The biggest difference is that DR tackles debt faster, so while you do cut short retirement, he expects you to be completely debt free except for the house in < 3 years.
Right, but in a world where professional degrees cost people $200K++ in debt, how is it possible to be "debt free except for the house in 3 years"? I just don't think it makes sense to apply this to those with lots of low-interest debt.
I totally agree with the alcoholic analogy. That's how I got through FPU. We were doing it to support BIL/SIL who needed drastic help. We weren't the target audience, so I tried very hard not to be argumentative when I disagreed on strategy, etc.
The biggest difference is that DR tackles debt faster, so while you do cut short retirement, he expects you to be completely debt free except for the house in < 3 years.
Right, but in a world where professional degrees cost people $200K++ in debt, how is it possible to be "debt free except for the house in 3 years"? I just don't think it makes sense to apply this to those with lots of low-interest debt.
I totally agree with the alcoholic analogy. That's how I got through FPU. We were doing it to support BIL/SIL who needed drastic help. We weren't the target audience, so I tried very hard not to be argumentative when I disagreed on strategy, etc.
I'd have to go back and look at the book, but I believe that his advice actually changes if it's going to take > 3 years.
DR is about the opposite of my financial view of the world.
My low interest debt (SLs and mortgage) allow me to have a LOT more money saved for retirement. My SLs are at 1.65% and 4.5%. Our mortgage is 3%. In 2012, I earned 16% in my 401K, and between 10-20% in my other accounts. By not paying down my debt with the money I put into my 401K and both our IRAs (to the tune of 27K), I leveraged my money to make money. I win.
Sure, I could be rid of my SLs in three years if I put that 27K towards my student loans. But I also lose tax advantages on top of actual gains made in the market. Stupid. I'll make more by putting that 27K in the market. I have more in my retirement account than I owe in SLs.
DR is stupid for people who have low interest debt.
Sorry, but having a paid off house doesn't necessarily mean freedom. Medical bills can be a LOT more than a mortgage payment when you are of advanced age. Its not just a co-pay to the doctor. Nursing home/assisted living, pricey medicines, medical equipment, etc etc. Having a paid off house isn't going to do you any good helping with that unless you plan on selling it, or (gasp) take out a reverse mortgage/HELOC- IF it has value left. My house went down about 100K in value, so I'm not in the "yay house" group.
My anticipated millions in retirement make me sleep better at night, than dreaming of having a paid off house that may have little value left.
I get this feeling that a lot of people aren't familiar with Ramsey's end goal, which is to accumulate wealth. He also urges everyone over the age of 60 to have long term care insurance.
You don't tackle the mortgage until after you have a fully funded e-fund, are putting 15% to retirement and are saving for your kid's educations. So, he wants you to be saving before paying off the house.
BTW, has anyone here read David Bach's Debt Free For Life? It seems that everyone here loves Bach, and he also advocates paying off the mortgage early
I get this feeling that a lot of people aren't familiar with Ramsey's end goal, which is to accumulate wealth. He also urges everyone over the age of 60 to have long term care insurance.
You don't tackle the mortgage until after you have a fully funded e-fund, are putting 15% to retirement and are saving for your kid's educations. So, he wants you to be saving before paying off the house.
I dont think you understand how leveraging and compounded interest work.
The earlier you save, the more you have. Its pretty simple. And by NOT paying off my debt, I've made money since my interest rates are far lower than what I've made in the market.
You dont accumulate true wealth under DR's plan. At least not the type of wealth I plan on having.
I get this feeling that a lot of people aren't familiar with Ramsey's end goal, which is to accumulate wealth.
And what we are saying is that by NOT paying off the mortgage early, we will accumulate TRUE wealth.
DR's plan costs people money, plain and simple, if they are paying off low interest debt when they could instead be investing that money. I dont' understand how one can argue with math.
I need a pocket volenti to do some calculations for me.
I get this feeling that a lot of people aren't familiar with Ramsey's end goal, which is to accumulate wealth. He also urges everyone over the age of 60 to have long term care insurance.
You don't tackle the mortgage until after you have a fully funded e-fund, are putting 15% to retirement and are saving for your kid's educations. So, he wants you to be saving before paying off the house.
I dont think you understand how leveraging and compounded interest work.
The earlier you save, the more you have. Its pretty simple. And by NOT paying off my debt, I've made money since my interest rates are far lower than what I've made in the market.
You dont accumulate true wealth under DR's plan. At least not the type of wealth I plan on having.
Well, I listen to DR's show and when I hear people calling in saying things like, I have been debt free for 20 years now after following your plan, I have 2 million in investments, 3 million in retirement and a paid for house and I want to know if you think it's ok for me to buy x,y or z? I think to myself, damn, that's the kind of wealth I want.
Just curious if PMI factors into this at all because getting out from under PMI would make a huge cash flow difference and it requires paying the mortgage off faster
I honestly don't think it matters that much which plan you follow. The secret to getting ahead is spending less than what you make. That's the part that DR is really good at helping people figure out.
I get this feeling that a lot of people aren't familiar with Ramsey's end goal, which is to accumulate wealth.
And what we are saying is that by NOT paying off the mortgage early, we will accumulate TRUE wealth.
DR's plan costs people money, plain and simple, if they are paying off low interest debt when they could instead be investing that money. I dont' understand how one can argue with math.
I need a pocket volenti to do some calculations for me.
That never did make it to mass production...
I think all PPs have brought up valid points that I haven't thought of. DH and I have never followed the DR plan step for step, word for word. We tend to modify it to fit our goals and personal situation.
MM is wise, very wise. I have learned a lot from you ladies in the past 4-5 years of lurking and occasional posting. Thanks!
BTW - I understand the math. It doesn't matter that I understand the math. What matters is that until Ramsey gave me the motivation for the come to Jesus, yes I was contributing to retirement, but I was contributing even more to Capital One. It's an extreme plan, but sometimes a lifestyle change doesn't happen without an extreme kick in the pants.
I need a pocket volenti to do some calculations for me.
She would come in here and say "if you had an extra $10k a year and put it in the market you would make $x in 30 years. if you put it to your mortgage, to pay your mortgage faster and then invested your mortgage payment and the $10k you would have $y. And X is more than Y." And it would be all neatly packaged and make sense
BTW - I understand the math. It doesn't matter that I understand the math. What matters is that until Ramsey gave me the motivation for the come to Jesus, yes I was contributing to retirement, but I was contributing even more to Capital One. It's an extreme plan, but sometimes a lifestyle change doesn't happen without an extreme kick in the pants.
These are two totally different things. If Ramsey gave you the motivation to pay off your debt, then that is awesome, congrats. But that does NOT mean that his math wins in this argument.
Play around with a retirement calculator and see how much someone following DR will be missing out by holding off on retirement.
Also, dont compare yourself to others. Not everyone has the same debt, are not the same age when they pay off the debt, etc. You need to compare apples to apples-- ie- YOUR situation in different scenarios.
Using this calculator, I will have 3.7Mil in retirement at 65 based on my age, current contributions and assuming a 6% rate.
Keeping all things identical, but if I had nothing in retirement and added 3 years to my age (to give me time to pay off my debt), with the same yearly contribution, I'll only have $2.4 million.
As for the paying off smaller cards first - I think that's good advice for the demographic who will benefit most from his plan for a few reasons.
His audience is probably composed of a lot of people who have their debt spread out among multiple cards. Reducing the number of bills they pay will go a long way towards helping them build a more organized approach to managing money.
If you have a lot of bills and are deep in debt, you are more likely to miss payments. Missed payments cause interest rates to rise and results in fees. Reducing the number of payments people have to make reduces the odds that they will miss a payment.
Interest rates on credit cards change (see #2). For people who are not savvy with numbers, customer service, or reading and understanding bills, figuring them out and staying on top of which ones are lowest could be a lot to handle.
Many people get into debt because of issues with instant gratification. Paying off small balance cards first satisfies that instinct.
His plan isn't right for most people, but I think for certain demographics, it's probably pretty smart. His plan isn't to offer you the best ways to leverage your debt or make your money work for you. It's to offer an easy-to-understand guidelines to chronic overspenders with a tenuous grasp of basic math. For those people, it's pretty brilliant.
The calculator hasn't given me any great life lesson. Contributing 12% now while paying off debt, vs not contributing for 1.5 years to wipe out debt and then contributing 15% is a difference of $80K
I need a more complex calculator that includes what I lose in interest on student loans by prolonging the snowball.
FWIW, we are contributing enough to get employer match even right now, so 6% (+6% match) for me and 8% (+4% match) for DH. We're just focused more on debt and will increase this when we're out of debt
Someone with low income and lots of CC debt, a person who cannot manage to pay off a $500 CC balance is not a person who is going to be able to manage to get more than 1K in an emergency fund prior to paying things off.
You should always adapt any financial advice to your own situation. DR is highly motivating to those who need a good kick in the pants. He gets the success cycle started.
The calculator hasn't given me any great life lesson. Contributing 12% now while paying off debt, vs not contributing for 1.5 years to wipe out debt and then contributing 15% is a difference of $80K
I need a more complex calculator that includes what I lose in interest on student loans by prolonging the snowball.
FWIW, we are contributing enough to get employer match even right now, so 6% (+6% match) for me and 8% (+4% match) for DH. We're just focused more on debt and will increase this when we're out of debt
but if you are contributing to retirement (and I'm glad you are), once again, like we said previously to you, you aren't following DR!!
I dont get why you are so hell bent on supporting him when YOU DONT FOLLOW HIM.
The other thing that these calculators don't take into effect is change in spending habits. My habits have changed drastically since starting DR, which will give me a lot more to throw at savings once we are at that point
Now I'm seeing that the higher number is actually the one where I wait 1.5 years and do 15% instead of doing 12% now and continuing to do 12%. Maybe we should go back to straight Ramsey and get our asses out of debt instead of farting around
I'm a social scientist, and so my thought is you have to think about what the "control group" for DR would look like. If you are choosing between DR and other tailored to your individual position financial advice, DR would lose in many cases. If you are choosing between DR and continuing to live beyond your means with maxxed out credit cards, obviously DR is a very, very wise choice.
I think a debt snowball is great for getting out of consumer debt, and agree that it should be something like "pay down all debt above 5%". Realistically, I had nothing to contribute to retirement when I was drowning in credit card debt. I didn't have to stop my 401k contributions to do the debt snowball - there were no 401k contributions. But I knew enough about money to start saving for retirement as soon as I had the cash flow.
I'm a bad MM and I don't know how much SL we have left, but it is probably close to 6 figures. I do have a large retirement account already. Why would I stop contributing to work 401ks/pensions/capital accumulation,etc to pay of SL debt that is less than 5%. Also, as morbid as it may seem our only SL debt is stafford loans and those are discharged at the death of the borrower so if one of us dies before our SLs are paid off the other doesn't owe.
I do think a paid off mortgage is sound retirement planning, but I see no reason to pay off my mortgage in 10 years. I would like it to be paid off within the next 10 years but that is more for cash flow planning and college.
I like DR. I think his plan is great for certain people. Like any financial plan out there, it's not for everyone.
Do I follow DR? No. But I think his plan is great to some.
Regarding the SL, to my understanding it does go to step 5 if it's larger than X amount (can't remember how much). So that's after the saving for retirement. The main focus of step 2 is paying off the "bad" debts (CC, car, etc).
Math? I don't like to focus too much on the math. Purely following the math does not guarantee anything. You see calculators everywhere on predicting how much you'll have in the future, etc. but it never considers risk. We all have different risk level.
Here on MM, there are several who has $$$ in their savings account that's barely growing. If one focuses on the math, then it would best to get that money out of savings and invest OR better to use it to pay down the 3% mortgage than having it just sit there. That's if we're only focusing on the math. There's too many variables out there.
One example we didn't follow the math but ended up ahead was when we decided to payoff the house before the market crashed. Of course, we didn't know the market was going to crash. A mortgage has low risk, but I wanted total peace of mind at that time. It allowed me to feel safer having a very low efund. So, as soon as we paid off the house, all our extras went to our investment accounts; that's when DOW was ~7000.
If we didn't do what we did, then our net worth would be less today; and would be less based on the math. There's too many unknowns that can affect ones financial picture. That's why I don't focus too much on the math. I do understand the math and do tons of calculations, but I don't use it as the sole factor in determining our next move.
If you follow his philosophy, you won't NEED a credit score because you won't be using/applying for credit.
.
I disagree. Credit scores are used for plenty of other things besides just obtaining credit. They are also used in a) getting jobs (see recent article in NYT about how you can lose out on a job because more and more places are checking credit scores before making an offer) or b) insurance rates.
In many states your insurance rate for your auto or home insurance depends on your credit score. The higher your score, the better your rating.
Last job I applied for the interviewee first thing he told me if you had a bad Credit score/history or no score please don't waste out time, since this job required you to have perfect credit. I guess depends on your field(if nothing corporate), but even with my current job they check up for security purposes.
In my state they check our credit all the time as well. There is a happy balance you need, use the card for groceries/gas pay off each month.
Post by Velvetshady on Jan 10, 2013 9:38:33 GMT -5
If we had followed DR, we would have paid tens of thousands more in extra interest than we did by focusing on interest rates, DH would be in his late 50s (or older) before saving a dime for retirement, we would have been screwed by the $1000 e-fund several times a year over the last 6 years, and we would not have the positive net worth we have right now.
The DR plan is a solution. It is a workable solution for some. It rarely is the "best" financial solution and sometimes can be a terrible solution.