By on September 20, 2011

Dave Ramsey has done an awful lot of good in this world. Millions have been helped. Billions in debt has been eradicated forever. Plus now a lot of folks finally understand that consumer debt is little more than a barnacle of financial enslavement. When it comes to frugality and avoiding consumer spending traps, Dave Ramsey offers a lot of solid advice.

So having said that, will this article be another soulless puff piece about the virtues of Dave Ramseys methods? Hell no!. As much as I love the fact that he helps so many, I think his math is horrific and his conclusions are dead wrong. .

At least when it comes to cars.

Take a look at this Drive FreeRetire Rich’ presentation and see what you think .

OK… well let’s assume for now you don’t want to. Or will do so after this article. The entire presentation is hinged on two beliefs.

A) Dave assumes we can get a 12% annual return on mutual funds. No taxation. No fees. Never. Plus if you can save that $475 a month payment… you may someday end up with $5.5 million.

This Warren Buffett article and this one by Bill Bernstein put these garbage stats to rest. The 12% annual return myth has been based on a lot of ‘nip and tuck’ investment studies that more or less espouse a belief that stocks can defy logic and grow at three to four times the annual GDP growth rate. They can’t over the long run.

I don’t care too much about the use of old financial myths. At least in 2011, most of us have already heard it all and seen the consequences of irrational exuberance.

What did get my eyebrows raised way beyond my imaginary hairline was this factoid.

B) On average, The top third of new car buyers finance a vehicle at $26,000 over 6 years and wind up paying $33,000. That means on average, one third of the vehicles you see on the street have an average monthly payment of $475 (assuming 9.6% interest).”

Really??? So 33+% of the vehicles on today’s roads are ‘recent‘ new cars that require, on average, $475 monthly payments? There is no way that can be right. Not even in Texas.

What I found out was a bit more sobering…

New car sales have cratered from their peak year of 17.4 Million in 2000 to 11.5 million in 2010. No surprise there.

In fact new car sales only made up 23% of all car sales in 2010 (36.7M Used vs. 11.5M New). Most folks in the auto industry believe that the ‘new normal’ will remain at a 12 to 13 million clip  for a while.

But let’s be generous. Let’s assume an annual rate of new car sales of 14 million over these next six years. That would make 4.67 million cars annually that get the Dave Ramsey $475 barnacle.

14 million x ⅓ of buyers = 4.67 million

Multiply the 4.67 million by 6 years for the total population of new cars still under loan, and you get 28 million. A nice round number. Finished? Not quite.

Now we need to subtract out the annual repossession rate (2010 new car repo rate is 2.2% annually) and we end up with 24.5 million.

Are we finished now? Nope. This number doesn’t factor in those new vehicles that were either stolen or totaled. 2.5 million were totaled last year out of a registered vehicle population of 246 million.

If we assume a highly optimistic 1% annual attrition rate, we wind up with only 23.6 million of these cars on the road.

So it looks like only about 9.6% of the cars on the road have these loans. Except registered vehicles are not always daily drivers. Some are tractor trailers. Others are antiques. Many more are government vehicles or commercial vehicles.

Even if 50 million of the 246 million are not daily drivers, the percentage of new vehicles with payment vs. all personal cars on the road would only come out to only 12.2%.


33.3% vs. 12.2%? That’s a lot lower than Dave Ramsey’s factoid.

Is that 12.2% correct? Probably not. I’ve crossed a threshold where statisticians and economists are far better qualified to find the ultimate true answer… if the data is out there. But the belief that one out of every three cars out there is a recent debtful new car still seems way off the mark.

It could be 1 out of 7. Maybe only 1 out of 8. But 1 in 3? In today’s economy? Sheeezzz!!!!

I found a few other whoppers in the presentation. Including…

  • Today’s new car loses 25% of it’s value the instant you drive it off the lot.
  • After four years, your new car loses 70% of it’s value.
  • That $26,000 creme puff bought 4 years ago is worth only about $6,000.
  • After 6 years, the ‘normal’ new car buyer gets car fever and buys another one on the note
  • A 6 year, 10 month old car is worth only $1500.
  • But don’t worry! If you save just 20k and put it in a super-duper ‘stock market mutual fund’, earning 12%, you can buy a $14k to $18k new car every five years for the rest of your life!


You know what? Even If all these ‘leaps of numerical indulgence’ were correct, I still would buy used. Just imagine how much joy you can get out of a 2004 Mazda MX-5 that is only $1500! I’ll gladly take three of those Miatas, another Honda Insight, and maybe a Camry for when my mom is in town.

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44 Comments on “Hammer Time: Dave Ramsey, Bad Math & Statistical Quagmires...”

  • avatar

    Dave needs to update his numbers. They seem to be based on an old Ford Taurus.

    He does have a point about interest. With interest on savings so low and questionable returns in the stock market, why would you finance a car at 4-5-6%? In this market, cars are depreciating more slowly. Pay cash. And have you ever looked at an amortization table for a 30 year mortgage? Makes you shiver.

    • 0 avatar

      Yes Steve Lang, you have crossed the Math event horizon with no hope of escape…

      But even though the numbers may be a bit exaggerated, you did miss the mileage piece of the valuation.

      The points he is making are great: buy what you can afford (with cash), used. He has an incredible message of hope.

      • 0 avatar
        Steven Lang

        Pistolero, I have absolutely no axes to grind here. Dave Ramsey does make a positive tangible difference in the lives of a lot of folks. Far more than the author that is typing this sentence.

        However, that does not mean his math is correct. If his financials are incorrect, then I’m sure he would want to revise them.

        As for who offers the best car advice… I would encourage everyone to read ‘Car Talk’ by Tom & Ray Magliozzi. Even as someone who has bought and sold thousands of cars (and written a few hundred articles on the subject), I still reflect on the recommendations in that book.

      • 0 avatar

        Ramsey makes me feel like a little kid. But anyway …. is it possible he was saying “one third of the (new) vehicles you see on the street have an average monthly payment of $475” … just sayin’

  • avatar

    All these numbers make my head spin. Too deep a subject for my shallow mind. I’ll keep my money and drive my Impala and CR-V into the ground – or when it doesn’t make any sense to fix them anymore. Those days aren’t here, yet.

    By the way, all these numbers and projections are very precise and neat, but hasn’t anyone ever heard the phrase: “…time and unforeseen occurance…”? or: “The best laid plans”?

  • avatar

    12% return.
    Where is he putting his money and what “long term” is he looking at?
    Why is 25% loss in “value” of the car when it leaves the lot a “whopper”? Just curious.

    • 0 avatar

      I’d like more info on the 25% loss “myth” too. I think that’s a fairly solid figure. Sure, as Banger points out below, you can find used cars advertised at new-car prices, but that doesn’t mean they’re actually getting that kind of money for the car. And a dealer can offer incentives and financing that an individual can’t.

  • avatar

    And I quote: “Today’s new car loses 25% of it’s value the instant you drive it off the lot.”

    Not necessarily. We noticed this 2010 Nissan Cube for sale at the dealer from whom we bought our Cube last December. Ours is also a 2010, but has one-third the mileage this Cube has. We have the same equipment. Going on what we paid ($16,990), our Cube hasn’t depreciated at all, really:

    • 0 avatar

      What the dealer is asking for a particular used car is not the same figure that you will get at trade-in or even with a private sale. If you are concerned about depreciation, you are mainly concerned about the latter two figures.

      When I run the figures for my 2003 Accord EX on, the trade-in value and what dealers are asking for that car are two very different numbers.

  • avatar

    My car loan was 2.7%, and I just missed a .99% promotion, that wasn’t taken into account. I don;t know many people sitting on 5 or 6 % car loans these days, the makers are willing to provide cheap financing to move metal. Plenty of vehicles hold their resale, but fleet sales cars and POS vehicles with known expensive problems are worthless after 5 years.

    The solution is to drive a car into the ground, after 8 years it makes more sense. You can get 10 or 12 years from a car these days, more if you don’t commute much.

    Cars are functional and handy. How much mulch or grocery bags will a mutual fund carry? Buses are great if you live near a stop and they go where you need to be, but for most people they are not practical. City dwellers save money on vehicle costs but spend it on taxes, exorbitant rent, and higher costs of goods and services.

    My car payment is higher than the 475 quoted, because I did not have a trade in and preferred not to drain my savings at the dealer. Next car I buy will involve a trade and be a better deal. In about 5 years.

  • avatar

    All snark aside, a large part of the financiall quagmire that we got ourselves into was obtaining loans on cars that folks could never afford. 0 down, 72 month financing (really??) are not that uncommon. With no leverage on the car, real depreciation (whatever the amount…YMMV depending on said vehicle) and a monster note…more than a trivial amount of people got themselves into trouble “toting the note.”

    And having your car repoed, stolen or totalled doesn’t necessarily mean that you quit having a car payment, so I’m not sure how this is even a valid point of discussion.

    So while Dave’s numbers might be open to, um, interpretation, I’m still a fan and fundamentally believe that he is on the right track when it comes to debt and debt management.

    • 0 avatar

      a large part of the financiall quagmire that we got ourselves into was obtaining loans on cars that folks could never afford.

      No. The economy didn’t nearly collapse because of a few bad car loans. It collapsed because people thought they were being prudent by buying as much house as they could possibly afford.

  • avatar

    The old assumptions about 10 or 12 percent return on investments over the long run were never true. When people like Ramsey keep repeating them, even now after everyone’s seen that the “long run” includes downs as well is ups, whatever useful information they may present about getting out of debt is seriously undermined.

  • avatar

    I’ll just chime in on the side of buying new – if you can afford it. (And I’m not going to try to tell other people whether or not they can afford it. They can figure it out, or not)

    I’m a believer in buying new and holding on to the car for about 15 years. I don’t have to worry that I bought someone else’s problems. I know exactly how the car has been maintained. I’m not going to have major repairs until many years down the line, at which time, the note will be paid off.

    • 0 avatar

      Add to that you get exactly the car you want with the options you want(assuming you’re not in a huge hurry), right down to the color.

    • 0 avatar
      30-mile fetch

      “I don’t have to worry that I bought someone else’s problems.”

      I saw a great visual illustration of this. Otherwise nice looking 1-2 yr old Prius making a hard left turn across traffic and over a raised 6-inch median. I didn’t know suspension components could move that much and that quickly without breaking. It’s abuse like that which a used car buyer would have a hard time detecting.

  • avatar

    Some good points Steve. Agreed that Ramsey means well, but he certainly uses some shoddy math in order to have sensational eye-popping numbers. My interpretation is his average customer [who pays for his services] is certainly on the lower end of the socioeconomic spectrum, and therefore not very math savvy.

    Saying a new car loses 70% over 4 years is laughable. Take a look at the average 3-Series, A4, and C-class with 30-36,000 miles coming off lease. They’re selling for 70% of MSRP.

    12% ROI, and he says it so casually it sounds like it’s risk-free. I use a conservative 5% for all long term modeling.

    • 0 avatar

      Agree. Obviously his market is people who have made multiple bad credit decisions which likely include car purchases with terrible terms.

      I think even 5% long term for modeling is too high. Why not annual GPD growth rate smoothed over several long cycles?

    • 0 avatar

      Based on my experiences, the people who pay for Dave Ramsey’s services are not buying or leasing new European luxury or near-luxury cars. They are more likely the type to have been seduced by the prospect of rebates or other such promotions at domestic dealers or the “off brand” Asian imports. And, yes, they would therefore experience horrific depreciation. So his main sin may have been not to have qualified his remarks – but the last thing he wants to be accused of is sending a mixed message.

      For example, imagine if he says: “Depreciation on SOME cars is horrible. But some cars are better in that regard.”

      Person attending seminar says, “Okay, I’ll buy one of those cars with a better depreciation rate next time!”.

      But by the time many people turn to him, they are so deep in the hole that they should not be considering ANY new car, regardless of the depreciation. (Of course, being in the hole hasn’t stopped them from making bad decisions, on their own, in the past, because they “needed” something new or different or “better.” Which is why they have turned to Dave Ramsey, often out of desperation.) Mr. Ramsey probably wants to keep the message simple and direct.

      And, as for this one:

      •After 6 years, the ‘normal’ new car buyer gets car fever and buys another one on the note

      If anything, until recently, this statement was too conservative. Most people I knew were trading every 3-4 years, and, yes, they were borrowing for the new car. This has changed with the recession.

  • avatar

    I had heard the 25 percent figure regarding immediate depreciation long before I had heard of Dave Ramsey. He may be using outdated figures, as Mr. Lang has written on the price inflation in the current used-car market. I also wouldn’t doubt that more than a few domestics and some of the “off brand” foreign nameplates did display that level of depreciation a few years back.

    • 0 avatar

      25% isn’t that much if you got it for 10% off the list price and buying a car isn’t exactly a pleasure trip so doing it more than once a year is definitely a sign that the car you bought earlier was a lemon (for you)

  • avatar

    •”A 6 year, 10 month old car is worth only $1500″
    I just sold a 8 year, 8 month old 2003 Hyundai Elantra with over 100,000 miles on it for $3400.00 – The terms on the new (used) car are 0.9% for 36 months. This guy’s numbers are all wrong.

    • 0 avatar

      8 y/o Elantra is a near-classic; price must be on the rise!

      • 0 avatar


        I bought my current daily driver(’02 Buick Century creampuff) in 2007 from a “little old lady” with 45K miles for $6800.00.

        It is still a cream puff only with 105K miles and it’s 4 years older. Based on my local market(Utah) with todays crazy market I think I could get $5,000.00 for it maybe more.

  • avatar
    30-mile fetch

    Thanks for the article, Steve.
    I knew Ramsey’s article was bogus when I read it 6 months ago and saw he was assuming those 12% annual returns. Anyone who has a retirement fund, even a well managed one, in this economy should see right through that. Didn’t Madoff get clients to flock to him on a 10% annual return?

    • 0 avatar

      Right on 30-mile……. My “expert financial advisor” for 25 years always penciled in 10% annual returns when making his projections(sales pitch). We got to be good friends over the years and I would just laugh at him and ask if he’d give me a personal guarantee in writing.

      Back in ’07 when the DOW hit 14,000 and then dropped back to under 13,000 I called him and told him to sell all my funds and put it in cash. He cried, chided me and told me I was a fool.

      When the DOW hit 6,500 I called him and asked him if he needed any part-time help. He hung up and we never spoke again.

      Re: Dave Ramsey. Although I believe his message is good, he is after all a salesman and all salesmen are selling something. In his case, books, seminars and referrals.

  • avatar

    Dave Ramsey completely ignores the long term cost of buying a used car instead of a new one.

    Jim buys a new car for $4,000 more than Dave spent for his used car with 12,000 miles on it.

    They both keep their cars 10 years. About 3 years in both cars have transmission issues. Jim’s car is still under warranty at just under 36,000 miles. Dave’s car is well out of warranty at 48,000 miles. Dave has to pay $1,000 to fix his car.

    At the end of 10 years Jim’s car has 120,000 miles and is a one owner vehicle. Dave’s car has 132,000 miles and thus worth less. So, Did Dave really save any money? Don’t forget Jim also got a lower interest rate on his new car.

    • 0 avatar

      Ramsey isn’t telling anyone to go out and finance a low-mileage, off-lease used car. He’s telling people who really shouldn’t be buying a $25-30k new car to save up the money they would have spent on payments for that car and eventually use it to pay cash for a ~$6k car instead.

  • avatar

    We can all sit here and come up with “what if” scenarios but these are all generalizations based on results from a study which assumptions had to be made in order to complete.

    My wife and I have attended Financial Peace University (Dave Ramsey’s curriculum) presented at our local church.

    Unfortunately, my wife and I were in the minority…the young, dual income family unit with no monthly balance carrying over on credit cards, no medical debt, no car payments and only some low interest school debt. The majority were either bad credit mistakes in the past or a widow(er) whose financial situation drastically changed due to the death of the spouse.

    FPU does have great points for those who do not handle money well and are in serious debt but everything you here has to be taken with a grain of salt…even on TTAC.

    Yes…Ramsey’s numbers are outdated.
    Yes…There are some mathematical tangents which enhance his points.

    …but…the crux of his philosophy is to prevent further debt and eventually get out of the current debt. Encouraging numbers like this for those in a lower socioeconomic, lower educational and sometimes worse emotional places show them that there are better options than financing a new / slightly used car when their 9 year old beater needs a water pump.

    FPU does work. I have seen it. No arguments that Ramsey’s numbers are fantastical but the crux of his philosophy is supported by how these numbers are used…to guide those who need guidance out of debt and into financial sustainability.

    Either way…my 1997 Chevrolet Monte Carlo with 202,500 miles on it is going to drive into the lower mantle before I purchase another car. My wife’s 2003 Chevrolet Blazer with 153,500 miles on might make it to the outer core…

  • avatar

    I wonder if leases and their large down payments are fudging the numbers a bit?

    Really, 9.6%?

  • avatar

    Ramsey does one thing well-telling people to reduce their debt load. What he then advises is questionable.

    • 0 avatar

      Ramsey may be a lousy investor, but coming from Gary North (a guy who promotes precious metals and tax protesting for ideological reasons) it’s the pot calling the kettle black.

      • 0 avatar

        The only thing in my portfolio that has done anything is gold. It has in fact doubled in price since I bought. Not offering any investment advice, here, just an anecdote. And if you read the article, North does not support tax protesting, if by that you mean not paying taxes.

      • 0 avatar

        I’m not implying gold is categorically a bad investment, and Ramsey saying so was crap advice. However, buying low and selling high is smart investing, buying because some guy on the internet told you fiat money is bad is gambling at best, and a lot of Gary’s material tends toward the latter.

        I read the article as well as clicked through the link where Gary claims to have been “clear” on Irwin Schiff, and it’s a quick fluffing of Schiff’s blog with some pro-tax protester links thrown in.

  • avatar
    DC Bruce

    As the comments show, comparing the “cost” of various car purchase options gets complicated and sophisticated fast. That said, Ramsay appears to make 3 good points: (1) don’t buy more car than you can afford by getting, say, a 72-month car loan, or heaven forbid, leasing; (2) consider the cost of credit versus the return you get on savings when you decide whether to finance a car or pay cash, (3) consider buying used, after the steep part of the depreciation curve.

    Even though you can dream up scenarios where these rules aren’t good, as general principles, they work. I think I would only quarrel with the last one, because it reflects a kind of “beat the dealer” mentality. My working principle is that only a really smart, really well-informed individual has a decent chance of “beating” the market. So, if the market prices a 3-year old version of the same car cheaper than the new version of that car, there’s a good reason for that: at some point in those two cars lives, the used car is going to be more expensive to own than the new car, because of its age. Now, that point may be when the used car is 10 years old and the new car is 7 years old; and, if you don’t plan on keeping the used car for more than 3 years, it may not matter. But I think the real way to save money on a car is to buy it new and keep it for 10 years (and, of course, take care of it), assuming you don’t drive an insane number of miles per year throughout the car’s life. In our family, we have rotated the new car out of being the primary car after about 6 or 7 years, so the car does not get the same amount of use per year for its entire life. So far, this has worked pretty well . . . and the secondary car has either become my daily driver for going to work or has gone to one of our kids while at college. The youngest kid is now a junior in college, so that program is coming to an end!

  • avatar

    I never got Dave Ramsey. The dude’s an con-man writing for idiots. He’s the other side of the credit-fueled conspicuous consumption coin along with the other late-night, get-rich-scheme pushers of his ilk. His numbers aren’t out-dated; they’re intentionally wrong. Ramsey’s gig is to sell self-help books to losers, and he’s obviously good at what he does. The problem is there isn’t really any value in selling truths. Get comfortable slowly isn’t sexy and doesn’t sell well. So what’s an unscrupulous, enterprising self-help author to do? Lie. Lie through his teeth selling sweet-nothings to fools. And that’s how you get your 12% average rate of return.

    To bad that average rate of return is a useless figure that only fools and crooks, such as Dave Ramsey and other opportunist out there to separate fools from there money, care about. Example? Year 1: 100% return, Year 2: -50% return. Average rate of return? 100% +(-50%) = 50%/2 years = 25%. Cool. You just had an annual average rate of return of 25% and ended up… exactly where you started. What matters for long-term growth projections is the ANNUALIZED rate of return. The annualized rate of return is actually less than 10%, adjusting for inflation it’s under 7%. The worst part it, that’s his smallest lie. Go hit up the used market for a $1,500 or $6,000 car and see how much that gets you. Cheaper than a new car with $475 payments? Probably. But you’ll be dumping at least half the money you saved into repairs.

    • 0 avatar

      malloric nobody calculates an average rate of return the way you laid it out. Even Dave Ramsey!

      The proper calc would be:

      (beginning value/ending value)^(1/number of periods)-1

      Which yields a 0% return.

  • avatar

    Maybe this is a good place to suggest that if a car gets you back and forth to work, it actually does count as an “investment.” An even better investment is a house close to work so you don’t have to drive, but that’s a different story…

    People who need Ramsey to tell them stuff have serious problems… but there’s plenty of those, and he has helped many. All the same, I don’t like the preachy stuff, and the numbers quoted here are just baloney.

    I’ve always had a hard time listening to “investment advice” from anyone, so I wound up with a 50/50 stock/bond split in my retirement accounts… it’s not been great but I’m very happy I didn’t go “all in” in stocks 15 years ago like many people I know.

    Twelve percent my wide behind…

  • avatar

    My opinion on Dave Ramsey is he sometimes overshoots his arguments, and probably uses cherry-picked stats of best and worst case scenarios (ie market returns during boom times or especially bad car loan structures that people with bad credit are forced to use, etc)

    Still, I think his message is one more Americans should heed. It’s astonishing to me our “debt culture” and how it enslaves people to a life of poverty.

    A little over shooting would probably put most people closer to where they should be.

  • avatar

    I have been listening to Dave Ramsey in TN on/off since before he hit it big (The Money Show anyone) and have purchased several of his books though only in used books stores!

    I tend to agree some with malloric above about Dave Ramsey: “He’s the other side of the credit-fueled conspicuous consumption coin along with the other late-night, get-rich-scheme pushers of his ilk.” And that is kind of proved by Dave’s books on what he says is even a simple subject: “spend less than you make.” Why do new books when he could just update an old one to a current edition? Dollars is the answer on that.

    One problem I have with him is that he is all about personal responsibility versus holding corporations feet to the fire. He has never ever come out against any predatory lending practices in TN or even to support TN gov’t agency’s or gov’t department’s investigations against predatory lending practices and or businesses. He is like an anti-drug crusader who is against drugs but won’t report the quick-mart down the street selling legal but harmful synthetic drugs as “bath salts”.

    Also Dave never ever tells people that a new car could be a good investment if it is bought with the understanding to keep it 10 years or more. Owning and (correctly) maintaining a car from mile zero is a better investment than any used car will ever be since you always risk someone else’s expensive problem(s) in a used car. Sure not everyone can afford a new car and should stay in a $4,000 used car if they cannot afford a new car versus trying to get a new car on credit alone and spiraling into debt.

    He should really counsel getting a specific type of used car- not just ugly but one owner for a long period, well maintained, low use, made in large production volumes = better parts availability , and with a good online support group so typical problems for that model car can be quickly queried and determined and/ or fixed or at least know what to tell a mechanic is wrong.

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