Welcome to Credit Withdrawal, if you like what you see, you may want to subscribe to my RSS feed. Thanks for visiting!
If you haven't lived under a rock your whole life and are looking to get your finances in shape, there's a few names you've heard; Suzy Orman (Oprah's tame financial expert), David Bach (the Automatic-man) and of course, Dave Ramsey (Gazelle intensity, Act your Wage, "We're Debt Freeeeeeeee").
In the Personal Finance blogging world, it seems that many either like Dave or hate him, depending on their take on his advice. There doesn't seem to be much middle ground. So whether it's his Baby Steps, or the Financial Peace University, or the syndicated radio show, he's got a lot of followers that take his word, if not as gospel, then pretty darn close.
Now on the minority opposition, there are always a few that point out "his math's wrong" or "you shouldn't pay off low-interest credit cards" or even sillier, "Credit cards are GOOD". And those are usually the geeks of the world that base their finances on the math.
They're Right,.. Sort of
Dave never said that his methods were the most efficient. His methods are more like weaning someone off an addiction. Certainly it's more 'efficient' to quit cold turkey, no matter what the addiction, but the likelihood of that happening is much less than for gradually quitting.
What Dave IS saying is to make a change. If you're calling into his show to ask for advice, it's fairly certain that you NEED advice (duh), and that what you're doing now, getting deeper and deeper in debt, is only getting you in trouble. It's easier to get back on your feet if you aren't carrying around the albatross of debt that many Americans are. That's why Dave recommends getting out of debt.
But They're Wrong Too,.. Sort of
Where the debate comes in is whether you should get rid of low-interest loans (such as mortgage, student loans, zero interest credit cards, etc) and work with a completely clean slate, or whether you should keep the loans, and concentrate on investing it in investments that have a higher return.
You might as well have gone to Kansas and yelled "Evolution" in one of the churches, then ran over and yelled "Intelligent Design" at the KU Campus. There's a ruckus no matter what side you're on.
Invest Now, Before it's Too Late!!
The Pro Side - Low interest debt is acceptable when someone is investing their free money in other higher-return investments. It's a type of arbitrage (borrow low, invest high, pocket the difference) and takes into account the Time Value of Money.
Time Value of Money - Money invested now, can gain more interest than money invested later, because of compound interest. Additionally, due to outside factors (inflation, cost of living) the 'real' value of money decreases over time as the buying power of that money decreases.
Many comparisons between past and present monetary expenditures take into account the 'present value' of the money spent in the past, adding in inflation rates and in some cases accrued interest to come up with an amount equivalent to what would have to be paid for the item in the past, if it were purchased today.
(i.e. A car in 1930 might cost $3000, but adjusted for today's rates, would cost $17,000. The dollars in 1930 bought MORE car AT THAT TIME than today's dollars buy today.)
The geeks of the world want to maximize their returns and make as much money as they can with the money they've got. No disagreement here with that.
The Con Side - This method isn't for those in deep trouble, for a few reasons.
- Higher Risk - The idea is to 'arbitrage' your money, with the goal that the return from investments is more than the amount spent on the other bills. That isn't necessarily a guarantee. Recently we have seen lots of ups and downs in the market that can blow-away a three to five month gain in a single day. Over the long run, there's going to be positive growth, but when you're teetering on the edge financially, you shouldn't take unnecessary risks. You have to be able to live through short-term storms, before you worry about long-term outcomes.
- Lack of Organization - Organizing a whole mass of bills and payments so that you come out to the good isn't a trivial thing. Usually it takes some time and/or a spreadsheet or two to make sure things come out in your favor. The people that need to take Dave's advice often don't have enough organization in there lives to manage their finances as-is.
- Changes Nothing - Most importantly, this does nothing for changing the actual problem that got some people into the deep-debt hole in the first place. You have to learn how to manage the money you have effectively, before you start making it work for you. Thus, Dave's Baby Steps.
The Dave Ramsey Baby Steps
1 $1,000 to start an Emergency Fund
2 Pay off all debt using the Debt Snowball
3 Three to six months of expenses in savings
4 Invest 15 percent of household income into Roth IRAs and pre-tax retirement
5 College funding for children
6 Pay off home early
7 Build wealth and give! Invest in mutual funds and real estate
From daveramsey.com
For those that need the help, getting back to the basics is more important in the big picture than squeezing out more money. Once the finances are back under control, and the spending habit has been beaten, then it's time to look into more advanced financial dealings, but not before.
Being completely out of debt will ALWAYS be preferable to having lots of debt because there's a lot less risk involved. Taking the time to GET out of debt is the stumbling-block that a lot of people have with the idea.
What side of the debate do YOU fall in?? We'd love to hear a comment from you about it.
We hope you liked the article, Subscribe to the Feed and get our articles every day!
February 5th, 2008 at 9:01 am
I found your site on google blog search and read a few of your other posts. Keep up the good work. Just added your RSS feed to my feed reader. Look forward to reading more from you.
Karen Halls
February 5th, 2008 at 1:32 pm
As if there is ANY doubt which side of this discussion I am on! KILL THE DEBT! I am not quite "debt free but the house," but already my money goes so much further than it ever did. Right now I can cash-flow any "emergency" under $1500 dollars a month. Just how cool is that? When you add in my emergency fund, I can handle up to a $3,000 situation! There is simply no way I could do that if I owed like I did a little over a year ago. In about two more months I will be able to say for sure how life is when the only debt I have is my mortgage.
February 5th, 2008 at 3:11 pm
I'm definitely with him on people needing to repay debt. I think he's got a good, decent system. Now if they can start to optimize their finances while retaining the principles and passion, that's even better. The majority probably don't know enough about finances (at least at first) to do that. Which is why they needed Dave in the first place and why they should listen to him.
Also, I think his system works best for people who only need to spend a short time (we'll say less than 3 years) in the most intense part. Those who'll take longer should, IMO, invest. Which is why we're investing a bit.
February 5th, 2008 at 3:33 pm
I am such a math geek that it's hard to agree with him based purely on the numbers. I have, however, experienced the euphoria of paying off a debt completely and I understand how that feeling alone can keep people going. Without a total commitment, however, no payoff or lower interest rates are going to hep, no matter the order you are working in.
February 8th, 2008 at 9:55 am
Of course he is right about KILL THE DEBT! However, nobody who can add could agree with him re the snowball approach. I understand why Dave advocates this inefficient method - it is so that people who are discouraged by their dbts get some runs on the board sooner rather than later and thus are necouraged in their financial reforms. The problem is that people who are in debt have, somewhere along the way, failed to some to terms with basic realities about how things like credit, interest and investment work. Helping folks to understand the financial sense of paying higher interest rate debts off first is a critical breakthrough PLUS it is so much more efficient and the whole point is that every penny counts.
February 10th, 2008 at 2:25 pm
From what I understand of it, it works well and I paid off my debt in a similar fashion without ever reading his books. But I agree with "Lemons" above, in that the issue of "why" needs to be addressed by Dave. Debt is amassed for a deeper reason (usually) other than "I want a new TV", and if he doesn't address this seriously, it is not going to change behavior of any of his readers, and they will find themselves back in that hole. Great post.
David's last blog post..Sunday Money Roundup - Patriots Sucked It Edition.
February 13th, 2008 at 9:55 am
I commend Dave Ramsey for being transparent in acknowledging the truth about his problem and the courage and the tenacity to change his life. The principles really do work should you decide to WORK them and not vascillate from them; for this is the key. When I download his show everyday, and read his book and apply the principles that I've learned in FPU, is the oppsition great? Yes, but the biggest challenge will be you for stepping out from the comfort zone of indecision to living focused and on point beyond payday and looking towards purpose instead of working to pay the bank until you retire. Credit is not an option; it is only living proof that the borrower is truly the slave to the lender.(Proverbs 22:7)
February 13th, 2008 at 9:15 pm
I'm a big believer in killing debt as fast as humanly possible. Like Ramsey, I believe you can build some serious wealth as soon as you free yourself from the bondage payments create.
Frugal Dad's last blog post..Reluctance to Use Emergency Funds
April 13th, 2008 at 7:32 pm
Dave has a spirtual aspect as well. The borrower IS slave to the lender. I am close to done with step 6 and will then experience the Dave Ramsey nirvana of not owing anyone a dime. if Dave is wrong and the grass does not feel different under my barefeet in my backyard, I can always go get another mortgage.
I have a feeling that Dave is right. I'll let you guys know.
FJH
http://daveramseyguru.com/
fielding j. hurst's last blog post..The Dave Ramsey Grocery Store Cash Challenge Game, Entertainment for the Debt-ridden and beyond ?
May 24th, 2008 at 10:56 pm
I'm one of the few people in the middle about Dave Ramsey. I generally agree with him, and most people are in debt and only a few paychecks from financial disaster.
I don't agree with him about his bankruptcy attitude. Personally, I have a huge amount of debt compared to my income, and I don't make anywhere near enough to pay it all off in 5-10 years, let alone 24-36 months. I am working on increasing my income and it's going up, but not fast enough to cover the debts I have from doing really stupid with a failed business. My debts have been sold many times, fees and interest added with each sale along with higher interest rates from each collector, I've been sued three times, and the only light at the end of the tunnel seems to be an on-coming train.
I've read Dave's books, and his advice is pretty clear in The Total Money Makeover that if you are having trouble meeting necessities (I am) and have debt that you can't become current on, you are in a much higher risk group than those who should be doing a total money makeover. He recommends reading and following Financial Peace, which I read and I'm following. But it will include a bankruptcy for me because I'm 47 and if I spend the next 10 years or more only paying off debt, I'll have to find an Alpo cookbook for retirement. The amounts I owe have grown so huge because of the factoring that takes place with each debt sale.
I paid off the smaller debts, and I'm working on the next debt in line, which may be paid before I file, but I see no hope of being able to pay off the big ones before I die. The interest rate on a $30,000 balance is 32.6%. The original balance was $17,000 just two years ago. I don't feel it's reasonable to jeopardize my retirement to pay so much that I wouldn't owe in a sane credit market.
After I file, I will take Dave's Financial Peace University Bankruptcy Edition. I feel he has sound principles, but is a bit blindsided because he went broke doing stupid before he was successful with money. I had no debt besides my first mortgage and I never borrowed to buy cars or toys. My debt problem hit when I was laid off from my job and I started a business, Katrina and Rita hit, and I listened to the wrong people about borrowing until the storm chaos subsided.
I still haven't figured out if Dave sees debt as he does out of fear for financial security or if he has a credit addiction. After reading Financial Peace, I think it's fear.
A Dave Ramsey fan who IS filing bankruptcy,
Sherri
Debt Free or Bust - Sherris last blog post..Price of gas a budget-buster?
June 18th, 2008 at 2:46 pm
Earlier this year, DH & I decided to try Dave Ramsey's approach to debt and to finances in general, after trying several other methods to rid ourselves of our stupid credit card debt.
Since February this year, we have paid off our car and over 12k in other consumer debt. We will be free of all credit card debt (we have about 18k to go) before 2008 ends.
I am a practical (now, anyway) person so this may seem weird (and possibly "new agey") but since we chose to follow Dave's approach, with respect to our debt, money just seems to "find" us (money here from selling things; money there from tax return or stimulus check; money from the parents). Some of the amounts we regard as mini-windfalls.
From the beginning, we recognized that Dave Ramsey's approach might not be logical (in many cases anyway) in the pure numbers sense (ignoring interest rates in favor of pure dollar amounts).
However, his debt payment approach takes into account a very real factor often ignored by those who espouse more "traditional" repayment methods: The role of emotion (inherently irrational and illogical) in something as important to us as our money.
If more of us (or even all of us) were logical and rational with respect to our money, we never would have accumulated debt in the first place. I think Dave Ramsey's success (and the success of those who follow his advice) lies in the way he has linked money to basic human psychology.
Of course, the Dave Ramsey debt snowball is just one piece of Dave's advice. The other pieces are often ignored by his critics. The only reason people use his debt snowball is because so many of us have debt. His approach would still be criticized if we had no debt. The focus would simply be on one of the other steps.