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
I’ve heard Dave tell multiple physicians to drop out of Public Service Loan Forgiveness when it would be a grave financial mistake to do so. His website also publishes anti-PSLF content as well.
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.
You are not only bending Dave’s advice you are lying about it.he absolutely advices to keep a side fun of your student loans payoff in case something happens with your government payoff such as you desire you dont like being a doc,your spouse has a better job offer, or any number of similar situations, and he absolutely recommends a large emergency fund, but only after paying off debt..and never use insurance as a investment..jeez ,you actually get by using lies??
Man, I was waiting for the first one of these all day!
I literally linked to the examples where he said these things himself. Now, is there a possibility that Dave now sings a different tune? Maybe. But by and large he gives horrible advice for doctors (and potentially great advice for the median income earner).
I heard a radio show literally in the last two months of Dave’s where he told someone to leave PSLF who was more than halfway through the program and had hundreds of thousands of dollars in student loan debt. That’s just bad advice.
And no where in there did I mention using insurance as an investment. I think you may have stopped at the title perhaps? Or…wait… Are you an endorse “financial advisor” of his perhaps who sells whole life?
His advice for the average income worker is just as bad. Fact is, if you’re middle or lower class, you’re stupid to not manage credit wisely and I have heard him on multiple occasions saying credit is bad and that you don’t need it. I have to tell people all the time that they can’t get a new AC or heat pump because they have no credit and they don’t have ten thousand in cash laying around. Good credit is everything, if you do not have a high income.
This article is Fake News he has never said don’t have an emergency fund because you have a larger income. On the contrary he has always said start with $1000 pay off your half million dollars in debt instead of buying a fancy car or big house the put 6 months away as your fully funded emergency fund. The article is nitpicking a man who is trying to help and his model has put more doctors in better financial situations than anyone. Also the idea behind the 15% is most Americans don’t come close to saying for retirement again it’s like a starter retirement fund so start with 15% then the last step invest and build wealth that is when you would max out retirement. This article is just simply embarrassing…..either you listen to a clip on one situation couldn’t comprehend that it was for that individual the decided to write this horrible excuse of an article or you just don’t like him based on his beliefs. Idk either way I’ve never read something so ignorant. Truth
Quotes directly from Ramsey highlighting what I said in the article:
“The answer to [Public Service Loan Forgiveness] is always ‘Don’t do it.’ Get your loans paid off as quick as you can. For God’s sake don’t stay in debt for ten years.”
On emergency funds for high income individuals directly from the video above:
“If you make $300,000 to $400,000 per year you don’t need much of an emergency fund…”
The man has done a lot of good, but his financial advice for doctors is consistently bad.
This Article writter needs to take the course
This is the first time I’ve read one of your articles as it was recommended to me by Google, but I have a few comments to make about this particular article.
First and foremost, these particular 5 examples do not encompass the entire scope of Dave Ramsey’s message, merely a few nit-picked parts of personal situations from listeners. You quoted what I think is a good summary of his message in one of the replies to the above comments: “For God’s sake don’t stay in debt for ten years.” Debt truly is enslaving to the borrower, and his philosophy is all about becoming debt free as fast as possible through extreme measures.
The underlying principles of Dave’s message is that you should avoid and eliminate debt as quickly as possible no matter where you start the Baby Steps. For Physicians coming out of school with $200K+ in loans, with a $300k+ income, that looks like living on $100K for 1 year (or whatever “cheap” is in your area) and using the remaining $200K to aggressively throw at the debt (obviously this ignores taxes, which are very relevant at this income level, but this is just a simple example).
Now, let’s talk about the 5 specific cases you mentioned.
As it relates to loan forgiveness programs, Dave’s point is that you can eliminate your student loans much faster, which is what his entire philosophy is about, by simply throwing your excess income (Take home pay minus bare essentials) at your debt than you can by waiting however long it takes for a loan forgiveness program that is completely reliant on the faith of a government $20+ Trillion dollars in debt itself. Live well below your means (and still considerably better than the median US household) and use the massive shovel of your income to fill in the massive debt hole as fast as possible.
This one seems to have a bit of misinformation in it. I just re-watched the video. Dave does not tell that couple that they don’t need an emergency fund like your paragraph suggests (“The video doesn’t stop there, but it goes on to say that high-income earners do not need to have an emergency fund!”). What he says and means in the context of the conversation is that with a mid-six-figure income while living on nothing, there probably aren’t going to be many emergencies over $1,000 (again, look at the entire Dave Philosophy, specifically Baby Step 1!) that their normal monthly income won’t cover. You and Dave both agree that everyone needs a fully-funded 3-6 months of expenses as an emergency fund, Dave’s philosophy just suggests to wait until after you are out of debt to have that fully-funded emergency fund. This paragraph of yours is the one I have the most problems with, frankly because it is misleading to your readers. Be better.
This one I don’t have a ton of gripes about. Your argument for passive vs active mutual funds is valid and fair. However, from the perspective of Dave Ramsey’s philosophy as a whole, another big emphasis is that people need to actively be controlling their money, not the other way around. When you are forced to sit down with your investment professional and look at each actively managed fund, you now have a much stronger grasp on what your money is doing for you. In the article linked to your post about why index funds are king, one of the reasons you listed was “set it and forget it,” which I think is exactly opposite of the point Dave tries to make. Is it worth the extra 50-100 basis points in fees? That’s for you to decide. From my own experience with active funds, however, they have consistently and substantially beaten market returns over the course of 10-20 years.
I don’t have any big problems with this one. To me, all advisors should be fiduciaries and I know that not all of the SmartVestor Pros are. That’s not to say that they don’t have the client’s best interest at heart, but if anything were to happen you would have no legal claim over them. As for commission, I’m guessing that you as a Doctor get some sort of kickback from pharmaceutical companies for recommending their drugs (even though it can’t be called commission). Most of the time that drug is what you would have recommended anyways, right? So what’s the difference?
I won’t say anything about this one since you admitted it was nit picking 🙂
Anyways, that’s just my independent thoughts on this article. Maybe this will help broaden your thinking about Dave Ramsey. His program truly will work for anyone when done correctly, but when taken standalone it can sound absurd and frankly wrong.
Hopefully there’s at least one person that made it to the end of this and learned something.
Stay safe, and everyone WASH YOUR HANDS!
Point 3: that’s factually incorrect. Actively managed funds, after fees, consistently underperform the market in the long run. This has been proven over and over again statistically. Maybe you’ve somehow managed to find the magical 15% that break the rule, but even then, past performance isn’t predictive. You’re just as likely to under perform the market in the future. That’s just what the data has shown over the long run with active funds.
Also I strongly disagree with your premise that active management somehow makes you more connected to your finances. Feeling like you or your advisor has the magic juice to pick the fund manager that in turn has the magic juice to pick the winning investments is just deluding yourself. In the end, believing the data and investing in low cost market ETF’s connects you to your finances all the same, only it’s evidence based and you can therefore have confidence in your plan to stick with it for the long term no matter what the market is doing or who is whispering in your ear about hot funds/managers or sectors.
Point 4: this is a very old conspiracy theory. Doctors do not get paid kickbacks from the big evil “pharma” and in fact, that would illegal. If a patient needs an intervention then they need an intervention. We spend far more energy dealing with insurance pre-auth’s and switching medicines to ones patients can afford based on their current insurance. Pharma kickbacks simply do not exist. So there is zero comparison there and shame on you for peddling that; be better. Now, in the space of bloggers the point is you can chose your sponsors and Dave could pick ones that are conflict-free and don’t peddle insurance sales commissions along with “financial advice.” These advisors exist, without these insurance sales conflicts, so he should chose them instead and refuse to work with conflicted ones. That’s the point, and it’s a good one.
I am not going to reply completely to everything because FrugalMD did a good job of that. I am going to add a couple of comments, though:
1) I really appreciate you providing a reasonable and thoughtful response to the article without belittling. It is nice to see that there are still people out there who want to have a conversation without getting all hot-and-bothered just because I said their financial hero gives bad advice for some people.
2) Frugal MD replied to many of your comments, but didn’t discuss the PSLF comment. In context, I actually hate debt just as much as Dave does. I went through a bankruptcy as a kid, made financial mistakes with my loans, etc…. so, I am really debt-averse. Just like Dave. That said, Dave doesn’t get a pass on math just because he hates debt. In the video above of the two doctors going into family medicine (3 years training) and psychiatry (4 years of training) who may then do a fellowship to bring it to 4 and 5 years… he is recommending paying off $670,000 in debt in 2 years after training. That brings us to potentially 6 and 7 years. And they are paying it all off themselves. Why wouldn’t you just work in a 501(c)3 hospital (Which >70% are) for another 3 to 4 years, making the minimum payment and get tax-free forgiveness? Telling this couple to “pay it off at all costs” is literally going to cost them north of $600,000 that they don’t have to pay.
Again, I am debt-averse like Dave…. but why tell people to do that when it is going to cost them that much? They could put that towards investments and be that much closer to financial freedom, instead of paying off money they would have been forgiven anyway. That’s a costly mistake.
And that doesn’t even get to Dave’s lack of understanding when the resident says he came from a single-parent household and wanted to become a doctor – so he had to finance his education. The whole video is cringe-worthy.
Again, thanks for actually providing thoughtful responses. Most people who comment get upset that someone is saying something different than “their guy”. I appreciate you taking the time to consider the thoughts laid out in the post and to provide a response.
Wow you completely overlook the very real loss of money one can expect when working with active managers. They do not consistently beat the stock market. Period. Their fees eat gains. Period. Real investment professionals like Buffet have said (and PROVEN) it for years. He even put part of his billions on the line in a public and long-term experiment with a fund manager. Keep in mind those “smart vestors” pay a fee to be considered such and are hardly vetted. Ramsey has some good basic principles (debt bad, saving good) but his radio persona as a hard nosed stickler has backed him into a corner where he can’t course correct, and his cult-like faith-based following means that any real evaluation of his bad advice brings loons out of the woodworks crying about “fake news.” That sounds disconcertingly familiar…
Completely agree on most points; advice for the masses isn’t necessarily applicable to every situation and discussing these issues is a worthwhile article. Dave Ramsey is just one voice and a good voice for a lot of people to hear. But has he ever dived into the complexities of maxing 401K matching taking the IRS income cap into consideration? Probably not.
That said, I’m not a believer in an emergency fund for >400K (FIRE) individuals. 1 final after-tax paycheck should be enough to float several months of basic necessary expenses (plus any bonuses or extra shifts due). If it’s not, it’s time to re-evaluate spending and savings habits. Even in a worst case scenario you should have enough cash flow, insurance, savings, and credit to deal with a few months of trouble. How much is in the direct deposit account you just haven’t gotten around to moving to investments yet, and what about dividends not yet reinvested? Then there’s locums work and a spouse’s income. If it continues beyond that then ok you’re looking at selling investments, not usually the end of the world. Worst case you take the 10% retirement account penalty but how many years of market gains did you make in the meantime before disaster struck? Point is, if you actually control spending/lifestyle then a true “emergency fund” becomes a redundant waste of potential gains at certain income levels. Which was the whole point of this article- advice for one person doesn’t necessarily apply to every situation.
Hey FrugalMD, Thanks for the defense above. Your points are well stated, and I appreciate them. Who knew that writing about Dave Ramsey made Google recommend your article and bring a bunch of his supporters to your site!
As to your emergency fund point… I think anyone should have at least an emergency fund in a high-yield savings account. Even if you earn 400K. This pandemic is a great example of why that may be necessary. Your pay could get cut substantially (or completely in some cases). In that situation, you could float your monthly costs for a paycheck, but unless you live so far below your means that the difference can cover three months worth of basic living expenses, I think an emergency fund is wise.
The most common reason for doing this (prior to the pandemic providing the example that it has) is for disability reasons. Most doc’s long-term disability policies don’t kick in until 60-90 days later. So, you need to be able to cover that length of time with no income whatsoever without putting anything onto a credit card (or taking investments out, which might be at a loss at the time like they are right now, in my opinion).
All that said, personal finance is personal. If your risk tolerance is through the roof and you’ve thought about what you would do in the above situations, and can sleep at night, it is your money.
Thanks again for your comments above. I appreciate reasonable people having a good conversation.
Regarding any planner , broker , banker , insurance agent , giving advice . Ask for 5 years tax returns , portfolio makeup , their portfolio returns vs passive indices , wealth accumulation and from what sources, plus fees they pay . Full disclosure is necessary , otherwise conflicts problematic.
As always I love your perspective but I think you are throwing the baby out with the bath water.
I spent a long time listening to Dave Ramsey and I would think his track record of helping people get out of debt would show his heart is to help people.
In general, his hypothesis is simple: get out of debt as fast as you can. That’s exactly what you did coming out of fellowship. You may have done a few things differently, but paying off a balance like you did in such a short time is EXACTLY what Dave would have recommended.
I think a lot of his discussion about debt his helpful. If you had $60k in a savings account and $150k debt in student loans it is the same as borrowing $60k on top of a $90k debt.
Additionally, when it comes to investment advisors, while you and I LOVE this stuff, the average doc doesn’t. They are going to use someone. And, yes, you are right that in the long run, index funds will probably do better (some people do best the market average over some periods of time), but any investment is better than not investing.
Finally, the difference between 30% net and 15% gross. Docs have a shorter career than average, so yes we should invest higher. But the 15% number you quoted is still more than most docs have in net worth. Again, I’m not arguing that what you are saying isn’t superior (it’s what you and I have talked about before) but it’s still far better than average. Additionally, if you follow his plan, it is save $1000, pay off your debts, 3-6 mo emergency fund, 15% in retirement, kids college, pay off the house, and then be generous. Just because you save $18000 less per year, you’re not spending it on speed boats—you are further building wealth by paying off your home, saving for kids’ college, and being generous with your wonderful salary. Again, it’s different than your plan—Dave is not pushing for FIRE and seems to have no plans to retire early—but he does want people to be free of debt so that they can become financially independent. I know it’s not what you (or I) do, but it’s still much better than the average Joe (or Dr. Joe’s) plan.
As always, I appreciate your perspective and deviate from Dave in a few ways, but his heart of his company/career/ministry is to see people financially able to take control of their lives, the way so many in the FIRE movement have (it’s just in a different ordering of steps).
LA Trauma Doc,
I have to disagree with most of your points except the general premise. If Dave Ramsey or Suzy Orman or any of the others is all that anyone hears then absolutely I agree it’s a great start and they’d be better off than not listening to anyone and being ignorant of finance in the first place. 100%. But this article, while perhaps being provocative given the cult-like following of these finance guru’s, is about the expectations. High income professionals and specific, unique advice that is different from others. That’s all this article is about, not tearing down good finance principles or even these guru’s in general. If all anyone ever finds is Dave Ramsey’s advice, most will be fine. But it doesn’t mean it’s tailored to every specific situation.
PSLF is a good example. His quote is don’t depend on the federal government and be in debt for 10 years. I agree to an extent on the former but when you take doctors into account that have already accumulated 4+ years of PSLF payments (Residency) this is just not the best advice depending on the number of years of residency and debt to income ratios (keeping in mind the 30 year cap payment). It begs a customized analysis. including the expense of MD/PHD/MHP and MD/JD degree seekers.
As for financial advisors for the ignorant, sure it’s probably better for them to turn to someone vs. no one. But the key players in the industry whether bloggers or guru personalities should only recommend the best, conflict free advisors. That was the only point made. Sure, anyone might be better than nothing for some people, but that doesn’t excuse anything. Guru’s especially with cult followings should carefully consider and vet their sponsors; even more so then bloggers.
As for the savings ratio comment I’m sorry but in the high income category savings ratios should be well in excess of these. 15% or 30% and gross vs. net is a worthless debate. If your spending is under control you should be saving well above these numbers; again, advice specifically tailored to high income professionals. For others, even 15% might be unreasonably high. That’s the point of this article (at least in my reading of it). For some 15% is an aspirational goal, but for others it’s too low and there’s no excuse for that kind of spending relative to income.
The average Joe is the heart of Dave’s advice and I fully support the cause. But this article is about the exceptions to the rule specifically high income professionals (i.e. the entire WCI network of bloggers). If you make the average American income this article isn’t for you, otherwise it might be something to consider. But in either case we should be able to agree that one-size-fits-all finance advice doesn’t apply to everyone, and that’s all this article stated in my reading.
Regarding payoffs from pharmaceutical companies:
In fairness, while the overwhelming majority of physicians receive no financial benefit from prescribing particular medications or medical implants, high users are frequently sent on speaking tours by companies and some have been reimbursed substantially.
More commonly physicians get free dinners and trips to attend seminars about new products.
These reimbursements can be found online now for each physician.
Some of this is part of business, and I don’t have a problem with it for the most part, but it does tarnish our reputation for impartiality with the public.
It’s not a conspiracy theory to bring it up. It’s just that the writer doesn’t understand how small the effect is for the average doctor.
Oh, we have our conflicts. That’s for sure. I – for one – am really glad I am not a surgeon paid on an RVU model, which is riddled with conflicts.
“What do you mean there are two different procedures for the same problem? Oh, this one has a higher RVU? That was an easy decision.”
Or even the decision to perform surgery or not in that model is a bit scary. Once I understood that it wasn’t surprising to me why some surgeon’s patient selection is less than ideal.
That said, many (most?) doctors work in very low conflict environments.
every argument with a Ramsey cultists ends in one of 2 ways:
1) they repeat his cute little sayings back to you without actually engaging with anything you said.
2) (more common) they admit that he may be wrong about X but he does so much good that he’s allowed to be wrong about some stuff.
no when you have a voice as large as he does and you refuse to be factually correct on simple issues.
the PSLF thing is a perfect example. what i think is going on is that Dave the conservative evangelical thinks that PSLF is somehow invalid or immoral and so he lies about it without compunction b/c he thinks it’s ethical in the long run.
this is a very common way of thinking in fundamentalist religious cults, namely that lying/cheating unbelievers and the uninitiated is not wrong.
Dave Ramsey is a charlatan with so many conflicts that I have trouble listing them. But I will list a few. His smart vestor pros re extremely conflicted. He uses churches and military bases for his FPU. He charges fees to students but does not pay rent to churches or pay his volunteers. Where does the tuition go? He advertises for a bogus timeshare exit company that refuses to refund money and has hundreds of complaints at BBB and other sites. He is also so thin skinned that he can’t tolerate anyone who dares to challenge anything he says. He reportedly once got mad and pulled a gun at a meeting with employees. He acts a little unhinged.
Dave Ramsey used to come on the radio while I was closing plants in the 1990’s for the DOL. His advice to people who were losing their jobs and who were eligible to be retrained, or had any questions about the unemployment insurance program were consistently WRONG and given to them in an extremely hateful supercilious way. His only goal is to make that 200 million he is worth so he can continue to be a bajillionaire at the expense of people who have believed in him and gotten in his classes. Yes, paying off debt, being out of debt, living on a budget is extremely good and he has inspired many people in this direction. But his overall spirit and practice has convinced me he is NOT in this to help other people.