Dave Ramsey’s College Savings Advice

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28 Comments

1. 

   Lily
   

   January 16, 2008, 7:27

   
   

   Oh, snap!

   Besides the reasons you listed against change investments frequently is that this encourages market-timing and performance-chasing. Ramsey’s practically asking people to buy good performers, then drop them if they don’t deliver. That’s a recipe for disaster – buy high, sell low.
2. 

   Ana
   

   January 16, 2008, 8:14

   
   

   I personally can’t say whether Dave Ramsey gives good or bad investing advice, since I am just not educated enough on that subject. But he is THE best “get-out-of-debt” guy around IMO…and I am working very hard to prove that myself (3 more months to go…)

   What Dave Ramsey does say is when you are ready to invest, find an advisor who will teach you the right way to do it (“heart of a teacher”) so that you understand something before you put money into it. I know you only caught part of one show TV show (the radio show goes 3 hours a day) but he continually stressed to never invest in something you don’t understand.
3. 

   Kevin
   

   January 16, 2008, 8:44

   
   

   If you listened to Dave more, you would realize that he is not giving bad advice here.

   It seems one of your main reasons was that “average people could get into trouble with ESA’s, where 529 plans are fool proof if it’s with a good company.”

   Dave doesn’t dumb down advice to protect people from themselves. The ESA’s functionality is far superior to a 529 plan. Dave isn’t going to go with 529’s simply because they are easier. Instead, he recommends that you use a professional broker to assist you.

   And he wasn’t recommending high turnover investing. He never does. He was simply saying that it’s an option if for some reason you need to.

   The age limit doesn’t matter because Dave suggests you get the saving done before they go to college anyway.

   And the age usage limit doesn’t apply because Dave wants them to finish school in four years-and not sit around on the money.

   The contribution limit doesn’t matter because you only need so much for college and you can easily save more than the required amount in an ESA.

   The Tax contribution will save you very little, and Dave is in a state with no state income tax.

   As far as I’m concerned, his advice on ESA’s is perfectly sound–no mistakes made whatsoever.

   I think if you listened to Dave’s principles more, you would understand WHY he advocates certain things.
4. 

   My Dollar Plan
   

   January 16, 2008, 7:50

   
   

   Excellent article. Don’t forget to look into the Ohio 529 plan. We use that one for the low cost index funds.
5. 

   SJean
   

   January 16, 2008, 7:58

   
   

   Not a dave ramsey fan. He seems best suited for helping people figure out how to get out of debt rather than doling out investment advice!
6. 

   The Happy Rock
   

   January 16, 2008, 8:01

   
   

   I think you glossed over the big reason ESAs can be better. Investment freedom.

   If you are locked into a 529 that gives you 5 choices A-E to invest in, none of which are that good, you are costing yourself a ton of money.

   If option C is the best at 7% year over year, but in an ESA you can get 12% with a fund you chose, we are talking a potential of $50,000 difference investing 2,000 for 18 years.

   I agree that people who are not savvy on picking good mutual funds yet, it would be overwhelming. That is why you would hire a good financial guy who would help train and teach to be able to make your own decisions.

   Just my two cents.

   PS – I would doubt that Dave would suggest that you should be buying and selling in an account. His recommendations are usually to pick great fund with 20-30 plus years of track records and let it ride.
7. 

   Lazy Man
   

   January 16, 2008, 9:20

   
   

   I think he avoids 529s because they are more difficult to understand. Since each state is different, it’s impossible for him to explain it in a way that his audience can use.

   This isn’t the first time Dave Ramsey has given advice.

   Like My Dollar Plan, I like the Ohio plan as well.
8. 

   LJ
   

   January 16, 2008, 11:30

   
   

   I couldn’t agree more!

   It is much easier for novice investors to pick a proper 529 plan than it is for them to pick well performing investments for an ESA.

   We use 529 plans for all our children, and have it set up so that all relatives can contribute to the funds, no limits and no requirements on income make them winners in my book.

   I would also like to mention that many sites/services like upromise.com and little grad.com will contribute to your 529 plans if you register your grocery store cards and the like. Just one more reason why I believe 529s are a better choice for regular parents who want to save for college without having to understand everything about investing.

   You have great insights!

   Take Care

   LJ
9. 

   Pinyo
   

   January 16, 2008, 10:11

   
   

   Wow, a lot of good discussion here. Thank you for your comments! I am going to touch on some of your comments here:

   @THR:
   Investment freedom is the exact reason why Dave recommended ESA over 529. I am not saying that’s greater investment freedom is a bad thing, but for a vast majority of people that are inexperienced with investing, they are probably better off with more limited options. Sure you can get into a bad 529 plans, but there are some really good ones out there that offer good investment options at low cost — more suitable for inexperienced investors.

   Yes, I agree that people should learn to invest and consult professional to help them if needed, but ESA is not a good place to learn.

   @DFR:
   yes, that is part of it. I only caught a glimpse of his teaching and do not fully understand everything that he preaches. I didn’t know about Dave, until you told me about him. And I intend to watch his show when I can. I agree that he’s one of the best “get out of debt” guru.

   @Kevin:
   I always enjoy reading your perspective because we do not always agree 100% and you add a lot of depth to the conversation.

   * Professional assistance – finding a good one is an art in itself. May be I just have bad experience, but I prefer to do things on my own. Now let’s look at which is easier to do: (1) learn how to invest well versus (2) find good 529 plan and learn how to manage the few options with proven strategy of asset allocation, regular contribution, and rebalancing. I would say option #2 is better for a vast majority of people.

   * Contribution limit – “The contribution limit doesn’t matter because you only need so much for college and you can easily save more than the required amount in an ESA.”

   I beg the difference on this. Unless our system changed somehow, college will become increasingly unaffordable. Based on my calculation, we will have to spend about $250,000 for a good 4 years public college 17 years from now; unless he gets scholarship, financial aids, etc. At that rate, we need to save about $5,000 a year, not $2,000.

   * “Dave is in a state with no state income tax.” But his listeners are in all 50 states. The state income tax benefit shouldn’t be overlooked.

   * As far as following Dave more, I intend to do that.

   @Lazy Man:
   I think you meant: “This isn’t the first time Dave Ramsey has given [bad] advice.” We all do sometimes right?
10. 

    FourPillars
    

    January 16, 2008, 10:16

    
    

    Nobody is perfect I guess.

    Good primer on 529s.

    Mike
11. 

    Ana
    

    January 16, 2008, 13:48

    
    

    @plonkee: Quite a few people get to Baby Step 4 & 5 which are saving for retirement and childrens’ college funds. But at that point, many people do spread their wings and learn from people other than Dave Ramsey. There tend to be some lively debates about those stages over at MyTotalMoneyMakeover forums as to what qualifies as good investing advice.

    Dave Ramsey’s advice to NEVER invest in things you do not understand is still good advice.
12. 

    Credit Repair
    

    January 16, 2008, 10:53

    
    

    I like Dave Ramsey a lot. I know his advice is not perfect, but chances are some of what you thought he said was not how he meant to say it.

    For instance, if he said “change your investment as many times as you like”, he probably meant that you CAN change it as much as you want. I doubt he was suggesting that you change it often. I’m sure he just meant that it was possible.

    Anyway, good post.
13. 

    Pinyo
    

    January 16, 2008, 11:29

    
    

    @FourPillars – thank you.

    @Credit Repair – “but chances are some of what you thought he said was not how he meant to say it.” I agree, that’s why I think it’s worth clarifying because some people make take his advice literally without understanding the logic behinds it.
14. 

    Jason
    

    January 16, 2008, 13:48

    
    

    Every day I loose more and more respect for fox news and their “experts.”
15. 

    Ana
    

    January 16, 2008, 15:16

    
    

    @Jason: Fox had nothing to do with Dave Ramsey other than signing him on after he had been on the radio here in the Nashville area for over 15 years! He is not one of “their experts” since he was successful before on his own before they ever contacted him.
16. 

    plonkee
    

    January 16, 2008, 12:58

    
    

    I remain distinctly underwhelmed by Dave Ramsey’s investing suggestions. I wonder why he doesn’t get called out about it – maybe no one following Dave Ramsey actually gets to the investing stage, or (and probably more likely) they don’t realise what they don’t know.

    The ESA doesn’t sound like as good a wrapper as the 529 primarily because of the age limits. Not everyone will need their education money between the ages of 18 and 30. Some people do a stint in the armed forces, others get scholarships for undergraduate degrees, but return for graduate work some time later.
17. 

    Kevin
    

    January 16, 2008, 17:42

    
    

    I would like to point out that Dave Ramsey is a more successful investor than anyone here.
18. 

    plonkee
    

    January 16, 2008, 15:29

    
    

    @Ana:
    That’s the kind of thing I was hoping to hear. I’d hate for people who have done so well at getting out of debt to be messing up a bright shiny future for no good reason.
19. 

    Pinyo
    

    January 16, 2008, 19:23

    
    

    @Kevin – He probably is, but that doesn’t mean anything. Just because someone is a good practitioner, doesn’t mean he is a good teacher.
20. 

    NCN
    

    January 16, 2008, 20:08

    
    

    Over the course of the last 4 years, I’ve listened to Dave’s radio program hundreds of times. If you listen, you’ll find that Dave not only encourages SAVING for college, but BUDGETING for college, once a student begins school. Plus, he encourages living in inexpensive housing (dorms) and having a job. His goal is to promote a balance between retirement / education / and long-term savings.

    As for the advice Dave gives, his primary goal is to get people to “think” about their financial decisions. I for one owe a LOT of my progress to his plans. That being said, I’ve moved beyond “15%” in retirement and ONLY using an ESA – but, for folks who are brand-new to personal finance, I think Dave rocks!

    NCN
21. 

    Chief Family Officer
    

    January 16, 2008, 21:17

    
    

    Hey Pinyo, I think you’re being unnecessarily harsh on Ramsey (not that I’m a fan, everything I know about him I heard from someone else). Although you make a good point about needing to know something about investing before putting money into an ESA, the same really holds true for 529s too. And I think there are times when an ESA is a better choice than 529s, as in our case, when we’ll be paying for private school. We can withdraw money from an ESA as soon as the kids start kindergarten, so I’ve fully funded ESAs for them instead of opening 529s (though I’m always thinking about that).
22. 

    Pinyo
    

    January 17, 2008, 7:32

    
    

    @NCN:

    Welcome to Moolanomy, and thank you for stopping by.

    “Dave not only encourages SAVING for college, but BUDGETING for college, once a student begins school. Plus, he encourages living in inexpensive housing (dorms) and having a job. His goal is to promote a balance between retirement / education / and long-term savings.”

    I think this is a great advice. I am not saying that he gives bad advice in general. I think he’s great and what he’s doing is admirable. I like the idea of teaching children to be financially responsible and to share educational expenses burden with their parents — I think they should do all of the above as Dave suggested.

    I just thought that this particular advice I heard was not that good.

    @CFO:

    Hi, there! I am not trying to be harsh on Dave. I just disagreed with this particular advice.

    Good point about using ESA for pre-college education expenses. That’s one nice thing about ESA — it’s more flexible in term of how you use the money.
23. 

    Best Advice on Debt
    

    January 17, 2008, 8:24

    
    

    @ Pinyo
    I see where your coming from but from my point of view, Dave Ramsey has helped tons of parents put their kids through college debt free.

    So his advice can’t be bad. It’s just different from what you recommend. Therefore, the title of your post should be “Dave Ramsey gives different advice about college savings than me”.

    Just my 2 cents.
24. 

    Pinyo
    

    January 17, 2008, 9:20

    
    

    @Best Advice – Welcome to Moolanomy.

    “Dave Ramsey gives different advice about college savings than me”

    It could be, but I still think presenting ESA as better because (10 it more investment options, (2) you can change to a different investment if you don’t like the one you currently have, and (3) because there are some bad 529 plans out there, still represents a “bad advice.”

    Regarding #3, there are a lot more bad investments to weed out than there are bad 529 plans.
25. 

    Mike Simone
    

    January 17, 2008, 13:46

    
    

    First, I am a Dave Ramsey fan, but I must admit he seems to be very naive when it comes to investing.

    Yeah, I know he has more money than me, but I often cringe when he gives investment advice.

    Anyway, it was a great post Moolanomy. First time here.
26. 

    Stephanie
    

    January 24, 2008, 16:06

    
    

    I don’t understand how people could have a hard time picking the right investments. Look at the past returns for 10-20 yrs, and the expenses. I showed some mutual funds to my 9 yr old sister and even she knew which one to pick. (Duh it’s not the one with the 5% return)
27. 

    Chancy
    

    April 18, 2008, 7:47

    
    

    Full disclosure: I teach Dave Ramsey’s FPU at my church, so I am a fan. You must recognize two things: 1. Dave assumes that responsible investors, such as the ones with the foresight to plan for their children’s college, will do their research and only invest in quality, long-standing mutual funds with a good track record. 2. He is not suggesting you continually roll your investments around, focusing on short term results. He’s making a point that YOU have control over where the funds are invested, as opposed to allowing someone else dictate that to you. and 3. If you’ve ever listened (or watched) to Dave Ramsey, you’ll know that he has answered this question hundreds of times, so it’s not a “spontaneous” answer. The ESA offers a more flexible definition of “qualified education expenses,” thereby increasing the chances of using all of the funds in the account, and minimizing the amount remaining, which would be subject to penalties and taxes.
28. 

    Peterman
    

    August 16, 2008, 11:03

    
    

    This provides a good comparison:

    http://www.fool.com/college/compare.htm