Dave Ramsey approach

[Gumby]

I doubt that ERD50 ignores risk.

 

[jollystomper]

The reason one can leverage debt to one's advantage is because one has already built up the capital to leverage debt and handle the risks.

According to Lending Tree, the average monthly credit card household debt is around $6,500. That is easy to pay off and leverage when you have the investments and net worth of most of us hear. Much tougher if you have the median/below median income or savings.

The Federal Reserve reported that 39% of Americans do not have enough to cover a $400 emergency. I would bet that most of those have credit card debt that they cannot leverage.

In my view, I would rather error on the side of teaching those with financial issues, or even starting out with their own personal finance, that credit cards are dangerous. I (and most others) are not taught that. I was lucky I learned the hard way, when the damage could still be corrected, and was able to develop the financial discipline.

Once they have the developed the financial discipline many of us in this community have, they will figure out for themselves, or can better learn, or can take more risks with leveraging CC debt.

A related, perhaps tangential issue, is the rush to "have it all". Credit cards are an attractive temptation when starting out to getting it all as soon as possible, rather than developing the patience to save for things. Again, something a lot of the population needs to learn.

 

[Aerides]

The point is that things work for you, will not work for everyone and this is a fact based on stats ...

And there you have it. No one approach works for everyone, and yet DR has a 100% no-debt rule, regardless of the person or their circumstances. Things that work for most of DR's audience don't apply to all of DR's audience, nor to everyone here.

I like using CC's. I don't use them for debt, and they are zero risk to me because I know what I'm doing, as do most folks here. Whether or not I take a mortgage in the future will be based on math, and benefits, in the scope of my financial picture as a whole.

 

[ERD50]

... Mortgage is considered good debt until 2009 recession happened. ... .

This makes no sense. Like DR, you hate all debt so much that it blinds you.

My mortgage was just fine in 2009. I made many tens of thousands over the life of that mortgage by staying invested.

... Using your experience and labeling CC as the correct way for life that applies to general spending style is wrong, not to mention most people buying into CC are already confused between buying power and borrowing power.

That's an education problem, not a CC problem. Far better to get educated than just ignore a valuable tool. That approach leads to not driving, because some people get into accidents. It's a tool, learn to use it.

The reason one can leverage debt to one's advantage is because one has already built up the capital to leverage debt and handle the risks.

According to Lending Tree, the average monthly credit card household debt is around $6,500. That is easy to pay off and leverage when you have the investments and net worth of most of us hear. Much tougher if you have the median/below median income or savings.

The Federal Reserve reported that 39% of Americans do not have enough to cover a $400 emergency. I would bet that most of those have credit card debt that they cannot leverage. ...

Some of these published stats are a bit questionable. IIRC, there was a thread about that emergency fund (though I thought it was more like $2000?), and according to that methodology, some of the millionaires on this forum would be included, because their definition was whether you had that amount readily available in cash equivalents. When you have the resources, you don't need it in cash, stocks are plenty liquid enough to meet the next credit card billing. There's an advantage to keeping it it invested and keeping your cash balance low.

I did find some data on CC debt, I think some sources include the EOM balance in the debt category, even if it is paid in full each month. Technically, it is debt, but if there is no interest on it, does the tree in the forest make a sound (for the mixed metaphor fans)?

https://www.creditcards.com/credit-card-news/credit-card-debt-statistics-1276/

The percentage of Americans who pay their credit card bill in full ("transactors") rose 1.5 percentage points to a record high of 33.7%4, according to data from the ABA. The number of transactors hit an all-time high for the second quarter in a row.

The percentage of revolvers fell during that same time period, to a record low of 40.7%4 of all accounts. The number of dormant accounts during that period rose a slight 0.1% to 25.6%4.

So since 25.6% are dormant, you have 40.7/(40.7+33.7) = 54.7% of active accounts have a balance past the due date (not sure if this is any given month, a pattern or what?).

Still probably not a good sign, but on the glass nearly half full view, about half do pay it off each month (again, is this for a month, or a year, or what?).

-ERD50

 

[pacergal]

Like many here, I've listened to Ramsey and Orman. I prefer Suzie. Years ago, there was a show "til debt do us part" by Gail Vaz Oxlade. I liked her too.
Every financial guru/advisor/planner has their own twist, you have to take what they say and create your own financial plan--whatever works to keep you out of overwhelming debt, and save well for emergencies and your future retirement.

 

[RetiredAt55.5]

I like using CC's. I don't use them for debt, and they are zero risk to me because I know what I'm doing, as do most folks here. Whether or not I take a mortgage in the future will be based on math, and benefits, in the scope of my financial picture as a whole.

+1

CC's are a great deal if used wisely. They lend me money interest free for 30 days, and they give me between 2 and 5% when I use them. Further, they provide a couple of years worth of monthly statements so I have a record of purchases.

What's the alternative, a debit card or walking around with a pile of cash and change in my pocket?

 

[jkern]

I like to use Credit Cards because they offer some security. You can challenge the charge if it's incorrect or the product was defective.

One time I replaced my car windshield and the rain sensor didn't work. The Vendor refused to replace the defective windshield. I filled out a claim with my CC and received a full refund.

 

[Sue J]

Like many here, I've listened to Ramsey and Orman. I prefer Suzie. Years ago, there was a show "til debt do us part" by Gail Vaz Oxlade. I liked her too.
Every financial guru/advisor/planner has their own twist, you have to take what they say and create your own financial plan--whatever works to keep you out of overwhelming debt, and save well for emergencies and your future retirement.

Yes, I loved Gail Vaz Oxlade's show.

Dave Ramsey's main idea is to get people to change their mindset about borrowing. So many people think that living beyond their means is normal and ok. Everybody does it, it's just the way things are. Too much in student loans, buying cars that are much too expensive, overspending because you deserve that thing you think you have to have. And when you have no savings or emergency fund then any little problem goes on the credit card.

So his basic goal is to get people to see that ongoing debt in your lives is detrimental and can be solved. His first 3 steps are basic. Spend less than you make or find a way to earn more. Pay off debt. SAVE. After that it's using that control over your finances to secure your future, retire, etc.

His idea of Financial Peace is pretty solid. Any of us here without debt and especially no mortgage know that feeling. It can be done, even without a big income.

On the rest of his advice, you have to decide for yourself. He tells families to go buy a $2000 car for cash. Around here that's an old, high mileage car in need of repairs. He doesn't understand two child car seats and another booster seat in a sedan. He tells people it's ok to withdraw 8%/yr from your investments because they are making 12%/yr. Lots of big assumptions based on long term historical data that may not apply to the here and now. And his employees have to abide by his "lifestyle" rules. Look that one up if you need to know.

I enjoy his radio show because of the real people stories. But I have a very strong filter for some of the Dave proclamations. I can understand why he thinks all credit cards are evil for everyone but I will still use mine and enjoy the convenience and the perks. Yes, I pay it off every month.

 

[timbervest]

Yes, I loved Gail Vaz Oxlade's show.

Dave Ramsey's main idea is to get people to change their mindset about borrowing. So many people think that living beyond their means is normal and ok. Everybody does it, it's just the way things are. Too much in student loans, buying cars that are much too expensive, overspending because you deserve that thing you think you have to have. And when you have no savings or emergency fund then any little problem goes on the credit card.

So his basic goal is to get people to see that ongoing debt in your lives is detrimental and can be solved. His first 3 steps are basic. Spend less than you make or find a way to earn more. Pay off debt. SAVE. After that it's using that control over your finances to secure your future, retire, etc.

His idea of Financial Peace is pretty solid. Any of us here without debt and especially no mortgage know that feeling. It can be done, even without a big income.

On the rest of his advice, you have to decide for yourself. He tells families to go buy a $2000 car for cash. Around here that's an old, high mileage car in need of repairs. He doesn't understand two child car seats and another booster seat in a sedan. He tells people it's ok to withdraw 8%/yr from your investments because they are making 12%/yr. Lots of big assumptions based on long term historical data that may not apply to the here and now. And his employees have to abide by his "lifestyle" rules. Look that one up if you need to know.

I enjoy his radio show because of the real people stories. But I have a very strong filter for some of the Dave proclamations. I can understand why he thinks all credit cards are evil for everyone but I will still use mine and enjoy the convenience and the perks. Yes, I pay it off every month.

Agree. I think most of the people on his show are lost/ out of control and living for wants rather than needs or need guidance (a "parent") to help them get back on solid footing. They want to feel empowered. But I agree his paid off mortgage and his 12% investment advice are pretty much off the mark.

 

[FANOFJESUS]

Yeah, I've never carried a balance on a credit card in my life. Well except when the bill fell off behind the desk. Score over 800 according to Discover card on my monthly bill which I pay in full each month.

Credit cards, I love credit cards. Who is Dave Ramsey anyway?

Here is today's show with Dave. You can rewind to the beginning.

 

[retire48in2018]

I followed, generally speaking, getting to FIRE. He has a seven step process, which, as others indicated is heavy on debt reduction.

His view is that the most powerful weapon for wealth is income (and compounding growth from investments). The biggest drag on that is debt - that is mostly represented by people living beyond their means, or living too close to their means.

It is very hard core to get through this process, but it is effective.

As far as direct investment advice, FIRE, etc - it is barely mentioned, and certainly not educating people to learn to invest DIY, etc. I would NOT recommend Dave Ramsey process for those who are looking for DIY investment that are debt free.

I agree with those stating the Dave Ramsey process/concept has helped millions to improve their financial situation. I also agree that it is not helpful for investing and FIRE DIY.

As far as people's beliefs on no CC, and credit score. There are misconceptions on both sides.

I have had no credit score (and no CC) for more than a decade. I have travelled internationally, rented cars domestically (and internationally). I've stayed at hotels, etc. I have bought & sold homes, etc. I've moved twice, rented, etc. All of my insurance policies are rock bottom and I am not paying a premium as a result of no credit score.

It is very possible to do so.

HOWEVER, there are limitations. For example - there are several rental car companies that will work with no credit card & score (such as Enterprise) - and some that won't (like Hertz). When getting utilities, I have had to pay a larger security deposit as a result of no credit score. When buying a new truck, I was paying cash, but the dealer tried to *finance* $750 of truck price, as there was a $750 rebate for using that OEM finance. System would not approve me (with 95% down!). Had I wanted this (which I did not, and was upset that the finance department did this without asking) - I would have lost this $750 rebate.

Another example is mortgages. Manual underwriting would be required vs automatic CC score method. There are companies and banks that work with people who are safe for mortgages, but choose no credit score (example would be Churchill Mortgage). There did not seem to be a premium for this vs auto-credit score (same interest rate and fees). Not all banks and brokers will work with no credit score (such as Quicken/Rocket Mortgage), just as not all rental car companies will rent cars to people without credit scores.

In general, it can be done - but there are inconveniences, at times, and perhaps with some utilities (and car financing) - premiums through larger security deposits, etc.

For us, life is simpler to remain debt free, no CC, etc.

Before Dave Ramsey process, I was a very active CC user with what I saw as large cash rebates, etc. I can say we both prefer this simpler process now - knowing at times, there are some limitations (like rental car companies, etc.) but if you plan your itinerary - these items are worked out ahead of time.

 

[ERD50]

... His view is that the most powerful weapon for wealth is income (and compounding growth from investments). The biggest drag on that is debt - that is mostly represented by people living beyond their means, or living too close to their means. ....

And that capsulizes some of my problems with DR.

Yes, you say "that is mostly represented by people living beyond their means...", but there is that overall message "The biggest drag on that is debt...", w/o consideration to good debt vs bad debt.

So let's back that up - I'd restate it to say "The biggest drag on that is people living beyond their means...". Period.

You see the difference? It is the living beyond means that is the problem, debt becomes the result. It isn't the debt that's the problem. Having a $1M mortgage with $10M in the bank is not a problem. Having $10M mortgage with $100M in the bank is not a problem. Fixating on debt is a distraction. If you want to solve a problem, focus on the problem, not the symptoms.

It just isn't helpful to people to not be straight with them. Blaming all debt is just wrong.

-ERD50

 

[disneysteve]

I'd restate it to say "The biggest drag on that is people living beyond their means...". Period.

You see the difference? It is the living beyond means that is the problem, debt becomes the result. It isn't the debt that's the problem.

BINGO! Exactly this!

 

[Gumby]

Agreed.

 

[RobbieB]

Yeah. No debt, no problem. Pay in full end of month. No finance charge. Easy.

 

[Markola]

Yeah. No debt, no problem. Pay in full end of month. No finance charge. Easy.

I’d only add, pay in full each month by auto pay. To do that safely, a person needs to keep at least one month of expenses in the checking account as a buffer. In my case, I enjoy using YNAB to have a clear view of all income/outgo. It’s how I start every day and have for years. Call me weird.

 

[jollystomper]

And that capsulizes some of my problems with DR.

Yes, you say "that is mostly represented by people living beyond their means...", but there is that overall message "The biggest drag on that is debt...", w/o consideration to good debt vs bad debt.
-ERD50

I would argue that if one is living beyond their means, there is no differentiation between "good" debt or "bad" debt. Both are preventing you from achieving whatever goals you desire that require building your wealth. Only when one has the discipline to live below your means can one begin to understand good debt, and to use it appropriately (and wisely, as it *can* turn into bad debt if one does not).

As others have pointed out, if one actually listens to him, Dave Ramsey *does* differentiate between debt somewhat. CC debt - bad because without discipline it it easily out of control. Mortgage - willing to tolerate but prefers looking at consider to pay it off early (not instantaneously).

 

[TheWizard]

I’d only add, pay in full each month by auto pay. To do that safely, a person needs to keep at least one month of expenses in the checking account as a buffer. In my case, I enjoy using YNAB to have a clear view of all income/outgo. It’s how I start every day and have for years. Call me weird.

Because of my heavy, but irregular, recreational travel expenses, I do it differently.
I generally pay the *balance* on my two CC's twice a month, but I do it manually on my smartphone to keep on top of things

I try to keep around $10k in my checking account to cover lumpy expenses and this month is a good example. I had $5000 in non-CC travel expenses, $2400 in property tax payment, and a few thousand in new CC charges.
So this works for me...

 

[Markola]

More power to you, as long as you don’t get busy traveling and forget, in which case, GOTCHA!

 

[racy]

DR makes a case for tithing to a church even though it slows a young woman's debt payoff.

 

[frayne]

DR teaches nothing more than financial common sense. Unfortunately most have neither the desire nor discipline heed it.

 

[Walt34]

DR teaches nothing more than financial common sense. Unfortunately most have neither the desire nor discipline heed it.

Exactly my thoughts too.

I didn't hear of Dave Ramsey until after I retired and we'd moved to WV, and I was looking through the stacks at the new-to-me local library and found a couple of his books and read them. While I don't agree with everything he says, such as his intolerance for credit cards, I could buy in to most of it and if not in exactitude at least with the intent which is of course the old "live below your means" that serves everyone here so well.

It seems that his target audience wants/needs that more rigid and structured list of rules or lessons, but hey, if it works more power to them. Overall, I'd venture that he does far more good than harm in this world and there's something to be said for that.

 

[beernutzbob]

DR teaches nothing more than financial common sense. Unfortunately most have neither the desire nor discipline heed it.

Horse hockey. Ramsey teaches all debt and all credit cards are horrible which isn't close to common sense. His investing advice is equally terrible.

He's a huckster who sucks people in with his get out of debt advice then those who can get out of debt are subjected to the second wave of his pyramid with the front loaded funds he recommends.

It's a sophisticated pyramid scheme.

 

[FANOFJESUS]

DR teaches nothing more than financial common sense. Unfortunately most have neither the desire nor discipline heed it.

It's your grandparents financial common sense. He just figured out a way to sell it. I am a fan because on the whole he has done so much to help the country.

 

[olyveoil]

Horse hockey. Ramsey teaches all debt and all credit cards are horrible which isn't close to common sense. His investing advice is equally terrible.

He's a huckster who sucks people in with his get out of debt advice then those who can get out of debt are subjected to the second wave of his pyramid with the front loaded funds he recommends.

It's a sophisticated pyramid scheme.

Funds that he runs / profits from?
Would love to hear more about how his pyramid works.