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Old 12-17-2008, 09:55 PM   #31
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Re: Dave Ramsey: get debt free

Its tyical but depressing human behavior to think that because too much debt is bad it somehow follows that any debt is bad.

In particular paying off mortgage debt should be thought hard about not just done because debt is 'bad'.
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Old 12-17-2008, 10:05 PM   #32
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Re: Dave Ramsey: get debt free

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Originally Posted by maxtower View Post
I think its funny that every couple years another guru pops up preaching the same simple concepts that basically just restate "save money" in a new a different way.

This isn't rocket science.
I think this is an oversimplification. I'm not saying he's saying anything new, but that's not the point...it needs to be said. And the message gets across best if there are multiple ways for it to be said.

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Its tyical but depressing human behavior to think that because too much debt is bad it somehow follows that any debt is bad.

In particular paying off mortgage debt should be thought hard about not just done because debt is 'bad'.
Yeah, I saw on his site that "debt is not a tool, it's stupid." Gross oversimplification...and flat out false. It absolutely is a tool, but the problem is that the vast vast majority of people can't use it properly so they do better by avoiding it at all costs (other than mortgage). Debt to increase net worth = good = tool...debt to decrease net worth = stupid.
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Old 12-17-2008, 10:10 PM   #33
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Re: Dave Ramsey: get debt free

Oddly enough I just saw that he has been added to Hulu so if anyone is curious:

http://www.hulu.com/the-dave-ramsey-show
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Old 12-17-2008, 10:24 PM   #34
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Re: Dave Ramsey: get debt free

i just watched a few minutes of one of his videos and the question from the caller involves a legal matter and instead of Ramsey saying "i'm not a lawyer, go talk to one", he gives legal advice and advice on legal strategy (and bad advice at that). so already he's scored bad marks with me, making me question the rest of the stuff of his that i'm about to watch.
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Old 12-18-2008, 11:42 AM   #35
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Re: Dave Ramsey: get debt free

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such a bad idea in general, but right now its terrible. inflation is probably going to be a major issue over the next decade and having a mortgage is a super solid way to offset that.
It's a bad idea to not have mortgage debt? I'd rather offset inflation with Step 7 which is to build wealth. If you have $1500, $2000, or more a month to invest for your future and to live life to the fullest now, how is that a "bad idea in general."

The original post is only the framework. There are a lot of details that could not be included here, but that do answer the questions of some of the critics here.

As far as Dave giving legal advice, he almost always qualifies these statements with one that he is not an attorney. But let's face it, most of the problems people call in with that have legal implications are pretty basic. He obviously cannot be knowledgable with the laws of 50 states.

What should be taken from this is the financial advice piece.
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Old 12-18-2008, 11:50 AM   #36
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Re: Dave Ramsey: get debt free

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Originally Posted by cwilli26 View Post
It's a bad idea to not have mortgage debt? I'd rather offset inflation with Step 7 which is to build wealth. If you have $1500, $2000, or more a month to invest for your future and to live life to the fullest now, how is that a "bad idea in general."
Debt is a way to protect yourself against inflation. And mortgages are cheap generally.
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Old 12-18-2008, 11:53 AM   #37
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Re: Dave Ramsey: get debt free

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Debt is a way to protect yourself against inflation. And mortgages are cheap generally.
Okay, explain how this would be rational.

It's still debt even if there's inflation...so how is it better to have debt with inflation than assets and no debt w/ inflation?
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Old 12-18-2008, 12:00 PM   #38
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Re: Dave Ramsey: get debt free

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Okay, explain how this would be rational.

It's still debt even if there's inflation...so how is it better to have debt with inflation than assets and no debt w/ inflation?
You can have assets and debt at the same time...

First, mortgage rates are low, then you go and deduct the interest from your taxes so in the end you pay (in relative terms) very little. Now inflation comes along and reduces your balance owed without you paying anything for it.

So now you can produce more wealth with the money Ramsey would've paid off against his mortgage. Generally speaking (it's different in every situation) it's -EV to pay off your mortgage.
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Old 12-18-2008, 12:25 PM   #39
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Re: Dave Ramsey: get debt free

I know you can have both at the same, obviously...but I said assets+no debt.

I don't know how much you know about taxes, but from my understanding, the savings on interest from tax deductions is pretty trivial considering the costs of borrowing (especially the way amortization schedules are weighted w/ interest heavy payments early). It's a tax DEDUCTION, which means that the interest you pay on a mortgage goes to reduce your taxable income. So, say you're in a 35% marginal tax rate. You make 50k/year. I'm going to oversimplify because I know that 35% tax bracket means that you pay a lower rate on the first X dollars, higher rate on next X dollars, etc. But let's just assume for simplicity that you pay 20% on first 30k and 35% on next 20k.

You have a new $175k mortgage at 5% fixed 5yr 25yr amortized. First year you pay ~$8578 interest on ~$12k payments. So, assuming u can deduct all that interest on your taxes (I dunno US code), your taxable income is now ~$41.5k from $50k.

Your taxes BEFORE the deduction would look like:
20% of $30k = $6k - net $24k
30% of $20k = $6k - net $14k
Total net income $38k.
Subtract the $12k for mortgage.
=$26k

Your taxes AFTER the deduction would look like:
20% of $30k = $6k - net $24k
30% of $11.5k = ~$3.5k - net $8k
Total net income (just wait) $32k
Subtract the $12k in mortgate minus the $8150 deducted ->$3850
=~$28

SO, you've paid ~$8k in interest and have a net gain of $2k. But that's only after one year...keep doing this over and over again, and you see that it's FAR FAR better to pay off the mortgage faster than to try to deduct the mortgage interest from your taxable income. Why? Because you only get a SMALL percentage of that actually translated into tax savings.
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Old 12-18-2008, 12:48 PM   #40
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Re: Dave Ramsey: get debt free

Durka is dead nuts on. Ramsey even explains this "myth" as he calls it on the Dallas Road Show in the www.hulu.com link above. If you want a tax deduction equivalent to mortgage interest, make a charitable donation which you can easily do because you have NO HOUSE PAYMENT! You have a choice: ship money to the mortgage company, the IRS or a charity of your choosing while ending up in the same financial position.

Bottom line: not -EV to payoff mortgage debt.
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Old 12-18-2008, 01:01 PM   #41
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Re: Dave Ramsey: get debt free

I was going to work out what it would look like to pay down the mortgage faster vs investing...but it's too much work for the moment

Basically, paying down the mortgage is 100% guaranteed investment for whatever the interest rate is. Investing vs paying down means that you do get to save some additional money each year in terms of the mortgage interest as a tax deduction), but the results of investing carry the risk associated with investing. So, say you put 1k/month towards the mortgage, you're paid off in just over 9yrs...and then you have 2k/month to put towards investing...vs the 9yr head start of investing 1k/month minus the mortgage interest of those 16yrs (subtracting tax benefits, though).

So I did some simple calcs.
2 Scenarios.
1) You don't pay down the mortage. So, from ages 25-50 you invest 1k/month tax sheltered (to make simple). Then 50-65 you invest 2k. I have not included the annual tax rebate of 2k...though that would change things a little for the first 25yrs. But, a simple side calc and I'll add it to the total at the end. Thinking out loud here.
2) You pay 1k/month extra to mortgage for 9yrs, then you invest 2k/month till 65.

Both assume 8%/year return. Both reinvest the annual 2k tax return (1. for 25yrs, 2. for 9yrs)...gross oversimplification I know but whatever.

Scenario 1 earns ~4.1mil on fewer deposits than scenario 2.
Scenario 2 earns ~3.1mil.

So, you're looing at a 33% increase in portfolio value from Scenario 2 to 1...so, factor into risk/variance, and make your decision.

It's not a clear-cut rational decision because you have to identify personally risk tolerance and that's not a black/white issue at all. There is no one correct answer (this is just a fact, not namby pamby comment). Personally, I'll take the paying down the mortgage. It's less risky AND the extra return of taking the risk is not sufficient for me.
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Old 12-18-2008, 01:10 PM   #42
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Re: Dave Ramsey: get debt free

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Originally Posted by cwilli26 View Post
Durka is dead nuts on. Ramsey even explains this "myth" as he calls it on the Dallas Road Show in the www.hulu.com link above. If you want a tax deduction equivalent to mortgage interest, make a charitable donation which you can easily do because you have NO HOUSE PAYMENT! You have a choice: ship money to the mortgage company, the IRS or a charity of your choosing while ending up in the same financial position.

Bottom line: not -EV to payoff mortgage debt.
There are people in the UK who can comfortably handle all but the most bleak recession who are likely to lose everything and end up with a huge debt if they follow the pay off mortgage debt path.

Not a good plan.
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Old 12-18-2008, 01:13 PM   #43
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Re: Dave Ramsey: get debt free

cwilli I sent you a pm, I would appreciate your input on my situation.

Thanks
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Old 12-18-2008, 01:21 PM   #44
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Re: Dave Ramsey: get debt free

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Originally Posted by durkadurka33 View Post
SO, you've paid ~$8k in interest and have a net gain of $2k. But that's only after one year...keep doing this over and over again, and you see that it's FAR FAR better to pay off the mortgage faster than to try to deduct the mortgage interest from your taxable income. Why? Because you only get a SMALL percentage of that actually translated into tax savings.
This is the usual straw man argument.

You're only looking at part of the picture. The other part is what you do with the money that you have available because it isn't tied up in the house.

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Old 12-18-2008, 01:28 PM   #45
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Re: Dave Ramsey: get debt free

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Originally Posted by cwilli26 View Post
Durka is dead nuts on. Ramsey even explains this "myth" as he calls it on the Dallas Road Show in the www.hulu.com link above. If you want a tax deduction equivalent to mortgage interest, make a charitable donation which you can easily do because you have NO HOUSE PAYMENT! You have a choice: ship money to the mortgage company, the IRS or a charity of your choosing while ending up in the same financial position.

Bottom line: not -EV to payoff mortgage debt.
Straw man "myth". Nobody is suggesting that you take the cash available to you if it's not tied up in the house and buy cigarettes and beer with it.

The problem with this "debt free" mantra is that it fails to distinguish between debt and leverage.

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