I am curious to listen to personal finance programs for several reasons - such as getting the glimpse into the life of others, who live very differently, in other parts of the country.
I also want to get motivated to save more. And I want to learn something new.
I find that I disagree with some things that are repeated over and over. And it is starting to annoy me.
The absolute "no debt" approach advocated by Dave Ramsey makes no sense to me.
Our only debt is a very manageable student loan.
He would not care that it is at 2% fixed interest. I do. We would have paid it off last year if it was at higher interest. But with official inflation at 4%, and real inflation even higher (I do include food as part of inflation because we do eat, and we eat every day) and my interest at 2% (even less if you consider partial tax deduction) the value of that debt is decreasing every year and it makes sense to pay the minimum. I would rather save 6% by putting that money toward a down payment or other needs.
"Pay the lowest balance first."
If something horrible happened to us and we had to go into cc debt, we would certainly pay the one with the highest interest first! Because it costs more to keep.
I would not care about getting "encouraged" by seeing a smaller number of balances. It is the amount that matters. If you have a limited amount of money, you have to do the most damage control that you can with it.
"Don't carry credit cards, credit cards are evil, you are playing with the devil, etc....."
They are a method of payment. That is it. If you don't spend more money than you have they only reward you. There is not much they can do to you if you pay your balance in full every month.
"Spend cash only because spending cash hurts more. You would not buy some items if you had to withdraw the cash and part with it there."
The only way that would apply to me is if I had to pay a fee to withdraw that cash.
When I buy something that is $300 I evaluate it in terms of that number. How does that number relate to the number that is currently representing my bank account, to the numbers that make up in my planned expenses.
It is $300 no matter how I would pay for it. It will have the same impact on my finances no matter how I pay for it. I evaluate that impact by that number - not by a method of payment.
"cut up or freeze your credit cards"
Really, I find it hard to comprehend that adults can't control themselves to the point they have to put their ccs in the freezer or cut them not to spend money they don't have. That is a behavior of a child.
"It is recommended that you spend no more than 25% of your income on your housing expenses."
Recommended for whom? Would your percentage be the same if you have to pay daycare for 3 kids and worry about their college as opposed to a childless couple?
What are the assumptions made? Do they know how many years you keep your cars, or if you have health issues, or how much your commute is costing you? Only you can really know these things. You can't expect the bank to tell you what you can really afford. It is up to you to figure it out.
Markets are also different. Housing prices are different. And percentages get skewed at different income level.
If you take home 3K monthly maybe you should not have 1.5k mortgage and have 1.5K left for everything else - it will be living to close to the edge.
If you bring home 10K monthly and your mortgage and taxes total 5K, it is conceivable that what you have left over can cover all other living expenses, even with your housing being 50% of your take-home.
There is not one number best for all.
It feels like these things are made up for people who cannot think for themselves.
Annoying things "financial experts" say
December 4th, 2008 at 05:11 pm
December 4th, 2008 at 05:32 pm 1228411967
I agree with you that many of those recommendations don't actually make any sense to those of us who are responsible with our money, but to those who are not, some of those things are really revelations, as hard as that is to believe.
So while, like you, I don't agree with most of that advice personally, I understand why they say it and why many people actually do need to follow those rules because it would be a whole lot better than what they are actually doing.
December 4th, 2008 at 05:45 pm 1228412743
"It is recommended that you spend no more than 25% of your income on your housing expenses. Recommended for whom? Would your percentage be the same if you have to pay daycare for 3 kids and worry about their college as opposed to a childless couple?"
I like that point. I never thought of it that way.
December 4th, 2008 at 05:46 pm 1228412779
You are not the only one questioning some of Ramsey's advice. Here's an article you might want to read.
December 4th, 2008 at 05:59 pm 1228413572
Let's take a mortgage. Most experts consider this good debt because of the tax right offs and the underlying asset should go up in the long run. DR's philosophy is that there is a risk. Regardless of your issues, you have to continuing make monthly payments on the mortgage. There is a risk that something could happen over a 15 or 30 year period where you would not be able to make the payment. There is a risk you could be foreclosed on.
If however you paid off your house, the chances of being foreclosed are far less. Sure, you could have tax liens and those tax liens could be bought and you foreclosed on. But that rarely happens, especially if you could sell it for more then the tax lien.
In any case, my point is there is risk associated with debt.
The second piece is opportunity costs. If you didn't have any debt, you could use that money towards other things. You could by a rental house, invest in the markets, give more to a charity that means something to you, invest in a hobby, change careers, etc.
As for most of the other items, he is of the philosophy that you need to change the behavior more then take the shortest path. In other words, if you start getting some small wins, it will motivate you to continue on that path.
December 4th, 2008 at 06:15 pm 1228414542
December 4th, 2008 at 06:19 pm 1228414750
I don't mind people thinking about the issues and pointing out good points such as the ones in this entry and comments.
However, to simply say, "Pay off the lowest balance. That's all you should do. Period." That makes no sense. And then they absolutely refuse to consider any other alternatives!
That "my way or the highway" mentality that really grates on me.
December 4th, 2008 at 06:32 pm 1228415551
December 4th, 2008 at 07:39 pm 1228419593
December 4th, 2008 at 08:58 pm 1228424292
I also agree with not all CC debt being bad. Now I admit I don't have everything at great rates, but 2 of my credit cards are 2.99 and 2.9 until they are paid off. Our banker mentioned the credit card debt once when we were rewriting a loan, and we told him we'd be happy to switch the unsecured loans over to his bank if he could match the rates. He never said another word.
December 5th, 2008 at 01:44 am 1228441492
I will add to the list (things I hear people say which I might disagree with):
1) always use a Roth IRA
2) don't finance anything
3) keep an EF when you have debt
4) save for a house before saving for retirement
December 5th, 2008 at 01:11 pm 1228482694
Not so elsewhere, I can assure you that!
December 5th, 2008 at 04:30 pm 1228494604
Merch, I think the opportunity cost of paying off that student loan is higher. That was my point. Than we won't have that money available to do the things we want to do. We have the money to pay it off, we just choose not to due to inflation reasoning and the opportunity cost of not having that money available.
I watch Suze Orman (for entertainment purposes) but I also find some of the things she repeats annoying. But that would probably take up another post.
December 5th, 2008 at 05:50 pm 1228499449
I did enjoy watching Dave for awhile though. Some of his insights into the part of the story people weren't telling were hilarious, when they would admit that he had them pegged. At least he doesn't call people "girlfriend" all the time; that's the main reason I can't watch Suze. LOL.
December 5th, 2008 at 05:54 pm 1228499682
I think it all comes down to the Thinking vs Unthinking mindsets.
Thinking people, with an interest in personal finance, can digest differing financial viewpoints and create a "hybrid" system (borrowing from several different schools) than suits them. They can also fine-tune/change as they see fit.
Unthinking people, in the financial sense (I'm not dissing them... they could be great carers, artists, sportspeople etc), are blinkered from the cold reality of financial suavity. If a celebrity like DR can instill good financial behaviours in them through brute persuasion, then so be it. They will be wealthier in the long-term and society will be a less desperate place.
It's like me jumping from an airplane for the first time..... I need someone to show me how to pack my parachute... now there may be 20 different ways to pack a parachute.... I don't care - as long as the one I use works !!
December 6th, 2008 at 05:27 am 1228541223
That’s the total of the financial advice I’ve learned from parents. The rest of my continuing education comes from reading and watching TV. I completely agree that the first time you do something, you need to (as DR puts it
December 7th, 2008 at 03:06 am 1228619198
so it's true, these are things for people who can't think for themselves. but you have to look at it in a good way too: some of these people, if it weren't for DR and his 'plans' and his 'approach' would still have their heads in the sand. so atleast it is doing SOMETHING, even if it could be done a BETTER way.
December 8th, 2008 at 06:13 am 1228716809