They are barely even saving 2%…
Right. 10% is at least a start and ahead of the median American. If one has a 401(k) with matching money, that 10% might be 15% after match. In which case, if one starts young enough, the numbers can work.
the 10% rule should be used as an absolute minimum. I try to take my monthly savings rate above 70% by saving money and making more money using different income streams. I always pay off my debts and save in investments account and reinvest dividends for faster growth. I hope more people strive to save more than 10% because it does not guarantee success.
No doubt! I think that everyone should be saving a minimum of 20% of their income … And that should be without really breaking a sweat! I do think that Dave Ramsey and others are good starting points if your life is a complete financial mess, but for those of us that are after FIRE, it doesn’t even come close to being what you need to do .
However given that most Americans are in awful financial shape , i’m glad that those people exist .
I agree with the sentiment on Dave Ramsey. I don’t know if he said this or if it was someone else’s take, but I think it’s appropriate…
His strategies aren’t the best or the most efficient, but if you’re trying to get someone who smokes two packs a day to quit, and they cut back to one pack a day.. isn’t that a success?
I have never read a Dave Ramsey book or any other financial guru’s book, and I’m not sure I ever will. I think some people who rely on what is in these types of books are expecting a one size fits all investment/savings plan. They don’t take into consideration other factors and get frustrated when their not wealthy in 5 years.
I do love the entertainment value of Dave’s radio show and glean a bit here and there. I like to compare Dave’s system to Atkins diet or the biggest loser or boot camp. It’s not really designed to help healthy people get healthier. It’s designed to whip fat people into shape. (Although, admitting such would damage their marketing positions.) If you can’t eat a chip (or use a credit card) without eating the bag (paying the card off in full each month), then lay off the carbs (cut up the cards)! But if you can handle yourself, there’s nothing wrong with a handful of Doritos (rack up those airline miles)!
Man, you guys are rolling with these analogies. Love it.
What a great article,I’ve only begun my financial journey but after reading many of the “financial gurus” I come back to reading articles like this. It makes so much more sense to grow more than 15 percent in saving.
Well some people might not be good with money, and 10% would be a good place to start. But you do have a point about your post. However, I simply see this book a beginner or intro book. Hopefully this book can lead to become more curious about money.
you certainly have that right.. infact I would say most people are just really bad with money….
I’m seeking some advice for my particular situation. If anyone could provide some suggestions I would greatly appreciate it.
I am 29, single living with a good family friend roommate in Southern California. I have a relatively stable job making $84,000 with one month of paid vacation and PPO 80/50/50 ish health and dental insurance plan paid for.
I have about $50,000 in debt. About half of that is a car loan debt. The rest is student loans and credit cards. In three months I will be moving within walking distance to work and selling the car and all the expenses that go along with it, about $966 a month for everything based on current usage trends.
That will cut me down to roughly $25,000 which I hope to aggressively pay off in a year.
I have gone to using cash to pay for things. I had a couple recent big financial bills of $1000 vet bill and $3000 dental bill. I have really bad teeth and there is always something that comes up with them. The pet has been adopted by another family so that is another expense out of my monthly budget. It seems like there is always something that comes up that sets me from paying off the debt more rapidly.
I cook a lot more and bring my lunches to work often. Though I like to shop at Trader Joe’s and farmer’s markets, which the food is of much higher quality, but pricier compared to the stuff you find in the big box grocery stores. I guess I’d rather pay for food then related health concerns later. I spend about $350 a month on groceries and $250 eating out.
I don’t like coffee. My Starbucks is a $1 soda from the gas station.
I have an iPhone 5 on a discounted no-contract cell phone service for $40 a month.
I have no desire to buy a house, especially in the real estate market where I am at.
How do people get ahead financially in high cost of living areas? Do I not make enough to live here? Should I make more money by getting a second job? I feel like I am challenging myself adequately in my current field, but there are other areas of life and work I would like to explore on a part time level. Get married? I’m gay and have all the stigmas to deal with what goes along with that.
Seeking guidance and grateful
I used to work as a software engineer, working for consulting firms on and off so I lived in many places. There is an advantage to living in a high cost area if your salary is also higher. Any given percentage of saving is more money and the ratio of your debt to your income is lower. If you can pick up any part time work in your high cost area, that can help because it’s income beyond the income allocated to paying expenses.
Only move to a lower cost of living area if you can keep your salary high, such that the new employer only looks at the numbers when offering a job. This effectively gives you a raise.
You will find it unusual to move to somewhere where you will not need to have a car and the associated costs.
As far as owning a place. If you are willing to live in any given place, and there is an opportunity to buy, you pretty much have a choice of do you buy the place for yourself or do you buy the place for the landlord. Ignore the realtors who tell you that a house is a good investment, it’s generally not. Ignore the people who tell you that a house is a bad investment, the main reason for buying a house has nothing to do with investments. You buy a house so that over the long run it’s less expensive than renting. I have been in my condo since 2002 and my total costs (mortgage, condo fees, maintenance, taxes, insurance, …) have been less than what I paid in rent for quite some time. In 2017 the mortgage will be paid and my costs will be even lower. When I move I get to sell the unit and get some of my costs back.
Thank you for sharing your experience. I am a software developer as well. I think my most recent hiccups with unexpected medical expenses has gotten me down. The beginning of the year I was making positive progress so much that I surprised myself and now I feel like there are many more obstacles in my way.
Now, I’m right at the median income for my area so the prior years I have been living here it has been more challenging.
There are other areas outside of my career that I would like to learn about and I think that will give me the opportunity to make a little extra income and explore those other career fields.
I understand that buying a property to live in and thinking of it as an investment is an illusion. I have run though various ROI calculators and it appears it will take anywhere between 8.5 and 15 years to break even with purchasing a place. It can lock in your cost of living expense over time, but that only works for as long as you stay at that place.
There is a lot of cultural pressure to settle down, buy a house and live happily ever after and I just don’t see that for myself. It wasn’t until I stopped marching to the beat of my own drum did things get out of whack.
I don’t buy any of that buying a house settling down and living happily ever after…
However, I am a home owner, trying to be a long distance landlord to a actively managed property in the Midwest is a challenge..
I hear software is a great area to do freelance, but I’m not sure how to break into that market… I’m an electrical hardware engineer and I have trouble on that end with picking up side work in that area without taking on large projects.
Keep marching on to your own drum!!!
hello fellow So. Cal neighbor.. It sounds like you are doing it right… Most importantly you recognize a need or want for change. The vet and dental bills can happen sometimes… I’m right there with you.. After a bit of that.. I brush my teeth A LOT now.. LOL..
Honestly your grocery bill seems very reasonable… However, the $1 soda at the gas station… well that’s not helping your teeth either… (I went thru the SAME thing).. Broke that habit and drink water and black coffee now when I need caffeine… Plus that’s 30 extra in your wallet each month… Well, I have to say I get free coffee at work, but what work place doesn’t offer that? Everywhere I’ve worked we always have had that.
The BEST thing you can do in my opinion in a high cost of living area is to rent a house share with some roommates you can tolerate… I don’t love it 100% but I pay a fraction of what it would cost me to live out here otherwise..
HUGE move selling the car.. but seriously the BEST one you can do. I have a decent Jeep parked in my garage.. and many times I wish I did not.. as I pay plates, insurance on it and drive it once or twice a month to go to the store… I am a cycling commuter 16 miles each way. I did there for a while in the Midwest but challenged by the weather.. upon moving to Southern California biking it a no brainer out here with this weather…
I’m not close enough to the city for Uber, that could probably easily work for you on grocery trips and when you have to get somewhere.
I don’t know where in So. Cal you live, but to be honest if I were to live in the greater LA area I would probably need to making $105k to justify the living expense trade off. I would highly recommend looking at a second job or atleast a side weekend gig that you enjoy doing outside of work..
I work a desk job and while I enjoy my work… I’m an active person so I have to get out on the weekends and do physical work…
Thank you so much for the reply! It’s refreshing to hear from another SoCal resident.
You are the first person that has ever said that dumping the car is a good idea. I mean after all said and done I’m spending almost as much on it as I am with my living situation.
The amount I quoted for living costs is half of the total cost. I share an apartment with a very dear friend. He helps out a lot, more than he realizes, because living with a stranger can suck sometimes.
I can’t wait to move within walking distance to work. You’re right, the weather out here is amazing and there is no excuse to ditch the car in some cases.
Where I live we have fairly regular buses, at least for the 9-5 type grind. I am within walking distance of a train station and 10 min from an airport. I think I’m in a good spot to ditch the car, but all of my friends think I’m crazy. Tons of Ubers, I was a driver even for a while myself. Lyft is here too, plus I’m sure any other new ones that come along now that people have seen what a hit it is.
I think the car thing will be a good decision and really help with the monthly cash flow to clean up this mess.
You are so very right people will look at you funny… My coworkers think I’m NUTS for biking to work.. but I hardly ever need to really work out.. after all I get about 100 miles a week in cycling… There is a bus route the spans most of my commute and I do hope on that a couple times a week usually and it costs a $1 each way..
I used to live close enough to work back in the Midwest I never factored commuting in .. 3 miles.. could be done in 6 minutes since there wasn’t traffic. But now after living here and couple of months of pay $300 a month a fuel I said screw this drain on my bank account… and made myself start cycling to work.. (After all if I didn’t I would drive and then when I get home from work I would go for a 15-20 mile for fun) Why not make the ride useful.
Sounds like 4-6 months you will be turning a corner and things will look a lot better and that cash flow will free up money and pay down that debt for sure. Come 2016 you will be in a groove.
Thank you for your motivational words. The last couple months, people I have shared these ideas with think I’m crazy. I guess it isn’t until you break away from the “norm” can you then see solutions to problems otherwise unseen.