Tuesday, March 07, 2006
First Command tries a flanking maneuver
Still smarting from the destruction of their business model and a $12 million fine from the National Association of Securities Dealers, First Command is anxious to begin rebuilding the credibility of their tattered brand.
And the irony is rich, indeed - because Paul Cozby, the Public Relations Director of this living, breathing example of how NOT to do business with the American serviceman has just gotten himself a seat on the Board of Directors on Fort Worth's Better Business Bureau.
I'm sure the BBB can be relied on to help resolve consumer complaints in the financial services industry. NOT! First Command couldn't even seriously discipline the Charleston advisor whose outrageous sales practices were specifically singled out by the NASD. The NASD suspended him for a time, but when I called the Charleston office last spring, he was back at work, dealing with the same military families whose trust the NASD found he had abused.
And Chron.com, the Website portal of the Houston Chronicle, doesn't even mention the controversy surrounding the company. Actually, they quite literally run an unedited corporate press release. Way to serve and inform your readers, Chron!
Splash, out
Jason
UPDATE: The Fort Worth Star Telegram details the changes that First Command has been making over the last year or so. If the report is accurate, I must say the changes are meaningful and I'm actually pleased.
The transition from Broker-Dealer status to Registered Investment Advisor is huge, and will require a major paradigm shift in the field, because - as the article points out, an RIA has a FIDUCIARY duty - the highest standard of care toward the client recognized by law - to act solely in the best interests of the client.
Obviously, a lot of salespeople hit the road. Good riddance to them. We don't need their ilk serving the military community. But it looks like there are some positive changes being made over at First Command. It's a bit late. And I don't think the bloodletting has gone deep enough. But what changes they do make for the better should be recognized and encouraged.
On the downside, they are still a commission-only organization. The conflict-of-interest in such a relationship is inherent, and very difficult to surmount - especially when they still have their old sales force mostly in place. They say they will be moving to a fee-only or fee-based system. I hope so. I'll believe that when I see it.
I'm predicting fellative coverage from Military Times any minute.
Splash, out
Jason
A Critique of Dave Ramsey
I wrote at length the other night about how much I owe to Dave Ramsey, and what a blessing I think his ministry - and I do think it's the best ministry in the country - has been for working Americans. He's a tremendous motivator, and does more than anyone else to help people harness emotional energy in pursuit of financial stability. And as any successful salesman will tell you, it is EMOTIONAL energy that closes the sale.
But as the saying goes, if two people agree all the time, only one of them is doing any thinking. And so here is where I would part company with Mr. Ramsey:
Ramsey's the best motivator in the business, but to be honest, it seems like he stopped learning new things somewhere around 1999. He does not seem to have kept up with any of the academic investment literature, for instance. If he had, he would have seen people like Bogle pointing out that for most of the period in which stocks had generated those 11-12 percent returns, they were issuing dividends at the rate of 4-7 percent, which is several TIMES what those dividends are today. Economic growth is strong...but it's not strong enough to make up for that, and because of the additional leverage implicit in the no-or-low dividend model, you have to expect volatility to increase - which is, over the last decade or so, exactly what we find.
What concerns me is whether the endorsed local providers are using Dave's unrealistic assumptions when conducting financial planning, because if you're projecting 12% return on anything over more than a few years, you are going to undersave by as much as half, or even more.
Furthermore, if you really DID expect a 12% return on equities, you would have to be nuts to pay off a 6% mortgage with tax-deductible interest. You'd have to be bonkers, because mortgages come in 30 year chunks, and - I'm drawing on some research by Wharton's Jeremy Siegel here - there has never in market history been a 30-year period in which the S&P 500 has not outperformed the U.S. Bond market.
Now, if you're like me, and you're really looking for a 6-8% return on equities, then paying down a home mortgage makes a lot more sense. You can always borrow it back, tax deductible, up to 100,000 dollars, if you REALLY needed to (But Dave is right about being loathe to put your home at risk.)
Third, I think Dave Ramsey's missing an opportunity here, because he ought to be an index fund zealot. Index funds - particularly lifestyle funds that adjust asset allocation as an investor cohort nears retirement - are ideally suited for his usual audience, who have limited financial educations and, to be honest, have no business trying to select active fund managers. David could get his listeners an extra 70-100 basis points per year simply by pounding the table for them to use Index funds. He's got a lot of military listeners, too, and he should be pounding the table for the TSP program as well. He does not - at least, not in anything that I've heard. But expense ratios in the TSP program are as low as you'll find anywhere. Their large cap US fund charges just six basis points!
Fourth, Dave's hip-pocket approach to asset allocation is suboptimal. By advising listeners to divide up their money between "four types of mutual funds, growth, growth & income, fixed income, and international," he may get a rough value vs. growth split - but many investors will find themselves with no exposure to small caps or micro caps, and Dave ignores the diversification benefit of REITs and emerging markets altogether. Furthermore, by dividing contributions up four ways, well, 25% in international funds might be a bit much.
Lastly, Dave pays little attention to tax efficiency when discussing mutual funds. But the inherent low turnover in index funds makes a big difference in any money held outside of tax-advantaged accounts.
I would replace Dave's quick-and-dirty asset allocation advice with the following:
1.) Use index funds. 80 percent of money managers underperform indexes anyway by the amount of their costs. There is no reliable way to tell, IN ADVANCE, who the outperformers are going to be. Plus, research from Ibbotson shows that 90 percent of investment returns are attributable to asset allocation decisions, and NOT to individual security or fund selection. Costs will kill you.
2.) Put 40-50 percent of your money in a Large Cap index, like an S&P 500 fund. Don't pay more than .18 percent in expenses, and don't bother paying a load. That much you can do on line. That's going to get you growth, it will get you value stocks, it will get you dividend-paying stocks, and will get you all US industries in one shot.
2.) Put another 20-40 percent in bonds. Use an index that tracks the Lehman U.S. Aggregate market, which represents all investment-grade bonds traded in the United States.
3.)Divide the rest up between an international fund (not a global fund, which will duplicate your US exposure), a small-cap fund, and a REIT fund.
4.) Limit gold and precious metals to 2-5% of your portfolio.
5.) Alternatively seek out a cohort, or lifestyle fund, that does all the above FOR you in one account, but tailors your asset allocation to reflect your time horizon. For example, American Century's Target 2030 fund does that for a cohort of investors who are retiring in or close to 2030. You can choose a different fund to fund known time horizons, as well, such as a Target 2025 fund to save for college costs for children born today.
Notice that the INTENT is the same - diversification among different asset classes but I'm being a little more specific than Dave is. And trying to ensure that as much after-tax growth remains in the hands of the INVESTOR as possible.
When it comes to lump-sum planning, Dave's so far off base he's not even in the same stadium. Here's why:
Here's Dave Ramsey on his page for Endorsed Local Providers:
"Q: My factory just closed. I am being asked to choose between a lump sum settlement and a lifetime pension. Help!
A. The short answer is that the lump sum usually makes more sense. The more thorough answer is that the stream of pension payments must be weighed against the value of the lump sum invested in good mutual funds over time. Typically, the stream of pension payments equates to somewhere around a 7 percent annual return. If you take the lump sum, it can be invested into good mutual funds that have a history of earning closer to 12 percent annually."
Frankly, Dave is wrong as a football bat. Mutual Funds don't have a history of earning 12 percent. The INDEX does! Mutual Funds have a history of failing, of lagging returns by fees, costs, and taxes. Watson Wyatt Worldwide notes that the average individual investor trails the average pension fund by 2 percent per year. That's huge! Barclays notes that defined contribution plans like 401(k)s, in which investors choose their own asset allocations, drag traditional pension plans by .56 percent annually.
There is simply no evidence that Dave's readers will, in practice, be able to net better returns - especially adjusting for risk - than the professional pension fund managers.
And DALBAR's annual quantitative investor behavior study finds that investors get, on average, only 25% of market returns, when cash flows are taken into account: Meaning that investors buy and sell at the wrong times.
Dave's information is flatly and dangerously wrong.
And if a fiduciary professional such as a CFP gave that advice, and took a commission or asset-based fee from any moneys resultant from the lump sum, it would be a lawsuit waiting to happen.
On the insurance side, Dave gives short shrift to whole life and other permanent forms of life insurance. Yes, they generate higher commissions than an equivalent amount of term insurance. But Dave has no problem with commissions to good advisors in other financial fields like mutual funds and real estate. Dave also understates the estate tax planning benefits of permanent life insurance plans, and the biggest drawback to term insurance - the possibility that the insured will become uninsurable during his or her term - is generally ignored. Yes, if we all got 12% in our mutual funds every year, we could all eventually self-insure. But we'd also all be subject to estate taxes, too. I think a permanent life insurance policy sufficient to cover any estate settlement costs, probate, and estate taxes for high net worth individuals just makes good sense. A universal policy also might make sense for someone with a highly irregular income, like a yacht salesman or seasonal business owner or farmer, because it allows him or her to choose when and how often to pay premiums. And no, I'm not an insurance salesman. I have no vested interest in permanent product commissions whatsoever, and nobody advertises on the blog. Term insurance is great - for temporary needs, like funding college or paying off a home mortgage. But for most successful people, I think the solution will involve a combination of term and permanent insurance policies taylored to match temporary and permanent insurance coverage needs.
Them's my thoughts. Take them for what they're worth. Dave understands families and consumer psychology much better than I do - he's got a family himself, including a couple of consumer daughters. Now THAT'S got to be a lesson in and of itself! And I cannot compare with his knowledge of real estate and bankruptcy-related topics, because he's been there and done that himself. But I think I've got a better handle on a few things than he does now, and I think there are a lot of people who are ready to take the Baby Steps to the next level, and really refine their asset allocations, and match their means to their goals more precisely.
But you know, if it wasn't for Ramsey, hundreds of thousands, if not millions of listeners would never have gotten to the point where that was possible. So I can't overstate how much many in the heartland owe to him.
Well, unless they cashed out their pensions thinking they could do better with Dave's advice!
Splash, out
Jason
Reconnecting with Dave Ramsey (A financial autobiography, of sorts)
So a few nights ago I sort of got reconnected with an old friend, radio talk show host, author, and financial counselor Dave Ramsey.
I first encountered Dave's show about ten years ago, when I was driving around middle Tennessee a lot, as a merchant services sales representative. At the time, I had just relocated from Hawaii to Tennessee, and found that I was making less than half of what I was making in Hawaii as a mental health technician. In fact, while I stayed in what I thought was going to be my field, I was back to making 7 dollars per hour, no benefits, and having my employer bitch that I was racking up too many hours if I worked more than 32 in a week.
I also found out that there was no reliable bus system to speak of, in Clarksville, and I only had a grand to my name, but had to get a car. Didn't want anything financeable (too rich for my blood!) so, in my 26-year-old wisdom, I had taken out a cash advance on a credit card to buy most of a $5,000 car. I had financed a car in Hawaii before, but worked a lot of hospital overtime and paid it off in about 5 months, and I figured I'd do the same thing here.
Wrong answer.
I was 26, saw my income slashed by more than half, and was already laboring under tens of thousands in student loan debt courtesy of the University of Southern California. I quickly ran into trouble. missed a payment on the credit card, and the rate got jacked up to 26%. It was all I could do to make the interest payment.
What I really wanted to do was be a newspaper reporter. I sat down with the editor of the Clarksville Leaf-Chronicle, and showed him some clips, which he liked, but he wasn't hiring. Jobs for college grads were tight in Clarksville, and even if he was hiring, the most he could pay was $17,000 per year for a full-time reporter - not nearly enough for me to pay down USC debt significantly, let alone keep up with a 26% car note! Yes, this was during the era of Irrational Exuberance.
So, I got involved in sales. Wound up learning the merchant services business from an old-school vacuum-cleaner salesman who drove a Lincoln around town and wore expensive jewelry. I learned a valuable skill - how to knock on doors! 30 calls a day, face to face, one business after another, and began to make what was - for Clarksville - pretty good money for a time.
But the commission checks were slow in coming. I should have been pulling in $800-$2000 per week, based on two to five new deals per week. That's what they told us we should be able to do if we cold-called 30 new merchants a day and followed up appropriately, and the conventional wisdom wasn't far off. But the commission checks just got later and later - and finally stopped altogether. The guy I was working for, it turned out, had given me a fake Green Hills address. The house didn't exist. And had essentially skipped town owing me thousands of desperately needed dollars.
I quickly signed on with a new company, with some success, initially, until I had tapped out Clarksville. So as I searched farther and farther afield - prospecting Bowling Green, Hopkinsville, Nashville, Franklin, and Lebanon, Tennessee, I spent a lot of time in my car.
Business was getting tougher, because the Web, I see in hindsight, was changing everything. All the sales reps in the field were getting shopped via the Web, and the business was changing from an outside-sales focused force to an inside sales. So after a pretty good run in Clarksville, I began hitting the wall.
But driving all over middle Tennessee, I heard Dave's show, "The Money Game," and it turned my head around. I was in dire financial straits at the time, and felt awful about it. I actually felt depressed and overwhelmed at the time, because I didn't see a way out of it, other than going active duty as a lieutenant - which I tried to do several times. The only people I knew who had any money were either successful Nashville merchants (few in Clarksville had much money outside of landholders) or in the military.
The Active Army wasn't taking anyone. The Infantry branch management people told me "The ONLY way you can go active duty is if you've ALREADY had four years of active duty. We don't want reserve officers."
"So much for the "One Army" concept, assholes," I told them. (To this day, I'm bitter about that crap. But militiamen have been bitching about regular Army arrogance since Washington headed the Virginia Militia during the French and Indian war.)
But listening to Dave turned my head around. He's a terrific motivator, and actually provided me with an intellectual and emotional framework for getting out of the quicksand I was in.
What's Dave all about?
Beating debt, for starters. Unlike most financial radio shows, Dave's show attracted callers that were a lot like me - I could relate to them: Struggling families in their 20s and 30s, many of which were dealing with situations far more difficult than mine. Unlike some muni bond guru talking with 65 year-olds about tax-free income in retirement, Dave was reaching people like ME, and WAS reaching me.
I started working on Ramsey's "Baby Steps." I could enumerate them, but they're already listed here. Highly recommended.
(I was shocked when I wrote out my "debt snowball" list and found out I was paying hundreds each month just in interest! But on the refrigerator it went, and I busted my ass to get a grand in the bank and start turning my smaller debts into gooseggs).
More important than the specific steps, though, was that Dave Ramsey, through his radio show, made mathematics and numbers accessible to me. I had always been the poster boy for math-anxiety disorder, but Dave was able to help me transcend that as I worked through the numbers. But even more important than the numbers was the EMOTIONAL energy that Dave helped me to harness. He draws a lot on scripture - it WAS the Bible Belt, after all! - and the image Dave uses to describe this energy is a scriptural one: "Flee from surety like a Gazelle flees a leopard."
Now THAT'S desperation! THAT is putting the petal to the metal. And while I could understand what was going on intellectually, that was precisely the language I needed to hear at that point, and I set to work with that kind of desperation.
Meanwhile, I took a (belated!) interest in personal finance. The topic had always bored me growing up. I had absolutely no interest. I was a musician and a writer, right? And a counselor! That stuff was for those Orange County rich kids majoring in business I had found so annoying back at USC. But again, by listening to Dave's show, and listening to distressed family after distressed family, I got an appreciation for the family dynamics in personal finance.
I was a good psych tech, but too young for the job. But I learned that a sound financial footing makes for a stronger marriage. Well, if I could figure that out, I'd be a better officer, a better teacher, a better psychiatric counselor, a better EVERYTHING. So I hit the library and began to read everything I could on personal finance. Not the academic stuff - I didn't know where to look for that, really. I had no idea what a CFP was. But I was gradually finding my calling, and so my long latent interest in a career as a financial planner was born - before I even really knew what they were.
Now, understand how tight things really were:
My blower motor went out in my car, and I drove without heat or air for over a year. Actually, without a defroster, that was a safety hazard, but there was no other way to get around.
I hocked a violin to get money to pay for a haircut and gas to get to drill, 120 miles away.
My heat was turned off in my apartment on several occasions during winter. (That wasn't a huge problem...even in 25 degree weather I could layer. It was just depressing).
Carbs were cheap. I lived on 33 cent boxes of Macaroni and Cheese. I was running a lot, but even then, I started gaining weight. I'm a stress eater, to begin with. I've sort of figured that out in the last couple of years about myself. The combination of money stress, depression, and the fact that the only foods I could afford were rice, starches, and cans of chili, well, it was a bad combination. I think it amounted to 20-25 pounds or so, in a few years.
Never let my car insurance lapse, though. I don't make bets I can't afford to lose. I also bought an individual health insurance policy from my best friend and kept that up.
Eventually, I got stuck. I could no longer compete with the Web for the lower-end merchants that were my credit-card processing market. I was making 7 bucks an hour, no benefits as a weekend companion for two severely mentally disabled guys I loved, and going to drill, and just unable to pull ahead. I continued making achingly slow progress on the debt snowball. In retrospect, I don't think the total debt ever amounted to more than $30,000, including student loan debt. Lots of people my age had more than that in car debt alone - with a couple of extra mouths to feed. But from where I was at the time, it seemed insurmountable.
Most of my peer group was in the same boat, which is dysfunctional in itself. But these were all highly intelligent - even brilliant - college graduates who couldn't get a leg up in that town. The only good jobs were in the Army and at the Trane factory. You could be the greatest computer whiz in the world - you would still be on the unemployment line in Clarksville in 1998-99. I know, because I comiserated with some of them in those days. I still felt like a loser. But I wasn't alone. It was, however, pretty depressing to have a four-year degree plus some grad work, to be one of the best musicians in town on top of that, to be a dedicated commissioned officer, and to find I was being outearned by 20-year-old E-4s on Fort Campbell, KY.
I tell you, I got so warped, I could barely talk to my active duty peers, the lieutenants and captains. I knew I was every bit the officer they were, but they were in an exclusive club, and even though I wanted to go on active duty more than anything else in the world, I was locked out of the club. I was so overwhelmed with bitterness I didn't want to have anything to do with active duty officers. Not that I resented them - they were just reminders of a very painful circumstance.
Just as I started to gain some momentum in the debt snowball, though, a funny thing happened: A Guard unit from Mississippi needed officers to help fill them out for a National Training Center rotation at Fort Irwin, California.
I jumped at the chance.
Had the time of my life, for three weeks. Visited my grandparents in California, after that, and taught myself all the algebra I flunked in high school (I had designs on resigning my commission and becoming a 52E Prime Power Production Specialist and learning a trade.)
I loved the NTC, though, and tried one more time to go on active duty. "Look," I said, "You've got a chronic shortage of captains. I want to go on active duty as a lieutenant. I know you need me. There are companies on Fort Campbell with half their officer slots vacant!"
"Fuck you," said the Army.
"Fuck you, too, then," I said back, and told the Kentucky National Guard I was hanging up my spurs, took the couple of thousand dollars I had saved up from the NTC rotation, and reserved a Ryder truck, and popped smoke from that town and never looked back.
"You're moving to Miami?!?!?" said my friend Maggie, a screaming liberal Democrat personal finance writer from Greenwich Village, New York. "Yep. My grandmother has a place down there which is vacant, and she offered to let me stay there for a while."
Maggie and I got to know each other debating politics on the Compuserve Democratic Politics forum. We didn't agree on much, except that we really liked each other, and she liked my writing.
"Well, when you get down there, stop by Mutual Funds Magazine, where I'm a contributing editor. Theyre about 40 miles away, in Deerfield Beach. I think they're looking for a fact checker."
So I loaded up all my earthly belongings into the Ryder truck, got down there, and scheduled an interview. Got caught in traffic on the way there, showed up 45 minutes late for the interview, and got the job.* They liked my writing, though, and made me a reporter, not a fact checker.
So I got hired making $8,000 per year more than I was making before (didn't think that was possible!) and then got a couple of merit bonuses after that, and became a very motivated personal finance reporter. I got hired in January 2000, busted my ass working 13-14 hour days (with a 90 minute commute! But I could stay almost rent free in my grandmother's place so it was worth it, and I needed a break). And was debt free within a year. Maybe less. I was thrilled.
Dave Ramsey didn't have an outlet in Miami then, but I owe him a lot - mostly for motivation, and hope.
I interviewed him a couple of times, in my capacity as a journalist - I was actually surprised at some of the gaps in his knowledge. He didn't know who Jack Bogle was - the inventor of the Index fund and founder of the Vanguard group. And when I called him for a comment about what he thought of broker-sold CDs, he had no idea what they were.
But that's alright. Ramsey helped me change my life.
And he's changed a lot of other peoples' lives for the better. 10 years ago, it was relatively unusual for a caller to call in bragging that they had paid off everything but their home. Listening to the show after six years absent, though, every other call is a success story - and on debts which dwarf mine: People are calling in having paid off 60, 70, 100,000 dollars. 30 something couples are calling in now having paid off their home mortgages. That was extremely unusual when I first started listening to Dave's program. I heard several calls like that in the last week.
I don't agree with Dave on every particular for every instance - I see a place for whole life insurance, for example, and I don't run away screaming from annuities within an IRA in some circumstances. And I'm actually ok with keeping money in a diversified pool of mutual funds, spread across all asset classes, rather than paying off a tax-deductible home mortgage.
And Dave is still projecting 12% growth from the stock market, and is using that number in his illustrations, and frankly, I think he's on crack, on that score.
But his influence has changed more lives for the better, in a more meaningful, tangible way, than just about anyone I can think of.
And that's what attracted me to financial journalism, and ultimately, to financial planning and education. That's what prompted me to write a Financial Readiness guide for soldiers while I was in Iraq (yes, I had too much time on my hands. Eventually, I started a blog, instead). And yes, I have a missionary-like zeal about financial education. Because I've been through the wringer myself. I've struggled with depression, and in a few of my darkest moments, despair and hopelessness.
Now, because I've been able to live on less than I've made for some time, I am in a position to take some time off to retool myself for a new profession. That's thanks to a lot of people - to family, to my best friend Kelley (who designed this blog, actually), to Dave Ramsey, but mostly to Providence, because so many things fell together at just the right time to lead me on the path upon which I now embark, which I believe will be the second most rewarding period of my life - second only to serving alongside the men of the 1st Battalion, 124th Infantry Regiment, Florida Army National Guard. I hope I can give back some of what those men (and a few women!) have given me.
Splash, out
Jason
*(I found out later that the editor, John Curran, figured that anybody with the balls to still show up 45 minutes late probably really wanted the job.)
UPDATE: Got debts? Check out this nifty spreadsheet to help you organize a plan to get rid of them!
More tools here.
And the irony is rich, indeed - because Paul Cozby, the Public Relations Director of this living, breathing example of how NOT to do business with the American serviceman has just gotten himself a seat on the Board of Directors on Fort Worth's Better Business Bureau.
I'm sure the BBB can be relied on to help resolve consumer complaints in the financial services industry. NOT! First Command couldn't even seriously discipline the Charleston advisor whose outrageous sales practices were specifically singled out by the NASD. The NASD suspended him for a time, but when I called the Charleston office last spring, he was back at work, dealing with the same military families whose trust the NASD found he had abused.
And Chron.com, the Website portal of the Houston Chronicle, doesn't even mention the controversy surrounding the company. Actually, they quite literally run an unedited corporate press release. Way to serve and inform your readers, Chron!
Splash, out
Jason
UPDATE: The Fort Worth Star Telegram details the changes that First Command has been making over the last year or so. If the report is accurate, I must say the changes are meaningful and I'm actually pleased.
The transition from Broker-Dealer status to Registered Investment Advisor is huge, and will require a major paradigm shift in the field, because - as the article points out, an RIA has a FIDUCIARY duty - the highest standard of care toward the client recognized by law - to act solely in the best interests of the client.
Obviously, a lot of salespeople hit the road. Good riddance to them. We don't need their ilk serving the military community. But it looks like there are some positive changes being made over at First Command. It's a bit late. And I don't think the bloodletting has gone deep enough. But what changes they do make for the better should be recognized and encouraged.
On the downside, they are still a commission-only organization. The conflict-of-interest in such a relationship is inherent, and very difficult to surmount - especially when they still have their old sales force mostly in place. They say they will be moving to a fee-only or fee-based system. I hope so. I'll believe that when I see it.
I'm predicting fellative coverage from Military Times any minute.
Splash, out
Jason
I wrote at length the other night about how much I owe to Dave Ramsey, and what a blessing I think his ministry - and I do think it's the best ministry in the country - has been for working Americans. He's a tremendous motivator, and does more than anyone else to help people harness emotional energy in pursuit of financial stability. And as any successful salesman will tell you, it is EMOTIONAL energy that closes the sale.
But as the saying goes, if two people agree all the time, only one of them is doing any thinking. And so here is where I would part company with Mr. Ramsey:
Ramsey's the best motivator in the business, but to be honest, it seems like he stopped learning new things somewhere around 1999. He does not seem to have kept up with any of the academic investment literature, for instance. If he had, he would have seen people like Bogle pointing out that for most of the period in which stocks had generated those 11-12 percent returns, they were issuing dividends at the rate of 4-7 percent, which is several TIMES what those dividends are today. Economic growth is strong...but it's not strong enough to make up for that, and because of the additional leverage implicit in the no-or-low dividend model, you have to expect volatility to increase - which is, over the last decade or so, exactly what we find.
What concerns me is whether the endorsed local providers are using Dave's unrealistic assumptions when conducting financial planning, because if you're projecting 12% return on anything over more than a few years, you are going to undersave by as much as half, or even more.
Furthermore, if you really DID expect a 12% return on equities, you would have to be nuts to pay off a 6% mortgage with tax-deductible interest. You'd have to be bonkers, because mortgages come in 30 year chunks, and - I'm drawing on some research by Wharton's Jeremy Siegel here - there has never in market history been a 30-year period in which the S&P 500 has not outperformed the U.S. Bond market.
Now, if you're like me, and you're really looking for a 6-8% return on equities, then paying down a home mortgage makes a lot more sense. You can always borrow it back, tax deductible, up to 100,000 dollars, if you REALLY needed to (But Dave is right about being loathe to put your home at risk.)
Third, I think Dave Ramsey's missing an opportunity here, because he ought to be an index fund zealot. Index funds - particularly lifestyle funds that adjust asset allocation as an investor cohort nears retirement - are ideally suited for his usual audience, who have limited financial educations and, to be honest, have no business trying to select active fund managers. David could get his listeners an extra 70-100 basis points per year simply by pounding the table for them to use Index funds. He's got a lot of military listeners, too, and he should be pounding the table for the TSP program as well. He does not - at least, not in anything that I've heard. But expense ratios in the TSP program are as low as you'll find anywhere. Their large cap US fund charges just six basis points!
Fourth, Dave's hip-pocket approach to asset allocation is suboptimal. By advising listeners to divide up their money between "four types of mutual funds, growth, growth & income, fixed income, and international," he may get a rough value vs. growth split - but many investors will find themselves with no exposure to small caps or micro caps, and Dave ignores the diversification benefit of REITs and emerging markets altogether. Furthermore, by dividing contributions up four ways, well, 25% in international funds might be a bit much.
Lastly, Dave pays little attention to tax efficiency when discussing mutual funds. But the inherent low turnover in index funds makes a big difference in any money held outside of tax-advantaged accounts.
I would replace Dave's quick-and-dirty asset allocation advice with the following:
1.) Use index funds. 80 percent of money managers underperform indexes anyway by the amount of their costs. There is no reliable way to tell, IN ADVANCE, who the outperformers are going to be. Plus, research from Ibbotson shows that 90 percent of investment returns are attributable to asset allocation decisions, and NOT to individual security or fund selection. Costs will kill you.
2.) Put 40-50 percent of your money in a Large Cap index, like an S&P 500 fund. Don't pay more than .18 percent in expenses, and don't bother paying a load. That much you can do on line. That's going to get you growth, it will get you value stocks, it will get you dividend-paying stocks, and will get you all US industries in one shot.
2.) Put another 20-40 percent in bonds. Use an index that tracks the Lehman U.S. Aggregate market, which represents all investment-grade bonds traded in the United States.
3.)Divide the rest up between an international fund (not a global fund, which will duplicate your US exposure), a small-cap fund, and a REIT fund.
4.) Limit gold and precious metals to 2-5% of your portfolio.
5.) Alternatively seek out a cohort, or lifestyle fund, that does all the above FOR you in one account, but tailors your asset allocation to reflect your time horizon. For example, American Century's Target 2030 fund does that for a cohort of investors who are retiring in or close to 2030. You can choose a different fund to fund known time horizons, as well, such as a Target 2025 fund to save for college costs for children born today.
Notice that the INTENT is the same - diversification among different asset classes but I'm being a little more specific than Dave is. And trying to ensure that as much after-tax growth remains in the hands of the INVESTOR as possible.
When it comes to lump-sum planning, Dave's so far off base he's not even in the same stadium. Here's why:
Here's Dave Ramsey on his page for Endorsed Local Providers:
Frankly, Dave is wrong as a football bat. Mutual Funds don't have a history of earning 12 percent. The INDEX does! Mutual Funds have a history of failing, of lagging returns by fees, costs, and taxes. Watson Wyatt Worldwide notes that the average individual investor trails the average pension fund by 2 percent per year. That's huge! Barclays notes that defined contribution plans like 401(k)s, in which investors choose their own asset allocations, drag traditional pension plans by .56 percent annually.
There is simply no evidence that Dave's readers will, in practice, be able to net better returns - especially adjusting for risk - than the professional pension fund managers.
And DALBAR's annual quantitative investor behavior study finds that investors get, on average, only 25% of market returns, when cash flows are taken into account: Meaning that investors buy and sell at the wrong times.
Dave's information is flatly and dangerously wrong.
And if a fiduciary professional such as a CFP gave that advice, and took a commission or asset-based fee from any moneys resultant from the lump sum, it would be a lawsuit waiting to happen.
On the insurance side, Dave gives short shrift to whole life and other permanent forms of life insurance. Yes, they generate higher commissions than an equivalent amount of term insurance. But Dave has no problem with commissions to good advisors in other financial fields like mutual funds and real estate. Dave also understates the estate tax planning benefits of permanent life insurance plans, and the biggest drawback to term insurance - the possibility that the insured will become uninsurable during his or her term - is generally ignored. Yes, if we all got 12% in our mutual funds every year, we could all eventually self-insure. But we'd also all be subject to estate taxes, too. I think a permanent life insurance policy sufficient to cover any estate settlement costs, probate, and estate taxes for high net worth individuals just makes good sense. A universal policy also might make sense for someone with a highly irregular income, like a yacht salesman or seasonal business owner or farmer, because it allows him or her to choose when and how often to pay premiums. And no, I'm not an insurance salesman. I have no vested interest in permanent product commissions whatsoever, and nobody advertises on the blog. Term insurance is great - for temporary needs, like funding college or paying off a home mortgage. But for most successful people, I think the solution will involve a combination of term and permanent insurance policies taylored to match temporary and permanent insurance coverage needs.
Them's my thoughts. Take them for what they're worth. Dave understands families and consumer psychology much better than I do - he's got a family himself, including a couple of consumer daughters. Now THAT'S got to be a lesson in and of itself! And I cannot compare with his knowledge of real estate and bankruptcy-related topics, because he's been there and done that himself. But I think I've got a better handle on a few things than he does now, and I think there are a lot of people who are ready to take the Baby Steps to the next level, and really refine their asset allocations, and match their means to their goals more precisely.
But you know, if it wasn't for Ramsey, hundreds of thousands, if not millions of listeners would never have gotten to the point where that was possible. So I can't overstate how much many in the heartland owe to him.
Well, unless they cashed out their pensions thinking they could do better with Dave's advice!
Splash, out
Jason
But as the saying goes, if two people agree all the time, only one of them is doing any thinking. And so here is where I would part company with Mr. Ramsey:
Ramsey's the best motivator in the business, but to be honest, it seems like he stopped learning new things somewhere around 1999. He does not seem to have kept up with any of the academic investment literature, for instance. If he had, he would have seen people like Bogle pointing out that for most of the period in which stocks had generated those 11-12 percent returns, they were issuing dividends at the rate of 4-7 percent, which is several TIMES what those dividends are today. Economic growth is strong...but it's not strong enough to make up for that, and because of the additional leverage implicit in the no-or-low dividend model, you have to expect volatility to increase - which is, over the last decade or so, exactly what we find.
What concerns me is whether the endorsed local providers are using Dave's unrealistic assumptions when conducting financial planning, because if you're projecting 12% return on anything over more than a few years, you are going to undersave by as much as half, or even more.
Furthermore, if you really DID expect a 12% return on equities, you would have to be nuts to pay off a 6% mortgage with tax-deductible interest. You'd have to be bonkers, because mortgages come in 30 year chunks, and - I'm drawing on some research by Wharton's Jeremy Siegel here - there has never in market history been a 30-year period in which the S&P 500 has not outperformed the U.S. Bond market.
Now, if you're like me, and you're really looking for a 6-8% return on equities, then paying down a home mortgage makes a lot more sense. You can always borrow it back, tax deductible, up to 100,000 dollars, if you REALLY needed to (But Dave is right about being loathe to put your home at risk.)
Third, I think Dave Ramsey's missing an opportunity here, because he ought to be an index fund zealot. Index funds - particularly lifestyle funds that adjust asset allocation as an investor cohort nears retirement - are ideally suited for his usual audience, who have limited financial educations and, to be honest, have no business trying to select active fund managers. David could get his listeners an extra 70-100 basis points per year simply by pounding the table for them to use Index funds. He's got a lot of military listeners, too, and he should be pounding the table for the TSP program as well. He does not - at least, not in anything that I've heard. But expense ratios in the TSP program are as low as you'll find anywhere. Their large cap US fund charges just six basis points!
Fourth, Dave's hip-pocket approach to asset allocation is suboptimal. By advising listeners to divide up their money between "four types of mutual funds, growth, growth & income, fixed income, and international," he may get a rough value vs. growth split - but many investors will find themselves with no exposure to small caps or micro caps, and Dave ignores the diversification benefit of REITs and emerging markets altogether. Furthermore, by dividing contributions up four ways, well, 25% in international funds might be a bit much.
Lastly, Dave pays little attention to tax efficiency when discussing mutual funds. But the inherent low turnover in index funds makes a big difference in any money held outside of tax-advantaged accounts.
I would replace Dave's quick-and-dirty asset allocation advice with the following:
1.) Use index funds. 80 percent of money managers underperform indexes anyway by the amount of their costs. There is no reliable way to tell, IN ADVANCE, who the outperformers are going to be. Plus, research from Ibbotson shows that 90 percent of investment returns are attributable to asset allocation decisions, and NOT to individual security or fund selection. Costs will kill you.
2.) Put 40-50 percent of your money in a Large Cap index, like an S&P 500 fund. Don't pay more than .18 percent in expenses, and don't bother paying a load. That much you can do on line. That's going to get you growth, it will get you value stocks, it will get you dividend-paying stocks, and will get you all US industries in one shot.
2.) Put another 20-40 percent in bonds. Use an index that tracks the Lehman U.S. Aggregate market, which represents all investment-grade bonds traded in the United States.
3.)Divide the rest up between an international fund (not a global fund, which will duplicate your US exposure), a small-cap fund, and a REIT fund.
4.) Limit gold and precious metals to 2-5% of your portfolio.
5.) Alternatively seek out a cohort, or lifestyle fund, that does all the above FOR you in one account, but tailors your asset allocation to reflect your time horizon. For example, American Century's Target 2030 fund does that for a cohort of investors who are retiring in or close to 2030. You can choose a different fund to fund known time horizons, as well, such as a Target 2025 fund to save for college costs for children born today.
Notice that the INTENT is the same - diversification among different asset classes but I'm being a little more specific than Dave is. And trying to ensure that as much after-tax growth remains in the hands of the INVESTOR as possible.
When it comes to lump-sum planning, Dave's so far off base he's not even in the same stadium. Here's why:
Here's Dave Ramsey on his page for Endorsed Local Providers:
"Q: My factory just closed. I am being asked to choose between a lump sum settlement and a lifetime pension. Help!
A. The short answer is that the lump sum usually makes more sense. The more thorough answer is that the stream of pension payments must be weighed against the value of the lump sum invested in good mutual funds over time. Typically, the stream of pension payments equates to somewhere around a 7 percent annual return. If you take the lump sum, it can be invested into good mutual funds that have a history of earning closer to 12 percent annually."
Frankly, Dave is wrong as a football bat. Mutual Funds don't have a history of earning 12 percent. The INDEX does! Mutual Funds have a history of failing, of lagging returns by fees, costs, and taxes. Watson Wyatt Worldwide notes that the average individual investor trails the average pension fund by 2 percent per year. That's huge! Barclays notes that defined contribution plans like 401(k)s, in which investors choose their own asset allocations, drag traditional pension plans by .56 percent annually.
There is simply no evidence that Dave's readers will, in practice, be able to net better returns - especially adjusting for risk - than the professional pension fund managers.
And DALBAR's annual quantitative investor behavior study finds that investors get, on average, only 25% of market returns, when cash flows are taken into account: Meaning that investors buy and sell at the wrong times.
Dave's information is flatly and dangerously wrong.
And if a fiduciary professional such as a CFP gave that advice, and took a commission or asset-based fee from any moneys resultant from the lump sum, it would be a lawsuit waiting to happen.
On the insurance side, Dave gives short shrift to whole life and other permanent forms of life insurance. Yes, they generate higher commissions than an equivalent amount of term insurance. But Dave has no problem with commissions to good advisors in other financial fields like mutual funds and real estate. Dave also understates the estate tax planning benefits of permanent life insurance plans, and the biggest drawback to term insurance - the possibility that the insured will become uninsurable during his or her term - is generally ignored. Yes, if we all got 12% in our mutual funds every year, we could all eventually self-insure. But we'd also all be subject to estate taxes, too. I think a permanent life insurance policy sufficient to cover any estate settlement costs, probate, and estate taxes for high net worth individuals just makes good sense. A universal policy also might make sense for someone with a highly irregular income, like a yacht salesman or seasonal business owner or farmer, because it allows him or her to choose when and how often to pay premiums. And no, I'm not an insurance salesman. I have no vested interest in permanent product commissions whatsoever, and nobody advertises on the blog. Term insurance is great - for temporary needs, like funding college or paying off a home mortgage. But for most successful people, I think the solution will involve a combination of term and permanent insurance policies taylored to match temporary and permanent insurance coverage needs.
Them's my thoughts. Take them for what they're worth. Dave understands families and consumer psychology much better than I do - he's got a family himself, including a couple of consumer daughters. Now THAT'S got to be a lesson in and of itself! And I cannot compare with his knowledge of real estate and bankruptcy-related topics, because he's been there and done that himself. But I think I've got a better handle on a few things than he does now, and I think there are a lot of people who are ready to take the Baby Steps to the next level, and really refine their asset allocations, and match their means to their goals more precisely.
But you know, if it wasn't for Ramsey, hundreds of thousands, if not millions of listeners would never have gotten to the point where that was possible. So I can't overstate how much many in the heartland owe to him.
Well, unless they cashed out their pensions thinking they could do better with Dave's advice!
Splash, out
Jason
Reconnecting with Dave Ramsey (A financial autobiography, of sorts)
So a few nights ago I sort of got reconnected with an old friend, radio talk show host, author, and financial counselor Dave Ramsey.
I first encountered Dave's show about ten years ago, when I was driving around middle Tennessee a lot, as a merchant services sales representative. At the time, I had just relocated from Hawaii to Tennessee, and found that I was making less than half of what I was making in Hawaii as a mental health technician. In fact, while I stayed in what I thought was going to be my field, I was back to making 7 dollars per hour, no benefits, and having my employer bitch that I was racking up too many hours if I worked more than 32 in a week.
I also found out that there was no reliable bus system to speak of, in Clarksville, and I only had a grand to my name, but had to get a car. Didn't want anything financeable (too rich for my blood!) so, in my 26-year-old wisdom, I had taken out a cash advance on a credit card to buy most of a $5,000 car. I had financed a car in Hawaii before, but worked a lot of hospital overtime and paid it off in about 5 months, and I figured I'd do the same thing here.
Wrong answer.
I was 26, saw my income slashed by more than half, and was already laboring under tens of thousands in student loan debt courtesy of the University of Southern California. I quickly ran into trouble. missed a payment on the credit card, and the rate got jacked up to 26%. It was all I could do to make the interest payment.
What I really wanted to do was be a newspaper reporter. I sat down with the editor of the Clarksville Leaf-Chronicle, and showed him some clips, which he liked, but he wasn't hiring. Jobs for college grads were tight in Clarksville, and even if he was hiring, the most he could pay was $17,000 per year for a full-time reporter - not nearly enough for me to pay down USC debt significantly, let alone keep up with a 26% car note! Yes, this was during the era of Irrational Exuberance.
So, I got involved in sales. Wound up learning the merchant services business from an old-school vacuum-cleaner salesman who drove a Lincoln around town and wore expensive jewelry. I learned a valuable skill - how to knock on doors! 30 calls a day, face to face, one business after another, and began to make what was - for Clarksville - pretty good money for a time.
But the commission checks were slow in coming. I should have been pulling in $800-$2000 per week, based on two to five new deals per week. That's what they told us we should be able to do if we cold-called 30 new merchants a day and followed up appropriately, and the conventional wisdom wasn't far off. But the commission checks just got later and later - and finally stopped altogether. The guy I was working for, it turned out, had given me a fake Green Hills address. The house didn't exist. And had essentially skipped town owing me thousands of desperately needed dollars.
I quickly signed on with a new company, with some success, initially, until I had tapped out Clarksville. So as I searched farther and farther afield - prospecting Bowling Green, Hopkinsville, Nashville, Franklin, and Lebanon, Tennessee, I spent a lot of time in my car.
Business was getting tougher, because the Web, I see in hindsight, was changing everything. All the sales reps in the field were getting shopped via the Web, and the business was changing from an outside-sales focused force to an inside sales. So after a pretty good run in Clarksville, I began hitting the wall.
But driving all over middle Tennessee, I heard Dave's show, "The Money Game," and it turned my head around. I was in dire financial straits at the time, and felt awful about it. I actually felt depressed and overwhelmed at the time, because I didn't see a way out of it, other than going active duty as a lieutenant - which I tried to do several times. The only people I knew who had any money were either successful Nashville merchants (few in Clarksville had much money outside of landholders) or in the military.
The Active Army wasn't taking anyone. The Infantry branch management people told me "The ONLY way you can go active duty is if you've ALREADY had four years of active duty. We don't want reserve officers."
"So much for the "One Army" concept, assholes," I told them. (To this day, I'm bitter about that crap. But militiamen have been bitching about regular Army arrogance since Washington headed the Virginia Militia during the French and Indian war.)
But listening to Dave turned my head around. He's a terrific motivator, and actually provided me with an intellectual and emotional framework for getting out of the quicksand I was in.
What's Dave all about?
Beating debt, for starters. Unlike most financial radio shows, Dave's show attracted callers that were a lot like me - I could relate to them: Struggling families in their 20s and 30s, many of which were dealing with situations far more difficult than mine. Unlike some muni bond guru talking with 65 year-olds about tax-free income in retirement, Dave was reaching people like ME, and WAS reaching me.
I started working on Ramsey's "Baby Steps." I could enumerate them, but they're already listed here. Highly recommended.
(I was shocked when I wrote out my "debt snowball" list and found out I was paying hundreds each month just in interest! But on the refrigerator it went, and I busted my ass to get a grand in the bank and start turning my smaller debts into gooseggs).
More important than the specific steps, though, was that Dave Ramsey, through his radio show, made mathematics and numbers accessible to me. I had always been the poster boy for math-anxiety disorder, but Dave was able to help me transcend that as I worked through the numbers. But even more important than the numbers was the EMOTIONAL energy that Dave helped me to harness. He draws a lot on scripture - it WAS the Bible Belt, after all! - and the image Dave uses to describe this energy is a scriptural one: "Flee from surety like a Gazelle flees a leopard."
Now THAT'S desperation! THAT is putting the petal to the metal. And while I could understand what was going on intellectually, that was precisely the language I needed to hear at that point, and I set to work with that kind of desperation.
Meanwhile, I took a (belated!) interest in personal finance. The topic had always bored me growing up. I had absolutely no interest. I was a musician and a writer, right? And a counselor! That stuff was for those Orange County rich kids majoring in business I had found so annoying back at USC. But again, by listening to Dave's show, and listening to distressed family after distressed family, I got an appreciation for the family dynamics in personal finance.
I was a good psych tech, but too young for the job. But I learned that a sound financial footing makes for a stronger marriage. Well, if I could figure that out, I'd be a better officer, a better teacher, a better psychiatric counselor, a better EVERYTHING. So I hit the library and began to read everything I could on personal finance. Not the academic stuff - I didn't know where to look for that, really. I had no idea what a CFP was. But I was gradually finding my calling, and so my long latent interest in a career as a financial planner was born - before I even really knew what they were.
Now, understand how tight things really were:
My blower motor went out in my car, and I drove without heat or air for over a year. Actually, without a defroster, that was a safety hazard, but there was no other way to get around.
I hocked a violin to get money to pay for a haircut and gas to get to drill, 120 miles away.
My heat was turned off in my apartment on several occasions during winter. (That wasn't a huge problem...even in 25 degree weather I could layer. It was just depressing).
Carbs were cheap. I lived on 33 cent boxes of Macaroni and Cheese. I was running a lot, but even then, I started gaining weight. I'm a stress eater, to begin with. I've sort of figured that out in the last couple of years about myself. The combination of money stress, depression, and the fact that the only foods I could afford were rice, starches, and cans of chili, well, it was a bad combination. I think it amounted to 20-25 pounds or so, in a few years.
Never let my car insurance lapse, though. I don't make bets I can't afford to lose. I also bought an individual health insurance policy from my best friend and kept that up.
Eventually, I got stuck. I could no longer compete with the Web for the lower-end merchants that were my credit-card processing market. I was making 7 bucks an hour, no benefits as a weekend companion for two severely mentally disabled guys I loved, and going to drill, and just unable to pull ahead. I continued making achingly slow progress on the debt snowball. In retrospect, I don't think the total debt ever amounted to more than $30,000, including student loan debt. Lots of people my age had more than that in car debt alone - with a couple of extra mouths to feed. But from where I was at the time, it seemed insurmountable.
Most of my peer group was in the same boat, which is dysfunctional in itself. But these were all highly intelligent - even brilliant - college graduates who couldn't get a leg up in that town. The only good jobs were in the Army and at the Trane factory. You could be the greatest computer whiz in the world - you would still be on the unemployment line in Clarksville in 1998-99. I know, because I comiserated with some of them in those days. I still felt like a loser. But I wasn't alone. It was, however, pretty depressing to have a four-year degree plus some grad work, to be one of the best musicians in town on top of that, to be a dedicated commissioned officer, and to find I was being outearned by 20-year-old E-4s on Fort Campbell, KY.
I tell you, I got so warped, I could barely talk to my active duty peers, the lieutenants and captains. I knew I was every bit the officer they were, but they were in an exclusive club, and even though I wanted to go on active duty more than anything else in the world, I was locked out of the club. I was so overwhelmed with bitterness I didn't want to have anything to do with active duty officers. Not that I resented them - they were just reminders of a very painful circumstance.
Just as I started to gain some momentum in the debt snowball, though, a funny thing happened: A Guard unit from Mississippi needed officers to help fill them out for a National Training Center rotation at Fort Irwin, California.
I jumped at the chance.
Had the time of my life, for three weeks. Visited my grandparents in California, after that, and taught myself all the algebra I flunked in high school (I had designs on resigning my commission and becoming a 52E Prime Power Production Specialist and learning a trade.)
I loved the NTC, though, and tried one more time to go on active duty. "Look," I said, "You've got a chronic shortage of captains. I want to go on active duty as a lieutenant. I know you need me. There are companies on Fort Campbell with half their officer slots vacant!"
"Fuck you," said the Army.
"Fuck you, too, then," I said back, and told the Kentucky National Guard I was hanging up my spurs, took the couple of thousand dollars I had saved up from the NTC rotation, and reserved a Ryder truck, and popped smoke from that town and never looked back.
"You're moving to Miami?!?!?" said my friend Maggie, a screaming liberal Democrat personal finance writer from Greenwich Village, New York. "Yep. My grandmother has a place down there which is vacant, and she offered to let me stay there for a while."
Maggie and I got to know each other debating politics on the Compuserve Democratic Politics forum. We didn't agree on much, except that we really liked each other, and she liked my writing.
"Well, when you get down there, stop by Mutual Funds Magazine, where I'm a contributing editor. Theyre about 40 miles away, in Deerfield Beach. I think they're looking for a fact checker."
So I loaded up all my earthly belongings into the Ryder truck, got down there, and scheduled an interview. Got caught in traffic on the way there, showed up 45 minutes late for the interview, and got the job.* They liked my writing, though, and made me a reporter, not a fact checker.
So I got hired making $8,000 per year more than I was making before (didn't think that was possible!) and then got a couple of merit bonuses after that, and became a very motivated personal finance reporter. I got hired in January 2000, busted my ass working 13-14 hour days (with a 90 minute commute! But I could stay almost rent free in my grandmother's place so it was worth it, and I needed a break). And was debt free within a year. Maybe less. I was thrilled.
Dave Ramsey didn't have an outlet in Miami then, but I owe him a lot - mostly for motivation, and hope.
I interviewed him a couple of times, in my capacity as a journalist - I was actually surprised at some of the gaps in his knowledge. He didn't know who Jack Bogle was - the inventor of the Index fund and founder of the Vanguard group. And when I called him for a comment about what he thought of broker-sold CDs, he had no idea what they were.
But that's alright. Ramsey helped me change my life.
And he's changed a lot of other peoples' lives for the better. 10 years ago, it was relatively unusual for a caller to call in bragging that they had paid off everything but their home. Listening to the show after six years absent, though, every other call is a success story - and on debts which dwarf mine: People are calling in having paid off 60, 70, 100,000 dollars. 30 something couples are calling in now having paid off their home mortgages. That was extremely unusual when I first started listening to Dave's program. I heard several calls like that in the last week.
I don't agree with Dave on every particular for every instance - I see a place for whole life insurance, for example, and I don't run away screaming from annuities within an IRA in some circumstances. And I'm actually ok with keeping money in a diversified pool of mutual funds, spread across all asset classes, rather than paying off a tax-deductible home mortgage.
And Dave is still projecting 12% growth from the stock market, and is using that number in his illustrations, and frankly, I think he's on crack, on that score.
But his influence has changed more lives for the better, in a more meaningful, tangible way, than just about anyone I can think of.
And that's what attracted me to financial journalism, and ultimately, to financial planning and education. That's what prompted me to write a Financial Readiness guide for soldiers while I was in Iraq (yes, I had too much time on my hands. Eventually, I started a blog, instead). And yes, I have a missionary-like zeal about financial education. Because I've been through the wringer myself. I've struggled with depression, and in a few of my darkest moments, despair and hopelessness.
Now, because I've been able to live on less than I've made for some time, I am in a position to take some time off to retool myself for a new profession. That's thanks to a lot of people - to family, to my best friend Kelley (who designed this blog, actually), to Dave Ramsey, but mostly to Providence, because so many things fell together at just the right time to lead me on the path upon which I now embark, which I believe will be the second most rewarding period of my life - second only to serving alongside the men of the 1st Battalion, 124th Infantry Regiment, Florida Army National Guard. I hope I can give back some of what those men (and a few women!) have given me.
Splash, out
Jason
*(I found out later that the editor, John Curran, figured that anybody with the balls to still show up 45 minutes late probably really wanted the job.)
UPDATE: Got debts? Check out this nifty spreadsheet to help you organize a plan to get rid of them!
More tools here.
I first encountered Dave's show about ten years ago, when I was driving around middle Tennessee a lot, as a merchant services sales representative. At the time, I had just relocated from Hawaii to Tennessee, and found that I was making less than half of what I was making in Hawaii as a mental health technician. In fact, while I stayed in what I thought was going to be my field, I was back to making 7 dollars per hour, no benefits, and having my employer bitch that I was racking up too many hours if I worked more than 32 in a week.
I also found out that there was no reliable bus system to speak of, in Clarksville, and I only had a grand to my name, but had to get a car. Didn't want anything financeable (too rich for my blood!) so, in my 26-year-old wisdom, I had taken out a cash advance on a credit card to buy most of a $5,000 car. I had financed a car in Hawaii before, but worked a lot of hospital overtime and paid it off in about 5 months, and I figured I'd do the same thing here.
Wrong answer.
I was 26, saw my income slashed by more than half, and was already laboring under tens of thousands in student loan debt courtesy of the University of Southern California. I quickly ran into trouble. missed a payment on the credit card, and the rate got jacked up to 26%. It was all I could do to make the interest payment.
What I really wanted to do was be a newspaper reporter. I sat down with the editor of the Clarksville Leaf-Chronicle, and showed him some clips, which he liked, but he wasn't hiring. Jobs for college grads were tight in Clarksville, and even if he was hiring, the most he could pay was $17,000 per year for a full-time reporter - not nearly enough for me to pay down USC debt significantly, let alone keep up with a 26% car note! Yes, this was during the era of Irrational Exuberance.
So, I got involved in sales. Wound up learning the merchant services business from an old-school vacuum-cleaner salesman who drove a Lincoln around town and wore expensive jewelry. I learned a valuable skill - how to knock on doors! 30 calls a day, face to face, one business after another, and began to make what was - for Clarksville - pretty good money for a time.
But the commission checks were slow in coming. I should have been pulling in $800-$2000 per week, based on two to five new deals per week. That's what they told us we should be able to do if we cold-called 30 new merchants a day and followed up appropriately, and the conventional wisdom wasn't far off. But the commission checks just got later and later - and finally stopped altogether. The guy I was working for, it turned out, had given me a fake Green Hills address. The house didn't exist. And had essentially skipped town owing me thousands of desperately needed dollars.
I quickly signed on with a new company, with some success, initially, until I had tapped out Clarksville. So as I searched farther and farther afield - prospecting Bowling Green, Hopkinsville, Nashville, Franklin, and Lebanon, Tennessee, I spent a lot of time in my car.
Business was getting tougher, because the Web, I see in hindsight, was changing everything. All the sales reps in the field were getting shopped via the Web, and the business was changing from an outside-sales focused force to an inside sales. So after a pretty good run in Clarksville, I began hitting the wall.
But driving all over middle Tennessee, I heard Dave's show, "The Money Game," and it turned my head around. I was in dire financial straits at the time, and felt awful about it. I actually felt depressed and overwhelmed at the time, because I didn't see a way out of it, other than going active duty as a lieutenant - which I tried to do several times. The only people I knew who had any money were either successful Nashville merchants (few in Clarksville had much money outside of landholders) or in the military.
The Active Army wasn't taking anyone. The Infantry branch management people told me "The ONLY way you can go active duty is if you've ALREADY had four years of active duty. We don't want reserve officers."
"So much for the "One Army" concept, assholes," I told them. (To this day, I'm bitter about that crap. But militiamen have been bitching about regular Army arrogance since Washington headed the Virginia Militia during the French and Indian war.)
But listening to Dave turned my head around. He's a terrific motivator, and actually provided me with an intellectual and emotional framework for getting out of the quicksand I was in.
What's Dave all about?
Beating debt, for starters. Unlike most financial radio shows, Dave's show attracted callers that were a lot like me - I could relate to them: Struggling families in their 20s and 30s, many of which were dealing with situations far more difficult than mine. Unlike some muni bond guru talking with 65 year-olds about tax-free income in retirement, Dave was reaching people like ME, and WAS reaching me.
I started working on Ramsey's "Baby Steps." I could enumerate them, but they're already listed here. Highly recommended.
(I was shocked when I wrote out my "debt snowball" list and found out I was paying hundreds each month just in interest! But on the refrigerator it went, and I busted my ass to get a grand in the bank and start turning my smaller debts into gooseggs).
More important than the specific steps, though, was that Dave Ramsey, through his radio show, made mathematics and numbers accessible to me. I had always been the poster boy for math-anxiety disorder, but Dave was able to help me transcend that as I worked through the numbers. But even more important than the numbers was the EMOTIONAL energy that Dave helped me to harness. He draws a lot on scripture - it WAS the Bible Belt, after all! - and the image Dave uses to describe this energy is a scriptural one: "Flee from surety like a Gazelle flees a leopard."
Now THAT'S desperation! THAT is putting the petal to the metal. And while I could understand what was going on intellectually, that was precisely the language I needed to hear at that point, and I set to work with that kind of desperation.
Meanwhile, I took a (belated!) interest in personal finance. The topic had always bored me growing up. I had absolutely no interest. I was a musician and a writer, right? And a counselor! That stuff was for those Orange County rich kids majoring in business I had found so annoying back at USC. But again, by listening to Dave's show, and listening to distressed family after distressed family, I got an appreciation for the family dynamics in personal finance.
I was a good psych tech, but too young for the job. But I learned that a sound financial footing makes for a stronger marriage. Well, if I could figure that out, I'd be a better officer, a better teacher, a better psychiatric counselor, a better EVERYTHING. So I hit the library and began to read everything I could on personal finance. Not the academic stuff - I didn't know where to look for that, really. I had no idea what a CFP was. But I was gradually finding my calling, and so my long latent interest in a career as a financial planner was born - before I even really knew what they were.
Now, understand how tight things really were:
My blower motor went out in my car, and I drove without heat or air for over a year. Actually, without a defroster, that was a safety hazard, but there was no other way to get around.
I hocked a violin to get money to pay for a haircut and gas to get to drill, 120 miles away.
My heat was turned off in my apartment on several occasions during winter. (That wasn't a huge problem...even in 25 degree weather I could layer. It was just depressing).
Carbs were cheap. I lived on 33 cent boxes of Macaroni and Cheese. I was running a lot, but even then, I started gaining weight. I'm a stress eater, to begin with. I've sort of figured that out in the last couple of years about myself. The combination of money stress, depression, and the fact that the only foods I could afford were rice, starches, and cans of chili, well, it was a bad combination. I think it amounted to 20-25 pounds or so, in a few years.
Never let my car insurance lapse, though. I don't make bets I can't afford to lose. I also bought an individual health insurance policy from my best friend and kept that up.
Eventually, I got stuck. I could no longer compete with the Web for the lower-end merchants that were my credit-card processing market. I was making 7 bucks an hour, no benefits as a weekend companion for two severely mentally disabled guys I loved, and going to drill, and just unable to pull ahead. I continued making achingly slow progress on the debt snowball. In retrospect, I don't think the total debt ever amounted to more than $30,000, including student loan debt. Lots of people my age had more than that in car debt alone - with a couple of extra mouths to feed. But from where I was at the time, it seemed insurmountable.
Most of my peer group was in the same boat, which is dysfunctional in itself. But these were all highly intelligent - even brilliant - college graduates who couldn't get a leg up in that town. The only good jobs were in the Army and at the Trane factory. You could be the greatest computer whiz in the world - you would still be on the unemployment line in Clarksville in 1998-99. I know, because I comiserated with some of them in those days. I still felt like a loser. But I wasn't alone. It was, however, pretty depressing to have a four-year degree plus some grad work, to be one of the best musicians in town on top of that, to be a dedicated commissioned officer, and to find I was being outearned by 20-year-old E-4s on Fort Campbell, KY.
I tell you, I got so warped, I could barely talk to my active duty peers, the lieutenants and captains. I knew I was every bit the officer they were, but they were in an exclusive club, and even though I wanted to go on active duty more than anything else in the world, I was locked out of the club. I was so overwhelmed with bitterness I didn't want to have anything to do with active duty officers. Not that I resented them - they were just reminders of a very painful circumstance.
Just as I started to gain some momentum in the debt snowball, though, a funny thing happened: A Guard unit from Mississippi needed officers to help fill them out for a National Training Center rotation at Fort Irwin, California.
I jumped at the chance.
Had the time of my life, for three weeks. Visited my grandparents in California, after that, and taught myself all the algebra I flunked in high school (I had designs on resigning my commission and becoming a 52E Prime Power Production Specialist and learning a trade.)
I loved the NTC, though, and tried one more time to go on active duty. "Look," I said, "You've got a chronic shortage of captains. I want to go on active duty as a lieutenant. I know you need me. There are companies on Fort Campbell with half their officer slots vacant!"
"Fuck you," said the Army.
"Fuck you, too, then," I said back, and told the Kentucky National Guard I was hanging up my spurs, took the couple of thousand dollars I had saved up from the NTC rotation, and reserved a Ryder truck, and popped smoke from that town and never looked back.
"You're moving to Miami?!?!?" said my friend Maggie, a screaming liberal Democrat personal finance writer from Greenwich Village, New York. "Yep. My grandmother has a place down there which is vacant, and she offered to let me stay there for a while."
Maggie and I got to know each other debating politics on the Compuserve Democratic Politics forum. We didn't agree on much, except that we really liked each other, and she liked my writing.
"Well, when you get down there, stop by Mutual Funds Magazine, where I'm a contributing editor. Theyre about 40 miles away, in Deerfield Beach. I think they're looking for a fact checker."
So I loaded up all my earthly belongings into the Ryder truck, got down there, and scheduled an interview. Got caught in traffic on the way there, showed up 45 minutes late for the interview, and got the job.* They liked my writing, though, and made me a reporter, not a fact checker.
So I got hired making $8,000 per year more than I was making before (didn't think that was possible!) and then got a couple of merit bonuses after that, and became a very motivated personal finance reporter. I got hired in January 2000, busted my ass working 13-14 hour days (with a 90 minute commute! But I could stay almost rent free in my grandmother's place so it was worth it, and I needed a break). And was debt free within a year. Maybe less. I was thrilled.
Dave Ramsey didn't have an outlet in Miami then, but I owe him a lot - mostly for motivation, and hope.
I interviewed him a couple of times, in my capacity as a journalist - I was actually surprised at some of the gaps in his knowledge. He didn't know who Jack Bogle was - the inventor of the Index fund and founder of the Vanguard group. And when I called him for a comment about what he thought of broker-sold CDs, he had no idea what they were.
But that's alright. Ramsey helped me change my life.
And he's changed a lot of other peoples' lives for the better. 10 years ago, it was relatively unusual for a caller to call in bragging that they had paid off everything but their home. Listening to the show after six years absent, though, every other call is a success story - and on debts which dwarf mine: People are calling in having paid off 60, 70, 100,000 dollars. 30 something couples are calling in now having paid off their home mortgages. That was extremely unusual when I first started listening to Dave's program. I heard several calls like that in the last week.
I don't agree with Dave on every particular for every instance - I see a place for whole life insurance, for example, and I don't run away screaming from annuities within an IRA in some circumstances. And I'm actually ok with keeping money in a diversified pool of mutual funds, spread across all asset classes, rather than paying off a tax-deductible home mortgage.
And Dave is still projecting 12% growth from the stock market, and is using that number in his illustrations, and frankly, I think he's on crack, on that score.
But his influence has changed more lives for the better, in a more meaningful, tangible way, than just about anyone I can think of.
And that's what attracted me to financial journalism, and ultimately, to financial planning and education. That's what prompted me to write a Financial Readiness guide for soldiers while I was in Iraq (yes, I had too much time on my hands. Eventually, I started a blog, instead). And yes, I have a missionary-like zeal about financial education. Because I've been through the wringer myself. I've struggled with depression, and in a few of my darkest moments, despair and hopelessness.
Now, because I've been able to live on less than I've made for some time, I am in a position to take some time off to retool myself for a new profession. That's thanks to a lot of people - to family, to my best friend Kelley (who designed this blog, actually), to Dave Ramsey, but mostly to Providence, because so many things fell together at just the right time to lead me on the path upon which I now embark, which I believe will be the second most rewarding period of my life - second only to serving alongside the men of the 1st Battalion, 124th Infantry Regiment, Florida Army National Guard. I hope I can give back some of what those men (and a few women!) have given me.
Splash, out
Jason
*(I found out later that the editor, John Curran, figured that anybody with the balls to still show up 45 minutes late probably really wanted the job.)
UPDATE: Got debts? Check out this nifty spreadsheet to help you organize a plan to get rid of them!
More tools here.
