Has anybody had success paying of debt with Dave Ramsey's theory?

[phillylawyer]

I was going to let you have the last word, because I don’t have time to make this discussion much longer. But I really want to mention just a few comments and questions:

OK, I see what you meant now about comparing to low-risk bonds. Where I am not entirely following you is this: If I invest $50,000 in low-risk bonds or in stocks, I am putting at most $50,000 at risk. But if I have a $50,000 mortgage balance on a $100,000 home, then I am putting an asset worth $100,000 at risk. So don’t we have a mismatch in risk here, between the “pay off mortgage” scenario and any investing scenario (whether bonds or stocks)?

Furthermore, the risk of losing the home where you live, where you have made memories with your family, where you have watched your children grow up, which may be the only home your children have ever known, is an intangible good that cannot easily be quantified in a numerical risk analysis. But I think that we do have to take this intangible value of a family’s home into account somehow, and I don’t think that a purely mathematical model is likely to do so.

Are you taking into account that in the scenario where you invested in stocks instead of paying off your mortgage, it is possible that the value of your stocks could have decreased dramatically, so that if you have to sell them to pay living expenses (including your mortgage), then you could have a lot less money than you initially invested? (It is also possible that the value of your house could dramatically decrease, but I think that this is less important, because this fact comes into play only if the person or family is going to sell the house.)

You have a good point that in a financial hardship, it could conceivably become necessary for a family to sell their home. However, I am not convinced that this is quite so cut-and-dried. For one thing, in times of hardship, families can cut many expenses. But a mortgage is one expense that is difficult to cut. So without a mortgage, it may be easier for a family to cut their expenses to a manageable level (e.g., to a level that can be paid mostly from unemployment benefits), than it would be with a mortgage – especially if the mortgage is a large percentage of the family’s monthly expenses.

Also, I just don’t hear much about families with a paid-for house that are forced to sell because of a job loss or other financial hardship. Maybe this is because few people have a paid-for house. Or maybe it’s because those who do have one tend also to have substantial emergency savings. But I think it might also be because these families find it easier to figure out some way to keep their house in the event of financial hardship, precisely because they don’t have a mortgage.

Yes. I am exactly taking this scenario into account. I am assuming that the stock you invest in drops to $0 (worst case scenario).

I think where we are talking past each other a little bit is that, in order to compare apples to apples, I am assuming that in both scenarios the family’s net worth is the same. This means, in the mortgage vs. stock scenario, they have, for example, a $50k mortgage and $20k in liquid assets. In the bonds vs. stock scenario, they have no mortgage and $70k in liquid assets ($50k more). Therefore, even though in scenario 1, the individual has a mortgage payment to make, where he does not in scenario 2, in scenario 1 he has additional cash to make those payments. This is how the risk of losing your house is the same by investing in stocks either in scenario 1 or scenario 2.

The point is, if you have basically no cash, then it is of course riskier to invest in stocks instead off paying your mortgage earlier than it would be to invest in stocks instead of investing in bonds, if you had no mortgage. I definitely agree with you on that point. But, the reason that decision is riskier, is not because there is any financial difference between paying off a mortgage and investing in guaranteed bonds. Instead, the difference arises from the fact that if you have a mortgage in one scenario and not in another (with everything else remaining the same), your NET WORTH/liquidity and thus your ability to meet your ongoing financial obligations decreases by the value of the mortgage.

As I tried to point out (but not very well), if you invest in stock instead of bonds and you own a real property, you still put your property at risk if the stocks tank and you have no ability to pay your living expenses. So, while you are certainly right that by choosing to invest in stocks instead of paying down your mortgage, the fact that the stock is a riskier investments means that the $100k property is at risk, it is ALSO TRUE if you invest in stocks rather than bonds that you put your $100k property at risk, if you have no other assets with which to pay your bills.

 

[pensmama87]

No need to apologize. I definitely enjoyed and learned from you posts. If anyone was long winder on this thread, it was certainly me.

Preferring you to Dave is a compliment. As I mentioned, I do like some aspects of what Dave does, and I know he has encouraged a number of my friends to get their financial house in order so to speak. And, since most people on this thread are talking positively about Ramsey, any points of discussion will center around aspects of his presentation I don’t like.

That being said, while I do appreciate some aspects of his program and getting people to think about money and debt, his approach does drive me a little nuts sometimes. I think he can accomplish the same benefit to people without some of the negative aspects of his advice that I have mentioned. But, doing so would require not talking in quite such absolute terms in a couple of areas, and, that may hurt his book sales and business. Perhaps I am being too cynical regarding his motivations.

I am not incredibly financially literate, but I do think part of the reason his financial advice is often presented in absolutes is that the people who seek his financial advice often need it as a result of thinking the bad would never happen to them, or their debt has accumulated as a result of thinking that they are going to be the ones who bend the rules and get away with it. I’ve always interpreted it as more psychological. A person who has a history of spending and accumulating debt recklessly probably needs more strict guidelines for investing. “Give 'em an inch and they’ll take a mile.” For people who have the discipline, it’s not a problem (think of the people on this thread who like Dave Ramsey who use credit cards even though he presents it as a HUGE no-no.)

Those are just my thoughts.

 

[phillylawyer]

I am not incredibly financially literate, but I do think part of the reason his financial advice is often presented in absolutes is that the people who seek his financial advice often need it as a result of thinking the bad would never happen to them, or their debt has accumulated as a result of thinking that they are going to be the ones who bend the rules and get away with it. I’ve always interpreted it as more psychological. A person who has a history of spending and accumulating debt recklessly probably needs more strict guidelines for investing. “Give 'em an inch and they’ll take a mile.” For people who have the discipline, it’s not a problem (think of the people on this thread who like Dave Ramsey who use credit cards even though he presents it as a HUGE no-no.)

Those are just my thoughts.

Pensmama,

I think you make a good point, and I agree that is part of the reason Dave expresses things the way he does. People need (want) a fixed plan and to be told what to do, so they can follow a set of steps. There definitely is some merit to the idea that, for people who are really in financially bad steps, going into the finer points of complicated financial calculations are not helpful. They just need basic financial direction to get out of debt and make informed decisions about their money.

However, in certain areas when these steps actually are financially “wrong” or at least more expensive, Dave should at least encourage them to calculate the cost to his method so that they truly can be informed. So, when he tells people to use the debt snowball, his program should calculate for them the cost of using his more expensive method (as opposed to the high interest first approach), so people can be at least informed of the cost (it would be very simple for Dave to do a program as part of his FPU). People could then make informed decisions about what they were deciding. I’m sure Dave doesn’t do it that way, because he believes his way works better for most people psychological and he worries that if people are told it may cost them more in the long run, they won’t follow his method. But, if Dave is really about making sure people are informed consumers, that sounds like a counterproductive approach to me.

Also, some things he says are just financially wrong. “Roth is always better than traditional IRA.” “It is always better to pay down your mortgage than invest in stocks.” “CPA’s who talk about the benefits of the mortgage interest deduction are just ignorant and bad at math.” Maybe it makes for a good soundbite, but these pieces of advice do nothing for helping the “reckless spender” make good financial decisions. They are just absolutist statements that maybe makes him sound smart and authoritative to the uninformed listener and thus helps him sell more product and get to his $50M+ net worth he has reached today.

 

[PaulGH]

Yes. I am exactly taking this scenario into account. I am assuming that the stock you invest in drops to $0 (worst case scenario).

I think where we are talking past each other a little bit is that, in order to compare apples to apples, I am assuming that in both scenarios the family’s net worth is the same. This means, in the mortgage vs. stock scenario, they have, for example, a $50k mortgage and $20k in liquid assets. In the bonds vs. stock scenario, they have no mortgage and $70k in liquid assets ($50k more). Therefore, even though in scenario 1, the individual has a mortgage payment to make, where he does not in scenario 2, in scenario 1 he has additional cash to make those payments. This is how the risk of losing your house is the same by investing in stocks either in scenario 1 or scenario 2.

The point is, if you have basically no cash, then it is of course riskier to invest in stocks instead off paying your mortgage earlier than it would be to invest in stocks instead of investing in bonds, if you had no mortgage. I definitely agree with you on that point. But, the reason that decision is riskier, is not because there is any financial difference between paying off a mortgage and investing in guaranteed bonds. Instead, the difference arises from the fact that if you have a mortgage in one scenario and not in another (with everything else remaining the same), your NET WORTH/liquidity and thus your ability to meet your ongoing financial obligations decreases by the value of the mortgage.

As I tried to point out (but not very well), if you invest in stock instead of bonds and you own a real property, you still put your property at risk if the stocks tank and you have no ability to pay your living expenses. So, while you are certainly right that by choosing to invest in stocks instead of paying down your mortgage, the fact that the stock is a riskier investments means that the $100k property is at risk, it is ALSO TRUE if you invest in stocks rather than bonds that you put your $100k property at risk, if you have no other assets with which to pay your bills.

If I understand correctly, one thing you are saying here is that paying extra on your mortgage or investing extra money in stocks are both bad ideas, unless you first have substantial emergency savings in something like a bank savings account. On that point, I definitely agree with you (and I think Dave Ramsey would agree as well).

 

[SuperLuigi]

When I was in college, you would get a free 2-liter soda or a free t-shirt for applying for a credit card. I guess I should have held out for more!

I think Ramsey noted that the reason why college kids were given credit was because if they ever got into trouble, the parents or a rich uncle would come swooping in to save the day. But I also now understand that you can’t have a lot (or any) credit at 18-20?

 

[DarkLight]

I think Ramsey noted that the reason why college kids were given credit was because if they ever got into trouble, the parents or a rich uncle would come swooping in to save the day. But I also now understand that you can’t have a lot (or any) credit at 18-20?

My first credit card had a $500 credit limit. I do think that’s why credit card companies are so eager to get their hooks into students - much better to promote immoderate spending early at an age where the kids won’t be paying the consequences of their actions.

That said, I still think if you’re the sort of person, no matter the age, who can use a credit card responsibly, it’s useful.

 

[fisherman_carl]

Has anybody had success paying of debt with Dave Ramsey’s theory? My wife and I finally open and honestly discussed out financial and debt situation. I started listening to the Dave Ramsey podcast, and he seems to have a common sense approach. I was looking to see if people have used his theory with success.

I’ve just discovered Dave Ramsey on YouTube. I don’t agree with everything he says but he has some interesting tips. A lot of it I have heard before or is just common sense. Like for instance don’t spend more than you have. As well as don’t rack up credit card debt. We all make mistakes. Its just easier to do it with a credit card.

He has a lot of useful tips. However, I don’t agree with what he said on this one YouTube video I saw recently. He said that unless you retire a millionaire in this country (U. S.) you are a loser. He says all you had to do was put a $100 a month away in a mutual fund for x number of years and you would have a million dollars. He made it seem like it was so easy that if you didn’t then you are a loser.

The problem with this though is he is judging someone solely based on their financial net worth. Could you see Jesus doing something like that? What about how did this person love others? Wouldn’t that be more important criteria than how much money you saved? Someone’s dignity is not based on their financial success. Mother Theresa took a vow of poverty yet I would consider her a success. So money is not the most important thing. I even heard someone on one of his programs say that the most important thing in your life is to pay off your mortgage. Well, that is just nonsense. Yes, it makes good sense to get your finances in order. It just should not be the most important thing in your life. How empty your life would be if money was all that matters.

 

[pensmama87]

I’ve just discovered Dave Ramsey on YouTube. I don’t agree with everything he says but he has some interesting tips. A lot of it I have heard before or is just common sense. Like for instance don’t spend more than you have. As well as don’t rack up credit card debt. We all make mistakes. Its just easier to do it with a credit card.

He has a lot of useful tips. However, I don’t agree with what he said on this one YouTube video I saw recently. He said that unless you retire a millionaire in this country (U. S.) you are a loser. He says all you had to do was put a $100 a month away in a mutual fund for x number of years and you would have a million dollars. He made it seem like it was so easy that if you didn’t then you are a loser.

The problem with this though is he is judging someone solely based on their financial net worth. Could you see Jesus doing something like that? What about how did this person love others? Wouldn’t that be more important criteria than how much money you saved? Someone’s dignity is not based on their financial success. Mother Theresa took a vow of poverty yet I would consider her a success. So money is not the most important thing. I even heard someone on one of his programs say that the most important thing in your life is to pay off your mortgage. Well, that is just nonsense. Yes, it makes good sense to get your finances in order. It just should not be the most important thing in your life. How empty your life would be if money was all that matters.

Even though I’ve mostly followed his plan for paying off debt (I don’t do a “true snowball” in that it’s smallest to largest, we’ve paid off based on interest rates which has been a substantial savings), this is one of the issues I have with him, and why I stick to his books and don’t listen to his radio show. I used to, and sometimes it is very motivating, but I think he can speak very rashly and uncharitably about people in poverty. When he gets political, too, I get flashbacks of being stuck in the van on family road trips listening to screaming talk radio.

I think in a less heated moment he would agree with you, but yes, the way he talks sometimes is very offputting.

 

[ProdglArchitect]

My wife and I are in the process of paying off our debts using his system. We haven’t had much success so far, but that’s because we had a number of issues come up with our house which ate up all of our extra money. The theories are sound, we just have to actually put it into practice. We’re hoping to have my car paid off next month, which will be about a year and a half ahead of schedule, and if we stick with it then we could have her car paid off about eight months after that, which would be about three years ahead of schedule.

So, no success yet, but we’re on our way.

 

[Xantippe]

Even though I’ve mostly followed his plan for paying off debt (I don’t do a “true snowball” in that it’s smallest to largest, we’ve paid off based on interest rates which has been a substantial savings), this is one of the issues I have with him, and why I stick to his books and don’t listen to his radio show. I used to, and sometimes it is very motivating, but I think he can speak very rashly and uncharitably about people in poverty. When he gets political, too, I get flashbacks of being stuck in the van on family road trips listening to screaming talk radio.

I think in a less heated moment he would agree with you, but yes, the way he talks sometimes is very offputting.

When talking to people on the radio, he’s very complimentary to older retired people that have even $250k or $500k in retirement savings.

Every little bit helps.

 

[Xantippe]

My wife and I are in the process of paying off our debts using his system. We haven’t had much success so far, but that’s because we had a number of issues come up with our house which ate up all of our extra money. The theories are sound, we just have to actually put it into practice. We’re hoping to have my car paid off next month, which will be about a year and a half ahead of schedule, and if we stick with it then we could have her car paid off about eight months after that, which would be about three years ahead of schedule.

So, no success yet, but we’re on our way.

That sounds like success to me!

 

[Irishmom2]

anyone else notice how old this thread is?

 

[Xantippe]

anyone else notice how old this thread is?

It’s kind of an evergreen subject.

 

[pensmama87]

When talking to people on the radio, he’s very complimentary to older retired people that have even $250k or $500k in retirement savings.

Every little bit helps.

I’m speaking more about general talk rather than interaction with specific callers. I don’t believe in making excuses, but I have gotten the impression that he thinks (in general) that people who are perpetually poor are stupid or lazy. I may be especially sensitive to that because it was a message I heard at home a lot.

 

[Xantippe]

I’m speaking more about general talk rather than interaction with specific callers. I don’t believe in making excuses, but I have gotten the impression that he thinks (in general) that people who are perpetually poor are stupid or lazy. I may be especially sensitive to that because it was a message I heard at home a lot.

I think you’re right, but the show is 95% specific callers, and he tends to approach those people where they are.

 

[pensmama87]

I think you’re right, but the show is 95% specific callers, and he tends to approach those people where they are.

No arguments there! When I did listen it was the one-hour summary podcast rather than the full show.

 

[Xantippe]

No arguments there! When I did listen it was the one-hour summary podcast rather than the full show.

He usually does those at the beginning of the show, if I’m remembering correctly, so you can zip past that and get straight to the calls.

(I listen mainly to the archives on the website.)

 

[pensmama87]

He usually does those at the beginning of the show, if I’m remembering correctly, so you can zip past that and get straight to the calls.

(I listen mainly to the archives on the website.)

Ooo, that’s a good idea. I also quit listening because many of the calls had to do with situations we weren’t likely to encounter for years and years since we were still drudging through the muck of baby step 2.

Though now that we’re starting to see the light at the end of that tunnel…

 

[ArchAngeles]

This is an old thread with a lot of posts so probably no one will see this. But we got out of debt using what turned out to be essentially what Dave Ramsey teaches. I didn’t hear about him until long after we’d gotten out of dept but we pretty much followed the debt snowball. No matter how you do it though, it’s a great idea to get out from under all debt.

 

[pensmama87]

This is an old thread with a lot of posts so probably no one will see this. But we got out of debt using what turned out to be essentially what Dave Ramsey teaches. I didn’t hear about him until long after we’d gotten out of dept but we pretty much followed the debt snowball. No matter how you do it though, it’s a great idea to get out from under all debt.

Absolutely. Good for you!

Even though we’re not totally paid off yet, I already feel much happier knowing that the repo man won’t be coming for any of our stuff. We own our possessions, including our cars. We save up for large expenses. Once that debt monkey is off our backs, we’re going to feel a lot, lot freer! (Ours is student loans).