Pay off debt or invest?

[maat55]

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]

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]

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]

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]

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]

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.

[maat55]

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]

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.