KEY POINTS:

  • (1) “Seven Baby Steps” is a Good Foundation for Beginners

  • (2) Intense Focus and Momentum can Lead to Success with Debt Snowball Method

  • (3) Personal Finance is 90% Behavior and 10% Math

  • (4) Debt is Often the Problem and Needs to be the First solution

  • (5) Investors Need to Take More Risk With Their Investments

  • (6) Avoid Whole Life Insurance at All Cost

  • (1) You Will Not Get a 12% Return in Your Portfolio

  • (2) Going to Optometry School Often Requires Taking Out Debt

  • (3) Poor Understanding of 10-years Public Service Loan Forgiveness (PSLF)

  • (4) Poor Investment Strategy in Choosing Actively Managed Funds with Front-loaded Fees Under AUM Financial Advisors

  • (5) $1000 Emergency Fund is Not Enough

  • (6) Deferring All Retirement Savings Until Debt is Paid Off, Even With Employer’s Match is Wrong

We have quite a few ODs on Finance members who are big Dave Ramsey fans, and quite a lot who are Dave Ramsey Haters.


First of all, we must give credit when credit is due! Dave Ramsey was the reason why I was motivated to start my own personal finance journey when I was a new OD graduate in 2015. I was a typical “rich doctor” making a “typical doctor salary” and spending close to 80% of my paycheck on bars and booze, while ignoring my massive $230,000 student debt.


When I discovered his radio talk show, it was eye-opening and literally lit a fire under my butt to take charge of my financial destiny and be debt-free!  In addition, Ramsey is a wonderful motivational speaker and gives decent advice for the most part. He offers a good foundation for the general public (basically anyone with a job), but it is important to take the lessons that Dave teaches and optimize them for our high-earning optometry profession to be even more successful. 

6 Lessons Dave Ramsey Gets Right

(1) “Seven Baby Steps” is a Good Foundation for Beginners

The one thing that Dave is famous for is his Seven Baby Steps, which are:


  • Baby Step 1: Save $1000 for your starter emergency fund
  • Baby Step 2: Pay off all debt (except for the house) using the debt snowball
  • Baby Step 3: Save 3-6 month expenses in an emergency fund
  • Baby Step 4: Invest 15% of your household income in retirement
  • Baby Step 5: Save for your children’s college fund
  • Baby Step 6: Pay off your home Early
  • Baby Step 7: Build wealth and give generously

Honestly, this is a great foundation for any newbie investor who is trying to create his or her financial plan.  He has some great valuable lessons such as having an emergency fund, paying off debt and investing for the future. But this is often too rigid and thus, all his practical lessons that can be significantly improved on.

(2) Intense Focus and Momentum can Lead to Success with Debt Snowball

Dave always talks about “gazelle-like” laser focus when it comes to paying off debt. This is absolutely true! Most people are awful at multitasking and balancing different financial goals such as paying off debt, investing, buying a house or rental properties, etc. Many people can often feel overwhelmed, give up and go back to their bad habits. Simply put, many optometrists just end up doing everything at 10% effort and not accomplishing anything at all.


In addition, I like his snowball method of paying off debt, which one lists the highest payment first at the top, down to the lowest amount of debt at the bottom, regardless of interest rate. This forces people to focus on paying the smallest debt first, then attacking the next highest debt amount.  While this doesn’t make sense mathematically to pay the highest interest first, it is extremely motivating (from a behavioral aspect) and keeps people on track! 

(3) Personal Finance is 90% Behavior and 10% Math

Dave is absolutely correct!  Most doctors who have massive credit card debt didn’t get there because they made too little income or some bad financial decisions (cough cough Bitcoin). They get into massive debt because of their ridiculously high consumer spending behavior.


From a behavioral aspect, society puts a lot of emphasis on young optometrists to “live like a rich doctor” upon graduation and buy that massive doctor's house. So this in turn justifies a lot of behaviors to spend and spend some more. Remember that debt is merely just a symptom of the behavioral disease, unless we fix the behavioral aspect of the doctor, it will still be a vicious cycle of living paycheck to paycheck. 


Too often I see optometrists who think they are so smart and try to fix their massive debt with “math” by moving debt from one credit card to another, chasing that zero-fee credit balance or even taking out a HELOC loan on their home to pay off their student debt.


Often, this is rather insignificant and extremely time consuming, since simply living on a stricter budget, spending less than what you make  and/or picking up extra work is more efficient. 

(4) Debt is Often the Problem and Needs to be the First solution

I love the fact that Dave puts a lot of emphasis on paying off all debt (except for your home mortgage). This is his biggest selling point. He really brings home the point that all debt is the same, regardless if it is your massive optometry student loan, credit card, car loan or business loan. 


Dave is definitely the most anti-debt advocate out there since he went bankrupt due to over-leveraging too much debt during his real estate business. So I get where he is coming from. Too many doctors are way too comfortable having hundreds of thousands in student debt or even taking on more debt for other business ventures or consumer spending. Often they are over-leveraged and just one bad emergency away from financial devastation.

(5) Investors Need to Take More Risk With Their Investments

Dave’s recommended portfolio looks like this:


  • 25% Growth and Income Funds (Large Cap Stock Funds)
  • 25% Growth Funds (Mid Cap Stock Funds)
  • 25% Aggressive Growth Funds (Small Cap Stock Funds)
  • 25% International Funds

As you can see, he is 100% all stocks with no bonds, CD and definitely no whole life insurance. He recommends this portfolio of 100% stocks regardless of age or even people nearing retirement. While this is a pretty aggressive allocation according to most financial planners, especially for optometrists within the 50-65 age range, it does bring home the point that many people, especially young ones, can be aggressive with their allocation.


It always drives me crazy when I see young optometrists in their 30s with a 30% bond allocation, and they are expecting their portfolio to have an average yearly return of 10% and be on track for retirement. Sorry, not going to happen.  Being too conservative with your portfolio is just as dangerous as taking unnecessary risks when it comes to investing.

(6) Avoid Whole Life Insurance at All Cost

I do admire that Dave advocates against whole life insurance (or any cash-value life insurance) and tells his listeners to avoid it at all cost. 


Due to its high monthly premium cost, high sales commission cost, low annual return and lack of liquidity, 99% of all optometrists out there do not need a whole life insurance policy. Simply buy cheap term life insurance and invest the difference in other better investment vehicles like a Roth IRA or taxable brokerage account.


Click here to read “The Optometrist’s Guide to Life Insurance”

6 Lessons Dave Ramsey Gets Completely Wrong

(1) You Will Not Get a 12% Return in Your Portfolio

I seriously have no idea where Dave got this number from.  Assuming he is 100% aggressively all-stock, the average annualized total return for the S&P 500 index for the past 90 years is only 9.8%. Even with a small tilt toward small-cap stocks, the return can a bit higher but is nowhere near where Dave tells his listeners.  This can be financially devastating for investors who might use this high return during their calculation, then realize that he or she doesn't have enough in their retirement accounts at the end. 


A more conservative average return is around 7-8%, assuming that an investor will have more bond allocations as they approach retirement age.


Want to check if you are on track for retirement? Check out our Retirement Calculator 

(2) Going to Optometry School Often Requires Taking Out Debt

Dave tends to talk down to healthcare professionals such as optometrists, dentists and medical physicians - chastising them for taking out any kind of student loan debt for their doctorate degree. For example, he often advocates potential applicants to:


  • (1) Utilize 529 college plans and other savings accounts
  • (2) Optimize school selection (often in-state) to save on tuition and housing
  • (3) Consider working for the military for 4 years to pay for optometry school
  • (4) Defer applying to optometry schools until you can save up (often working as an optometric assistant)  

I understand that student loan debt for optometrists is grossly overcharged (average graduating debt around $200,000 to $280,000) and stagnant initial OD salary of $100,000 to $120,000 often leaving new OD graduates with a debt to income ratio of close to 3:1. This often leaves young graduates with a shovel that is often too small and a hole that is too big to dig out of.


So while option #1, #2 and #3 are all great to reduce tuition debt, the harsh reality is that unless you have wealthy parents, the mass majority of ODs will need to take out a big chunk of student loans to pay for their optometry school


Lastly, option #4 is just awful advice. The average optometric assistant makes around $11-15 per hour, or an annual salary of $28,000 or so, which basically means one would have to work as an assistant for 10 years straight (not accounting for taxes or living expenses) to save up for optometry school. This is ridiculous.  In addition, if your goal is to be an optometrist, it is better to apply to school sooner than later (avoiding the gap year after college), and start making that doctor’s salary ASAP. 

(3) Poor Understanding of 10-year Public Service Loan Forgiveness (PSLF)

In a recent episode, a public school assistant principal with $200,000 of student loan debt  and making $63,000, who is currently on 10 years Public School Loan Forgiveness (PSLF). asks Dave for advice. Dave bluntly told her that PSLF is a scam and she should just aggressively pay it off by living on beans and rice. This is awful advice. With a debt to income around 4:1, her only realistic option to have any decent retirement investments is to go through the PSLF program.


The current high rate of PSLF forgiveness rejection is often due to the applicants not being in the correct payment plan or having the right types of federal loans. Yes, while this is an awful situation for the borrowers and often blamed due to the lack of guidance and misinformation from lenders themselves, it is far from a scam. Recently, a podcast from the White Coat Investors spoke to a doctor who successfully got her student loans forgiven via PSLF by carefully doing the correct steps.


While ODsonFinance advocate for aggressive student loan payments for the majority of ODs - for a small handful of ODs working in the Veterans Affairs (VA) or Indian Health Service (IHS), 10 year PSLF is a great path for wealth accumulation, assuming they will stick with it for the whole 10 years.

(4) Poor Investment Strategy in Choosing Actively Managed Funds with Front-loaded Fees Under AUM Financial Advisors

Dave constantly recommends his listeners to invest with his Endorsed Local Providers (ELP) -  financial advisors who often charge a 1-2% asset under management (AUM) fee, compared to a fee-only financial planners who charge an hourly fee or a set annual fee. He claims that a financial advisor needs to be commission-based so he is “hungry” to make you money. But this often leads to bias and making financial decisions that are not within the client’s best interest.  In addition, that 1-2% AUM over a lifetime of investing can end up costing you hundreds of thousands in advisory fees, resulting in a huge sacrificed return to your portfolio. 


Even worse, Dave LOVES actively-managed mutual funds and constantly defends front-loaded funds which charge an initial fee of 5% first prior to even investing any capital.


The amount of data that support passive, low cost index funds as being a better option for investors is overwhelming, yet Dave refuses to change his poor investment advice for his listeners.


Click here to Read: "8 Reasons Why Every Optometrist Should Invest in Index Funds" 

 

(5) $1000 Emergency Fund is Not Enough

Dave emphasizes the importance of having an initial emergency fund (Baby Step 1) prior to paying off debt or investing. This is solid advice, but unfortunately $1000 is simply not enough to support any practicing optometrist, especially when the minimal monthly student loan payment is around $800-1200.


I get the behavioral aspect of putting any extra cash toward paying off debt and maintaining that $1,000 emergency fund as a low baseline. But with the recent COVID shut-down which resulted in thousands of optometrists being furloughed or even losing their jobs, it is vital for any doctors to have a minimum of 3 to 6 months in their emergency fund prior to everything else. 

(6) Deferring All Retirement Savings Until Debt is Paid Off, Even With Employer’s Match is Wrong

While I admire Dave's aggressive attitude to paying off ALL debts, it is financially unwise to defer all investments (especially retirement) before getting rid of ALL non-mortgage debt due to the power of compounding and allowing as much time as possible to grow wealth.


This is extremely rigid and not practical for the typical optometrist graduating with over $200,000 in student debt. Even with an aggressive payment plan on a typical $100,000-150,000 OD salary, most optometrists will take a minimum of 3 to 5 years to finish paying off their student debt.  That is 3 to 5 years of compounding loss in their retirement savings, especially since many optometrists are playing catch-up compared to their non-healthcare peers. 


In addition, it drives me crazy that Dave tells his listeners to NOT contribute to their employer’s 401K, even with a 6% Match, until all non-mortgage debt is paid off. This is insane, that 6% match (or $6,000 per year) is literally free money that you are leaving on the table. Remember that any match is considered a part of your overall salary. 


We recommend all ODs take a more balanced approach such as taking advantage of their employer’s 401K match, having semi-aggressive debt payments, while contributing at least 10% toward retirement investment within their Roth IRA and/or 401K plan.


Want to know how to Create a Financial Game Plan? Check out "Step by Step Guideline for the OD"  

Summary

Overall, Dave Ramsey is a great motivator and has helped numerous people get out of debt and on the right financial track. His radio show truly motivates individuals to budget, live below their means, pay off student loans, get better at investing and change mindsets as a “rich” doctor at the beginning.  But now that I am 5 years into my journey, his advice seems almost incorrect at times, impractical and often too rigid for a typical high-earning professionals. 


Dave gets most of the lessons right, but ODs on Finance members should incorporate other investing strategies and financial knowledge from other reputable sources to be even more successful.

Want to learn how to build your own portfolio? Check out  The Optometrist's Guide to Investing 101

Want to get a full blueprint on How to start? Buy our Book The Optometrist's Guide to Financial Freedom

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About DatBuiOD

Dr. Bui is a lead optometrist at the Apple Wellness Center in the heart of Silicon Valley. He has a deep passion for ocular disease and healthcare technology. He started his career with $230K of student debt and has been focusing on strategies on attacking this massive debt such as budgeting and personal finance, along with investing. He is a big advocate for passive index funding with a small portfolio toward technology stocks. Lastly, he wants to help all new doctors and high-earning professionals navigate toward wealth and financial independence.

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