Debt and Fire

[maddythebeagle]

I dont know if many here have heard of Dave Ramsey, he is a money talk show host that I guess is mostly on Christian/Conservative radio. Well, anyway, from his life experiences he was highly leveraged on a lot of property and had to sell a bunch to pay the bank back and went broke. I think he spent way about his means, also. Now is selling books and seminars.

Well, anyway, he has this idea that just about all debt is a bad idea and thinks people should even pay off the low interest debts (student loans) and only use cash to pay for stuff.

I tend to agree with him somewhat that debt for consumerism is pretty dumb, but it seems to me that low interest debt isnt a big deal esp. if you can use that money to increase your net worth. (i.e. why pay off low interest tax deductible student loan debt when you can contribute more to a 401k, etc.). Maybe most folks really dont have enough discipline? I dont feel that my use of a credit card makes me spend more and use as a tool and LBYM easily. Anyway, considering JG has over 100k credit card debt and flips in his ING account, I suspect that most FIRE's dont have a problem with credit or it causes them much stress?

 

[brewer12345]

I tend to sweat out my (relatively minor) debt more than I really should. Part of it is that I am more leveraged than I really want to be (as far as cash-out-the-door payments go, not the amount outstanding). This is really my own doing, since I intentionally chose a 15 year mortgage, etc. However, a few marginal dollars are not worth the stress, so I have decided to nuke the car loans (can't comfortably kill the mortgage in one go and I'm not paying off my ~3% student loans any faster than they make me). One car loan is dead from amrtization in a few months and the other I will take out with the first bonus (~6 months, god willing).

 

[FlowGirl]

I never understood the whole moral quandry regarding debt.

To my way of thinking, interest is just the cost of having money now vs. having money later. Sometimes the cost is worth it (student loans), sometimes not (for me- big screen TV). As long as you can rationally weigh those costs, I don't see a problem.

 

[justin]

We have a lot (<$100,000) of student loans, and you can't beat the fixed 1% APR rates on them. Plus, if you die, the debts are discharged.

 

[JDARNELL]

I never understood the whole moral quandry regarding debt. 

To my way of thinking, interest is just the cost of having money now vs. having money later.  Sometimes the cost is worth it (student loans), sometimes not (for me- big screen TV).  As long as you can rationally weigh those costs, I don't see a problem. 

Interesting thought on debt. can you expand on this for me?   For some reason I am slow in this one.

JDW

 

[Nords]

Well, anyway, he has this idea that just about all debt is a bad idea and thinks people should even pay off the low interest debts (student loans) and only use cash to pay for stuff.

It'd be most interesting to see what an investigative reporter discovered about Ramsey's credit report.  Isn't it especially dangerous to be a hypocrite among the Christian/Conservative crowd?  (Hmmm... Jim Bakker... Rush Limbaugh... never mind.) I wonder if Ramsey uses a credit card when he's traveling/vending or if he keeps a hundred Benjamins in a money belt?

Interesting thought on debt. can you expand on this for me?   For some reason I am slow in this one.  JDW

Another idea (already heavily debated)-- paying a 5.375% 30-year mortgage and investing the proceeds in the stock market.  Over 30 years FIRECalc gives the idea a 70% chance of success.

I'm drooling over the thought of being able to do it with 1%-3% student loans.  Is that interest tax-deductible?

 

[haha]

I'm drooling over the thought of being able to do it with 1%-3% student loans.  Is that interest tax-deductible?

Yes, with income limit phaseouts, and on page one of your 1040.

ha

 

[maddythebeagle]

"It'd be most interesting to see what an investigative reporter discovered about Ramsey's credit report. Isn't it especially dangerous to be a hypocrite among the Christian/Conservative crowd? (Hmmm... Jim Bakker... Rush Limbaugh... never mind.) I wonder if Ramsey uses a credit card when he's traveling/vending or if he keeps a hundred Benjamins in a money belt?"

-
My thoughts exactly. I mentioned something similar on the "Simple Living Forum Boards" and I just about got stoned by the faithful ones over there. You can use a credit card to buy all the junk on Dave's website (cds, books, and a monthly premium service with downloads) :

 

[FlowGirl]

Interesting thought on debt. can you expand on this for me? For some reason I am slow in this one.

JDW

Sure, its just another way of saying that things bought on credit cost more. The thing that most anti-debt people like Ramsey leave out is that you do get something in return for that extra cost - you get the money right now. If I want to buy something for $1000, but I don't have a pile that big right now, one option is that I can save $100/month and buy it in about 10 months. However, I have another option - I can get the money and my item today, but pay more for it via interest. I look at the interest rate I'm being charged as the "cost of having the money now." As long as you know that that cost is, and can figure out if its worth it, then I don't see a problem.

BTW, I'm not a fan of debt at all, but I have a problem with Ramsey's all-or-nothing "debt is evil" mentality. Debt in and of itself isn't good, bad, ugly or anything else - its just another tool.

 

[Mr._johngalt]

Sure, its just another way of saying that things bought on credit cost more.  The thing that most anti-debt people like Ramsey leave out is that you do get something in return for that extra cost - you get the money right now.  If I want to buy something for $1000, but I don't have a pile that big right now, one option is that I can save $100/month and buy it in about 10 months.  However, I have another option - I can get the money and my item today, but pay more for it via interest.  I look at the interest rate I'm being charged as the "cost of having the money now."   As long as you know that that cost is, and can figure out if its worth it, then I don't see a problem. 

BTW, I'm not a fan of debt at all, but I  have a problem with Ramsey's all-or-nothing "debt is evil" mentality.      Debt in and of itself isn't good, bad, ugly or anything else - its just another tool.

I agree. Same thing applies to guns.

JG

 

[mikew]

I guess I am in the minority here. I hate debt. We use cash for almost everything. The only time I use credit cards is Amazon or overseas travel (domestic is all cash). But the credit cards are not revolving credit so we have to pay them off every month. (This is a choice for our Japanese credit cards.) Also, I went through a distance graduate school so I could keep working and graduate debt free.

With the house we have a 1.5% mortgage. I am torn between investing and paying it off early. I am thinking of taking a part time job to pay it off early. Although I know I would probably put the extra money into the stock market.

 

[riskadverse]

I've always hated debt.  If I can't afford it, I don't buy it.  The only thing significant debt I ever had was a mortgage, and I always hated that.  As soon as I could pay it off, I did and never regreted it.  I'm sure it doesn't always make good economic sense to do it the way I do, but somehow it gives me peace of mind to not owe money.  It gave me a different outlook on my job, my career, and ultimately my retirement. 

 

[azanon]

I tend to agree with him somewhat that debt for consumerism is pretty dumb, but it seems to me that low interest debt isnt a big deal esp. if you can use that money to increase your net worth. (i.e. why pay off low interest tax deductible student loan debt when you can contribute more to a 401k, etc.).  Maybe most folks really dont have enough discipline?

I think you hit it right there.  Dave is for the average joe which is actually most people.  Most people don't have self control when it comes to debt, so the only way it works for them is to abstain completely.   

There are certainly things much worse than having no debt.   He also makes a good point in that you're in a good position when emergencies arise if you have no debt hanging on you that you have to pay for.

I also don't agree with him, being a more advanced investor.  I have a student loan at just over 3%, and a car loan for 3.59%.    My investments are making more than twice that and i have enough to pay them both off, but i prefer to pay the loans monthly and keep the difference in what i make by investing this borrowed money.

As for house, dave would have you not even finance a house, and if you just absolutely couldnt resist, he insists on no more than a 15-year loan.    That just doesnt cut it for me.   It made more sense for me to buy a larger house on a 30-year loan and grown into the payments since my wife and I expect to make more as we advance in our careers (which we have been doing).

 

[bpp]

Mikew writes,

I guess I am in the minority here. I hate debt. We use cash for almost everything. The only time I use credit cards is Amazon or overseas travel (domestic is all cash). But the credit cards are not revolving credit so we have to pay them off every month. (This is a choice for our Japanese credit cards.)

I'm with you. I absolutely hate to use credit cards, even though they are automatically paid off in full every month, and so are really more like debit cards. I only use them when it is impossible to use cash.

With the house we have a 1.5% mortgage. I am torn between investing and paying it off early. I am thinking of taking a part time job to pay it off early. Although I know I would probably put the extra money into the stock market.

What's the term of your mortgage? I'm debating the same issue, though with a higher rate (2.6% fixed for 30 years). Intellectually I know I should probably invest any extra money, but the attraction of paying off early is strong. I'm thinking of just splitting any extra money 50/50, investing half, and making extra mortgage payments with the other half, thus satisfying both urges.

Bpp

 

[mikew]

It is a 2 year fixed 30 yr loan. If we got a 30 fixed it would have something like yours. It looks like the rate won't shoot up but if it does we'll just pay it down to keep the low monthly payment.

It is hard to actually put money in to pay the loan off. It is like free money. I am thinking that we may actually put any extra money in a seperate investing account that will be able to make the monthly payment and eventually be able to pay off the mortgage, even if we keep making the monthly payments from our salaries.

 

[Mr._johngalt]

I've always hated debt.  If I can't afford it, I don't buy it.  The only thing significant debt I ever had was a mortgage, and I always hated that.  As soon as I could pay it off, I did and never regreted it.  I'm sure it doesn't always make good economic sense to do it the way I do, but somehow it gives me peace of mind to not owe money.  It gave me a different outlook on my job, my career, and ultimately my retirement. 

There are many many who feel just the same. I don't . If I was younger,
I would pile on the debt as I can make big money by using OPM. Have done it before and could do it again. Too old and lazy now. Of course I do owe
my credit cards 111K, but that doesn't count as I am paying them practically nothing while I earn 3.5%. That's free money. No matter how much you hate
debt, you'd be stupid not to take it.

JG

 

[azanon]

Of course I do owe
my credit cards 111K, but that doesn't count as I am paying them practically nothing while I earn 3.5%. That's free money. No matter how much you hate
debt, you'd be stupid not to take it.

If it takes you time to do that, its not free. How much did you used to be worth an hr JG? Around here, we value our time more than anything.

 

[mikew]

There are many many who feel just the same.  I don't .  If I was younger,
I would pile on the debt as I can make big money by using OPM.  Have done it before and could do it again.  Too old and lazy now.  Of course I do owe
my credit cards 111K, but that doesn't count as I am paying them practically nothing while I earn 3.5%.  That's free money.  No matter how much you hate
debt, you'd be stupid not to take it.

JG

I understand the math of this kind of thing but I don't know how to do it with a risk factor I would feel comfortable with. If you can, I say more power to you.

Mike

 

[maddythebeagle]

I heard another person call in to Dave and explain that she used credit card balance transfers (none more than 2%) to pay off a house mortgage and then pay down the credit card debt over time. It obviously is a little more risky to do this since the cc's can up the rate based on missing a payment on another card, etc., but if she wanted to take the risk and understood the game and she didnt lose any sleep on it.....

That said, I am not sure that I would try this. I like the idea of putting in a higher yield short term account in case it has to be paid back.

 

[MJ]

JG
I understand the math of this kind of thing but I don't know how to do it with a risk factor I would feel comfortable with. If you can, I say more power to you.
Mike

I took advantage of MBNA "free" money offer and borrowed $24k against my credit line. I had the money to pay back $24k anytime I wanted, so there was no risk.
If you didn't have the money and had to return it in 7 months then you just take out a 6 month CD. The remote small risk I see is that the bank with your CD goes bankrupt and the return of your money is delayed. Basically no risk.

 

[Mr._johngalt]

If it takes you time to do that, its not free.   How much did you used to be worth an hr JG?  Around here, we value our time more than anything.

That's the beauty part. Takes almost no time, at least for me.

JG

 

[Mr._johngalt]

I heard another person call in to Dave and explain that she used credit card balance transfers (none more than 2%) to pay off a house mortgage and then pay down the credit card debt over time. It obviously is a little more risky to do this since the cc's can up the rate based on missing a payment on another card, etc., but if she wanted to take the risk and understood the game and she didnt lose any sleep on it.....

That said, I am not sure that I would try this. I like the idea of putting in a higher yield short term account in case it has to be paid back.

Another reason this woman was smart was she exchanged secured debt for
unsecured. Almost always a good thing from the debtor's perspective.

JG

 

[JDARNELL]

Sure, its just another way of saying that things bought on credit cost more.  The thing that most anti-debt people like Ramsey leave out is that you do get something in return for that extra cost - you get the money right now.  If I want to buy something for $1000, but I don't have a pile that big right now, one option is that I can save $100/month and buy it in about 10 months.  However, I have another option - I can get the money and my item today, but pay more for it via interest.  I look at the interest rate I'm being charged as the "cost of having the money now."   As long as you know that that cost is, and can figure out if its worth it, then I don't see a problem. 

BTW, I'm not a fan of debt at all, but I  have a problem with Ramsey's all-or-nothing "debt is evil" mentality.      Debt in and of itself isn't good, bad, ugly or anything else - its just another tool.

I agree with your example.  This is how I think about it also.   I guess you could argue that by servicing debt it keeps some from spending on other stuff.

I find that I go through different swings on the debt issue with an overall bias of getting rid of all debt.  We are aggressively paying down the mortgage on the primary residence and may start working on the investment property mortgages once that is done.  It is very feasable the house and one property could be paid off before I leave the AF in 5 yrs.

However, we now have an option to buy another rental property that will positive cash flow with a 2-3 yr renter.  Not sure if I want 3 rentals in the same area plus a primary residence.  One one hand I know we will make $$$ over the long term, but on the other hand I really would like to not take on the additional risk and just pay everything off, have the cash flow and lower the required amount of cash each month.

For us there is a lot of uncertainty in the next 4 months with a deployment, potential PCS, and/or a short 10 month school.  I find that when I am undecided I just wait.  I guess I have strategic paralysis.

JDW

 

[poyet]

My feeling is that: some well thought debt (e.g. mortgage on NNN prop) is a requirement to engineer equity growth, too much leverage with little management (e.g. trading on margin or large & leveraged positions on futures) is an effective way to go bust (quickly) and debt to purchase new useless items is nonsense. Sometimes people go bust on real estate as they leverage too much and do not think mortgage(s) as debt instruments nor as leveraged positions. Depending on the type of mortgage (e.g. variable rates going up) and RE market downturning would leave them with virtually no equity and debt ! Some go bust this way too.
I carry on a mortgage only if I make more than the cost of it (typically on NNN props), one at a time, and consider paying it back a minimal objective until I can move to the next investment. Leveraging on margin is a business in itself.
Not using debt instruments & mortgages I would have not succeded building a portfolio of NNN props which I make a living on and enable me to keep saving, investing and trading with the surpluses.
I would deter people from holding too many residential rental estate as it is more difficult to remove families (in all ways including moral) than companies stopping paying the rents. It also ensure diversification.
My two (euro / Ben) cents.
Patrice

 

[Eagle43]

I've heard Brother Ramsey a couple of times, and most of what he preaches is good. I believe it is aimed at the average American who is in debt up to his/her ears. I know people like that and they live in fear of the collector. And, as I grew up poor, I believe that debt is a killer. LBYM. Save for that proverbial rainy day.

Debt can be good, if used for business purposes; to make money, as you say, use it as a tool. In most cases it's vital for home ownership. But, other consumer items should be paid for in cash, and on-sale, preferably. I use a credit card for airline miles, and pay off monthly. To my knowledge, have not paid a dime of interest on the card.

Oh, and I didn't know he (Ramsey) lets you charge stuff on his site. Now that takes large ones, don't ya think? Talk about hypocrisy!