I know what that post title sounds like. You’re thinking, “Here’s another entitled Millennial, complaining about how tough life is.”
I’m going to make a statement right off the bat: Dave, if you’re reading this (verrrrrry unlikely, but just in case), let me just say that there is no one that I need to thank more for getting me interested in personal finance. I know that the title of this post is a little harsh, but it’s really not meant to disparage how good Dave is at what he does. In fact, I’d go as far to say that when it comes to inspiring people to learn about their finances and encouraging them to get out of debt, nobody does it better. It’s a noble mission he’s on, and he’s helped countless people improve their lives through his programs, including me.
Like I said, there’s nobody I need to thank more for getting me interested in finance than Dave. It started with the Total Money Makeover audiobook. My parents gave it to me right after I had graduated from professional school and was starting my first job. They had listened to it, and had been telling me about Dave’s radio show, but I had never heard of the guy or his books.
I popped it in the CD player in my car, started listening on a morning drive one day, and was immediately hooked. I knocked it out in a day or two, going to and from work (and even just driving around town) to listen as fast as I could, and my eyes were opened, so to speak. Thank you Dave, and especially thank you to my parents for introducing me to him!
So if I appreciate him so much, why the tough title? Because as great as I think Dave’s plan is for the majority of Americans, there’s a lot of problems with it when trying to apply it to the typical financial situation of most freshly minted young doctors.
I’ll go one step further: For high-debt young professionals who start their working life later than the typical American worker, I think Dave’s advice is just about as bad as you can get.
The Numbers Don’t Lie
Dave is an inspiration, but oftentimes his math doesn’t add up. And you know what? That’s okay. I’ve made a point to say on this blog multiple times that I’m not always a math guy, either. I firmly believe that a lot of the time the psychology of personal finance is more important than the numbers of it, and Dave has built an empire on that very concept. I just wish he’d be more honest about his method.
Dave wants his listeners to believe that both the numbers AND the psychology are on his side, even when they’re not. The only time he ever comes close to admitting that the math isn’t with him is when he makes concessions now and then that during the “Debt Snowball” part of his program (if you’re not familiar with it, this is when he has you pay off your loans, from smallest to largest) he’ll advise you to start making extra payments on the loan with the lowest balance, no matter the interest rate. He admits that if you do the math, paying off the loans with the highest interest rate makes more sense.
His reasoning for not doing that is that seeing the loans disappear gives you a psychological boost to continue making the extra payments. I think there’s some truth to that, I just wish he was more forthright about the other aspects of his plan that aren’t as cut-and-dry as he makes them seem.
So what about the specifics? If Dave Ramsey’s methods are good for the majority of Americans, how can they be so bad for high-income, high-debt young professionals? Here’s the issues as I see them:
Most Young Professionals Start Their Working Career Late
Most high-income, high-debt young professionals who went to postgraduate school are starting their working career later in life than the typical American worker.
Why does this matter? Because, thanks to our compound interest calculators, we know that the later you start saving, the more you need to save to reach the same savings goal in the end. In some cases, it may never be possible to catch up.
What does that mean for us? If you’ve gone to professional school and haven’t started saving for retirement by the time you’ve graduated, you’re already behind in the retirement savings race. If then, upon graduation, you follow Dave’s Baby Steps and put nothing towards retirement until your student loans are paid off, you’re putting yourself in an even deeper hole. His advice just isn’t sound anymore, not with the ridiculous student loan amounts we are now seeing people come out of professional school with.
Do yourself a favor and start saving for retirement the moment you collect your first paycheck. How much you should be saving before your student loans are gone is up for debate, but waiting until you’re 26 or 27 (or even into your 30’s) to start saving anything is a bad idea.
Dave’s “Beginner” Emergency Fund is Inadequate
A $1,000 Emergency Fund – as Dave advocates for in Step 1 of his “Baby Steps” – is woefully inadequate for most high-income, high-debt young professionals.
In some ways this ties back into my first point, that many young professionals are older when they graduate from their respective programs, making it more likely that they have families, or are getting ready to. A thousand bucks in cash is just not enough for people in that situation.
An argument can be made that a true emergency fund isn’t really need. After all, you could always use credit cards (or some other financial vehicle) to fund unexpected expenses. We aren’t totally sold on this idea, because if you end up having to bust those things out to pay for an unexpected expense, then you’re just trading one emergency for another (the latter being your new debt emergency, because you’ve just increased your debt).
We subscribe to the theory that a true emergency fund of 3-6 months of your expenses is the prudent amount of cash to have on-hand.
If you’re single with few responsibilities, you can probably get away with 3 months or less. If you’re married and have a family, you probably want closer to 6 months spending money.
We track our expenses with Mint to get a decent idea of what our monthly liabilities are, and we keep our emergency fund in an Ally Bank Savings account that pays us 1.15% interest. Better than a kick in the pants, and I feel good knowing if something major happens we have half a year or so to figure things out before we really have to start worrying about money.
Professional Job Prospects Aren’t What They Once Were
At the risk of again sounding all Millennial-y, Dave doesn’t understand the job-prospect realities that are facing many high-debt young professionals.
The days of hanging a shingle up and having a busy practice Day 1 are over, for the vast majority of us, at least. The loans are outpacing the salaries in a bad way, and Dave doesn’t seem to get that. Paying off a $300-400k student loan in 2 or 3 years, as Dave would have you do, is nearly impossible when you’re starting out making a third of that.
The obvious question is: Are medical/dental/law schools worth it anymore? I think they probably are for now, but if the tuition and loan situations don’t improve soon I’m not sure how long they will be.
Appreciate Dave For Who He Is
If you’re looking for inspiration, for someone to kick you in the rear and get you fired up about taking control of your financial life, there’s no better person to listen to than Dave Ramsey.
If, however, you’ve just graduated from professional school, you’re in your late 20’s or early 30’s, with student loan debt that is 2 or 3x your starting salary, the details of Dave’s plan just don’t make sense. Don’t handcuff yourself by following his advice to a T.
What do you think? Are you a fan of Dave Ramsey? Do you think it’s still possible to follow his plan even if you’re a new professional with immense amount of debt, or is he way off base when it comes to advising young doctors? Let us know in the comments!