Pay off debt or invest?

[maat55]

Originally Posted by jIM_Ohio

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


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.

The smallest to largest snowball is recommended because he views finances as 80% behavoir and 20% knowledge. Because he has had more than 20 years experience actually working with people as an financial adviser, he has determined that more people will succeed at getting out of debt in this manner. Anyone who is dilligent at a more spread out slower approach will be better off with the highest to lowest interest plan.

You say most people need specific answers. He says most people need a simple plan, the rest take care of itself. If you use his basic fundamentals, you should be prepared for any specific problems. There are plenty of you here trying to give specific solutions to one problem, of which I do also, but I will still lean on getting the fundamentals across because people need to understand why it helps and how to advoid the problem next time.

No, my challenge was directed at LAL.

DR recommends a 15 year note because if used, it can't hurt you. It's a better home investment. Many people move several times in the life, you will build more equity on a 15 year note. Now, I do agree that those who live in CA and other high cost areas are not likely to do this. But it doesn't make the advice, as you say, not good.

I give the advice I do, the way I do, because I believe there is a big picture that needs to seen other than one micro managed answer. Usually there are multiple problem associated with one question and they usually stem from the basic fundamentals. I'm proof that DR helps. I love to learn about finances and am not against other methods. Not many people are willing to learn and be as diligent as we are at managing money. I advise to the concervative side because many people need to master the basic fundamentals before they try to tackle complicated managment.

[JinCO]

Snave - yes I have not been around in this forum for a long time but have already picked up on some of the frequent posters philosophies’. I think it is great to have different opinions, but hopefully people who are seeking advice form their own opinions and develop a process that will fit their particular needs. I don't have a problem with the Dave Ramsey method, I just don't happen to believe that it is a perfect fit for my situation. For example, the advice to pay down debt at all costs doesn't seem to take into account the detrimental tax consequences of foregoing our 401K investments to accelerate the debt reduction. I am in the process of reading financial advice books and will probably pick up a DR book just to understand his point of view.

In terms of the 401k match, I know the 7% is correct for my employer. They match in company stock but you can diversify into other funds as soon as it posts. I have not looked at my wife's plan in detail but we are planning to review her plan and allocations soon.

[LivingAlmostLarge]

Why the 15 year can hurt? Get a 30 year fixed, and you can always pay it faster. You can never slow the 15 year fixed.

Well if you lose your job. You will lose your home. Cash is king. Until you own the house 100% it can be foreclosed. So then keep mortgage extra payments so if you are unemployed for 2-3 years then you can pay it off and not worry. So how is prepaying a mortgage over keeping the cash smart?

Read wastrelshow.blogspot.com and her husband was "unemployed" for 3 years from being a high up executive. So she says it can happen. And apparently they almost lost their home.

So if they had kept more cash they could make payments for years. So classic example of his advice of hurting someone. By they way she lives completely debt free now, after working hard to get back out of the tailspin of not having a job for so long.

[maat55]

Originally Posted by LivingAlmostLarge

Why the 15 year can hurt? Get a 30 year fixed, and you can always pay it faster. You can never slow the 15 year fixed.

Well if you lose your job. You will lose your home. Cash is king. Until you own the house 100% it can be foreclosed. So then keep mortgage extra payments so if you are unemployed for 2-3 years then you can pay it off and not worry. So how is prepaying a mortgage over keeping the cash smart?

Read wastrelshow.blogspot.com and her husband was "unemployed" for 3 years from being a high up executive. So she says it can happen. And apparently they almost lost their home.

So if they had kept more cash they could make payments for years. So classic example of his advice of hurting someone. By they way she lives completely debt free now, after working hard to get back out of the tailspin of not having a job for so long.

What you do seem to get is that if they have a 900 payment on a 30, they would have 900 payment on a 15 year. They are not to pay the house off early until they have a fully funded EF and have 15% going to retirement. Also, Dave recommends that if you are aware of a possible layoff, you should build up more EF.

You have no idea what you are talking about. And by the way, anyone unemployed for three years is loafing.

[disneysteve]

maat, I have a question about the 15-year mortgage advice. If my wife and I had taken a 15-year loan when we were buying, we would have needed to buy a smaller, cheaper house or a house in a less desirable neighborhood in order to keep the payments the same as they would be on a 30-year loan on the house we bought. That would have meant that we would have wanted (I'd say "needed" but I know that isn't technically true) to move again once we could afford something better.

In the long run, aren't we better off having bought the "keeper" house with the 30-year instead of the "starter" house with the 15-year and avoiding the expense and hassle of moving again? We've been here 14 years and will have the loan paid off in less than the original 30 years, even though we refinanced a couple of times along the way.

[LivingAlmostLarge]

Maat, Go tell Boomie from the wastrelshow that someone not working for 3 years is a loafer. She'll tell you are talking CRAP. That's what she told me for asking why not work for 3 years. And said I don't know anything in my 20s. Heck your a lot older so you say it, but she'll tell you it's because he DIDN'T know he was going to get fired. You can't tell you know?

And he made A LOT of money. So getting an equitable job was not possible for that many years, I don't know why but she said no one would hire him for less either.

Look, you either get a $900 30 year or a $1200 15 year loan for the SAME home. Then you can pay $1200/month and drop it down anytime a Storm Cloud approaches, OR even better you can bank $300/month and pay it off 100% in full after 15 years.

Basically I just built you a 100% more secure way of paying off a home than Dave Ramsey. And so yes his advice can be harmful.

I know MANY, MANY people who are laid off for more than 6 months. Some switch careers because they feel it's the right time as well. That being said, with the money in the bank you can live for say 3-5 years while you retool OR you can have a semi-paid for home and only 6 months of an EF.

How much are you saving outside of prepaying your mortgage and EF? How long could you live? I plan on having years worth in a taxable account. That way no matter what, lets say my husband has cancer and we both don't work for the 1 year he's in treatment, we can afford to not.

Someone following DR would have 6 months EF, retirement, and prepaying the mortgage. They would find out they have cancer (no prediagnosis) and then suddenly with surgery, chemo, radiation, let's say they suddenly are in year 2 of their 15 year note.

Gee how will they survive? And I know a 31 year old woman who had breast cancer, fortunately her family helped her out. She was getting disability but there are bills for her cancer treatment, let's not forget. And she could give up her apartment and live rent free. BUT if you have 2 kids, your mortgage how will you do that?

I wonder could you afford all the Out of Pocket treatements, your 15 year note and not working? And consider you are running around more so you end up eating out because you sit in chemo or radiation for hours?

Or you need more help around the house? Things like that add up. So yep, I think DR advice about prepaying the 15 year note and even getting a 15 year note is not wise.

You can always pay a 30 year fixed as a 15 year note. But you can't go the other way. Nor can you own your home until it 100%. Although maybe they'll cut you a break as you go BK?

[disneysteve]

Originally Posted by maat55

anyone unemployed for three years is loafing.

Originally Posted by LivingAlmostLarge

Maat, Go tell Boomie from the wastrelshow that someone not working for 3 years is a loafer. She'll tell you are talking CRAP. That's what she told me for asking why not work for 3 years.

And he made A LOT of money. So getting an equitable job was not possible for that many years, I don't know why but she said no one would hire him for less either.

I hear these kinds of stories regularly and I always wonder about them, too. Some people say that places wouldn't hire them because they were over-qualified for the jobs they were applying for. Like some corporate exec trying to get a job at McDonald's. I guess there must be some truth to those stories because I see them often. I suppose the employers don't want to hire and train someone who is going to jump ship as soon something better comes along.

I can certainly understand not being able to easily replace a high paying job, but still, I can't believe that someone is unable to find any gainful employment for 3 years.

[jIM_Ohio]

Originally Posted by disneysteve

I can certainly understand not being able to easily replace a high paying job, but still, I can't believe that someone is unable to find any gainful employment for 3 years.

Tell that to someone which is the campaign manager for a democratic presidential candidate. Only worked twice in last 8 years.

LOL.

[noppenbd]

I have to speak up here about the DR advice. I think there have been some errors of omission here. DR says you should buy a house where the payment is no more than 25% of your take home pay AND it is a 15-year mortgage.

So it is not just a matter of the shorter term on the mortgage; by making the payment fixed at no more than a quarter of your take home he is also forcing you to live below your means. I don't think he would advise someone who can barely afford a 30-year mortgage to take a 15-year mortgage on the same house; instead he would say they need to buy less house and do the 15-year mortgage. He is basically just being very conservative. Whether or not his advice is actually feasible is another issue. In some high cost areas you simply cannot find housing that falls within those 2 guidelines. But I don't think it is bad advice to tell someone to buy less house. We live in a 1800-square foot townhouse that probably comfortably fit a family of 6-8 people when it was built in the 1920s. Nowadays it would be considered small for a family of 4. Would it kill us to stay in this house when our 2nd child is born? Definitely not.

[disneysteve]

Originally Posted by noppenbd

Whether or not his advice is actually feasible is another issue.

I think this is where some people take issue with his advice. It might sound great on paper until you actually go house hunting.

We paid $142,000 for our house. To have the same payment on a 15-year loan, we could only have spent about $111,500. I can tell you after house hunting for months and seeing dozens of homes that there was nothing in this area for $30,000 less than we paid. We had enough trouble finding something decent for what we did spend.

So DR's advice might work sometimes, for some people, in certain areas, but it doesn't work everywhere or all the time.

[noppenbd]

Originally Posted by disneysteve

We paid $142,000 for our house. To have the same payment on a 15-year loan, we could only have spent about $111,500.

What percentage of your take home pay did that payment represent at the time?

[disneysteve]

Originally Posted by noppenbd

What percentage of your take home pay did that payment represent at the time?

I started to figure out an answer to this and realized that it wasn't so easy. I used 5.5% and 6% in my example, but those aren't the rates that existed when we bought 14 years ago. I'd have to dig out the original loan documents to know what we actually paid.

For the purposes of this thread, let's say we actually paid 8% which is probably about right. So our principle and interest would have been $833.56. That would have been about 15% of our take-home pay at the time. Of course, that doesn't include taxes and insurance which would have made the total payment a little higher percentage (though still well under 25%).

[noppenbd]

Without checking the math, it looks like you probably could have bought the same house with a 15-year loan and stayed within DR's guidelines. So in your case his advice would just be to get the 15-year loan. But I suspect you are far from the norm. Most people in your shoes would have been looking at houses that would give them 30-year payments in the 33% of gross pay range. So his advice would keep them in the more conservative price range that you ended up purchasing in.

Bottom line for me is that there are a variety of solutions for every financial problem. While DRs advice may not get you 100% of the financial benefit in every case, I think it is generally getting you 75% of the way there in almost all cases. On this site we (myself included) tend to get caught up in the minutiae of Roth vs traditional vs 401k and Vanguard vs Fidelity vs TRP. In reality, doing any of those is going to get you 80% of the way there, and the improvement from making the "right" choice is only going to offer marginal improvements.

The fact is that most households in this country make less than $60K, and will do just fine with a paid-off house, no debt, and modest retirement savings, assuming SS does not completely fail. For those people, DR's advice is a godsend. For others, taking his advice is not going to be the ideal path, but it is not a bad one, IMO.

[disneysteve]

Originally Posted by noppenbd

Without checking the math, it looks like you probably could have bought the same house with a 15-year loan and stayed within DR's guidelines. So in your case his advice would just be to get the 15-year loan.

Exactly what I thought you'd say. What I didn't mention is that at that time, I also had over $100,000 in student loans which essentially amounted to the equivalent of a mortgage already. Had I taken a 15-year home loan, we could have afforded the higher payment, but it would have meant taking a lot longer to repay the student loans. It would have worked but wasn't how I preferred to do it. My priority was paying off the student loans. I didn't mind paying longer on the house. I figured that once the student loans were gone, I could accelerate the house payments if I chose to. The 30-year loan gave us a lot more flexibility in our cash flow.

[disneysteve]

Originally Posted by noppenbd

The fact is that most households in this country make less than $60K, and will do just fine with a paid-off house, no debt, and modest retirement savings, assuming SS does not completely fail. For those people, DR's advice is a godsend. For others, taking his advice is not going to be the ideal path, but it is not a bad one, IMO.

I generally agree with this sentiment. Most Americans are doing very little of what they should be doing. Even though I prefer investing over prepaying the mortgage, I'd much rather see someone prepaying their mortgage instead of blowing money at the mall or paying $150/month for super-premium HD cable TV.

[maat55]

Originally Posted by LivingAlmostLarge

Maat, Go tell Boomie from the wastrelshow that someone not working for 3 years is a loafer. She'll tell you are talking CRAP. That's what she told me for asking why not work for 3 years. And said I don't know anything in my 20s. Heck your a lot older so you say it, but she'll tell you it's because he DIDN'T know he was going to get fired. You can't tell you know?

And he made A LOT of money. So getting an equitable job was not possible for that many years, I don't know why but she said no one would hire him for less either.

Look, you either get a $900 30 year or a $1200 15 year loan for the SAME home. Then you can pay $1200/month and drop it down anytime a Storm Cloud approaches, OR even better you can bank $300/month and pay it off 100% in full after 15 years.

Basically I just built you a 100% more secure way of paying off a home than Dave Ramsey. And so yes his advice can be harmful.

I know MANY, MANY people who are laid off for more than 6 months. Some switch careers because they feel it's the right time as well. That being said, with the money in the bank you can live for say 3-5 years while you retool OR you can have a semi-paid for home and only 6 months of an EF.

How much are you saving outside of prepaying your mortgage and EF? How long could you live? I plan on having years worth in a taxable account. That way no matter what, lets say my husband has cancer and we both don't work for the 1 year he's in treatment, we can afford to not.

Someone following DR would have 6 months EF, retirement, and prepaying the mortgage. They would find out they have cancer (no prediagnosis) and then suddenly with surgery, chemo, radiation, let's say they suddenly are in year 2 of their 15 year note.

Gee how will they survive? And I know a 31 year old woman who had breast cancer, fortunately her family helped her out. She was getting disability but there are bills for her cancer treatment, let's not forget. And she could give up her apartment and live rent free. BUT if you have 2 kids, your mortgage how will you do that?

I wonder could you afford all the Out of Pocket treatements, your 15 year note and not working? And consider you are running around more so you end up eating out because you sit in chemo or radiation for hours?

Or you need more help around the house? Things like that add up. So yep, I think DR advice about prepaying the 15 year note and even getting a 15 year note is not wise.

You can always pay a 30 year fixed as a 15 year note. But you can't go the other way. Nor can you own your home until it 100%. Although maybe they'll cut you a break as you go BK?

He's a LOAFER, he like many who do not work for that amount of time, is too proud to work for less. Many years ago when I was new in my business, I had a slow period so I went to work for another shop. I didn't have severance or unemployment to save me.

Again you make no sense, I would hate to be debt free, have 6 months EF and equity in my home if I were to find out I had cancer. BK on WHAT? By your standards, everyone should have a 5 year EF. I feel stupid just wasting my time on you.

[disneysteve]

maat, I think the point is that if your goal is a paid off home, you can accomplish the same thing as Dave Ramsey suggests in a safer way by taking the 30-year loan and saving/investing on your own until you have enough to pay off the balance of the mortgage. By doing it that way, you retain access to those funds if some other need were to arrive (like unemployment or illness) and, most likely, get a higher return on your money in the process which actually gets you the paid off home faster than the other way. The 15-year loan ties your hands and limits your options moreso than the 30-year loan. Neither way is "right" or "wrong" but one way is better.

Another question for you: I have more than enough in savings to pay off our mortgage right now. Would Dave Ramsey's system have me pull the money out of savings to pay off the loan?

[maat55]

Originally Posted by disneysteve

maat, I think the point is that if your goal is a paid off home, you can accomplish the same thing as Dave Ramsey suggests in a safer way by taking the 30-year loan and saving/investing on your own until you have enough to pay off the balance of the mortgage. By doing it that way, you retain access to those funds if some other need were to arrive (like unemployment or illness) and, most likely, get a higher return on your money in the process which actually gets you the paid off home faster than the other way. The 15-year loan ties your hands and limits your options moreso than the 30-year loan. Neither way is "right" or "wrong" but one way is better.

Another question for you: I have more than enough in savings to pay off our mortgage right now. Would Dave Ramsey's system have me pull the money out of savings to pay off the loan?

If you had money that was not tied to IRA's or 401k and you were sufficienly on track for retirement. Yes he would, he would say that you would have to take the house payment and add it to your investments.

I'm not arguing that taking the difference from a 30 year and investing it is a bad plan, but you do have to weigh in all the variables: Taxes on the investment, dilligence to stay on the plan. In reallity, very few people are as dlligent as you are. The 15 forces people to at least build good equity.

You need to remember, I base answers on what will normally happen when someone gets a 30 year. But I do agree that your plan if done religously is better, but not a great deal better. In the event you have a major illness and need the money, you can refinance or take out an HEL if necessary, though a last resort.

[LivingAlmostLarge]

How am I stupid? I think I've more intelligently present multiple scenarios where a 30 year outweighs a 15 year fixed rate mortgage.

I've also presented reasons why a 30 year fixed and cash in the bank instead of prepaying a mortgage.

You don't have to invest it. You can buy bonds with your extra money or leave it in a money market. If you have a 6% mortgage that's 4.5%. And you can probably earn that in a money market or a bond fund. So the risk is mitigated.

I think if anyone is being dumbed down it's me. I am tired of giving reasonable explanations of why a 30 year fixed is better than a 15 year fixed. You couldn't even understand it's not $900 on a 30 year and $900 on a 15 year fixed.

Nor do you understand why you would go bankrupt from medical issues or continued unemployement. Often times people go BK from medical issues because they can no longer work.

And how about you tell that to Boomie from the wastrelshow. She'd tell you she's 3rd generation millionaire and has been asked to be on Good Morning America. Are you as rich as she? Do you have a million in the bank? Obviously not. Then shut up she would say.

I asked the question to her a hardcore Dave Ramsey follower and she said that my plan of cash in the bank was MUCH wiser and what she tells her own kids.

Because cash is king, and until you have NO DEBT, 100% paid for home, you can lose it all.

How can you not get it? Is the math too hard to follow? That you can be unemployed or unemployable for longer than your miniscule 6 month EF?

Hate to break it to you but cancer is easily more than 1 year of treatments. Hmm..how many months longer than your stupid 6 month EF? And you made all your extra cash to a 15 year mortgage? Gee what would you do?

Cash out refinance? Bad idea, whose going to do it when you are disabled?

Cash in bank is king. Until you learn that maat, you haven't learned anything.

And Disneysteve is the major breadwinner. Sure he could pay off his mortgage but until he had enough to pay off his mortgage, by prepaying his mortgage he was putting his wife at risk.

Let's say he got into a car accident and couldn't work for 1 year, getting rehab, etc. By your plan, what would he do after 6 months? His stay at home wife, let's say couldn't work because she was caring for him and their child? Hmm...interesting scenario.

The prepaying of the mortgage is only smart if it works and nothing goes wrong. If any disability, injury, or accident occurs you'd be up the creek.

[disneysteve]

Originally Posted by maat55

In the event you have a major illness and need the money, you can refinance or take out an HEL if necessary, though a last resort.

Two problems with that:

1. Try getting a HEL if you suddenly find yourself unemployed or disabled due to illness.

2. Even if you are somehow able to get a loan, how will you make the payments if you aren't working? That would be a time when you'd want to be cutting expenses to the bare minimum, not taking on new debt.