Personal finance is personal. That’s what they say, right? Then, you might conclude that a lot of financial advice out there is right for some people and wrong for others. If you do, you are right. Unfortunately, many talking heads out there do not stick to their wheelhouse and often venture into other financial territories. The best example of this is Dave Ramsey’s bad financial advice for doctors.
While Dave has done a lot of good for the average American who follows his advice, I’ve read and heard him give truly terrible advice to doctors on multiple occasions now. The reason is that our financial situation is drastically different than most others in two distinct ways.
First, we go from earning a median income for our country to multiples of that overnight. This poses all sorts of behavioral finance problems (e.g. keeping up with the Joneses) in addition to providing us with a very big shovel to dig out of the hole we’ve dug. Speaking of the hole, it is filled with a lot more debt. The average student loan debt for physicians is $200,000. That’s coming out of medical school. This is very different from the average American.
For this reason, doctors cannot (and should not) use advice geared towards most Americans. Don’t believe me? Here are 5 examples of bad financial advice for doctors from Dave Ramsey.
#1 Don’t Trust Forgiveness Programs
Rather than telling them to make their payments and save up a PSLF side fund in case the government fails to follow through on their promise, he will tell them to drop out completely.
I’ve heard him tell this to people even when their Debt to Income Ratio was well over 2! This is despite the person being in a long-training period and making low payments during residency and fellowship.
For those that need a reminder of what good advice for physicians looks like, this is the tool I recommend people use to sort through their student loan situation:
- Debt to Income (DIR) Ratio < 1 = Refinance Your Student Loans (Get a Cash Back Bonus Here) & Pay them off ASAP.
- DIR 1 to 1.5 = Start considering PSLF. Paying them off yourself may still be reasonable.
- DIR >1.5 = PSLF starts to be overwhelmingly favored.
Other situations that favor PSLF: guaranteed work in a VA or academic 501(c)3 qualifying hospital or a long training period (the closer to 10 years the more it favors PSLF).
#2 You Don’t Need an Emergency Fund with a High Income
While we are railing on Dave’s advice on student loans for doctors, check out this amazingly awful video where Dave Ramsey berates a family medicine and psychiatrist couple for having a high student loan debt figure and low paying jobs.
The video doesn’t stop there, but it goes on to say that high-income earners do not need to have an emergency fund! If you’ve read any of my posts during the COVID pandemic, you know that I do not (nor have I ever) felt this way.
Everyone needs 3 to 6 months of basic monthly expenses set aside as an emergency fund. Just because you have a high-income does not mean that you are immune from emergency expenses.
Dave needs to stick to advising people with median incomes. His advice for high-earning physicians just doesn’t make sense.
#3 Pick Actively Managed Mutual Funds
This next one isn’t just bad advice for doctors. It is bad advice for anyone and it is laughable that Dave has stuck to this advice for so long instead of admitting his mistake.
The evidence favoring passive index funds over actively managed mutual funds at this point is overwhelming. The only reason to recommend it is that the advisors he recommends stand to make money on it (more on that next).
Dave shows dodgy math to support his argument, but the truth is that saving 0.5% to 0.9% year over year using index funds – which have a much lower expense ratio than actively managed mutual funds – matters a lot.
#4 Advisors with Bad Fee Models
Dave Ramsey maintains a list of endorsed local providers and “Smartvestor” advisors he recommends. You’ll note that I am not going to link to either of those, because I think the list is full of advisors who have very conflicted fee-models.
While most doctors out there would benefit from financial advice, where you get your advice and how that advisor’s fee-model is set up matters. While I might fight for a less conflicted financial advising model than others in this space, the one thing all of us agree on is that the right kind of advisor is a fee-ONLY advisor and not a fee-BASED advisor.
The way that I remind people of this is that a Fee-ONLY advisor is the ONLY advisor you should use.
Many of the advisors on Dave’s list are fee-based, which means that they get paid to sell you products and make commission. This means that they are encouraged to sell you loaded mutual funds (ouch) and inappropriate insurance products (yikes)!
Reminder: The Gold-Standard and Least Conflicted Financial Advisor is one who is (1) fee-only with a (2) flat-fee structure, (3) operates as a Fiduciary, and (4) has experience working with physicians.
If you are looking for such an advisor, click here to see the very short list of advisors I trust.
#5 Save 15% of Your Income
This one is a bit nit-picky, but the point holds true.
Saving 15% of your gross income is great if you started saving 15% when you finished college. However, if you – like most physicians – learned nothing about money and then went through all of medical school, residency, and fellowship without saving; saving 15% is not going to get you to your goals quickly enough.
This is another example of how Ramsey’s advice isn’t meant for high-income earners who had a delayed start.
That said, it also begs the question of how much should I be saving?
Dave recommends 15% of your gross income.
I think that you should be saving 30% of your take-home pay.
To calculate take-home pay I encourage people to simply add what hits their checking account and any additional retirement contributions (including tax savings accounts like a flexible spending account, etc) that are made each month.
In other words, if you receive $15,000 in your checking account each month and put $1,625 towards your 401K each month and $500 into an FSA, your take-home pay would be $17,125.
For someone with a base salary of $310,000
this is how the two recommendations compare:
- Dave Ramsey’s 15% (of $310,000) = $46,500
- 30% of Take Home in NC = ~$64,500
Let’s assume that nothing else changed over the next 20 years. At 8% interest in the market, this would be the end result for each situation:
- Dave Ramsey’s Model = $2.3 million
- 30% Take Home Model = $3.2 million
If you took 4% from each of these the Ramsey’s model would allow you to take $92,000 per year while the 30% model would allow for $128,000.
Simply put, that is a huge difference in lifestyle during retirement. If you carry that out over 30 years, you can imagine that the difference is even larger ($5.7 million versus $8 million, which would allow for $228,000 per year versus $320,000).
The take-home here is simple. Dave Ramsey (and others) who provide advice for the average Jane and Joe should not offer the same advice for doctors. It just doesn’t work. We have very different financial situations.
If you want to take part in a 5-step cash flow system that was created by a doctor – and meant for doctors – click here to check out the Medical Degree to Financially Free course.