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Is it Irresponsible for Dave Ramsey to Assume a 12% Rate of Return in His Examples?

By JLP | October 8, 2009

My church participated in Dave Ramsey’s “The Total Money Makeover Live!” event a couple of weeks ago. I did not attend the event but did pick up a copy of the workbook that went along with the event.

I have never counted myself among the Dave Ramsey fans. Sure, his advice is better than racking up lots of debt and not saving for the future. But, he also generalizes and has a one-size-fits-all approach to the advice he offers his listeners.

What bugs me most is the math behind his assumptions.

For example…

On page 3 of the above-mentioned workbook, is this:

The American Dream

Imagine if…
A 30-year old couple made $48,000 a year and saved 15% ($7,200 per year or $600 per month) in a 401(k) at 12% growth.

At 70 years old, they will have…
$7,058,863.50 in the 401(k)”

How did Dave arrive at that number? Here’s the math:

FV = $600 × (1 + .01)480

FV = $7,058,863.51

That’s a lot of money!

But, how would this look in the real world? I summarized Dave’s information into the following graphic and used 2009″s numbers from the IRS to calculate income taxes.

Dave's Math

For my example, I assumed that this couple does not have children. If that were the case, it would probably be possible for them to sock away $7,200 per year. Their budget would be tight unless they economized.

Then comes my next question:


Seriously, WHO assumes a 12% rate of return for 40 years? Later on in the book, Dave stresses diversification. There’s not a properly diversified portfolio on earth that is going to average a 12% rate of return on a consistent basis. The ONLY way you’re going to get that kind of return is to invest ALL YOUR MONEY in small cap stocks, which are highly volatile.

I think the word “imagine” was the proper word to use for his scenario because the only way he’s going to get those numbers is with IMAGINATION!

To bring us back to REALITY, I reran Dave’s numbers using a much more conservative .77% monthly rate of return, which happens to be the geometric average return for the S&P going back to 1926. Take a wild guess at what the 401(k)’s expected value becomes with that number?


And that number’s even somewhat inflated because it assumes 100% of the money is invested in the S&P for all 40 years.


Neither of those numbers include inflation, which would eat up at least half of those accounts.

So why does Dave use such a high number for an assumed rate of return? I would have to say it’s to give people hope (a false sense of hope, but hope nonetheless). When people look at those numbers, they go, “WOW! I can do that? I had no idea!” I will admit, that those numbers are eye-popping.




Topics: Dave Ramsey, Financial Math Basics, Investing, Miscellaneous, Retirement Planning | 69 Comments »

69 Responses to “Is it Irresponsible for Dave Ramsey to Assume a 12% Rate of Return in His Examples?”

  1. fidr01 Says:
    October 8th, 2009 at 1:24 pm

    Yeah, I don’t see any reason to save. The government will take it all in the name of making sure you have something when you retire and pay you back $1,000 a month.
    Might as well borrow as much as you can on a house, couple of cars and let the government bail you out so you are not homeless.
    It seems like a lot of people are taking this as reality.

  2. Mr.GoTo Says:
    October 8th, 2009 at 1:59 pm

    I have heard this from Ramsey repeatedly – including on his radio show. I can’t tell if he is being disingenuous or if he simply lacks sophistication in the investing world. He is most of all an entertainer. We know he failed at real estate. We don’t know anything about his investing acumen. But he sure can sell books that contain unsupported data like this 12% doozy!

  3. RJ Weiss Says:
    October 8th, 2009 at 2:01 pm

    I listen to Dave’s podcast occasionally. His advice on getting out of debt is great, but his investment advice is pretty bad.

    I once heard him tell someone that they can safely withdrawal 8% a year from their portfolio. Also, I’m pretty sure he only recommends growth mutual funds.

  4. Wayne Elgin Says:
    October 8th, 2009 at 2:20 pm

    This explains his thinking regarding investments numbers a little more:

    Funny, during his Total Money Makeover live events, after going over those numbers Dave says, “What if I’m half wrong?!?”

    Also, there’s this:

  5. Doug W. Says:
    October 8th, 2009 at 2:30 pm

    I admit I’m a huge fan of Dave’s so I’m biased. 12% does seem unrealistic, but he boasts of mutual funds that have been around more than 20 years that have avg. annual returns, albeit some are closed to new investors. They are out there. He also argues you need to find such a high rate of return due to inflation eating away at your savings.

    What I love about what he says though is “what if I’m half wrong”, then the couple (in simplistic terms) will only have $3 million, instead of $7 million. Is that so bad?

    His whole point is not enough people are saving early enough and investing in the stock market (he only recommends mutual funds and real estate) to get ahead. He says, if you want to be rich, do what rich people do. They invest & didn’t get rich with car loans and credit cards.

    Ok, there’s my defense of Dave for what its worth! Great discussion!

  6. Evan Says:
    October 8th, 2009 at 3:32 pm

    It is 100% irresponsible! It is attempting to make a serious subject attainable and understandable to the detriment of everyone.

    If he actually says, “What if I am half wrong” then why not use the real number of 6%?

  7. Doug W. Says:
    October 8th, 2009 at 3:53 pm

    Another point I would like to make is Dave recommends saving 12% of YOUR money, regardless of your employer match. If your employer matches can’t that be considered part of your return? It is a gain since it is not out of your pocket.

    Dave’s example also fails to factor in raises & bonuses to keep it simple. In reality the young couple will get raises, bonuses, gifts, inheritances, etc.

  8. JLP Says:
    October 8th, 2009 at 4:03 pm

    Great discussion.

    Yes, Dave leaves out stuff in order to make it simpler. A couple that starts out making $48k per year at age 30 will get raises and such throughout their career.

    They will also face different periods in their life where they will have to save less or they might be able to save more. It depends on the situation.

    Whether Dave’s approach factors in these inconsistencies by using a higher rate of return is debatable. All I know, is when I look at something that says, “invest $600 per month for 40 years at 12% interest…” I have to think he expects a 12% rate of return.

    Oh, and if he is half wrong on the return, the end value is $1.2 million, a far cry from half the $7 mllion figure. This is due to compounding.

  9. Greg Retzloff Says:
    October 8th, 2009 at 4:16 pm

    Not all PF gurus are good in all areas of PF, including Dave Ramsey and Suze Orman.

    No competent, qualified, and experienced financial advisor would assume a 12% return over the long haul when drawing up a personal financial plan for a client. The risk taken in shooting for 12% would be unacceptable to most investors.

    Consider these long-term numbers: According to Robert J. Schiller (of “Irrational Exuberance” fame), real estate has provided a real (inflation adjusted) return of about 4% since the late 1800s or so. According to Jermey Siegel in “Stocks for the Long Run,” the compound average real return on U.S. stocks between 1802 and 1997 was about 7%. The real return on long bonds during this period was about 3.5%.

    I generally like Dave Ramsey’s approach and advice, but his assumptions about investment returns are just unrealistic. This doesn’t spoil an otherwise good book like “Total Money Makeover,” but it makes you think…

    By the way, inflation can be hedged in a portfolio with a combination of a broad-based stock index fund, a REIT fund, a TIPS fund, and a commodity-linked fund.

  10. jim Says:
    October 8th, 2009 at 4:25 pm

    Yes expecting 12% annual return is too optimistic. Ramsey’s investment advice isn’t the best IMHO.

    It looks like he’s citing old data that looks at average annual return. Thats not the same as the real compound annual growth rate. e.g. +40%, +4% & -8% averages to +12% but if you had 3 years with +40%, +4% and -8% then you’re up 10% compounded.

  11. Dylan Says:
    October 8th, 2009 at 5:41 pm

    First there is a big difference between averaging 12% and getting 12% every year with each contribution.

    Second, he’s basing that on his conclusion that 12% is what the stock market will return. Yes, he’s in the optimists’ camp, but he’s also completely ignoring fees. Since Dave recommends using brokers and funds with loads, he ought to knock that down a few notches.

    Is it irresponsible for someone with Dave Ramsey’s influence to suggest investors can assume a 12% rate of return?

    Are trees made of wood?

  12. JLP Says:
    October 8th, 2009 at 5:49 pm


    I wasn’t aware that Dave recommends brokers and mutual funds with loads. That’s interesting.

  13. Dylan Says:
    October 8th, 2009 at 6:01 pm


    Check out “Dave Ramsey Getting Kickbacks From Investment Brokers” on Eric Tyson’s (Dummies Author) site:

    Dave once even said on his radio show that he doesn’t refer to fee-only advisors and went on to imply that you have to give up control of your money with fee-only planners.

  14. Moneymonk Says:
    October 8th, 2009 at 6:14 pm

    I think the word “imagine” was the proper word to use ……LOL

    Yes indeed!

    Dave is a debt guy and he should stick solely to debt advice.

    I also agree with Doug W, I think he’s just getting people to wake up and start investing instead of spending all the time

    Just admit it JLP, you can’t stand Dave Ramsey, LOL…..I personally think he’s just a Savvy Capitalist, his entire website screams “spend your money on me !!!”

  15. Lara Says:
    October 8th, 2009 at 7:50 pm

    Dave Ramsey has very few pieces of advice to dispense, and he keeps dispensing them over and over again. He also only gives arguments that support his statement, whether they make sense or not. For instance, on carrying a credit card vs cash, he states something along the lines of “thieves don’t know what you have in your pocket, so your chance of getting mugged isn’t changed.” Now the obvious fact is that if you get mugged and you’re carrying cash, you’re out the cash. If you get mugged, and you’re carrying a credit card, you’re out $0. While he may be good at motivating some folks, his advice and financial savy is very unsophisticated. It’s also very unrealistic. He is ignorant of the current real estate market and advises people over and over again to sell their home. Much of his advice is easily said, near impossible to do.

  16. Mike Says:
    October 8th, 2009 at 8:48 pm

    Dave is an excellent businessman and entrepreneur!

    But Dave’s knowledge of finance is equal to a small animal.

  17. Darwin's Finance Says:
    October 8th, 2009 at 9:48 pm

    Assuming 12% investment returns net of fees when there is no long term historical precedent for it is no different than the quants on Wall Street building mortgage securitization models that assumed real estate in the US would continue to appreciate at more than double the rate of inflation through infinity even though history dictates that real estate appreciates at roughly the rate of inflation and we were already way above the mean.

    He should know better.

  18. kitty Says:
    October 8th, 2009 at 10:13 pm

    @Dylan: “First there is a big difference between averaging 12% and getting 12% every year with each contribution.”
    @Jim, Dylan, you took the words right out of my mouth. Dave isn’t very good in math, so here he confuses average return with compound annual return.

    It is irresponsible. Not only this is unrealistic, it is dangerous, especially for older people. Imagine some 60 year old who followed Dave’s advice and invested all his money in stocks last year. Oh, maybe if they are lucky they may get it back in 20 years or so – assuming they live as long. Now, maybe market will be back sooner; maybe even in a year – if you believe in miracles – but is there anybody near retirement who wants to bet on it?

    Also, keeping all money in stock funds isn’t diversification. Diversification means diversifying across all asset classes, including cash.

    @moneymonk – LOL, this is great. I love your “spend the money on me” line. Hm… maybe I should come up with money advice website.

    Agree with most of the posters here. I think Dave should keep to common sense part of his advice on getting out of debt. I don’t agree with his smaller balance first approach, but then as I’ve never had consumer debt, the psychology tricks are too difficult for me to comprehend. But as to investment advice, I don’t quite see how his credentials in finance are any better than say credentials of movie stars who dispense medical advice in medicine. “I am not a financial expert but I play one on TV”.

    @fidr01 – something wrong with your reading comprehension? Where did JLP mentioned not saving? Not expecting 12% every year in the market is not the same as not saving. Saving is not the same as putting all your money in stocks. If you want to keep the money you save, you may as well learn this. You get as much chance of getting 12% year after year as winning a million in Las Vegas. That is unless you find a nice pyramid scheme.

  19. mbhunter Says:
    October 8th, 2009 at 11:13 pm

    Yeah, assuming 12% annoys the tar out of me. It’s Fantasy Land.

  20. JoeTaxpayer Says:
    October 9th, 2009 at 9:00 am

    Who knows what returns will be starting now?
    At 6%, that $600 will be $1.2M, at 8%, $2.09M.
    Those numbers sound big, but where does he acknowledge inflation? In today’s dollars, at 3% inflation, why not assume a “real” growth (above inflation) of 3 or 4%. At 3%, this couple is looking at $555,635 real worth, At 4%, $709,176. Their incomes will rise as well, so their deposits should, too, which makes the math move from simple finance calculator to a spreadsheet. Regardless, a 15% saving rate should be fine, despite Dave’s bad assumptions. 12% is irresponsible, plain and simple.

    As far as employer match goes – it should go into the deposit side of the calculation, not the ‘return’ side. I like to ignore it, myself. By all means take the match, but only count your own deposits as what you are saving. The company can cancel it anytime. You may change companies and new one has no match. While you are getting it, just let it be a bonus. Save the percent that would help you reach your goals.

  21. Mitch Says:
    October 9th, 2009 at 10:28 am

    Just checked out Money magazines list of the largest mutual funds (the ones that have the most money invested in them) and American Funds seems to dominate. I decided to check out their website and determine what their long term track record is and if you could diversify using their funds. In other words, can I use only that fund family to diversify for my age (34) and risk tolerance and come out with a 12% return. Also, they are a loaded fund so I used their A shares and I didn’t account for breakpoints, the full 5.75% up front cost. I put 25% in the Bond Fund of America, 50% in Investment Company of America and 25% in Growth Fund of America. So, I put $20,000 total to work (don’t want to hit the first breakpoint)- $5000 in BFA, $5000 in GFA and $10000 in ICA. I don’t have a cool tool that financial advisors have, so I am only going off the “since inception date” annual average for each fund. They are: 8.37% BFA, 12.04% ICA, and 13.5% of GFA. Run this for 20 years and I come up with BFA $5K is now $26,512.75, ICA $10k is now 109,791.89, and GFA $5k is $73,285.67, grand total $209,590.31. I found a financial calculator on google (don’t know how reliable) but put in Present value of 20000, Future value of 209590, 20 periods and had it calculate interest rate and got an annual return of 12.46%. Now, past performance is not indicative of future performance and all that jazz, but why not say it? JLP, hit me back, bro.

  22. JoeTaxpayer Says:
    October 9th, 2009 at 10:53 am

    Mitch, this is the fallacy of looking in the rear view mirror. There are so many funds out there, you’ll always be able to find one or many that have beaten the average, but will that same fund do as well moving forward.
    Since early 2005, I have an account that’s up over 15%, compared to the S&P down over 10%. Am I a genius? Nope. It was an account, one of many, and this one happened to contain a mix that exceeded the market. Looking across the mix of our accounts, we beet the S&P slightly. Beating is good, right? Well, a mix of 60% S&P 40% cash/bond will “always” beat S&P when the S&P is down and the cash part isn’t. The same mix will lag the S&P over time by some amount as well.
    Forget the assumption that you can get 12% long term. The 80’s and 90’s saw rates drop from high teens to near zero. The next decade can’t enjoy such a fall.
    I wrote about using past data to project, at
    Please take a look, and keep the conversation here, curious what you think. A beautiful 20 year line, then all heck breaks loose.

  23. Doug W. Says:
    October 9th, 2009 at 11:04 am

    Good work Mitch!

    JLP, I know you’ve posted about Personal Rate of Return which is what started me following your posts. Any comment on how dollar cost averaging (which Dave recommends) would affect the outcome of this discussion? Since average annual return is static, I would have to think if you aggregate your personal investing you are likely to do better than the average.

  24. JT Says:
    October 9th, 2009 at 11:18 am

    Doesn’t Ramsey insist on tithing? There’s a good way to save 10% right off the bat! Stop tithing. Donate your time instead.

  25. Kirk Kinder Says:
    October 9th, 2009 at 11:24 am

    Dave is great at debt advice. His advice on savings and estate issues is bad. I would think he would start studying a bit on these topics since he is giving advice on them.

    Maybe he just wants to titillate the listeners to call his ELPs so he can get a cut of the commissions. And, 12% is a great return.

  26. JLP Says:
    October 9th, 2009 at 12:22 pm


    You used lump sum amounts while Dave is using DCA. If you DCAed in a front-load fund, there’s no way you would get that rate of return.

    One other thing, you used a 20-year time horizon, while Dave is using 40 years.

    So, yes, I won’t dispute your numbers but you didn’t exactly apply them to the right situation.

    One other thing…do you know how hard it is to find a fund that is going to outperform in the FUTURE?

  27. JLP Says:
    October 9th, 2009 at 12:38 pm


    Yes, Dave believes in tithing. So do I.

  28. Dylan Says:
    October 9th, 2009 at 12:51 pm

    This is not about averages (geometric or arithmetic). Because other returns make up the average, the sequence of returns relative to your savings contributions will have more influence over your balance than averages will.

    In Mitch’s example, so an investor got that return on his first $20,000 invested, but the chances of that happening with every subsequent investment are slim to none. What was the return of the contribution invested in year 2 for the next 19 year period starting in year two? Year three’s contribution?….

    What will be the return on the $380,000 (more if you adjust for inflation) invested over the remaining 19 years.

    What if they started in a different year?

    I suspect Dave came up with 12% the same way Mitch did, not including the rest of the equation.

  29. kitty Says:
    October 9th, 2009 at 12:59 pm

    @Mitch – do your numbers correspond to average return or compound annual return? 12% average is NOT the same as 12% year after year. For example, if you invest $10,000 in a fund that goes up by 24% one year than down 12% the next, your average return is 12%. But… your money would grow to 12400 one year, than down to 10912 the next year – i.e. the equivalent of a little under 4.5% in compound annual return. Also – past is the past. We can all get rich if we could go back armed with the knowledge of what would happen.

    As badmoneyadvice blogger said when he was commenting on Madoff if I remember correctly: if someone has a method that would guarantee 12% year after year than this person wouldn’t need investors: he or she can just borrow the money from a bank at 5% and invest it at 12%. This is what Madoff promised by the way – 12% year after year after year. We all know how it worked out.

    Now back in the early 80s, you could get more than that on a CD at a bank. But at that time, banks were borrowing at 20-something percent. This is by the way another illustration about how you could find great returns in the past: some time around early 80s you could buy US government bonds with guaranteed rate of 18%. No need for stocks. The trouble is – you cannot do it now.

  30. kitty Says:
    October 9th, 2009 at 1:00 pm

    “banks were borrowing at 20-something percent. ” I meant lending.

  31. Doug W. Says:
    October 9th, 2009 at 1:01 pm

    I realize no one likes paying those front load fees, but in all fairness, the average returns published are after fees, so they are actual returns. Some fund families will allow you see returns with or without the sales charges for various reasons.

  32. JLP Says:
    October 9th, 2009 at 1:07 pm


    I think you are wrong. The returns reflect management expenses but most likely DO NOT reflect sales loads.

  33. Doug W. Says:
    October 9th, 2009 at 1:17 pm

    I’m open to being wrong, but it clearly says on American Funds historical returns and Van Kampen funds – “with sales charge”. Maybe other funds don’t do that, but I’m pretty sure if one does it they all will because there is probably some financial regulation to protect investors from being duped to believe they have a higher return than they actually do because of sales charges.

  34. Mitch Says:
    October 9th, 2009 at 1:55 pm

    I love posts on Ramsey (good or bad) becuse they always get responses…as I write this there are 33. Like him, hate him, it doesn’t matter: he sells! For himself, sure, but check out your blog, he sells here, too. I have been an advid follower of yours for 2 years now (wrote you once), all to say I usually don’t post, but here I am, twice in one day. At this rate I am good for half a decade.

    To answer your question, “do I know how hard it is to find a fund that will outperform in the future?” Short answer: no. Longer answer: I am not silly enough to say that I know the future. I am unsure of what will happen tomorrow let alone 5 minutes from now, let alone how American Funds will do over the course of the next 20 years. I could easily say, “they will earn 14.4% annum over the next 8 years” without anything to back it up but hope of being correct. My point? You are the investing guru, not me. Isn’t that why your clients come to you? To give them investment advice? Do you fill them with false hope and promise them 18% returns per year, or do you tell them that something to the effect of “I don’t know what tomorrow will bring, but we have a conservatively positioned portfolio of good mutual funds that should earn us around 7% a year.” “some years will be up more, some will be negative, but over the long haul, 7% should bring tthe average.” (internally, aren’t you expecting that they will return 8-10% so you look good?) under promise, over perform? That is how I would do it in your world. I really do believe an investor can get above 10% returns. Does that make me bad? Does it make Ramsey bad that he wants people to get out of debt and invest for the future? Is it “irresponsible?” I will go on record to say no, it is not.

    I got to get back to work, I will try to read the posts from the others including your link, taxguy, and respond later….it is a slower Friday than usual. Later.

  35. BG Says:
    October 9th, 2009 at 1:56 pm

    Obviously Dave Ramsey is using arithmetic means, and not geometric means as so many people do when calculating “average” returns.

    JLP: you yourself recently (and mistakenly) said the monthly average return was 0.93% for the S&P 500. A 0.93% monthly return is 11.75% yearly (right at what Dave R is saying).

    The flaw is in the original calculation to arrive at 0.93% monthly average. You did correct this in the other post to be 0.77% monthly average (using geometric means). This results in 9.6% average yearly return of the S&P 500 since 1926.

  36. JLP Says:
    October 9th, 2009 at 2:13 pm


    I DID NOT make an error in that orginal post. .93% IS the arithmetic average. It is what it is. I stated average monthly TR because the monthly figures INCLUDED dividends, so they were total returns.

    An error WOULD HAVE OCCURED had I used that arithmetic average in a “you-coulda-had-this-much-money…” example. I didn’t do that.

    I have talked about geometric average in the past. Do a site search using the search box on the right hand sidebar.

  37. BG Says:
    October 9th, 2009 at 2:23 pm

    Then DR is also correct saying 12% yearly average — if I use your exact argument against you. Hey, 12% arithmetic average is what it is, right?

    I say both of you are incorrect, and to ALWAYS use geometric means when calculating “average returns”.

  38. BG Says:
    October 9th, 2009 at 2:32 pm

    FYI, I took your advice and searched your site, and guess what, I found other posts of yours practically saying 12% average returns of the S&P 500:

  39. JLP Says:
    October 9th, 2009 at 2:37 pm

    Dave is WRONG becuase he’s using a 12% average rate of return and ATTACHING it to numbers.

    I didn’t do that.

  40. Mitch Says:
    October 9th, 2009 at 4:27 pm

    Joe Taxpayer,
    I wasn’t looking in the rearview mirror and searching for the one fund that would work. I simply went to the largest mutual fund FAMILY and looked at their top funds in three categories: Income, Growth and Income, and Growth. Nothing more, nothing less, just a super simple way of a somewhat balanced portfolio within ONE fund company. I think it took me all of 6 minutes. I am not digging for data to support Ramsey, don’t care if you like looking back to project forward or not, I was just trying to point out that when he claims that he has a growth fund that is older than 20 years and that it has earned 12% over its lifetime, he is not misleading anyone. It has happened. I did attempt to show that it is possible and even possible using a dreaded front-loaded mutual fund. And yes, the sales charge is taken into account. Finally, Joe, I took a look at your article and am aware of the nice line and the fall-off, I was around and investing at that time, I remember April of 2000- October 2002 very, very well.

    JT, I also tithe, what’s the point?

    Good catch on the lump sum versus DCA. I hope you can forgive me for not wanting to spend hours attempting to figure out the no kidding return over 20 or, (got me again, 40 year period) in which breakpoints come into play. Again, I didn’t have the cool-guy software that I would think financial advisors have to plug in these numbers (I had to do a search for “financial calculator”). Also, Doug is correct. The return is listed including the sales charge.

    Dude, I wasn’t trying to DCA, I was just trying to say it is possible that a mutual fund, or a family of funds diversified could get you that return. To make the point somewhat stronger, I used a family that charges a sales charge and I figured most on this site enjoyed indexing or at least no-loads.

    I was using an average. I get it, it isn’t 12% every year. I just wanted to throw out some food for thought. You all ate it and regurgitated it right back at me. Well played. By the way, Kitty, I recently saw a certificate for deposit that my grandmother had back in 1982. It paid 15.8% for 3 years. Pretty cool.

    The question posed is whether it is “irresponsible” and I don’t think it is. When Ramsey incites people to action and it is for their own good, then who cares? Obviously, all of you aren’t his target audience. But can’t you see the good that can come from his target audience becoming debt-free and investing their surplus? Holy cow, be greedy and see that you are all doing it already and benefit from others buying into the market and bidding the market higher. It is good for you. Ramsey is a capitalist and doing a good job, JLP is one too. He provides content that we are all willing to read and come back to and he is reimbursed by revenue from ads. So what? Don’t like it, go to The Simple Dollar and read about making some laundry soap, oh wait, he is selling something, too. Where to go, where to go…..

  41. Stacey Says:
    October 9th, 2009 at 5:52 pm

    Hey Mitch…I thought I was doing well as a teenager having a CD paying 13.5%…wish I had had your Grandma’s!! Oh for the good ol’ days (in savers’ minds anyway…)

  42. jim Says:
    October 9th, 2009 at 5:58 pm


    I don’t think anyone is doubting its *possible* for a mutual fund to get 12% returns long term. The question is whether or not it is responsible for people to *expect* 12% returns long term.

    The reason I think it is irresponsible is that it can give people some unrealistic expectations that will negatively impact their financial planning. If people assume too high of a return on their investments then they may end up falling short of their retirement needs.

    What if Ramsey told everyone that they should expect social security to pay them $1000 to $2000 a month when they retire. Do you think that would be responsible? SS does that right now and has done so for decades. But should we assume it will in the future? Whats the harm if people rely on SS which might not be there?


  43. Credit Card Chaser Says:
    October 9th, 2009 at 8:11 pm

    Definitely an optimistic estimate. I love your chart on this recent post btw:

  44. Brian Says:
    October 10th, 2009 at 12:41 am

    $3,183/month net “…would be tight…” ?


  45. Mitch Says:
    October 10th, 2009 at 10:05 am

    “So why does Dave use such a high number for an assumed rate of return? I would have to say it’s to give people hope (a false sense of hope, but hope nonetheless). When people look at those numbers, they go, “WOW! I can do that? I had no idea!” I will admit, that those numbers are eye-popping.”

    I would say Dave does this to spur ACTION. I cannot say it enough: look at his target audience. They haven’t figured out the spending problems in their lives, let alone dreamed of investing. But, if they see what they could have, no matter how “eye-popping,” they might stop spending, get out of debt and then begin to save and invest.

    You are correct that people could fall short using a 12% return. I won’t attempt to dispute. I will say that he is not giving investment advice. He is not telling folks to buy certain mutual funds or stocks or bonds or CDs, etc. He advises classes of mutual funds such as growth or growth and income, but he doesn’t give actual advice. He sends them off to his investing ELPs for that. Folks like JLP. Actual advisors. Note: I am not implying that JLP is a Ramsey ELP, I think he would rather cut off his leg than be anything associated with Ramsey….

  46. Cheapskate Sandy Says:
    October 10th, 2009 at 7:32 pm

    About fricken time! I hate when people assume double digits returns saying that “historically the sock markets generate those kinds of returns over time.” Over how much time? What block? Did I miss it? Other than this year I have never realized that interest rate. I WISH they would just the expected return to 6% and be realistic.

  47. kitty Says:
    October 10th, 2009 at 9:38 pm


    “The question posed is whether it is “irresponsible” and I don’t think it is. When Ramsey incites people to action and it is for their own good, then who cares?”

    There are actions and there are actions. Inciting people to save money is great. But telling everyone – including 60-something people – to put all their money in stocks is not for their own good. Someone quoted Ramsey as telling some retiree who had a bit of money to put all the money in stocks. This was before the crash by the way. This is pretty irresponsible.

    “By the way, Kitty, I recently saw a certificate for deposit that my grandmother had back in 1982. It paid 15.8% for 3 years. Pretty cool.”

    Regarding the 80s… I had one of those CDs. I just started my first real job in 1983, not counting teaching assistantship. Atually the only real job since I still work for the same company, but this is beside the point. Anyway, as soon as I saved a little bit of money – about $3000, I figured I open a CD. So I came to open a CD and the rate was 13% for 6 months. It was a little higher for longer periods, but I was young and stupid. I thought “what if I need the money”. This was incredibly stupid since I did left a bit in checking for minor life emergencies, not to mention that my employer had no layoff policy at the time, so my job was 100% safe – this changed in the 90s.

    6 months later, the rate was 11%, but again I only renewed for 6 months; than it was 9%… It got lower every time, but then I thought “oh, but it was high before maybe it would go back up”. This was before internet, and there was no internet then or any kind of information about interest rates, inflation and such at least not on TV. My parents told me to open a CD for longer period, but I was young. My parents didn’t understand much about interest rates back then either except for my mother did lots of rate chasing – we only came to the US from the Soviet Union a few years earlier, so it’s not like we were financial experts….

    It’s a bit silly, but I still regret not having bought longer term CDs back then. Also government bonds. I didn’t have much money, but I sure could put whatever I was saving in longer term CDs.

    This is by the way how dangerous it is to assume that if stocks averaged 12% for the past 20 years, they’d do so in future. This period started from double digit interest rates and went down from there. Now we are starting from 0 interest rates and are likely to go up. Who knows how stocks will perform?

  48. Mitch Says:
    October 11th, 2009 at 8:19 am

    Good points. I appreciate your story, too. I think it is good for folks to hear about what it was like coming out of the late 70’s and into the early 80’s. I was a young pup back then, but I still remember the effects it had on my family, but the whole community (I was from a very small town outside a mid-sized city).
    I will say, however, that you can forgive yourself for not purchasing the longer term CD. Water under the bridge. I think it was good for you to learn at such a good age.
    Finally, I appreciate you, and everyone else’s, thinking in terms of it being irresponsible. I still am not convinced and my view is unchanged, but I will not dispute that it is more prudent to factor in a lower return. I have had fun commenting and appreciate the back-and-forth. Later, M

  49. BG Says:
    October 11th, 2009 at 10:22 am

    Looking at an old portfolio from 2001 that my financial adviser (was AMEX) created, in it he had an assumed 9.0% growth rate in my retirement accounts _after_ taxes.

    In 2003, he brought it down to a more reasonable 7.0% ROR after taxes.

  50. JJ Says:
    October 11th, 2009 at 11:45 am

    Not only is Dave out of his mind with 12% expected returns. He also tells people that real estate is a no brainer investment. Not surprising since he is a real estate broker and investor. Anyone who has bought real estate in the past 5 years knows that it’s not always a good investment.

    He also never talks about the high transaction costs of real estate. Buy a house for $250K, it appreciates 10%, you’ve made $25K!! Super. Except it’s wrong. You have to assume 1-2% buying costs and 6-8% selling costs. There goes your 10% right out the window. And what if it only appreciates 5%? Or 0%. Or depreciates even 5%? Since real estate is highly leveraged for most people, losing 5% of the value of the house means you’ve just lost 100% of your investment plus you now owe more to cover transaction costs.

    Also, he contradicts himself. He tells people to be diversified, but then says buy mutual funds. HUH? If you want the most diversification, the best thing is buying the S&P through a SPDR. The costs are low and you’re as diversified as can be. Why buy a mutual fund and pay a higher fee? I know why. Because part of Dave’s business is getting kick backs from his network of financial planners that sell mutual funds.

    And of course the stupidity that is Dave’s advice on credit cards. Credit cards give you literally free money. They give you a 25-30 day interest free loan every month. And on top of that whether it’s cashback, hotel points, FF miles or whatever, you get benefits on top of that. I have a Discover card that I use for pretty much everything I buy. Every year I get over $1000 in cashback. That’s $1000 tax free income for doing nothing. I pay $0 interest since I pay off the balances every month and carry a balance of anywhere from $5000 to $10,000 a month interest free. I’d have to have my head checked to give that up and use cash as he suggests. And even if there were no cashback, just the convenience of having a plastic card available instead of carrying money and going to the ATM every few days would be worth it enough.

  51. Stacey Says:
    October 11th, 2009 at 5:58 pm

    Yup BG #49, our NWM agent just told us to expect the dividends on our whole life policies to be around 5-6% in the coming year. So yes, expectations have been lowered from the original “illustrations.”

    However, it still beats losing $ like last year! And will be tax-free when our numbers’ are up!

    @#50 JJ–yes, I will NEVER, EVER be a cash person, either. If prices were to be lowered 3% for paying cash, then yes, but I covet my Upromise $ for college and my Discover rebates (which aren’t as generous as years’ past, but still good, esp w/the quarterly 5% Cash-back promotions.)

    Tax-free $ is good. Wonder when Congress/IRS will finally get around to whacking us on our freebies w/taxes :)

  52. kitty Says:
    October 11th, 2009 at 8:17 pm

    @JJ “Anyone who has bought real estate in the past 5 years knows that it’s not always a good investment. ”

    Word. I don’t normally listen to Ramsey so whatever I know about him is what I read on these blogs. So naturally I didn’t know about his real estate advice.
    IMHO, and also based on my limited but moderately successful experience with real estate is that there are times to buy it and there are times not to. The prices don’t always go up – I was surprised why people in 2000s forgot about what happened with real estate in the 90s. When I bought my current place in late 90s, the family who sold me the place had to add their own money to pay off their mortgage – they were upside down and that with reasonable mortgages of the 80s. As in 2006, the bubble was totally obvious.

    As to Ramsey credit card advice – it is silly, but I kind of see his point: his target audience is composed of credit addicts. So I can see how someone who doesn’t understand the difference between credit and spending money should stay away from cards. One things that bugs me is that he seems to see everything in black/white – all credit is bad, stocks and real estate are good. I read on some blog – not sure if it is right – that he actually shouted at a young doctor for having a lot of student loans. It’s totally ridiculous since only very rich can become doctors without student loans. Credit can be a great tool and taking a loan instead of paying cash can be a good investment decision under the right circumstances: e.g. business loans or some student loans or even low fixed interest loan when one expects inflation or has access to better reasonably safe investments. E.g. only a few months ago, I bought some AA and AAA individual municipal bonds with tax free interest rate of 5% and 5.25%. Not only that I bought them at a discount. At the same time, the mortgage interest rate was around 4.5%. Now, if I were to “upgrade” to a more expensive property at the time or upgrade, you bet I would’ve taken mortgage instead of paying cash.

  53. Doug W. Says:
    October 12th, 2009 at 9:29 am

    JJ, I have to laugh at your post about using “free” money from credit card companies. I guess you’ve really pulled one over on them, you’re sticking it to them, they have nothing on you!

    Dave’s whole point on credit cards is not that some people are not “responsible” in paying them off, but it is a FACT that you spend MORE using credit cards than cash. Why do you think all the stupid fast food places take them now? For OUR CONVENIENCE? Nope! They find that someone who walks in with a $5 cash will only spend $5. Someone with a credit/debit card (debit cards apply as well that’s why Dave says USE CASH for most purchases) you will spend more, supersize, get the kid the extra thing they’re whining for, etc.

    Also, have you ever taken a wad of cash to Home Depot or Best Buy and gotten a deal? If not, then you have again fallen victim to the credit card over spending. I’ve negotiated with my mechanic for car repairs because I know he has to pay a fee to the credit card company to process the plastic. Cash saves him money, so he gave me a discount. I personally think the price of goods has gone up solely because of credit card fees the business owner has to pay. We all know businesses pass costs/taxes on to customers, they don’t pay it themselves. I know a restaraunt owner that was contemplating having a “cash price” due to credit card fees increasing he wanted to lower his costs by encouraging cash usage.

    Dave’s point (in my opinion) is that we’ve taken simple common sense and made sophisticated financial products that only make money for their creators. It’s not a “sin” to use credit cards, but if you think you’re beating them at their game, you’re mistaken. Like Dave says “if you play with snakes you’ll get bitten.”

  54. Travis Says:
    October 12th, 2009 at 10:55 am

    Stocks generally average +8 or 9%/yr but a diversified, less risky portfolio of stocks and bonds would do a little less than that. I also agree that there are many great funds out there that have historically outperformed their respective index on a risk-adjusted basis. And if you’re with a fee-based advisor, you can buy them with no-loads and simply pay the advisor .5-1.25%/year.

    If you want an example, compare NYVTX to the S&P 500 or PTTAX to the Barclay Aggregate Bond Index.

    The big picture is that he is helping a lot of people do the right thing with their finances. Stocks are still the best investment vehicle in the long-run, bar none.

  55. BG Says:
    October 12th, 2009 at 1:04 pm

    Stacey #51) I think my adviser was pumping the returns in the 2001 portfolio he put together for me. He was assuming a 10.6% return (before taxes), and 9% (after taxes), and also assuming we were in the 15% tax-bracket — but in actuality, we were near the middle of the 27.5% bracket in 2001. Maybe he was assuming we’d be in a 15% bracket during retirement, which I guess would make more sense.

    Is using a 10.6% ROR (before-taxes) irresponsible? What would be a responsible ROR assumption for an 80/20 mix, for example? Or better yet, what would be a better assumed ROR for an 80/20 mix _after_inflation_?

  56. kitty Says:
    October 12th, 2009 at 3:07 pm

    @Doug W: “… it is a FACT that you spend MORE using credit cards than cash…”

    Since when is it a fact? Based on some not very scientific studies that look at a very small number of people and didn’t adjust for confounding evidence? Plus if you even accept the conclusion of the studies and ignore the flaws, you are forgetting that “on the average people spend more” is not the same as “everyone spends more”. Have you ever had statistics? I find it amazing that people who know zero statistics love to quote studies they haven’t themselves read and don’t understand. Here is an example for you: “on the average women gain weight after the menopause” is true. But “every woman gets fat after menopause” is wrong. Averages are extremely misleading. Take 10 people one of whom carries a huge credit card balance i.e. significantly overspends. If you divide then a total amount of money spent by 10 people, you’ll get “credit card users spend more on the average”.

    “Also, have you ever taken a wad of cash to Home Depot or Best Buy and gotten a deal? ”
    Actually, I always ask if I can get a better deal with cash. If I can, I’d use cash. If not, I’d use credit cards.

    BTW Doug W, I’ve used credit cards for over 25 years. Would you care to compare net worth? Mine is in seven digits…

  57. BG Says:
    October 12th, 2009 at 3:42 pm

    @kitty #56) “@Doug W: “… it is a FACT that you spend MORE using credit cards than cash…”

    Since when is it a fact?”

    It is a fact! Here is a simple thought-exercise: Person with cash can only spend the amount he has in his pocket — no debt (spends less). The average CC-toting American has an $8k balance on his cards. I see your argument about averages, but even if the “statistics” are not exactly perfect for you, you still can’t deny that the average non-CC person has exactly $0 in CC-debt, and the average CC person has “greater than zero” CC-debt.

    That right there should tell you that the people carrying credit cards spend more than people who do not.

  58. BG Says:
    October 12th, 2009 at 3:55 pm

    kitty) ah, one more: I would like to compare networths (if you don’t mind), though I think you have some age/time on me since you used CC cards for 25 years. What was your networth (inflation-adjusted) when you were 32?


  59. kitty Says:
    October 12th, 2009 at 9:59 pm

    @BG: ” Person with cash can only spend the amount he has in his pocket — no debt (spends less). The average CC-toting American has an $8k balance on his cards…”

    I.e. some Americans have over 16K balance and some have $0 balance. We know most Americans carry balances, and consequently spend more than they would’ve otherwise. But what you cannot prove is that CC users who always pay their balances in full spend more than they would’ve otherwise. Your logic fails here: if those of us who always pay our balances in full are able to do so, then we only spend what we have, right?

    Being able to buy isn’t the same as buying. I can easily afford $300 pair of shoes I fancy and barely notice it, but I am not doing it because I think it’s silly to spend $300 on a pair of shoes. On the other hand I spent over $100 on an opera ticket in Bayreuth (Germany) many years ago when I earned a lot less than what I do now and had a lot less money and paid cash for it — it was from someone selling an extra ticket in front of a theater (at face value).

    “What was your networth (inflation-adjusted) when you were 32?”
    OK, I am 50 now. So it’d be 18 years ago. Tough to remember, honestly, probably in low six digits, but I could be off considerably. BTW – when I say net worth I include home equity and investible assets; no other items. I also don’t include the value of my pension.

    So at 32: I really don’t know. By that time I had been contributing to 401K for several years up to company match, I had also been buying ESPP on 10% of my salary. I kept most of 401K in stable value since I got scared by 87 crash. Missed out on some good stock market years. I had also been buying ESPP stock for 10% since 1984 and holding on to most of it — yes, it seems wrong now, but as I said above, we didn’t have internet and financial advice then. My employer seemed as stable as a rock in the 80s. But by early 90s i.e. by the time I was 32, my employer was as close to bankrupcy as it ever got – there was talk about break up, and the stock went down a lot, but it seemed silly to sell it when it was below break up value. It’s done OK since then, I cannot complain.
    I also had some cash/CD savings, but I really don’t remember how much. Around that time, I had paid a large chunk of my cash savings – over 25K – for a down payment on a 125K condo as I had just moved to a more expensive area. No other debt but mortgage at 32, and I have always made a point of buying property for less than I could afford so that I had money to enjoy life (within reason). At any rate, I was saving over 16% in combination of 401K and ESPP between ages of 25 and 32, and I had money left every month which I kept in cash and CDs. So I was probably saving over 20%, but I wasn’t really trying.

    Keep in mind also, that during the 80s I thought my retirement was secure: my employer had no layoff policy and very generous retirement plan that also promised medical care. This all changed in the 90s – the plan changed, medical care promise went away, then benefits were frozen. But during the 80s, I did believe I had a secure job from which I would retire at 54.5 with a generous pension.

    Hence, I wasn’t making it my life’s purpose to save, or be frugal, even though a roommate I had for a few months after I started working told me “you are so cheap” (I really don’t understand why, I swear I wasn’t).

    I traveled all over Europe, I bought stuff I liked – within reason. But while I may have made a number of stupid investment decisions, but overspending with CC wasn’t among them. In fact, I have always been a whole lot more careful with cards than with cash.

  60. BG Says:
    October 13th, 2009 at 8:29 pm

    @kitty #59) Great story, thanks for sharing. I’m in the ballpark where you were at 32, I guess, but I’m not saving nearly the amount you were. I’ve had to spend boatloads on medical (15% of my net) these past two years — its sad to be in a position where I claim the medical deduction, even though I have insurance and work for a fortune 25 company.

    FYI: I think we work at the same place: HAL+1. The early 90s were dangerous times, but you got some nice stock splits since then if I guessing your employer right. Unfortunately I came in just afterwards (1999) so I only got a little of the tail-end.

    As for the CC discussion: I see your point. For people who pay the CC card off every month then they are equivalent to “cash”-people, but I think the majority of CC users do not pay the cards off in full every month — but the trend is looking better.

  61. Stacey Says:
    October 14th, 2009 at 7:56 am

    @Doug, I think Kitty correctly analyzed the whole “average” cc balance argument–some carry 0, some carry high amounts, etc. Although I use mine for almost every purchase, they are paid in full each month. And unless everyone in the universe went back to paying cash, little ol’ me paying cash will not have a positive effect on my personal net worth b/c prices will not be lowered by merchants. “Oh here comes Stacey…I’m going to lower my prices 2% just for her!!”

    It would take a universal cash tsunami for decreased merchant prices to occur, and even then, I doubt it would. It’s like waiting for gas prices at the pump to fall after barrel prices drop.

    So, in a nutshell, if I continue to “earn” my Upromise rebates which are immediately channeled into my oldest son’s 529, earn 5% or so a year (we’re 100% equities in his plan), take my 3% IL income tax deduction on the contribution, then at the finish line I’d say I’ve definitely earned a monetary benefit that cash couldn’t give me (and that’s not even considering the interest I earned on the monthly amount of CC pmt that continues to earn 1.3% or so in my savings acct while I wait to pay the bill.)

  62. smith2t Says:
    December 17th, 2009 at 12:07 am

    I think that if you don’t do anything you get nothing. Dave is making a point to folks that you have to DO something. Does the math have to be ablsolutly correct? No! From what I see posted here you must have a math major to keep up with everything. I myself am a humble bloke and need it right there where Dave has put it plane and simple. Diversify in Mutual Funds and most importantly tithe 10%…God Bless.

  63. smith2t Says:
    December 17th, 2009 at 12:10 am

    Oh! I forgot…

    Be Debt freeeeee!!!!

    Are you?

    That is the key to Wealth.

    Dave says to do what rich people do. Rich people dont borrow and don’t do complex invesetments.

    KISS….Keep is simple sweetie!…;-)

  64. ParisGirl111 Says:
    February 12th, 2010 at 4:00 pm

    It’s funny you should mention the 12% because during the Financial Peace University class, they showed us a lesson on mutual funds. And he states in the video that critics state that this type of mutual fund that yields 12% doesn’t exist. He then makes fun of these people and says they do, but never offers any sources of where people can find these funds. Does anyone even know where you would go to invest in a mutual fund??? Because he never tells you this in the course.

  65. Hello Says:
    May 6th, 2010 at 9:09 pm

    Ramsey loves that 12% return. I was reading today on his website that im an idiot for buying a small cash value life insurance plan along with my term, and that I should be investing the money from the cash value account into a 12% return mutual fund. Where is this fund? Because its not like im going to need life insurance when im 51 because i bought a 30 year term at 21. If I listen to Dave, I will never run into any unexpected financial hardships and will be debt free.

  66. G Says:
    July 2nd, 2010 at 12:11 am

    I apologize in advance. The beauty of America is Ramsey gets to have his own show, whether he’s nuts or not. And we the people can listen or not. He’s sharing his opinions, and I actually enjoy getting a little excited about the possibility of greatness. If someone tells me there’s a way to get 12% rate of return, heck, I’m going to find a way. Do you really think Ramsey is going to tell the world what funds he’s investing in? He’s not going to do the work for us. There are a lot of things we can’t control, but the things we can we need to take advantage of, or adleast not think, well-Ramsey must be crazy because I’m an educated person and I haven’t found what he says to be true. Sometimes looking at opportunity like we did when we were kids goes a long way… and sometimes pulls you out of a funk, lets you take a deep breathe, and smile.

  67. Hibryd Says:
    July 7th, 2010 at 7:11 pm

    Wondering why you’re not getting 12% on your investments? According to Dave Ramsey, it’s because you’re a moron. No, really!

    I know, I know, that was a surprise to me too. I mean, wasn’t consistent 12-13% returns a big red flag that Madoff had to be cooking the books? But at the 4 minute mark on the above clip, Dave helpfully explains things:

    “Let’s say you outperformed the stock market because you had the good sense to actually study mutual funds and select a good one and got 12% on your money. Let’s just pretend you are smart enough to do that. I can do that in 35 seconds on Morningstar. Some of you financial people are too STUPID to find a 12% mutual fund. I don’t know WHY you’re that dad-blame dumb, by the way, but some of you are. I can find one in 32 seconds on my Morningstar, but anyway, I just found one…”

    I keep remembering the “past performance” caveat in “A Random Walk Down Wall Street.” The book said that of *course* some funds are going to beat the market, with so many of them trying; you’re just never going to know which ones will do so in advance. It said that if you had a room full of people flipping coins, eventually someone is going to flip 100 heads in a row. This does not mean that person actually has head-flipping skills. ARWDWS broke down some statistical evidence that funds which have great 10 or 20 year winning streaks tended to perform really badly in following decades.

  68. Chuck Says:
    July 16th, 2010 at 12:48 pm

    @ Moron 😉 … smile I’m just kidding :-)

    Here is a list of US Stock Mutual Funds from Morningstar Financial with at least a 10 Year track record making annualized returns of 12% or greater. I don’t ever recall DR stating leave your money in the same fund for 40 years and play dead. But maybe it was on a show I didn’t hear :-)

    CGMRX CGM Realty 17.64
    SSGRX BlackRock Energy & Resources Inv A 17.17
    CGMFX CGM Focus 16.57
    PSPFX U.S. Global Investors Global Res 16.57
    LEXMX ING Global Natural Resources A 15.76
    PRGNX Prudential Jennison Natural Resources B 15.59
    RSNRX RS Global Natural Resources A 14.87
    GHAAX Van Eck Global Hard Assets A 13.96
    VGENX Vanguard Energy 13.51
    YAFFX Yacktman Focused 13.10
    RSPFX RS Partners A 13.00
    ICENX ICON Energy 12.90
    FAIRX Fairholme 12.74
    IGNAX Ivy Global Natural Resources A 12.49
    BURKX Burnham Financial Services A 12.48
    FSDPX Fidelity Select Materials 12.48
    YACKX Yacktman 12.43
    LMVYX Lord Abbett Micro Cap Value I 12.39
    HWSIX Hotchkis and Wiley Small Cap Value I 12.22

  69. John C-CFP Says:
    July 16th, 2010 at 6:31 pm

    Lots of sharp comments on this thread. Whomever made note of geometric mean hit the nail on the head.If a fund loses 50% this year, it has to do 100% next year just to get even. If the tacticle managed fund only loses 30%, it only has to do 42% to get even. So beating the S&P in a given year isnt really apples to apples.

    I do agree with Ramsey on watching fees. I have seen advisors sell funds with 1.5% internal fees then charge a 2% wrap fee. So that fund will have to beat the respective index by 3.5% just to be even.

    I’ll gladly pay .3 in extra fees for well managed tacticle fund that limits downside loss, is style pure and limits drift. A low fee portfolio that includes a mix of asset classes to include equities,small med and large cap, foreign and domestic, fixed income, hard assets, real estate, commodities and cash is, in my opinion the way to go.

    Of course, you could just figure out the exact date you will die, and save yourself a ton of planning!!