For those of you who don't know of Dave Ramsey (though I'm fairly sure a number of my readers are followers), he's an evangelical personal finance guru who has a syndicated radio show and a television program on Fox Business. Ramsey's program has a few basic pillars:
- Cut up all your credit cards and promise never to use them again
- Do not borrow money for any purpose whatsoever, with two exceptions:
- You may take out a 15-year fixed rate mortgage where the payment is no more than 25% of your take home pay
- You may take out a bridge loan to cover the underwater portion of a car, boat, or other asset loan, if you are selling the asset in order to get out from under the payment
- Sit down at the beginning of every month and do a written budget in which you allocate every dollar you expect to earn
- Take cash out of the bank and use it to pay for your non-automatic purchases: eating out, groceries, gas, parking, clothing, etc.
- Pay off all of your debt as quickly as possible
- Give ten percent of your income to charity
- Save fifteen percent of your income
- Don't declare bankruptcy unless they bailiffs are actually on their way to your house to evict you, seize your furniture, and put your family on the street
What did we think? Well, that's in the article. But the upshot is, we're sticking with the program, though the part where we pay off all our outstanding debt is on hold while we save for our wedding. I'd never done a detailed budget before, much less written it down, and forced myself to stick to it by doling out all the payments in cash.
It sounds unbearably tedious. But it's actually incredibly freeing. I have never before felt like I had total control over my money. And given all the economic gyrations, it would be awfully nice to know that I was on the road to a paid off house, and could cut my expenses to the bare bones if needed.
But it's odd. And it's really hard to do in a society where lots of people are willing to take on lots of debt, because their debt-laden lifestyle sets the standards for yours. It's hard enough when everyone has nicer stuff. But as I note in the article, in the case of housing, it actually makes it hard for people to, say, secure a home in a decent school district, if other people with similar incomes are willing to leverage themselves to the hilt in order to bid on that home.
A society run by Ramseyites would be a very different society. It would have very high savings rates--in excess of 15% of national income. Some goods, like cars, might be more expensive, because financing substantially smooths demand and allows larger manufacturing runs. People would probably live in smaller homes. Younger people would live poorer, and probably stay at home longer.
Would it be a better world? I thought about this recently, reading this Felix Salmon post:
Ezra Klein, on what he considers a vicious cycle in credit cards:
The problem is that the people who migrate toward debit cards are the people who have enough money not to need much credit and are responsible enough to not want it. The good risks, in other words. The people left in the credit card market will be disproportionately bad risks, which means rates will go up and standards will tighten, which will in turn drive more people out of the market, starting the cycle over again.
I'm not convinced that this is a bad thing. Credit cards are useful payment devices, but atrocious borrowing devices. (Steve Waldman has a great post explaining the distinction further.) We want to move to a world where people use charge cards for transactional purposes, and personal loans for credit purposes. The way we're going to get there is, essentially, by taxing the stuff we want less of -- and that means increasing the interest rates and annual fees on credit cards.
This is a pretty common sentiment. In fact, I don't think personal loans are a very good substitute for the kinds of emergencies that frequently beset the people who this would most effect--if your car breaks down and you can't get to work, you don't really want to wait until the bank approves your personal loan to get the car fixed. But there are a lot of people who think we could make the poor better off by essentially denying them access to credit, because credit extended to the poor carries high interest rates to cover the default risk, and many people get themselves into big trouble with it.
The problem is, there are two sets of outcomes. There are people who are made better off by payday loans or credit cards, because they get the car fixed and don't lose their job. Then there's a group, which seems to be smaller but significant, who end up much worse off.
Personally, I look forward to the day when I have no debt. Would we all be better off if we decided to go that way? Probably. But would we be better off if we legislated that outcome? I'm skeptical.
"Give ten percent of your income to charity": no, don't; not while you are struggling. Once you've got your head above water, reconsider.
I prefer to tip twice the going rate.
Actually, that's incorrect. As Ramsey points out, giving away money changes your attitude toward it. It makes you less self-centered and less materialistic. The biggest thing a person has to change to get out of debt is his attitude. That's why lottery winners so often end up bankrupt -- They suddenly have money, but no clue how to control it. Learning to give money away is one of the keys to learning how to manage it, rather than it managing you.
You may be right, but I'm not thinking of "me", but of my duty to repay my creditors. Until they are paid, I can't accept that it's OK to give what is morally their money to a third party. I realise that it may be a faux pas to suggest to Americans that "me, me, me" isn't necessarily the right way to view the world, but so be it.
Until your creditors are paid, can you accept that it's OK for you to take "what is morally their money" and spend it on anything at all for yourself (or anyone else for that matter) beyond what keeps you fed, clothed, and housed? Do you advocate that people in debt never spend a penny on a petty luxury or a birthday present?
Anyone who can spend money on *themselves* can give a mite to charity.
I'm not sure that ten percent is the right target for everyone, but I can tell you right away that everyone can give to charity if they value that.
Incidentally, all the commenters here seem to think that Ramsey advocates giving to charity because it's somehow going to help people get out of debt and manage their money better. That may be a side effect for some folks, but I suspect Ramsey advocates it because he thinks it's, I don't know, virtuous or something.
You mean you will face bankruptcy if you don't pay your creditors?
Sure, then you don't. But otherwise, your creditors agreed to be paid over time and have no moral obligation to the money you happen to have now, except what is due now.
Even assuming the effect you describe is real, which I doubt, and subject to alteration due to the tax implications (if applicable), giving away 10% of your income would have to cause you to change your attitude towards money enough to save 10%+$1 of your income for it to be a cost-saving move. Even assuming somebody is at a high bracket and can take a dollar for dollar deduction, this "new attitude" would have to cause them to save approximately 6-7%+$1 to be a cost-cutting move. I seriously doubt that's the case, but welcome any empirical or even anecdotal evidence to the contrary. To the extent the shift you describe is real, it probably makes more sense to accept the imperfection because the cure costs more than the disease.
I don't think we need to legislate it, but I'd prefer that we don't legislate against it. There's been lots of uproar about the rate increase/canceling binge that the CC companies have been going on recently -- for example, I saw my oldest CC canceled because I never use it any more -- and now my senator is making noise about further trying to restrict the CC's freedom to respond to risk as they see fit.
I'd never done a detailed budget before,
Good God. How old are you? Nevermind. If a person employed to opine on economic issues has never done a detailed budget before...
Haven't read the article yet (mag just came yesterday) but the way I do a budget, or recommend to friends is:
Track every expense, down to the penny if possible, to the dollar at least, for a month. Use a small notebook for the tracking. Yes, every expense. Including the snickers bar you had for lunch. For things like electric and gas bills try to determine the highest payment in the last year. Add all those up. This is your "baseline" monthly expenses.
To this add one or two time/year expenses. Things like Christmas/birthday presents, vacations. Use last year's expenses as a guide.
(If you don't keep the bills for a year or more after they're paid you'll have to guesstimate. But start saving them now.)
Now what you have is actual spending. To figure out the budget look at actual spending for what you can cut. Do you really need that latte, etc. Do you watch HBO enough to subscribe, or is netflix a better deal? How much do you want to cut? Remember the O'Rourke Principle (from Parliament of Whores) "You can take 10% off the top of anything."
Learned this from Dad, who grew up during the Depression.
Another thing. Learn how to do at least basic maintenance on anything mechanical you use, and learn as much otherwise about it as possible.
On your car, learn how to change the oil and filter. Also coolant, fuses, bulbs, other filters, battery. Learn enough that, when a mechanic tries to sell you on new Johnson Rods you can tell him where to stick those selfsame rods. The Chilton's guide for your car is a very good investment. If you can find an equivalent to "How To Keep Your VW alive" by Muir for your car, even better. Pay attention to what the owner's manual says about maintenance intervals, not a mechanics. Every shop in town says "Change oil and filter every 3000 miles". The manual says 5000 for oil and 10000 for filter. At $30/change that adds up over the life of the car.
Learn how to do basic repair and maintenance on items around your home. Replace belts on clothes washers, filters on dishwashers, anode rod on the hot water heater. Learn the manufacturer's maintenance schedule on your equipment and follow it.
Why the hell would I ever want to change the oil in my car by myself? This process costs me $30, and takes about a half an hour of my time. to do this myself would take a significantly longer time, not to mention how filthy the process is.
How much is your time worth? Mine is worth a lot more than that.
It costs me less than $10 and takes less than 20 minutes of my time from stepping into the garage to having my hands clean again (plus a capital investment of maybe $20 in tools). And your half-hour doesn't account for driving to and from the oil change place.
Also, very, very few people can actually spend that less-than-20-minutes earning money. More likely it would be spent in front of the TV.
I think you missed the second part. Even if you don't change your own oil, you'll benefit from mechanical knowledge such as knowing when repairs are necessary and how much they should cost. BTW, if you've just lost your job, I doubt the search is so intense that you can't spare 20-30 minutes for an oil change.
@Rob, I don't think that's what people mean when they say "my time is worth more than that." Not that it's some kind of opportunity cost for some kind of income, but rather that "yeah I'd pay $X to save Y minutes of my time."
In my case, I very rarely find it worth the cost benefit analysis to change my own oil. When I was in college, yeah - I had plenty of free time and not much money. I also don't have a garage so there really isn't a place to store used oil, so I'd still have to drive it somewhere to be disposed properly.
Learn how to do at least basic maintenance on anything mechanical you use, and learn as much otherwise about it as possible.
If you want to do your own maintenance because you enjoy doing it then by all means do it. But, if you don't particularly care for it, it might be best to learn skills, perhapse work related, that might be more lucrative.
For example, if the choice is between learning to change your own oil and do other maintenance or finally buckeling down and passing the CPA exam, it might be better to study for the exam.
You know, it isn't a binary choice. You can do both. Learning the basics of automotive maintenance doesn't take much time, and can be learned as you do it. And it saves you from being sold new johnson rods by a corrupt mechanic.
Then the manuals are full of crap. Conventional engine oil should be changed every 3k miles; off-the-shelf synthetics can go 5k miles; exotics like AmsOil can go longer. Disregard that, and the engine will accumulate varnish, sludge, and ordinary wear at a much faster rate. A high quality oil filter might survive a couple changes, but the cheaper units degrade quickly and should be swapped with every oil change. There's no reason not to, it's a $12 part that is protecting your engine from an $1800 rebuild.
Likewise, ask any mechanic what he thinks about the "100,000 mile antifreeze" some manufacturers sell with their cars, and he'll roll his eyes and tell you about some very profitable heater core change-outs in which the old one came out filled with jelly, and maybe throw in a word about the double cooling system flush that was required to fully purge all the rust. Typical "100,000 mile automatic transmission fluid", same thing -- for the sake of saving one or two service changes at maybe $100 each, the transmission gives up the ghost prematurely to the tune of $2200.
Take that as advice from someone who has never bought a car with less than 100k miles on the odometer and self-performs at least 50% of all maintenance. Nearly any modern car will turn over 100k without a catastrophic failure unless the user runs the oil dry, but after that is when the sheep are separated from the goats.
"I got to go to Detroit."
That's got to be the first time in a long time that 'getting' to go to Detroit has been listed as a positive.
To paraphrase WC Fields: "First prize: one week in Detroit. Second prize: TWO weeks in Detroit."
I did enjoy the piece. If I weren't scared of envelopes I'd be more tempted to try the cash-only organizational scheme. Thankfully, I'm also scared of credit cards so excessive debt tends not to be much of a problem for me either.
If you're electronically inclined, you might try the electronic version of the envelope system: www.mvelopes.com
Paying cash is an excellent way to limit your spending - running the plastic through the machine at the store is just too damn easy.
But as I note in the article, in the case of housing, it actually makes it hard for people to, say, secure a home in a decent school district, if other people with similar incomes are willing to leverage themselves to the hilt in order to bid on that home.
Same thing applies to college tuitions - which is an excellent reason for the government not to subsidize credit expansion for housing or education.
I have only 2 debts: the home I will retire in, and the home I am living in.
I drive a 10-year-old car. My wife drives a 6-year-old SUV.
The $215k homeloan on the retirement home will be paid off in 12 months. The $60k house we are living in will be paid off in 5 years or less.
The home we will retire to will be used as collateral to get a loan for a vacation rental in Waikiki. The rent from both of those will pay of the vacation rental within 5 years. Wash, rinse, repeat. When I fully reture in 20 years, I will have 4 vacation rentals and two homes, and will be pulling in at least $9k/month in non-inflationary dollars. Of course, the govt will take about half right off the top, but that's still renewable income regardless of what happens with with the stock market or my pension or my IRA or singularity lifespan (my wife and I live to be 190 years old, say).
Oh, yeah:
To reach that, we eat out, on average, less than 1x/month. We buy 80% of our meat on clearance. The bulk of our sweets, fruit, vegetables, etc, are all purchased fresh and handmade (my wife doesn't work outside the home).
I've already mentioned the vehicles.
We don't go out to see movies.
We do have satellite TV...
We have taken a few vacations, spending up to $500/vacation. Maybe 3 times in 3 years.
Clothes shopping is all done at outlet malls, Ross Dress for Less, or clearance. (My wife is a great gatherer).
So all extra income goes to pay down the home loan, and we buy NOTHING on credit.
Megan McArdle said:
Well, as far as that goes, Waldman said:
And that seems precisely correct to me. We can't seem to dis-aggregate the rational "use-only-in-true-emergency" from the irrational "use whenever your impulse overwhelms you and you sell out your future for today" It's kind of like the deficit - it's reasonable (if used properly) to go into debt in true economic catastrophes, but it's foolish to have a "structural", chronic, and continuous inability to pay for our expenditures, even in the good times. Maybe a "restricted to the typical major risks in life" credit-line is a compromise?
I think DR makes sense for people who have had problems with money in the past or have trouble managing money, but refusing to use credit can mean giving up free money.
I use reward credit cards for pretty much everything, and pay in full every month. I get several hundred dollars back every year. I also get additional protections - chargebacks have come in handy a few times - and if my card number gets stolen (which has happened to me a few times) it's the banks money, not the money in my checking account, that gets taken, unlike a debit card.
FWIW, the only debt I have right now is a mortgage (although it's a 40 year fixed rate, and it's more like 50% of my after-tax income) and some student loans that are at a ridiculously low government-subsidized interest rate - I could pay them off, but then if I ever need to borrow there is no way I would get a rate that low...
Ever see a gas station that offers a five or ten cent discount per gallon for cash payments versus credit cards? Ever stop to wonder why they might do that?
Summarily, that's not "free" money. It gets paid for out of merchant fees and the interest charged to other, less-responsible users, and merchants have to take that overhead cost into account when setting their prices. Meaning, to some extent, you are paying money to yourself by a long and circular route.
Sure, as long as the system continues to exist that way, you might as well recover whatever you can. But the money returned is more analogous to getting a tax refund. You can choose to view and use it as a windfall, but one way or another you've already paid for it.
Ah-hah, but, since most places do not offer a cash discount, if you don't take advantage of these programs then you are actually subsidizing those who do - you're actually losing out.
As noted: "Sure, as long as the system continues to exist that way, you might as well recover whatever you can."
"Experience keeps a dear school, but a fool will learn in no other."
We're all fools about something, and money is one of the more common somethings. Of course, "consumer education" websites aside, it is to the benefit of those who control most of the money if the rest of us are foolish about it, so don't expect them to get excited about the concept of us getting a little smarter.
I have a degree in Mathematics, a postgraduate degree in Law, and am ridiculously well-read and altogether, according to most people who know me, too clever by half. I still made decades of bad decisions about money. Spectacularly bad decisions. (With me it wasn't, "If you're so smart, why ain't you rich?" it was more like, "If you're so smart, why haven't you got two real nickels to rub together?")
While I don't necessarily agree with every facet of the Ramsey program, he is of course spectacularly right in his main observation that debt is the life-killer. When I finally decided to get serious about it - and it took a near financial catastrophe - it really was amazing to learn:
1) How simple it was to reduce my debts once I started viewing every purchase as something REAL that I had to WORK FOR to pay off instead of some kind of imaginary thing that would just make my minimum payment go up a little bit next month.
2) How much fun it was to watch those balances go down, how satisfying, even when there were things I really wanted and could easily have bought on credit. Oh, a few hundred bucks wouldn't slow me down much... but it was backward movement. I did not want to move backward. I wanted to move forward. It sounds very stupid and Power of Positive Thinkingish when put that way, but it really was that simple.
3) How RIDICULOUSLY much money I make once my debt service is out of the picture. Not having to make those debt service payments, living with some reasonable discipline - and I still eat out when I want to, I still buy things for myself and the people I love, and so on - frees up more money than you will ever believe until you actually do it.
Now, not everybody is so fortunate as I, especially in the third matter. But it's really the first one that is key. Do that and the rest just happens.
For those of us who pay our CC balances in full every month, I don't get this "advice". Now if the CC company is going to start charging me an annual fee due to "Free riding", then I'll take my business elsewhere. But don't lump me in with the degenerates.
I think it mostly comes down to the fact that anyone who is listening to him in the first place is obviously the sort of person who doesn't pay off their bill in full every month(curious journalists excepted). If you know how to manage your finances on your own, you don't bother paying $220 so you can listen to this fellow.
My brother and his wife follow the Ramsey program and they are frugal souls who never had a credit card balance. They found Ramsey's system helps them save more--much more, like, over the course of a few years, thousands of dollars more. More than they would get out of "rewards" on a card. It's that pain of handing over actual cash that does it, I think.
Joy,
psychology is individual. We keep our credit cards because I actually feel much more flush and irresponsible when I have a wallet full of cash, because my Mormon-Puritan conscience won't let me make small purchases (like convenience store sodas, etc.) on a credit card, and because impulse credit card buys go right on to your credit statement along with everything else, so you can't fudge or forget recording. the expenditure.
His advice is specifically geared for people who have problems managing their money, so it's based more on psychological effects to get you thinking the right way, rather than maximizing net present value. Another of his "wrong" strategies is the "debt snowball", where he has you pay off the smallest debt first. Of course the optimal strategy is to pay off the highest interest debt first regardless of size, but he claims that by getting rid of one of your debts completely you'll be encouraged to keep going.
His basic message is correct: with a few specific exceptions, debt is evil. But if you aren't the type who will dig yourself into a hole when left to your own devices, you don't need to and probably shouldn't follow his exact advice.
I have mixed feelings about this advise. I have found that for some people, having cash means running through it fast. My wife falls into that category. Pushing her to use checks, debit and credit cards did more to get her expenses under control than anything (I'm "frugal" [okay a Scrooge, though compared to my dad I'm crazy with money] so spending too much money simply isn't an issue with me.)
We use a rewards credit cards and pay them off every month. When running my own business I ran up credit card debt (knew what I was doing, and had good interest rates on them so I didn't panic.) Several years back, one of my loony credit card companies offered me 1.9% for the life of the balance. I maxed the card out and paid off all my other debts, including payments on two cars. I then paid it off in eighteen months. (Cash advances are no longer capped by most credit card companies, probably because of people like me.)
As I said, I ran my own business and went deep into debt. One thing I learned is to NOT pay off your debts as fast as possible. It's horrible advise. Not having cash in the bank causes serious problem when you have fluctuations in expenses (like a sudden car repair.) I also found that a good tactic is to pay your debt off with large payments on your lowest debt and then rolling that same amount to the next debt and so forth (I found lowest works because it gives you a positive feeling once paid off--it feels like you are really making progress.) The key is to have a set amount for servicing debt--one idea is that once you are done servicing the debt, bank this same amount.
I did the 10% to charity for years and decided it was idiotic. I give some now, but am quite disgusted at how corrupt most charitable organizations are, so I'm extremely select (and there are VERY few charitable organizations that meet my standards, no big ones.)
One thing I've observed about myself and others is how much money is blown on small, stupid stuff. Eating out is expensive, especially if you buy alcoholic beverages. Buying that cup of coffee in the morning really adds up. I like going out for lunch to escape my office, but using coupons and getting water and I can usually keep my lunch under $5.
Speaking of coupons, my formerly un-money-concious wife has become a fanatical couponer. Between that and following sales, we easily save $200-$300 a month on groceries. Using a store card at several stores not only saves more money, but gives us discounts at their gas pumps (15 cents a gallon!)
And speaking of groceries; one trick that saves money is to plan your shopping and do it once a week. During the week, we purchase bread, milk and a very few other things where freshness is very important. Do this a while and you won't even need a list anymore.
The Dave Ramsey program has a few caveats in the pay down debt as quickly as possible. It actually calls for saving up a good sum of money, then starting the accelerated debt repayment program. This recommendation covers exactly the problem you mentioned, needing further debt to cover emergencies.
I am with you on the cash thing. I usually keep a pretty good running balance of my bank account and my credit card in my head, but once cash has been withdrawn from the ATM, I tend to regard it as "already spend".
same here. I tend to look at my bank account balance minus my credit card total as how much money I have, since I use rewards cards for almost everything. Actual cash isn't entered in the equation, so it's easy to look at it as free money.
I withdraw cash in little chunks. I used to get weekly expenses and found it vanished too quickly. Then I tried in 20, 40 or (occasionally) 60 and found it moved more slowly.
That would really not work in Canada - IIRC RBC was charging me a fee after the second withdrawal each month.
Way to go Megan!
I have lots of specific disagreements with Dave Ramsey, but I think his general message is great: get out of debt and live within your means.
Personally I find living within a budget to be invigorating too.
A misconception is that a budget tells me how much I can't spend. But it doesn't, it tells me that it's okay to spend. Without it I would have to agonize if I should be spending money on some random luxury, like say gourmet coffee. But with a budget the answer is, if there is money left in the category I am allowed to spend it and I don't have to feel guilty about it.
The other big thing I love is that sometimes when you look at it, you realize that your budget doesn't actually reflect your goals and priorities. For me, in my entertainment catagory, I was spending more money at bars/clubs and less money at comedy shows. When I realized this, I rebalanced it. Now I have some great memories of fantastic performers. It doesn't have to be "too much wasted not enough saved". Sometimes it is "too many shows, not enough travel", or "too much on movies, not enough at the ballpark".
Good luck Megan!
Good point Jay. You make an important distinction that I think often gets lost on people. To me it's the essential difference between being frugal and being a cheapskate.
It's less about the amount you spend on a given thing (eg gourmet coffee) and more about whether the spending is done on purpose and in a rational way, or whether it's just out-of-control spending. In other words it's about intention.
IMO, the goal is to maximize utility, not necessarily minimize spending. The key is that "utility" has to include the added emotional (and real) costs of buying on credit, living beyond your means, or not saving for retirement.
Jim
++
That really *is* a good way of looking at it. I'm personally not particularly informed about my own finances but the money tends to pile up. Mainly because I live in terror of buyer's remorse. From the earliest age that I have disposable income it always seemed like 1/2 - or more - of the purchases I made left me feeling dissatisfied in almost no time. That and the realization that money in the bank seemed better then actual goods - after all if you have the potential to buy a new TV you have the potential to buy any number of different models, you can get the absolute best deal - and then wait until another better deal comes along because that potential is still there. It's Hamlet in fantasy land stuff but it does help me save.
I don't know though. What's life for if not living?
I can't recommend a debt free life highly enough. We started this when my wife and I were just out of school and loaded down with school loans, car loans, credit card debt, and a mortgage. Hadn't yet heard of Dave Ramsey, but when we finally heard him on the radio the spending control fit perfectly into our plans. We live very simply, don't buy any of the standard toys people get (cars, clothes, boats, expensive vacations) unless it is with cash. Now we have only the mortgage, and that for another 4-5 years and then its done. We both work, but only need the income from one of the jobs as our expenses are now so low. We both feel like we could quit at any time and do something else. We can spend more time with the kids as the need to make every possible dollar is gone. I can't describe the sense of liberation and control we have, now that money just isn't the issue it once was. The stuff we did without is just stuff, and not worth the feeling of being trapped. You will thank yourself the rest of your life if you adopt this.
Nathan's life style (above) depresses me. We have enough to retire on if I never work again (which would also depress me). I am, however, working just 10 hours/week. We own exactly one house, which is one more than I would prefer to own, but that's another story.
All the money is in CDs and Annuities. I know we could get hurt by serious inflation, but I'm keeping an eye out for that. That's one reason I'm reading this blog.
I must admit that we never paid much attention to money in our early years. We enjoyed life, had five kids (who turned out great), and managed to live on what I made. My wife wanted to be a stay-at-home mom, and I agreed with her. We had no desire to own any toys, and most of our tastes were middle class (and lower :-)). Of course, there were no credit cards in our early years, so I suppose that helped.
As I look back, here's some things we did, without really planning.
- We never paid more than 2 years' gross income for a home.
- We never paid more than 3 months' gross for a car.
- We have only one car. We rent one on the rare occasion it's necessary (we don't have a local zipcar).
- We always paid off the credit card (one) every month.
- OTOH, we helped pay 34 person-years of tuition. The kids got financial aid, and paid some themselves.
There's no reason anyone should feel pressured to do the same thing. I just wanted to share how we do things.
Much of the impetus of it comes from my wife, who was raised in China and believes that you should scrimp, save, and sacrifice before age 55, so that you can really enjoy your golden years.
They say that youth is for working hard, because you can't work hard when you're older.
Americans tend to say, youth is for playing hard, because you can't play hard when you're older.
Both views have their strong points. You probably shouldn't take up snowboarding for the first time at age 82.
That's why I prefer lower taxes and lower govt benefits. I think everyone should have the freedom to choose what path they choose based on their own values. And they should have the freedom to experience the consequences of that choice, good or bad. And have the opportunity to recover from that choice if the result was bad. You can't do that under a high-tax, high-govt benefit socio-economic policy.
"Credit cards are useful payment devices, but atrocious borrowing devices."
Megan,
I have all my revolving debt on a 2.99% APR credit card. You, and anyone else who wants to, can very cheaply finance revolving debt (rates have risen a bit to 4.99%):
https://www.penfed.org/
Can you demonstrate to me how I could borrow differently and achieve a lower interest rate? Because although you state that credit cards are "atrocious borrowing devices" I've proven by linking you to it that there is no cheaper way to finance debt. You state things, but cannot link to proof. I state things, but link you to the proof.
Given the effects of inflation and the prospects for coming inflation, wouldn't it be foolish for me to pay off this debt? Will I ever be able to borrow at this low rate ever again?
You're supposed to be an economist. Yet, your economic advice really sucks. And you've never created a home budget? How could you possibly admit this fact in public?
You should be horribly embarrassed by this entire post.
I'll see your 2.99% and raise it (uh... lower?) to 1.99% :-)
The point stands -- one does need to be a Stone Age absolutist to keep out of debt. "Shred your credit cards and withdraw cash for daily expenses" is not a good advice to anyone with a modicum of intelligence and self-control. To wit:
- Accounting software does a better job of keeping statistics on your expenses than a notebook.
- I haven't seen gas stations offering cash discounts in about... forever. My AmEx card gives me a 2% cashback on gas.
- 0% loan for 12 months from a credit card may bring you some money as a CD -- if the upfront fee is not excessive.
- Yes, sub-4% "until paid off" credit card deals do exist!
- Physical cash in the pocket gets physically lost.
And much more in the same vein.
She's not an economist, she's an MBA and journalist who blogs about economics and policy.
You also can't look at just the APR on a credit card, since origination fees, late fees, and maintenance fees are sometimes extracted out of the APR calculation by charging them to the principle balance. And if you look at the terms and conditions for that offer you linked, you'll note a few things that are not typical for personal bank loans:
1. Rates and terms subject to change at any time.
2. Offer good for 24 months at the advertised APR, after which the default APR (between 12.5 and 14%) comes into effect if the debt continues to revolve.
3. A late payment triggers a monthly late payment fee, AND triggers the default APR until three consecutive timely payments are made.
In short, this is an atrocious borrowing device. Can you take advantage of it as a low-interest loan if you pay close attention to the terms and fees? Sure, but a lot of people get sucked in by the fancy promises up front and then get jacked around by the backend stuff. A personal bank loan requires a lot more hassle and ten times as much paperwork to launch, but the terms are generally pretty straightforward -- no arbitrary reduction of credit limits (which, according to these terms, can trigger a monthly over-credit penalty fee), no arbitrary changing of the payment-due date, no arbitrary changes to interest rates, etc.
Something that is fundamentally stupid can still be a useful tool in the hands of a clever person, but that doesn't make it less stupid in the abstract case.
Sure, but a lot of people get sucked in by the fancy promises up front and then get jacked around by the backend stuff.
And yet I have not seen a personal loan offer, HELOC or any other accessible borrowing device with the annual interest anywhere near what I am paying on my few remaining credit card balances. To be sure, I wouldn't have those balances in the first place if I didn't try to bootstrap a hi-tech startup in the middle of the .com bust.... :-D .... so much for the vaunted intelligence.
I'm paying 2.5% on my HELOC, but I still am paying down ASAP, because I am uncomfortable with floating interest rates.
"I'm paying 2.5% on my HELOC, but I still am paying down ASAP, because I am uncomfortable with floating interest rates."
That's a poor strategy.
Here's what you should be doing (assuming you have some personal self-control): Take the money you are spending to pay off the HELOC and save that money instead. Don't pay off the debt, but put the money that you would use into a 2-year CD (you should be able to find 2%+ interest products out there). That way, you have the cash available if interest rates turn against you (you're hedged) ... all the while you have cash available should an emergency occur (like you lose your job).
Cash. Is. King.
You should not pay off a 2.5% HELOC. The most that money will earn you is 2.5%. And your lender will likely not extend that credit to you again at any rate of interest. Many lenders have completely abandoned the HELOC market.
"Pay Off All Debt" advice is for morons who don't understand or pay off their debt. It is not for intelligent people who have self-control and live within their means.
"She's not an economist, she's an MBA and journalist who blogs about economics and policy."
An MBA who has never made her own budget for her own household? WTF? Who graduated this person?
Who would take economic advice from someone so poorly equipped to manage their own meager income?
Sheesh.
Why are there fat doctors? Getting an MBA doesn't mean you're a personal finance expert; it means you can analyze a financial statement for a company.
Anyway, I've had budgets before, but never one this detailed, that's all. And I've never tried keeping it in cash.
So analyze: Should someone pay off a 2.99% APR credit card?
Why not?
Explain your work.
Now? When inflation is effectively zero? Unless you expect to make dramatically more money in the near future, yes. When you account for default risk, definitely yes.
I was lucky enough to marry a man who's been a Dave Ramsey fan for a decade. He had no debt, and I had none other than a mortgage, so for the first few years of our marriage, we saved and paid aggressively on the mortgage. I didn't know it at the time, but we were literally buying the chance to have children -- when we turned out to need infertility treatment, we had the money in the bank. When I got pregnant with multiples, we were able to purchase a vehicle capable of transporting them for cash. I didn't have to go back to a full-time job, and was able to choose to be a part-time freelancer, and to have some help with the kids.
We're not hardcore frugalistas, and we're not perfect. Since the kids have been born and our income dropped significantly, we're not saving much at all, and we eventually dropped envelopes because cash is a hassle. If two people do the grocery shopping, you're constantly rebalancing the food money, and redepositing to cover online purchases, and it's just a PITA. I use Quicken Online now, but I consequently don't keep as tight a rein on spending as I could. We could be doing better, if we really wanted or needed to be.
The beautiful thing, though, is that we don't HAVE to be as hardcore, because we got the no-debt stuff right (through a mix of good decisions and incredible good luck). If you can just get out of debt, live within your means, and have an emergency fund, everything else takes care of itself so much better. I'll be the first to admit that it's all a lot easier to do when you're an upper-middle-class professional, but the math is the same for everyone.
$220 - Can the evangilist really feel good about charging people in depressed cities this much money? The main advice: Don't spend more than you earn and keep a lot of cash in the house.
Psychology again. If you spend money on it, you're probably more likely to implement it.
That was for the Platinum level with a private dinner with Dave (I mean, private for me and 30 other people.) The normal admission is $45
Did he spend the dinner yelling at everyone there that they wasted their money, and what the hell is wrong with you people, you're supposed to be saving, not wasting money on "Platinum level" ANYTHING?
I got it for free in a video. I'm guessing my church payed any fees.
The biggest issue I have with Mr. Ramsey is he focuses way too much on how to save money and not nearly enough on how to make money.
For example - we recently hired a guy who, as it turns out, is a big Dave Ramsey fan. When we hired him we were struck by the fact that he didn't bother to negotiate his compensation (as is customary in my business) and left, at the bare minimum, 15k on the table. Later, after a few drinks, we asked him why he didn't bother to negotiate. His response, "I didn't know I could."
All the "rice and beans" and cupon clipping in the world isnt' going to make up for him leaving 15k on the table.
In another example, I've worked at companies that have two people doing the same job, one makes 125k and the other makes 65k. Why? Well, one knew that no one ever gets a raise or promotion so the only way to move up is to switch jobs. The person who switches every 2-4 years is 32 yo making 125k and the one who has been with the company since college is making 65k.
Oh man.... YES! Not negotiating for your salary or rate. Not negotiating when buying a house or a car or a piece of furniture. Leaving money on the table.
It's not because of Dave Ramsey that he didn't know to negotiate. I've listened to him off and on for years and he actually stresses negotiating for everything from your pay to your purchases.
I'd also say that the person that makes 65k when a coworker in the same job makes 125k wasn't being proactive in asking for raises or promoting themselves to management. The person that's switching jobs probably has a better sense of their worth and is constantly stretching for more.
I've listened to him off and on for years and he actually stresses negotiating for everything from your pay to your purchases.
I've listened as well and I don't recall him ever dispensing career or salary negotiating advise.
That being said I think he makes a lot of great points and has some good advise. But, I think he doesn't do nearly enough to stress the income side vs. the expense side of the ledger.
In the past 10 years the only times I've gotten raises over the rate of inflation has been when I switched jobs. I understand this is fairly common in the tech sector.
Most people don't like negotiating because it's a form of conflict. Now, negotiation (and conflict) are pretty much my full-time job, so when I have to do it recreationally, I don't mind. Plus my wife gets earnestly hotheaded and emotional about things like car dealers making lousy offers, so we have an excellent good cop/bad cop patter without even trying.
But...even I dislike it when I don't have some idea of the other side's position. I can wrangle with car dealers because I have the invoice and true dealer cost in my back pocket. I can turn down 60-day payment terms from a settling defendant because I know that's utterly ridiculous. But when I'm negotiating with (for instance) a bank about buying a REO house, what the hell do I use as a gauge of how far I can push the nameless bureaucrat in their Ohio processing center?
It seems like their plenty of information out their on how to negotiate for raises-I'm not sure it gets used. I suspect the real reason Dave Ramsey doesn't emphasize this very much is that increasing income tends to be a false god for most people with chronic debt. Your 10% pay raise won't amount to much when you've raised your standard of living to match within 6 months. OTOH, if you already have a plan to save some money and start paying off your credit cards, it just get's simpler when you get the raise. No study to back me up, just watched one of my roommates complain about his debt level and lack of money. His basic plan was get promoted to E-5 next time around. I kept telling him that it would be better learn to how spend on an E-4 salary, then stick with the same budget if he made E-5. This was before I heard of Dave Ramsey.
I suspect the real reason Dave Ramsey doesn't emphasize this very much is that increasing income tends to be a false god for most people with chronic debt.
Do you think it has anything to do with a streak or puritanical moralism? Might some feel that it's better to suffer and do without then be smart and find a way to bring in some extra money?
For example - two 32 yo guys:
A. who stayed at the same firm for 10 years and makes 65k and
B. who switched jobs twice and now makes 125k.
Both guy A and guy B save 15% and have an 8 month emergency fund. But guy B also goes on a nice vacation, has a nice car, lives in a better neighborhood, goes out to dinner often, etc.
Wouldn't some feel guy A is morally superior because of his sacrifice? I know it doesn't make any logical sense, but I know people who feel this way.
Do you think it has anything to do with a streak or puritanical moralism?
Having thought about this, fairly, I think the answer is "no".
I think it has to do with risk management. Dave tends to minimize the worst case, rather than maximize the expected outcome.
I do not agree with Dave on many points, but I think his position on this issue has more to do with his being extremely risk adverse than his position as a moralizing Christianist.
Finally, I sort-of agree with Dave. You can both increase income AND decrease spending, but I think if you have budget problems, it is more reasonable (from a risk-management perspective) to lower expense than to depend on a raise that may or may not come. Do not spend money that has not yet been earned. Once it has been earned, proceed however you like.
Jay,
I totally agree that getting the expense side under control is vitally important. But, I think any realistic long term financial plan needs to include a focus on maximising revenue as well.
While I can fault Dave Ramsey on some things I don't think its all that horrible for him to pick one area (the expense side of the equation) to focus on. Career management has too many variables to really be a big portion of his message.
I make about $250K a year, have no debts, and am looking forward to a great retirement. Following Dave Ramsey's advice helped me get out of debt, save money, earn more money, and plan for the future. Listen to him and learn.
Megan, thanks for trying the program of opining about it. I'd like to see more personal experimentation than opinions from our experts.
In the Christian world, giving stores up treasures in heaven. It's a long term investment. If a person doesn't believe in heaven or isn't convinced that they are going to one, then charitable giving is an illogical activity. Better to enjoy it now.
It appears that the American people and businesses have decided that debt is dangerous and are reducing their outstanding balances. The only two groups left promoting "debt is good" are the economists and the government. Maybe even the highly educated economists are coming around.
There's danger ahead, though. Keep on this path for another ten years and you may find yourself labeled "a conservative".
Always enjoy your thought process and analysis. Best wishes on fame, fortune and family.
"Personally, I look forward to the day when I have no debt. Would we all be better off if we decided to go that way?"
Absolutely!
"Probably. But would we be better off if we legislated that outcome?"
Hell no!
I do have one bone to pick with Dave Ramsey, though: he's the reason we couldn't get a joint mortgage, even back in 2007. When real-estate prices started to fall, we thought we'd like to get a larger house for our family and move closer to my husband's work. Despite a 50% down payment, no other debt, far-more-than-sufficient income, and substantial cash assets, we couldn't get approved.
Why? Because my husband, whose last debt was a small car loan paid off in 1997, had no FICO score. Not a bad score, just literally no score at all. My score is OK, since our current mortgage was mine prior to our marriage, but I didn't have any income, so apparently it didn't count. We got turned down by three separate banks, which at the time was incredibly frustrating and baffling. Humiliating too, because we'd done all the "right" things financially, and meanwhile we watched our friends with checkered histories get mortgages without trouble.
We were in the process of working with the company Dave Ramsey promotes, and perhaps it would have worked out there, but we wound up pulling our house off the market for other reasons. In hindsight, it wasn't all that bad a thing for us to stay in our current house, but I'd be less serene about it if we'd been trying to relocate, or if we'd really needed that extra bedroom.
It's a flaw of the mortgage system, not really of Ramsey, but it's still something to consider. Next time we buy a car, we will probably use some small form of debt financing and pay it off as soon as it's had enough impact on my husband's credit history. Silly that we have to do that, just so we can buy a house we're already well able to afford (with a 15-year mortgage), but there you go.
the bahaviour wrt credit cards espoused above is very similar to what Canadians already embody - not that *nobody* uses cc debt, but not many do - this may be another "hidden in plain sight" factor behind the relative strength of canuck banks and the canuck economy (esp housing), since the onset of the credit/subprime/securitization/ratings crisis
Nonsense. Canadian debt to income ratio rose from 1.3ish to 1.4 this year. Housing prices have increased 20% THIS YEAR.
I don't think the banks will be in very good shape when the prices drop 20-30%. And a point in interest rates will do that.
Derek
I have a number of arguments with Dave Ramsey, but I still find his message of conscious, careful frugality to be uncommonly wise. My parents, now 89 and 81 years old, know nothing of Dave Ramsey, but they have lived by his precepts. They managed their modest income with care, largely eschewing debt and only rarely indulging in extravagance. As one consequence, they have enjoyed a relatively comfortable retirement and have not been concerned about outliving their resources.
I have not been as careful as my parents, but at the age of 48 I am within five years of paying off my mortgage. I'll be able to live debt free if I choose; or perhaps my next car will be a bit nicer than the current one because I will be able to easily afford some debt if I want to. Carrying little or no debt means I have more freedom, and more choices, in how I save and spend money.
I read one of Dave Ramseys columns where both husband and wife lost their jobs and had an expensive mortgage.
He told them to sell their house and rent another one to live in.
Thats TERRIBLE advice!
Rent out the expensive house and thus allow someone else to pay for it.
Buy a cheap house and work at McDonalds if you have to.
Eventually, the expensive house will be paid for (by someone else!)
and can be sold at a profit.
You can sell the cheap house for a profit and you wont have wasted your money on rent.
and work at McDonalds if you have to
Keep at it for a couple years and never get your career back. If the job you lost paid considerably more than McD and your industry didn't disappear off the face of the Earth, this is probably bad advice.
I never suggested that you not get your career back.
Of course the goal is to get your career back, but McDonalds stands as a symbol for monthly income if needed.
You take pleasure in knocking others ideas.
I bet my net worth is more than yours. :)
Of course the goal is to get your career back, but McDonalds stands as a symbol for monthly income if needed.
Which is exactly the part I have objected to. Let me put it this way: your time spent looking for a new job may well be worth more than minimum wage.
You take pleasure in knocking others ideas.
Are you saying some people don't? ;-)
I bet my net worth is more than yours
No bet -- too many variables. Mine is far from negative though. I also think myself to be in position to dispense career advice but that ain't worth much either, is it :-)
You can sell the cheap house for a profit and you wont have wasted your money on rent.
You have noticed that the housing bubble is over, haven't you? Good luck getting someone to pay a rent that covers even half the mortgage on the expensive house - better to dispose of it and free up some cash.
The idea that real-estate is a guaranteed iron-clad investment that can only make money is so 2005. I rent a small, old, house in a desirable neighborhood, and even with the decline in housing prices, I'm still renting it for less than the cost to own it, and I have a lot more flexibility if my income suddenly takes a hit. How am I "wasting my money on rent" again?
I forgot one point - I'm renting my house for less than half the cost of owning it.
Your landlord isn't very bright, then.
Finding an innumerate landlord was an excellent move on your part, but I'm not sure it works as a general principle.
You forgot another point: if you need to move -- which you well may, when you lost your job -- getting out of a lease is way simpler than shedding (or renting out!) the house.
I'd say, keep the house if you like it and the place where it is located (of course assuming you can do that and still recover financially). But selling one house and immediately buying another in the same area just to reduce your expenses... bad idea.
TallDave,
It is unusual in most markets for rent to cover the mortgage let alone things like property taxes, insurance and maintainance.
It depends on the market, but in most places renting is less expensive on a per month basis than owning. Often by 30% and in some cases 50%.
It is unusual in most markets for rent to cover the mortgage let alone things like property taxes, insurance and maintainance.
Then I stand corrected: finding an innumerate landlord apparently does work as a general principle.
I'm skeptical, though. I'm a landlord and I have a couple friends who are too, and we all get mortgage + taxes + insurance + landscaping/exterior maintenance + a little extra. Do you have a link?
http://3.bp.blogspot.com/_pMscxxELHEg/SaQT0LoQbkI/AAAAAAAAEmg/msaXwQnSUvU/s1600-h/PriceRentQ42008.jpg
At the peak, and in many areas still today the cost of owning far exceeds the cost of rent on a per month basis.
"As my colleague M.P. Dunleavey found in "Why buy in an overpriced housing market?," many Manhattanites would have to pay two or even three times their current rents to afford a comparable home. On the other coast, similar economics apply. You could lease a three-bedroom, four-bath home in the pleasant Los Angeles neighborhood of Colfax Meadows for $4,300 a month. The same house would sell for well over $1 million and set you back at least $6,000 on the mortgage payment alone, plus more than $1,000 a month in property taxes."
http://moneycentral.msn.com/content/Banking/Homebuyingguide/P37627.asp
You don't need an innumerate landlord, you just need one who owns the property outright, or secured the mortgage in a more sensible time, or has a pool of properties both owned outright and mortgaged that produce a net profit.
Also, under market circumstances where the available rentals outstrips demand, a landlord may sign a lease that is below cost to reduce his losses, since an empty house generally costs more than a house rented at a loss.
Renting the house might not work if the market rents won't cover your expensive mortgage. As to the job advice, it would seem the best would be split. One of you gets a job any job, and the other one looks for something closer to what you had before.
I don't understand the credit card part. Just pay it off every month.
Debit cards have the huge drawback that, in the event your number is swiped and used fraudulently, you are missing the money rather than the bank.
With a credit card, you're out no money, and the issuer is on the contrary very anxious to help clean the mess up.
It's a useful hedge against bad sellers, too.
not to mention you can get good rewards cards, too.
The credit card companies offer those 'good rewards' for a reason, and it's calculated to their self-interest, not their customers'.
Not every financial transaction is a zero-sum game. When I buy a sandwich from a deli, both the store and me benefit from the transaction. This is a libertarian-leaning blog, after all.
'I don't understand the credit card part. Just pay it off every month.'
"I don't understand overweight problems, just don't eat so much."
"I don't understand being out of shape, just exercise regularly."
I don't mean to come across as snarky, but you just put your finger on the core issue, it's psychologically hard for many people to pay off the credit cards every month, because they spend more than they earn and the credit card is the enabling tool.
Note that the credit card companies want you to overspend, they set the system up in such a way as to encourage it, because they make more money that way. From their POV, it's far better if their customers pay the minimum payment, because that way they carry a balance and pay high interest.
It's not about math, it's about behavior, that's the core insight about which Ramsey is dead right.
Megan, you left out the first and most important step in the Dave Ramsey "financial peace" program - The 3 to 6 month emergency fund - to take care just such emergencies. We are completely debt-free (no mortgage payments!), on a monthly budget, and we maintain a $16K emergency fund to avoid the hassle of personal loans.
Frankly we appreciate the security of the emergency fund nearly as much as we appreciate not having to make monthly debt payments. We are now able to invest 48% of our net income for retirement, while we also save for the regular anticipated expenses (new tires, Christmas, etc.) and give 10%+ to our favorite charities!
I certainly don't disagree with his stance on debt. However, some things are just not realistic. For example, the 15 year mortgage/25% income idea sounds great until you realize your kids will end up in the crappiest school on the wrong side of town, and fear for their life everyday.
Or you can pay to send them to a private school. Not all of them cost as much as a New England boarding school, although if you're not religious the pool does grow smaller.
Don't declare bankruptcy unless they bailiffs are actually on their way to your house to evict you, seize your furniture, and put your family on the street.
Out of curiosity for anybody in the know: upon what does Ramsey base his admonition against bankruptcy? It's obviously not a wise choice for everybody, but for some people -- like Ramsey and his wife back in the 80s -- it does make sense, no?
I rent a small, old, house in a desirable neighborhood, and even with the decline in housing prices, I'm still renting it for less than the cost to own it, and I have a lot more flexibility if my income suddenly takes a hit. How am I "wasting my money on rent" again?
I'm not one to oversell the virtues of home ownership. For starters I agree wholeheartedly that's it's folly to overconsume housing by lying to yourself that it's an investment while eschewing other, more sensible places to park that extra cash being spent on an excessively high mortgage you don't really need to be making. Still, I think a fair argument can be made that in a lot of cases renting is wasting one's money at least compared to buying a modest, truly affordable house. If your income should suffer a major hit -- or your other investments lose value -- you can always live cheaply in a house that you don't owe any money on (you can't live in your suddenly-worth-much-less 401k). And a landlord is unlikely to sentimentally shelter you from rent increases just because you're not earning what you used to.
Affordable houses - in the sense of those so cheap you can pay off the mortgage in 5-7 years probably means they're old or shoddily built and will require huge sums of cash to upkeep. That's hardly a bargain. Renting is the only way to go, unless you are flush with cash.
Affordable houses - in the sense of those so cheap you can pay off the mortgage in 5-7 years probably means they're old or shoddily built and will require huge sums of cash to upkeep. That's hardly a bargain.
Obviously if you have to spend vast sums on upkeep, you're not getting a bargain. But I'm not talking about a bargain. I'm talking about a sensible purchase of a decently valued house that's big enough for your needs and no bigger.
Renting is the only way to go, unless you are flush with cash.
If you're truly flush with cash I say it makes sense to lock in a hedge against housing inflation. I mean, if you're, say, 35 years old, how do you know how much a typical rent is going to be when you're 70? There are plenty of things we can live without in this life, but housing ain't one of them.
I'm talking about a sensible purchase of a decently valued house that's big enough for your needs and no bigger.
The key is if you can find said sensible home then by all means buy it. But, and again this is key, if you can't find a "sensible...decently valued house" then feel free to rent.
upon what does Ramsey base his admonition against bankruptcy?
He isn't trying to give the optimal "according to the numbers" financial advice. He's trying to change behavior. Part of "good behavior" is being responsible enough to pay debts and owning up to past mistakes. And did you miss the part about Christianity? Declaring bankruptcy, especially for consumer loans, is very similar to stealing.
It's a great guide for people who can't manage their money very well. Simplicity is often best if your core competencies don't involve finance.
OTOH, if you have decent income and a modicum of self-control, you can use credit cards for years and never pay a dime of interest while getting a 2% arbitrage on your mortgage vs bonds, which can be worth a few thousand a year.
Long-term, a mortgage is an inflation hedge. Both your property value and comparable rents will rise with inflation, but your (ummm, fixed rate) mortgage won't. So if you're really going to be there 30 years, you're going to be paying far less for housing then than renters.
It also has its downsides, of course.
We haven't had real inflation since 1982. Of course with Obama running $2 trillion deficits, they might be back with a vengeance. I'm talking 1920s Germany level hyperinflation. Got wheelbarrows?
I don't have a wheelbarrow, but I have been trying to convince my wife to get a Weimaraner.
That got a laugh. Nice one, Rob.
You're the only one who ever notices :(
It sounds unbearably tedious. But it's actually incredibly freeing. I have never before felt like I had total control over my money.
I agree 100%. I obsess over my Excel spreadsheet 10 year plan several times a week. Can't imagine life without it.
I use the CC as a convenience way of buying things. I hate handling cash. I always pay off the balance in full every month. Also how to buy things online w/o a CC? Also you can't buy an airline ticket or rent a car with a CC. If a person can't help but be tempted to buy more then they can afford because of a piece of plastic - they've got deeper problems and "advice" isn't going to help them.
Not to mention that some of us spend cash much easier than charge. If it is not going to appear as a transaction in my database, I am not really spending money! :-P
And yet it does help some people (I know some of them). Perhaps they're lying, the theory cannot be wrong!
1. Dave Ramsey is okay with someone using debit cards for purchases instead of cash, as long as it's on a budget. You have to know yourself. Some people spend less with cash, while others find it very easy to spend all the cash in their wallet. For some people it's hard to control spending with a debit card, because you're just swiping it. For others, like me, it makes me spend less, because I
check my bank balance online every day, and every time I use a debit card, I know I'm going to see that amount subtracted from my bank account the next time I check my balance.
2. His point about credit cards really hit home with me because I had transferred $3000 to a card with 0% APR for 12 months. It was way too easy to think "Oh, I don't have to worry about that for another few months... I just want to have a really good month (I freelance) and then I'll start paying it down..." Of course, after 12 months, I hadn't paid it off, and then 10% apr kicked in, and half my $50 minimum payments were going toward interest. When I listened to Dave Ramsey every day, hearing him say "Debt is evil" I realized I had to pay down my credit card, even if it was 0% APR.
3. If you absolutely cannot give up the rewards/points that come with a credit card, pay your balance each week (online on course, so you don't waste money on stamps). That way, you won't constantly be a month behind.
4. His philosophy helps you eliminate a lot of expenses you realize were ridiculous in retrospect. Not having cable saves $50 a month for most people - really try going without it for a month, you probably can adjust to it. Get a digital converter box with a rabbit ears antenna and you'll probably be able to get all the networks very clearly. (I love the transition to digital TV!) Whenever I want to treat myself, I reactivate my netflix subscription for a month and get 2 dvds at a time. $15 for a month for netflix is much better than $50 for cable. And of course you can watch most tv shows online (Yay, hulu.com!) and take out dvds from the library.
5. It's very easy to decrease the money you save on food. Anything you're purchasing on a daily or weekly basis that you can reduce saves you lots of money. The store brand of ketchup is $2.50 cheaper than Heinz. That adds up to $125 a year. The store brand of corn flakes is $3 cheaper than Kellog's. That adds up to $150 a year. A few more changes like that, and you have an extra $1000 in your bank account after a year. I'm addicted to diet coke. But I buy two 2-liter bottles for $2 each for each week, and keep them in the kitchen area of my office. That way, I spend $4 a week instead of the $10 or more you can spend when you're just buying the cans for 75 cents or $1 each or the 20-ounce bottles which are sometimes $1.25 or $1.50. Oh, and you'll find yourself eating out a lot less.
6. My laptop died and I had to get something to replace it. Of course I *wanted* to splurge - it's been eight years since I purchased a new laptop. This is a rare purchase, shouldn't I make sure it's good? You know what, I bought a used laptop off craigslist for $180. It works just fine.
7. Any other suggestions from people on how to reduce expenses would be most welcome - I'm always looking to save money.
Any other suggestions from people on how to reduce expenses would be most welcome - I'm always looking to save money
Well, one can die early and save on the rest of his lifetime expenses.
Otherwise, it may be a good idea to spend on the things you like and not spend on the things you don't really care for. And do your homework before making a big purchase. And keep in mind what the tradeoffs are. And never leave money on the table.
Not having cable saves $50 a month for most people - really try going without it for a month, you probably can adjust to it. Get a digital converter box with a rabbit ears antenna and you'll probably be able to get all the networks very clearly. (I love the transition to digital TV!)
I've been trying this experiment since the beginning of 2009. And I just broke down and re-ordered cable. Yes, The Man forced me to buckle under.
I can live without everything you can't get via rabbit ears/the Web and Netflix save the NBA (even here you can buy a web package directly from the NBA itself, but the problem is they black out home games). I did find one or two sites that re-broadcast the games via broadband, but they're unreliable, and the broadcast quality if incredibly bad. I know there are some file sharing sites, too, where one can download broadcasts of individual games, but the files are massive.
To paraphrase Winston Smith, I love Big Cable.
7. Any other suggestions from people on how to reduce expenses would be most welcome - I'm always looking to save money.
Have you looked at your career and job situation to ensure you're maximizing your earnings. It's a lot easier to save more money if you have more income.
The store brand of ketchup is $2.50 cheaper than Heinz. That adds up to $125 a year.
You go through a bottle of catsup a week?!
See my comments above about learning how to do basic maintenance and repairs. That way you can save money by DIY and by not getting ripped off by a mechanic.
Also, you eat way too much. A bottle of ketchup/week? A box of corn flakes/week? Unless you're on the cornflakes and ketchup diet, or have 10 kids (in which case, shop at costco).
No, I go through a bottle of ketchup and a box of corn flakes every two weeks. But I definitely know families with two or three kids who consume that much.
Also, another thing I did to save money - I bought my last pair of glasses from zennioptical.com - the total charge was around $15. (They have really cheap prices.)
Dig yourself a kitchen garden.
There are people who are made better off by payday loans or credit cards, because they get the car fixed and don't lose their job. Then there's a group, which seems to be smaller but significant, who end up much worse off.
I'm not for legislating anything, but if we took Ramsey's admonition to set up an emergency fund FIRST (even before paying down debts and starting at $1000), the need for a payday loan would be very rare indeed.
One other thing, when I hear people complain about CC companies I always repeat what I heard Ramsey say:
"If you lay down with snakes, you're gonna get bit."
All very well. Just one suggestion
for future editions: Add a chapter
titled "The Grasshopper and the Ant".
See also "A Bug's Life", not "Antz" :-)
But as I note in the article, in the case of housing, it actually makes it hard for people to, say, secure a home in a decent school district, if other people with similar incomes are willing to leverage themselves to the hilt in order to bid on that home.
This is a real effect, but as an excuse it is way overused. In most large urban agglomerations, there is the city itself, which has high housing prices and unacceptably bad schools, and nearby nice suburbs, which have high housing prices and good schools. But there are also slightly more distant, slightly less nice suburbs, which have low housing prices and still good schools. The people who compete for the nearby nice suburbs are drawn by status and amenities; they could have had good schools for less money by moving 15 miles or less.
Even without the contraint of good schools, finding affordable housing (including rentals) not in an outright dump of a neighborhood can be difficult in many places these days. I am paying more than twice what I paid in rent five years ago (then: St Pete FL; now: Baltimore), but I have a smaller house in a very mixed neighborhood. I would love to cut my housing costs, but moving to a dilipidated 800$ row house in the midst of the West Baltimore slums is not worth the savings. Nor is living some ungodly distance from work with a hellish commute when gas prices (and maybe even availability) are a great big question mark in the years ahead.
Jasper wrote: "Out of curiosity for anybody in the know: upon what does Ramsey base his admonition against bankruptcy? It's obviously not a wise choice for everybody, but for some people -- like Ramsey and his wife back in the 80s -- it does make sense, no?"
Dave feels the same way about bankruptcy as he does about divorce. Bankruptcy is listed in the top five life-altering negative events that we can go through, along with divorce, severe illness, disability, and loss of a loved one. I would never say that bankruptcy is as bad as losing a loved one, but it is life-altering and leaves deep wounds both to the psyche and the credit report.
Chapter 7 Bankruptcy, which is total bankruptcy, stays on your credit report for 10 years. Chapter 13 Bankruptcy, more like a payment plan, stays on your credit report for seven years. Bankruptcy, however, is for life. Loan applications and many job applications ask if you have ever filed for bankruptcy. Ever. If you lie to get a loan because your bankruptcy is very old, technically you have committed criminal fraud.
But there are also slightly more distant, slightly less nice suburbs, which have low housing prices and still good schools.
This is a good point. And the thing is, your kids may well be better off from the perspective of college admissions graduating high school with the higher class rank they're more likely to attain in the less fancy school district.
While it is true that Ramsey is an evangelical Christian, and he does usually include a plug for his faith around the edges of his message, the key to his "crossover appeal" is that he deals with people as they are. I have listened to him for years, and he never tells anyone to become a Christian as part of their get-out-of-debt program.
The advice he gives just makes sense, no matter who you are or what your faith situation is.
Our family actually uses a modified Ramsey approach, using debit cards instead of cash. This is because we live close to the bone, anyway, so there is never any threat of blowing money on double lattes.
Very much enjoyed your Ramsey article. Nice contrast to the other article about the use of ministers to sell mortgages.
Go on, you're just a shill for Big Envelope.
Why a method like Ramsey's can work if one really follows it: The only always-true thing about money is that having it (and control over it) gives you options. {{It doesn't buy love; doesn't guarantee happiness; etc.}} Being able to stay in the black gives you enough money to exercise relevant options. The psychological benefit of feeling more in control of your domain results. Being in debt puts you under the power of somebody else's options because yours have diminished to the point of being mostly bad ones.
My wife and I always felt like we were strange - we were on the Ramsey plan before it was cool. We were making about $65K a year in the mid-1980s and we bought a house for....$65K. Our mortgage payment felt like nothing but our friends would make fun of our ratty little 1930s bungalow. We always saved 20% of our pay. We always paid cash for used cars. We ate at home alot. Our vacations were generally heavy on frequent flier miles and hotel points. We paid off our mortgage in the early 1990s as rates were 9% back then.
Well - here it is 25 years later and we have amassed a pretty good nest egg, assuming Congress and Obama don't turn the USA into Zimbabwe. So, it does work and you really don't miss all of the stuff that other people think you need.
I also agree with the spiritual aspect to this advice: get control of your money instead of the other way around. I don't know where I read this, but apparently money issues cause more relationship problems than any other issue.
I agree, however, that you don't have to completely put yourself in the Ramsey straightjacket. For example, we mortgaged our second house (an indefensible luxury) when rates dropped to around 5%, because 1) I was pretty confident I could invest that money at a better rate, and 2) I wanted to get liquidity out of a declining asset. And I thing using credit cards is better than cash for a host of reasons including the security issues and the freebies. You just have to be sensible.
This method appeals to me, but I have one question: how are online transactions conducted when you limit yourself to only spending cash?
I can't live without buying books from Amazon and train tickets from Amtrak. Should I just use my debit card for these purchases?
If so, doesn't this defeat the purpose a bit -- by using a debit card I remove myself from the immediacy of the money I'm spending, but I also lose the nice 1% cash back that my credit card offers me.
In other words, don't debit cards have all the drawbacks of credit cards, and none of the benefits? (I'm assuming a credit card that is paid off in full each month, which is how I operate).
Thanks,
Jon
I don't think you have to be an absolutist on credit cards as long as you stick to a budget. Credit cards just make it harder.
Debit cards can be used for most such purchases. One does want to be careful with debit cards for security reasons, but there are ways to deal with that.
I use my credit card for any and all online purchases, no matter how small or how reputable the company. I once was the victim of an $1800 online billing error and couldn't get the dipshit customer disservice folks in Bangalore to even admit such an error had occured (they pray to this day they never have to talk to me again-- and they needn't worry because the Devil will need long johns before I deal with that company again). When informed of the error, HSBC went to bat for me and got the charges reversed in less than 24 hours. Frankly that's well worth any other hassles credit cards can bring. Imagine having $1800 lifted from your checking account and being stonewalled by some nitwit on the other side of the planet.
Also: car rentals always go on my credit card. Many don't even take debit cards (none take cash) and the free insurance many credit cards offer is also a good deal.
One other point. At every cycle, celebrities emerge who embody the zeitgest. Dave Ramsey embodies the new, no-frills, ascetic ethos pretty well. Americans in particular have a history of excess and atonement, and we do need some serious atoning after the binging of the past 25 years.
This is one reason why Congress and Obama are losing the support of all but the hard core lefties. Americans are buckling down everywhere except Washington where $1T healthcare bills are being debated in the face of $1.7T deficits.
As economists will tell you, however, it won't be great if we all pay our debt down at the same time. Not so good for GDP unless we suddenly become an export machine.
This is a serious time. At least Ramsey challenges his followers with an equally serious response.
And the country will never become an export machine unless it gets it's budgets in balance.
Another interesting facet. Debt and easy debt drive up real estate prices. Housing costs would drive wages required to attract labor, which ends up making US businesses uncompetitive.
Derek
While Ramsey may embody the zeitgeist well, he's been around for quite a while, it seems. His radio show has been around since 1996, and I remember hearing it in 2004 or so...
The thing about Ramsey's approach is that it's based in the realities of human nature as it actually works, rather than any sort of theory. Home economicus is fictional. Likewise, the reference to 'Grandma's ways' is solid, too, though not every grandparent followed it, of course. But those who grew up and lived during the Great Depression had their noses rubbed in practical economics the hard way.
There's far more to Megan's comment about how it's hard to use Ramsey's approach in a society that generally doesn't than just what she comments. Some of this Ramsey himself talks about, other things can be observed if one is looking.
The first thing to recognize that much of the 'conventional wisdom' about things like lifestyle, education, marriage and money, status, etc, are actually the product of calculated advertising activity, by people who are phenomenally skilled at what they do. Madison Avenue is very, very, very good at creating new 'needs'. In fact, as Ramsey is fond of pointing out, the only things anybody really and truly needs are things like food, water, shelter, heat in the winter, etc. Pretty much everything else is some priority level of a 'want'.
One of Ramsey's favorite examples is that we judge people by the car they drive, on many levels. We assess material/career success by how good a car a person drives, girls are impressed by the car a boy drives, someone driving a used car takes a perceived status penalty in many circles. This is utterly silly, yet it's a monument to the success of the ad industry.
A favorite example of mine: the 'wedding industry'. They've been brilliantly successful in training a generation of (mostly) young women that a 'normal' wedding costs thousands or tens of thousands of dollars, involves expensive outfits, photographers, themes, etc. They peddle the fantasy to sell the various accoutrements of it.
All of which would be a harmless nonsense except that it A) leads to huge disappointments when the real thing can't live up to the carefully inculcated fantasy, and more relevantly to our current discussion, B) keads people to spend, and sometimes borrow, thousands of dollars in pursuit of a meaningless fantasy.
I personally know people who have taken out loans they can't afford to pay for an elaborate wedding for themselves or an offspring (usually a daughter).
A minor theme of the same industry is the 'senior prom' fantasy, with its multi-hundred dollar or more dresses, limousines, and other ridiculous excesses.
The key for me is that for things like cars, college, weddings, gifts etc. it's best to have money and use it pay for things before you need them.
I have a friend who grew up in a family in which the family was expected to set a child up with a paid for education, a new car, and a wedding. In order to accomplish this sons were expected to educate themselfes and pursue careers that could comfortably support a family. The other vital part of their value system was that things should budgeted for and funds should be sensibly invested well in advance of the need.
So, rather than doing a HELOC to pay for college, a car, and a wedding and turning a $300k bill into a loan that ends up costing $450k, they started putting $550 a month away for each child starting when they were born. $550 a month for 20 years is only $132,000 but at 7% it's worth nearly $300k when you actually need it.
Pay with a loan the and the total cost soars to $450k --- prepay and it only costs $132k.
For a couple of examples of how the credit card companies outplay their customers, consider these:
A popular scam on the part of the CC companies is to offer easy access to credit cards to college undergrads. They like to present this as a recognization of adulthood, a rite of passage, etc. In practice, of course, they are counting on the fact that A) many undergrads have no practical experience with money management, and will be irresponsible with them, running up lucrative (for the CC company) debt, and B) they're not figuring on the undergrad paying the bill, they're counting on the parents of said undergrand paying it.
Another little trick many of the CC companies use is visible if you read the really fine print on the credit card contract. Usually there will be a due date, of course,and you'll accrue penalties if you miss it, which is natural.
But if you real closely, often the deadline for payment is something like nine or ten a.m. on the due date! In short, even if your payment arrives on the due date but is picked up/arrives in the afternoon, you've now got a higher interest rate or other penalty. Since some people will pay at the last possible second, this is gravy for the CC company.
You write about economics and you've never written out a budget before?
While I understand that personal finance and macroeconomics are two different beasts, I still find this unsettling.
We have no debt. We've never had debt, except for the house. I put about $4000 (give or take) on a credit card every month, but only for convenience; I pay it off in full every month, and they've never made a dime of interest off me.
I have an insanely complicated spreadsheet budget which makes everyone tell me it's too complex, but y'know what? It works.
Megan,
If you are putting off debt reduction in order to save for a wedding, I'd suggest paying all your credit cards off completely, and everything else you possibly can first.
Then when wedding time comes around, sit down with your lucky guy and see how you feel about borrowing back all that money you just paid off!
I'll bet you'll spend a bit less on your wedding!
My detailed look at Ramsey's advice, including his debt reduction, insurance and investing ideas, is here: http://iraqnow.blogspot.com/2006/03/critique-of-dave-ramsey.html
Caveat: When I wrote that, I didn't sell insurance or any other financial product for a living. Now I do, so my disclaimer that I don't sell insurance no longer applies.