Is Dave Ramsey right?

I’m a regular listener of the Dave Ramsey Show, the radio advice show that’s all about getting out of debt.

Ramsey’s recurring spiel is to live on rice and beans until you have all your debt paid off, then pay cash for everything, invest in growth mutual funds, and give generously to charity. So far, so good.

But there are a few details with which I take issue:

1) 401(k) match: Ramsey recommends not saving or investing at all beyond a $1000 emergency reserve until you have paid off all of your non-mortgage debt. This includes 401(k)s. This is horrible advice to forgo maximizing your 401(k) up to the company match amount. You’re giving up free money, an instant 100% return. You’d even be better off taking the match, then doing an early withdrawal of your contribution and paying taxes and penalties, and using that money to pay down your debt. Not that I’d recommend that.

2) Mortgages: Ramsey recommends only using 15-year fixed-rate mortgages with payments equal to or less than 25% of take-home pay, if not paying cash outright. While a noble goal, this is highly unrealistic in a world where house prices are set by other buyers paying 40% or more of income on 30-year mortgages. I’m all for paying cash for a house in San Diego where median home prices are over $400,000, but then I’m all for regular guys getting laid by supermodels too.

Let’s say you have a household income of $100,000, far above the San Diego median of $60,000. Your take-home pay after taxes and other deductions is about $5600 a month, if you don’t contribute anything at all to a 401(k). 25% of that is $1400 a month, which will service a $200,000 loan for 15 years at 3.25%. You’ve got a well above average income, but you can afford only half of an average house. Most Ramsey followers in expensive markets like California would have to be permanent renters at least until late in their careers, even though early home ownership has historically been a pretty significant contributor to household wealth.

3) Gold: Ramsey has been saying for years, since gold was way below $1000, not to buy gold. That’s horrible advice, as gold has equity-like returns with great diversification properties because it is generally uncorrelated with equities and bonds. It is financial malpractice not to have at least a small allocation to gold, especially now with stocks at record highs and gold far below its Fed balance sheet fair value.