The eighth member of our Women in Finance series isn’t exactly on the inside of the financial industry. Still, her name is probably the most recognizable of all in the average American household. And if not, then her father, Dave Ramsey, surely is. You’ve probably heard her on the radio or seen her books in the store; we’re talking about Rachel Cruze.
Rachel Cruze is an up-and-coming star in the realm of personal finance. She might become the next Clark Howard or Susie Orman.
Cruze speaks to her fans with the same common sense approach to money and budgeting that her father does, but with her own twist.
Cruze attended the University of Tennessee (if you’ve ever heard Dave on the radio you know he’s a Tennessee Vols fan), graduating with a degree in communications, not a Bachelors or Masters in Finance degree as you might expect.1 Afterwards, she began her career working at Ramsey Solutions.
Rachel Cruze: The Business
While nowhere near the scale of her father’s empire, Rachel has carved herself out a great niche, combining financial acumen with an appealing personality. She has frequent speaking engagements and is a guest or contributor to a variety of television shows and publications. She is also a busy author, with a new book out called “Love Your Life Not There’s”. It is a New York Times bestseller and speaks to people very frankly about money. We visited Rachel’s website and signed up for a free preview of the book, which we enjoyed.2
One way Rachel Cruze has built a following is through social media. She has a YouTube channel and Instagram account with over 60,000 followers each, a Twitter handle with over 104,000 followers, as well as Facebook and Pinterest pages (her communications degree has certainly paid off).3
While Miss Cruze optimizes her use of social media, she does point out the temptations they can bring-specifically the ‘comparison living’ mentality that is created by viewing friend’s Facebook and Instagram pictures. She makes a great point saying that you must remember those types of posts are a “highlight reel” and may not portray everything that goes on within a family.
Rachel Cruze: The Message
Cruze (and Ramsey’s) message is simple- you can’t lead the life you want being burdened with personal debt (especially credit card debt). Together, they have connected with a growing movement towards deleveraging by consumers. That attitude resonates with many in the wake of the financial crisis who remember how debt got them into trouble.
Even though the crisis is now almost a decade in the past, the financial scars are still worn by many Americans. The average American household lost one-third of its net worth during the crisis and subsequent recession.4
We all know the narrative-home prices were soaring and people were using their homes as ATMs. Bankers and loan originators were also complicit in the problem by offering first and second mortgage loans to people who couldn’t afford them. Word of mouth (vanity) and the media (house flipping shows, etc.) helped fan the flames. We can only hope the multitude of current flipping shows (Flip or Flop, Vegas Flip, First Time Flippers, etc.) aren’t portending a repeat of the last housing crisis, especially if rising interest rates continue.5
Even if things are getting frothy again, the followers of Cruze and Ramsey should fare much better if there is another economic setback.
Cruze speaks to qualities like contentment and gratitude which help people live within their means and still enjoy life without having to keep up with the Joneses. Dave goes so far as to proclaim “the paid off home mortgage has taken the place of the BMW as the status symbol of choice”. We love that.
And the message rings loud and clear to many. There are now hundreds of church groups and organizations nationwide that teach and promote Ramsey’s methods. Being able to share financial struggles with like-minded people is appealing to many which is why it’s caught on so strongly. As the old saying goes, misery loves company.
The Baby Steps
Rachel Cruze learned most of her financial skills from her father. Dave Ramsey, the creator of the “debt-free scream” has transformed the lives of thousands of his listeners and customers. In his book, The Total Money Makeover, he outlines a path to financial freedom one step at a time, called the Baby Steps. Baby Step One-starts the journey with a $1,000 emergency fund. This way you avoid incurring further bad debt handling unforeseen surprises such as transmission issues in your car or a broken air conditioning unit at home.
Without an emergency fund, you may be forced to enter the dangerous cycle of revolving (credit card) debt or even worse, payday lending or cash advances.
But these steps sometimes run contrary to traditional wisdom of financial advisors or planners. For example, Baby Step #2, the ‘Debt Snowball’, advises paying off debts smallest to largest (in dollar amount). Traditional household economics says to pay off the loan with the highest interest rate first, and then move on to the next highest rate and so on. This is Ramsey’s ‘small wins’ approach that believes you will continue to be motivated by achieving small financial goals than by tackling a huge one right away.
In other words, it is more of a behavioral finance method.
The battle between traditional and behavioral finance can also be seen in the analyst community- some prefer technical analysis (stock charts and sentiment indicators) instead of the number-crunching fundamental analysis taught in the CFA program.
Further, Baby Step Seven, ‘Build Wealth and Give’, suggests investing in “good growth mutual funds”. This is a powerful tool in wealth generation which can be used to ‘live like no one else’. Still, it is a bit curious to suggest actively managed mutual funds in lieu of cheaper, passively managed index funds. According to Morningstar, the average mutual fund expense ratio is about 1.25%, over a full percentage point higher than some comparable exchange traded funds such as Vanguard’s S&P 500 Index ETF.6
“Growth” mutual funds are often comprised of smaller, more tech-heavy companies. The point Dave is probably making is that the rate of return on these higher-beta names is often greater than the market as a whole. And since you are debt free, when you reach this stage, you’ll be much better equipped to ride out the increased volatility that comes with owning these funds.
Be very careful in selecting the funds because the majority of actively managed funds do underperform the market. This is due to a variety of reasons including higher trade commissions (for ‘soft dollar’ arrangements) and repeatedly paying the spread (a factor for funds with higher turnover rates). There is also a performance drag from the percentage of cash on hand that the fund holds to meet redemptions.7
Kids and Money
Another area both Rachel and Dave have focused on, often overlooked by traditional financial planners and our school system, is financial education for children. They have written extensively on the subject, including the book they co-authored called Smart Money Smart Kids, a New York Times Bestseller.
Not many people realize it, but you can actually open up a Roth IRA for kids. Most kids start earning ‘real money’ (not allowance) at around 13 (babysitting, paper route, lawn mowing, etc.). And when they are 14 they become legally employed at their first jobs and get actual paychecks.
An adult can open up a Roth IRA for the minor and fund it up to the amount the minor earns. For example, if your child mowed a couple neighbor’s lawns on the street at $10 a pop, once a week for a year, they could contribute $1,000. If there was additional income that can be added but it must be from actual work. There is a cap of $5,500 per year (as of 2016) but that would be pretty tough to meet unless your kid is a YouTube star or appearing in television commercials.8
The power of compounding is what makes this such a tremendous opportunity for earnings growth.
While your 13 year old is probably more interested in a skateboard than retirement savings, it is worth the conversation if you could walk through the numbers with them.
A single, $1,000 investment at age 13, compounded at the long-term rate of return for the market (12%) would be worth just over $194,000 when junior must take his first distributions at 59 ½ (this doesn’t account for any ancillary fees or account charges). Assuming a frugal early withdrawal schedule, by age 65 that number could be over $300,000. If you think that rate of return is a bit optimistic, realize it is the number used by Dave Ramsey himself.9
If your New Year’s Resolution was to get a better handle on your money this year, check out the variety of resources provided by Ramsey Solutions on the subject of personal finance (you can also access old radio shows).
They can help you create a budget or improve your credit score. Credit scores are important for those pursuing a career in finance since prospective employers increasingly check credit scores during the hiring process. If they find a low credit score for you, just say “sorry, I follow Dave Ramsey and Rachel Cruze and have no debt”. We wish Ms. Cruze much future success.