Pay off debt or invest?

[jIM_Ohio]

we don't knock DR because we don't like him, we mock him because the advice is less than good.

[maat55]

Originally Posted by jIM_Ohio

we don't knock DR because we don't like him, we mock him because the advice is less than good.

Thats your oppinion and nowhere near fact.

[LivingAlmostLarge]

Act your wage how did you pay off 50% of your income in 10 months? I am curious, did you sell anything big like a car? I mean obviously you pay zero taxes right? At $60k and couple of kids then = zero taxes. So you pretty much get everything.

[ActYourWage]

Originally Posted by LivingAlmostLarge

Act your wage how did you pay off 50% of your income in 10 months? I am curious, did you sell anything big like a car? I mean obviously you pay zero taxes right? At $60k and couple of kids then = zero taxes. So you pretty much get everything.

We do not have kids at the moment. We surely do pay taxes (too much I think). Last March (2007), I begin to really save my money. I saved up almost $9000 dollars. Paid my wifes student loan off with that. We got married last October and our tax refund was pretty big (around $2600) since then we have adjusted that to where we are bringing home more money each pay check. Used that toward the remaining debt. I will say, my God helped us be frugal and we ATTACKED the remainer of our debt. I believe the key from the beginning was when we started a budget where we assigned EVERY dollar a name. It has worked wonders. If you need any more info, I will surely be glad to help. Thanks.

[ActYourWage]

Originally Posted by jIM_Ohio

we don't knock DR because we don't like him, we mock him because the advice is less than good.

Why do you say that? Give examples. I am sure everything he says may not fit with what one is trying to accomplish, but he will make you think about how one is spending their money.


BTW, DR practices what he preaches. He once had nothing but now is a multi-millionaire. I believe his advice is working from some! Alot of people tune him off once he says to get rid of that ridiculous car payment or some other thing they don't need.

[Scanner]

Originally Posted by jIM_Ohio
we don't knock DR because we don't like him, we mock him because the advice is less than good.

Thats your oppinion and nowhere near fact.

Well of course it's an opinion. (which is right). I deal in the world of opinions every day. People ask my opinions all day.

Actually, I like Suze Orman's advice better than DR's. I can appreciate debt reduction as a worthy goal. In fact, I prefer to reduce debt vs. hold bonds as part of my financial plan.

But if DR is advocating "Pay yourself last" as part of the equation of building wealth, then I very much disagree with that.

As I said, in life, someone will always have their hand out.

You can never go back in time and contribute to your 401(k) and/or Roth. My measley $85,000 portfolio and my home equity (considerable) are all we have to show for our years of hard work. (and our beautiful, kind children)

I really don't care about the "PAID OFF" status on my credit report on all the loans (student and business) I have had.

That and $5.00 will buy you a cup of Starbuck's coffee.

[Scanner]

cancelled

[LivingAlmostLarge]

Actyourwage, so you have minimum expenses of less than $30k? And that $30k includes taxes? So if you paid $10k in taxes you lived on $20k and paid off $30k of after tax money right?

Wow, where do you live? $1500/month can barely buy you rent here, but heck if it's where you live I'm curious.

[toptaxguy]

If the percentage return on your investments will be greater than your percentage paid on loans then you should invest. The objective is to increase your net worth.

[jIM_Ohio]

Originally Posted by ActYourWage

Why do you say that? Give examples. I am sure everything he says may not fit with what one is trying to accomplish, but he will make you think about how one is spending their money.


BTW, DR practices what he preaches. He once had nothing but now is a multi-millionaire. I believe his advice is working from some! Alot of people tune him off once he says to get rid of that ridiculous car payment or some other thing they don't need.

My best guess is DR makes more money from his books and radio shows than he does through financial planning or another day job.

His advice is less than good because, as you put it, he makes you think how you spend money. It is not saving advice (which is what this forum is about). He is in a position to give much better advice about saving money (like pay yourself first) but chooses not too.

Less than good advice.

[maat55]

Originally Posted by Scanner

Well of course it's an opinion. (which is right). I deal in the world of opinions every day. People ask my opinions all day.

Actually, I like Suze Orman's advice better than DR's. I can appreciate debt reduction as a worthy goal. In fact, I prefer to reduce debt vs. hold bonds as part of my financial plan.

But if DR is advocating "Pay yourself last" as part of the equation of building wealth, then I very much disagree with that.

As I said, in life, someone will always have their hand out.

You can never go back in time and contribute to your 401(k) and/or Roth. My measley $85,000 portfolio and my home equity (considerable) are all we have to show for our years of hard work. (and our beautiful, kind children)

I really don't care about the "PAID OFF" status on my credit report on all the loans (student and business) I have had.

That and $5.00 will buy you a cup of Starbuck's coffee.

You obviously do not understand DR's approach to finances. It's one thing to disagree with something you have knowledge of and another for something you don't.

DR does not advocate against investing first. He advocates that you payoff your debts within two years and then invest 15% religiously.

DR views finances more from a behavoir standpoint and not from an math standpoint. Paying off debt first and quickly is designed to motivate people to a better form of managment over their money. His advice is simple and useful for those who do not micro manage their finances.

You tell me which of these fundamentals of Dave's you find harmful.

Having a 1000 ef while in debt.
Paying off all debt within 2 years. (other than the house)
Building a 3 to 6 month ef quickly.
Investing 15% of income into 4 groups of mutual funds.
saving for college funds.
paying off home.
Paying cash for autos and all other consumer debt.
Buying a home with a 15 year note and 20% down on 25% of your take home pay.
Do not have credit cards
Carry term life, disability and HSA health ins.

He make exceptions for those who may loose their jobs of are about to have babies to build ef before paying off debt.

Ask yourself these questions and give a truthful answer. If a person was to follow this advice, would they live well and sleep at night? Would they be better off than 75% of americans are today? What percentage of them would file bankruptsy? How many of them would retire broke? How many of them would have their car reposessed?

I could cririsize something about every financial adviser on the planet. But overall, I have no respect for anyone who can say DR is worthless.

[LivingAlmostLarge]

Paying off all debt in 2 years. I have meet many pf bloggers who take longer than 2 years, and I wonder if they can really survive on $1k? Example needtobedebtfree.blogspot.com. He ran through $3500/month plus his snowball because of emergencies. Only because people on his blog (myself included) pushed him to have more than $1k in the bank. IF he didn't he would have used the CC to make ends meet. Plus one of his bills was the IRS, so you don't mess with them! You pay them first, then your mortgage and then when there wasn't enough what? CC baby.

So I think his advice is okay, but it can be very harmful. For example another couple is going to take 4 years to pay off debts. Can they really suspend retirement contributions for 4-6 years while building an EF? Bad idea.

Another point is his investing in 4 mutual funds is not wise. If you are 50-something, why would you be 100% in equities and no bonds? I mean even 10-20%? And why would you be 25% in small cap, 25% mid cap and 25% international at 50-something? Time to balance your risk moderately, not quite so aggressively. It could hurt someone to follow that stupidity. You don't need 100% equities even in your 20s. You can but the return isn't that much more than adding a bit of bonds/cash to your portfolio.
So someone nearing retirement? Bad Idea.

Also he says if you can pay cash you can afford it. I think most on this board would say that's not true. Unfortunately just because I can pay cash for a $30k car and I make $30k and it took me 5 years, doesn't mean it's affordable. But it seems like a quick way to get whatever you want.

Save and pay cash, who really cares about retirement, sinking funds, etc? I notice Dave Ramsey does not emphasize anything other than debt. He doesn't explain about savings, he doesn't explain about planning for purchases that are large long term. This can hurt people, because it's automatically assumed if you can pay cash you can AFFORD it.

[maat55]

Originally Posted by LivingAlmostLarge

Paying off all debt in 2 years. I have meet many pf bloggers who take longer than 2 years, and I wonder if they can really survive on $1k? Example needtobedebtfree.blogspot.com. He ran through $3500/month plus his snowball because of emergencies. Only because people on his blog (myself included) pushed him to have more than $1k in the bank. IF he didn't he would have used the CC to make ends meet. Plus one of his bills was the IRS, so you don't mess with them! You pay them first, then your mortgage and then when there wasn't enough what? CC baby.

So I think his advice is okay, but it can be very harmful. For example another couple is going to take 4 years to pay off debts. Can they really suspend retirement contributions for 4-6 years while building an EF? Bad idea.

Another point is his investing in 4 mutual funds is not wise. If you are 50-something, why would you be 100% in equities and no bonds? I mean even 10-20%? And why would you be 25% in small cap, 25% mid cap and 25% international at 50-something? Time to balance your risk moderately, not quite so aggressively. It could hurt someone to follow that stupidity. You don't need 100% equities even in your 20s. You can but the return isn't that much more than adding a bit of bonds/cash to your portfolio.
So someone nearing retirement? Bad Idea.

Also he says if you can pay cash you can afford it. I think most on this board would say that's not true. Unfortunately just because I can pay cash for a $30k car and I make $30k and it took me 5 years, doesn't mean it's affordable. But it seems like a quick way to get whatever you want.

Save and pay cash, who really cares about retirement, sinking funds, etc? I notice Dave Ramsey does not emphasize anything other than debt. He doesn't explain about savings, he doesn't explain about planning for purchases that are large long term. This can hurt people, because it's automatically assumed if you can pay cash you can AFFORD it.

Dave has said many times: If you are not willing to get gazelle intense, his program is not for you. He has said many times that the IRS comes first. I don't know what show you are listening to, but DR has never said that if you have cash you can afford it. His whole program is about getting out of debt so that you can build wealth.

I challange right now to listen to his show for 1 month and if you can come back here and tell me he is giving bad advice and harming peoples futures, I will leave this forum.

[jIM_Ohio]

Originally Posted by maat55

You obviously do not understand DR's approach to finances. It's one thing to disagree with something you have knowledge of and another for something you don't.

DR does not advocate against investing first. He advocates that you payoff your debts within two years and then invest 15% religiously.

DR views finances more from a behavoir standpoint and not from an math standpoint. Paying off debt first and quickly is designed to motivate people to a better form of managment over their money. His advice is simple and useful for those who do not micro manage their finances.

I will tackle this from two directions- what I do, and what I think is prudent for someone to suggest if they have the attention of a mass audience:

What I do:

Having a 1000 ef while in debt. All cash goes to debt until it is paid off.
Paying off all debt within 2 years. (other than the house). I finance cars for 1 year less each time we go to dealer (5 year, then 4 year, then 3 year). Next time we go back it's 2 year. I carry some debt (car loans) which is considered consumer debt.
Building a 3 to 6 month ef quickly. I have a 3 month cash EF and am in process of building an additional 3 months in a more aggressive investment account.
Investing 15% of income into 4 groups of mutual funds. I invest more than 17% of combined gross income each year.
saving for college funds. No college savings as of yet for my twins.
paying off home. My goal is to pay off my home the year before I retire.
Paying cash for autos and all other consumer debt. I have two notes- one 4 year loan and one 3 year lease.
Buying a home with a 15 year note and 20% down on 25% of your take home pay. I have a 30 year note with 5% down. Now have 8% equity and more liquidity in cash accounts.
Do not have credit cards. I have numerous cc with an annual limit which is 2X our gross pay.
Carry term life, disability and HSA health ins. Have life and HSA. Have disability thru employer only

What I would recomend to others.

Having a 1000 ef while in debt. $1000 EF can come from "liquidity" in budget. I assume more than $1000/month is going to debt payments which can be reallocated short term for emergencies.
Paying off all debt within 2 years. (other than the house). Pay off debt highest interest rate to lowest rate (excluding house). If mortgage is higher than 7%, include mortgage.
Building a 3 to 6 month ef quickly. I suggest 3 months in cash and 3 more months in a higher performing asset class.
Investing 15% of income into 4 groups of mutual funds. Do not agree into the 4 groups of mutual funds. There should be an asset allocation of at least 5 classes (large cap- domestic and foreign, small cap-domestic and foreign, and diversified bonds- which include real estate, foreign, domestic, corporate, government, inflation protected, junk and high yield)
saving for college funds. Save for college once debt is paid off, retirement by age 65 is on track (for 80% of current expenses) and house is paid off.
paying off home. Within 30 years of first purchase.
Paying cash for autos and all other consumer debt. If the investments are earning more than the debt costs, this issue is highly debatable.
Buying a home with a 15 year note and 20% down on 25% of your take home pay. Plan to live in same house for as long as possible. Downsize house when needed based on family size and age of person maintaining house.
Do not have credit cards. Pay off CC balances in full each month.
Carry term life, disability and HSA health ins. Once you have debt paid off, carry enough insurance to cover lost income for each spouse and fund reasonable financial goals (kids education, mortgage paid off, retirement).

Another issue I have is you listed some high level philosophies of DR, but did not hit the same level of detail in each point.

You listed specific mortgage criteria (15 year note, 20% down, 25% of income).
For paying down debt in 2 years, you did not list the detailed snow ball method (lowest balance first??) which is frequently discussed with DR's name.

I did learn a few things from your post about the details of the advice given in other threads- thank you for posting the part I quoted.

[jIM_Ohio]

Originally Posted by maat55

I challange right now to listen to his show for 1 month and if you can come back here and tell me he is giving bad advice and harming peoples futures, I will leave this forum.

Not sure if this was directed at me or not...

First, not asking anyone to leave- multiple viewpoints is acceptable in all aspects of my life except who to sleep with at night.

Second, I said above

we don't knock DR because we don't like him, we mock him because the advice is less than good.

Less than good does not mean bad, it means less than good.

If DR suggests to someone they should pay down the lowest balance debt first (snowball), that advice is less than good. The same way the two presidential candidates are less than good options... LOL.

It is better than no advice, in some cases. But to be good advice a second sentance is needed- 3 examples.

Assuming you can pay off all debt in 2 years on this plan.
OR
Because you need the cash flow to solve another problem.
OR
Because the difference in interest paid (between highest and lowest interest rate) is not enough to warrant the improved cash flow from this one step.

Or something like any of above.

If he recomends a 15 yr note with 20% down, but person lives in CA, one of those has to give, or person will be renting their whole life- assuming houses average 400k and a 100k down payment is needed (for people whose average salary is 80-120k).

This goes to my mantra-

general problems get general advice and general solutions.
specific problems get specific advice and specific solutions.

Most people need specific solutions (to their problems) and use the general advice of DR which can lead people to make less than good decisions.

Less than good=uninformed.

[disneysteve]

I think the whole Dave Ramsey debate is getting out of hand. As I've said in many threads where the topic has come up, his system DOES work, but it isn't right for everyone. We are all individuals and have different needs, different financial problems, etc. There isn't a one-size-fits-all solution that is right for everybody.

Are there flaws to some things he recommends or points that one could argue? Of course. Nobody is perfect, including Dave Ramsey. If you want an example, maat, I disagree with his debt snowball. I believe that it is better to pay from highest interest rate to lowest than from lowest balance to highest. Is his way "wrong"? No. It is just different. It is based more on emotion and psychology than on finance and that's just fine as long as the person following it understands that.

Also, some people have mentioned (and I'm not positive if this is true or not) that his system works best in low cost of living areas and that his show often isn't even carried in high COL markets. Assuming that is true, it just goes to my earlier point that the system isn't right for everyone.

So can we all stop arguing with DR's system? If there is a specific part of his advice that you disagree with in a given situation, by all means post and tell us why you disagree and what you would suggest instead. I've done that plenty of times myself. But let's stop bashing DR just for the sake of bashing him. I don't think it is helpful to anyone who comes here looking for advice.

[disneysteve]

Originally Posted by jIM_Ohio

Do not have credit cards. Pay off CC balances in full each month.

Jim, I absolutely use credit cards extensively and pay them off in full each month, but I also understand that there are people who simply can't do that. They don't have the self-control to not overspend when given a card and it is best for them to not have one.

So again, general vs. specific advice. I disagree with the general advice to not use CCs but I would agree with that advice in specific instances depending on the individual.

[ActYourWage]

Originally Posted by LivingAlmostLarge

Paying off all debt in 2 years. I have meet many pf bloggers who take longer than 2 years, and I wonder if they can really survive on $1k? Example needtobedebtfree.blogspot.com. He ran through $3500/month plus his snowball because of emergencies. Only because people on his blog (myself included) pushed him to have more than $1k in the bank. IF he didn't he would have used the CC to make ends meet. Plus one of his bills was the IRS, so you don't mess with them! You pay them first, then your mortgage and then when there wasn't enough what? CC baby.

So I think his advice is okay, but it can be very harmful. For example another couple is going to take 4 years to pay off debts. Can they really suspend retirement contributions for 4-6 years while building an EF? Bad idea.

Another point is his investing in 4 mutual funds is not wise. If you are 50-something, why would you be 100% in equities and no bonds? I mean even 10-20%? And why would you be 25% in small cap, 25% mid cap and 25% international at 50-something? Time to balance your risk moderately, not quite so aggressively. It could hurt someone to follow that stupidity. You don't need 100% equities even in your 20s. You can but the return isn't that much more than adding a bit of bonds/cash to your portfolio.
So someone nearing retirement? Bad Idea.

Also he says if you can pay cash you can afford it. I think most on this board would say that's not true. Unfortunately just because I can pay cash for a $30k car and I make $30k and it took me 5 years, doesn't mean it's affordable. But it seems like a quick way to get whatever you want.

Save and pay cash, who really cares about retirement, sinking funds, etc? I notice Dave Ramsey does not emphasize anything other than debt. He doesn't explain about savings, he doesn't explain about planning for purchases that are large long term. This can hurt people, because it's automatically assumed if you can pay cash you can AFFORD it.

LivingAlmostLarge, I was just about to address that last question you had for me when my internet went down. I will address that later on.

[cptacek]

I think the tax consequences for someone who earns $210,000 needs to be addressed first and foremost, or at least, it needs to be examined just as rigorously as debt interest rates vs. investment interest rates. People who make less than that might not understand how important tax planning is for income like that.

Jim_Ohio has done a great job of laying out a plan for the OP. Thanks Jim!

In general, I think that <generic famous person>'s plan is great for people who are at their wits end, followers, risk intolerant, or not able to dig through all the details for themselves. Or that is the only way to get their spouse to agree. Once you are past the basics, though, you need to think for yourself and figure out what is best for you, not just blindly follow someone, no matter who it is.

[Snave]

JinCo,

I noticed you are a Savings 3rd Grader, so you have not been around an extremely long time. If you stick around, you will begin to learn the saving philosophy of many of the others on the board. For example, you probably noticed that maat55 is a BIG Dave Ramsey fan as noted by a few of his posts to your thread. A majority of his advice will follow much of Dave's advice. With that said, you may want to read one of Dave's books, so at least you understand where he and others might be coming from that prescribe to this philosophy. Still others here believe that you should invest as much as possible as you will most likely get better returns than the interest you pay. I fall somewhere in the middle. Yes, it is nice to be debt free, and when you get there, it is even better to stay there. However, a balance can be struck. Just reading your posts and knowing only what I have read, I am just wondering how much more psychological weight the debt has over you than the actual debt itself hurts you? My wife and I are close to your age and I have been in simialr shoes. When we had more debt than we wanted, sometimes it looked daunting when it was all added up. I felt like I was on a roller coaster. Some days I wanted to invest more, other days I wanted to pay off the debt. It was up and down all the time. My guess is that you might feel the same way. Hopefully these numbers make you feel a little better. If I use 240K as your income (210 + 30 bonus), you are saving 13% of your income to your 401k by maxing it out. That is great considering you have 170K already invested. You stated that your employers match also (4% for wife and 7% for you), so that adds another 11%. Please tell me that is correct, because that is some big time money! That equates to another 26K. I hope like heck that is correct because it is fantastic. So, if it is right, you are saving 55+K a year in your 401k's with matches which is over 23%. I would not stop putting this money away. You will never get the time back to add to it. In 10 years your 401k's will have over $1,000,000 just assuming a 7% return. This year sucks, but hey, you have time on your side. In that same 10 year period, you will pay off the HELOC, and all of the student loand if you put 20K extra in each year. Rough math had it paid off in about 9 years or so. I say to stay the course. Continue to invest for your retirement and also pay some to the debt to make yourself feel better. You are in good shape.