Pay off debt or invest?

[Snave]

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.

The reason he is a millionaire is b/c he sells lots of books.

[Snave]

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.

If you are aware of the layoff?! Gosh, I was aware of mine about 2 weeks before it happened. Good thing I took that time to sock away the big bucks.

[maat55]

Steve and LAL, You make a good arguement and for those who very disciplined with their money, your plan is a notch better.

But I must argue that if you were to have 100 do my plan and 100 do your plan, in the end, I think they come out better on mine. (Dave's) Not because DR's is better, but because the 15 forces a better investment. I believe that a large percentage of those who, even if you told them your plan, would still fail in the end to see it through. This is why Dave does not advise it.

To LAL, I am sorry I implied that you were stupid. It was not so much the 15-30 thing as it was your implying that DR's plan is harmful, when I know better. If you were right, he would not be so popular. I see his plan as a safe and much better plan than the populous is doing with no direction at all.

If you both are so concerned that people are at a huge risk of getting cancer or having a wreck causing them not to work for a year, you should push for a larger EF. Dave does highly recommend disability ins. Again, for the normal person I will still recommend the 15 note because if used, IMO, will have a much higher rate of success over the 30.

[Snave]

Maat55,

The challenge you have when posting your views about Dave are that there are many people on this board that ARE financially savvy. You said that you agree with Steve that his plan would work. (in regards to the 30 year vs. 15) because he is disciplined unlike a lot of others. I agree with you on this. However, there are a lot of people on this board that are just as disciplined. While this baord does attract a lot of people that are looking for advice such as Dave would give, it also attracts a lot of people that are financially savvy. I think that is where you get pushback.

This reminds me of some of the survey questions you see on sites such as money.com or something like that when they ask if you are on track for retirement and 80% of the people respond taht they are. Well of course they are. You get a higher proportion of financially secure people on that site responding to those type of questions. That is also what you have here - and where you get pushback. I am not saying that Dave's advice isn't good, just that there are other options that are equally appealing to some.

So, keep on spouting your Daveisms. That's what we like about you... and it works for you. As for me, I'll just keep on investing the difference in my 30 year mortagage vs. a 15. It's what works for me. In the end, we both will be "living like no one else" and "walking through the grass of our paid off homes." We will just have gotten there by different routes.

[cptacek]

My financial adviser once suggested to put investing on auto-pay because "no one actually invests a certain amount a month by themselves" meaning putting a stamp on an envelope with the check inside month after month after month. I did that for about 5 years, every month. Boy, was he impressed! He said, no one ever does that. I have since graduated to automatic withdrawals now, though.

So, I agree with Snave. Some people need to have simple "get started" answers and some people need to have more nuanced answers, depending on their temperament, interest, and understanding.

Once the OP in a particular post indicated they have listened to our opinions and weighed the pros and cons and have decided they would want to go one way (as this one did) it is illogical to keep spouting off about things they will not do. That isn't helping the OP.

[maat55]

Maat55,

The challenge you have when posting your views about Dave are that there are many people on this board that ARE financially savvy. You said that you agree with Steve that his plan would work. (in regards to the 30 year vs. 15) because he is disciplined unlike a lot of others. I agree with you on this. However, there are a lot of people on this board that are just as disciplined. While this baord does attract a lot of people that are looking for advice such as Dave would give, it also attracts a lot of people that are financially savvy. I think that is where you get pushback.

This reminds me of some of the survey questions you see on sites such as money.com or something like that when they ask if you are on track for retirement and 80% of the people respond taht they are. Well of course they are. You get a higher proportion of financially secure people on that site responding to those type of questions. That is also what you have here - and where you get pushback. I am not saying that Dave's advice isn't good, just that there are other options that are equally appealing to some.

So, keep on spouting your Daveisms. That's what we like about you... and it works for you. As for me, I'll just keep on investing the difference in my 30 year mortagage vs. a 15. It's what works for me. In the end, we both will be "living like no one else" and "walking through the grass of our paid off homes." We will just have gotten there by different routes.

Yes, the people on this forum are financially savy. And yes, the 30 if extra invested, is a good plan. But statistically, when the average gut gos house shopping with mindset of a 30 year note, what will happen in most cases? Second, even if he buy's less house so to invest the difference, how many of those proceeds end up getting invested? I'm not trying to advise you guy's. just the average guy's. A 15 ( most times I use 20) year note, means the buyer has to shop for less house and make a better investment. In most areas of the country, your home does not end up being much if any of an investmetn but rather a liability. This liability is taking away from the average guy's retiement investing. Thats my argument and I'm done with it.

[disneysteve]

I believe that a large percentage of those who, even if you told them your plan, would still fail in the end to see it through. This is why Dave does not advise it.

I think you're right. A decent plan is better than no plan, even if an even better plan exists. I've said before, there is no one-size-fits-all answer to most financial questions. You can take different routes and end up in the same place. One way might save you a few more dollars than another way, but in the end, both ways work.

When someone comes along and poses a question to the board, we will each continue to give the type of advice we've been giving, whether it is the Dave Ramsey philosophy or the Suze Orman advice or some other methods. I think that gives this board a nice mix and balance so that folks looking for advice get some options and they can choose the method that makes the most sense to them in their situation and in their mindset. Each person knows their own strengths and weaknesses. Some people need a "forced" or automatic savings plan, others can commit to sending in that monthly payment manually month after month. Some will invest savings, others will end up blowing it and never having it reach the bank. Some can use credit cards responsibly and reap the benefits, others need to live credit card free if they are to have any hope of getting their finances under control.

So let's just keep the discussions civil, as they have been for the most part.

[tripods68]

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

I completely disagree on DR on this comment. We bought our house about 5 years ago with debt/income ratio 43%. Today, our debt/income ratio stands at 21%. DR doesn't take any account that income generally go up over time. That's my problem with DR's advice. However, it might be true for people that never see their income grow then it might make sense to stick to the 25% rule. But we all know as we grow in our careers we tend to make more.

[disneysteve]

I completely disagree on DR on this comment. We bought our house about 5 years ago with debt/income ratio 43%. Today, our debt/income ratio stands at 21%. DR doesn't take any account that income generally go up over time.

That can be true, but isn't always true, so you need to consider your individual circumstances. When we bought, I was in the first year of a 3-year employment contract. I knew exactly what was going to happen to my income. It was going up 10% the 2nd year and another 10% the 3rd year plus there was a productivity bonus on top of those base raises. So we could spend a bit more on the house knowing that our income would be rapidly rising.

If I were buying today, however, the situation would be different. My income has been flat for about 5 years and I don't anticipate it changing anytime soon, so I wouldn't be stretching to buy because I know my income won't be rising.

Overall, I would tend to agree with DR on this one. You should buy based on your current circumstances, not what you think your circumstances might be in 3 or 5 or 10 years because that is always subject to change. For example, one spouse might decide to stay home to raise the kids (which is what my wife did less than a year after we bought our home).

[tripods68]

DS---We are both in agreement in general. You have to look at your circumstances in a case by case. But we knew both our incomes were only going up with stable jobs and promotions along the way with certainty. There's nothing that prevent you from making the type of income you need to make no matter how tough the state of our economy. Entrenuership exist for a reason. I could lose my job today and I'm back the next day working as Insurance agent. That's what all I'm saying.

[LivingAlmostLarge]

Not just dave ramsey but many people suggest keeping home mortgages at 25%. But there is merit to increasing income. One example is my DH and I. We knew we'd be in a position in 5 years to buy home when I finished school. My income would not stay under $30k as soon as I finished. Easily double or more, but we bought with what we were comfortable with. But we have many friends with offer letters in hand, who know what they make so yes they did buy before really settling into a set job. But when you go from making a student's salary to a real one it's a very different job from just a regular job to the next. I think it's reasonable to consider your real potential income coming out of school instead of your fake school income.

Second, I think the problem is that people who are truly aware of potential disasters plan better. Dave Ramsey gives advice that works for 90% of people who are bad with money management. And for people with lower incomes.

High incomes unfortunately can do lots of stupidity but they also have to consider other things when paying off debt, like in the OP's case. Mostly because the tax burden is a huge cut about 40% with federal and state taxes cutting into their debt repayment.

So yes Dave Ramsey's not doing retirement savings advice can be hugely detrimental to a person. It's not detrimental to get out of debt, but his advice can be very harmful

His advice isn't often applicable to place where of HCOLA. Why? Because the 25% rule doesn't work for home AND it doesn't work for renting even. When we first bought our condo it was 50% of our salary. But it was less than renting! Unfortunately we made very little and renting a studio was $1k/month. So we weren't exactly rolling in the dough! When we moved 5 years later a studio was $1400/month without parking. So it's not like renting is necessarily a cheaper option in HCOLA. I know many people who rent and pay more than my DH and I. Rents in HCOLA are typically higher too along with home prices.

As for 30 versus 15, there are many arguments why it's better to invest. One key factor Maat you have to consider, is if you aren't maxing out your 401ks and IRAs, then you should not be prepaying the mortgage. You are losing out on the tax break on the 401k, the mortgage tax break is all fine and dandy. But you can never go back and invest in a 401k.

That's $31k/year for a normal couple = 15% Dave Ramsey's suggested retirement means you need to be making $200k+. Thus another reason why I suggest a 30 year fixed over a 15 year fixed. Investing in a 401k you save at least 15% in federal taxes and probably state income taxes as well. The math is there to show you are making more than your 6% mortgage.

Another reason which I've pointed out is security. Cash is always king. You talk about not using CC, well if believe that you cannot help but believe cash in the bank is better than a mortgage. You can always pay down the mortgage 100%, but you can't refinance without a job, at least last I checked.

[disneysteve]

DS---We are both in agreement in general. You have to look at your circumstances in a case by case.

Agreed. But as Jim always says, general questions get general answers. As a general rule, folks should base their purchases on their income situation at the time of the purchase. Certainly, as both you and I illustrated, there are specific instances where taking future earnings into account makes sense, but since many people are already pushing the limit when they buy a home, I wouldn't suggest they push it even more by counting on raises that haven't happened yet. That's why in general, I would agree with DR on this one (see maat, I do agree with some of his advice ).

[maat55]

I think you're right. A decent plan is better than no plan, even if an even better plan exists. I've said before, there is no one-size-fits-all answer to most financial questions. You can take different routes and end up in the same place. One way might save you a few more dollars than another way, but in the end, both ways work.

When someone comes along and poses a question to the board, we will each continue to give the type of advice we've been giving, whether it is the Dave Ramsey philosophy or the Suze Orman advice or some other methods. I think that gives this board a nice mix and balance so that folks looking for advice get some options and they can choose the method that makes the most sense to them in their situation and in their mindset. Each person knows their own strengths and weaknesses. Some people need a "forced" or automatic savings plan, others can commit to sending in that monthly payment manually month after month. Some will invest savings, others will end up blowing it and never having it reach the bank. Some can use credit cards responsibly and reap the benefits, others need to live credit card free if they are to have any hope of getting their finances under control.

So let's just keep the discussions civil, as they have been for the most part.

I couldn't agree more. I don't attack Suzie or any other adviser, but I or Dave gets attacked regularly on these forums. Steve, thanks for being a sound voice of reason.

[maat55]

[

Second, I think the problem is that people who are truly aware of potential disasters plan better. Dave Ramsey gives advice that works for 90% of people who are bad with money management. And for people with lower incomes.

DR say's regularly, to prepare for any forseen problems by beefing up your EF.

So yes Dave Ramsey's not doing retirement savings advice can be hugely detrimental to a person. It's not detrimental to get out of debt, but his advice can be very harmful

You obviouly do not read his books or listen to his show. He advocates investing daily.

As for 30 versus 15, there are many arguments why it's better to invest. One key factor Maat you have to consider, is if you aren't maxing out your 401ks and IRAs, then you should not be prepaying the mortgage. You are losing out on the tax break on the 401k, the mortgage tax break is all fine and dandy. But you can never go back and invest in a 401k.

Again if you were to read or listen, you would know that he has a 7 step plan. Paying extra toward the house, comes after investing 15% into 401's and roths and anything else.

Another reason which I've pointed out is security. Cash is always king. You talk about not using CC, well if believe that you cannot help but believe cash in the bank is better than a mortgage. You can always pay down the mortgage 100%, but you can't refinance without a job, at least last I checked.

[/QUOTE]

I agree with your point, it can be done. But I will bet you 100 bucks that 75% of those who take the 30 with the intent to save the difference, will not do it.

You are making numerous false statements concerning DR's plan. Please investigate before you speak.

[tripods68]

Just to be on the record. I follow my own path to riches


"King Kong got nothin on me"
-Movie "Training Day"