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Old 12-18-2008, 03:06 PM   #51
cwilli26
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Re: Dave Ramsey: get debt free

Brons -

I understand what you are saying, but not all the details of the program are here. I'll try to fill in some of the holes, but it is tough trying to describe a 300-page book in this format.

It's not about having nerves in investing. Ramsey suggests investing in mutual funds with at least a 5-10 year history using a 25% split among growth, growth and income, aggressive growth and international. These type funds will generally show a 12% rate of growth/return.

In terms of liquidity, if you don't own a home, Ramsey suggests (strongly) that you simply rent until you are consumer debt free, have 3-6 months of expenses in an emergency fund, and that you have saved at least 20% of the purchase price of the home you want to buy.

I agree with your statement that if you have $100k cash and want to buy a $100k home that you would not do that. You would have paid all debt off then put $15-$20k into a money market account as your EF and put the rest of the money down on the house.

Your liquidity statement is completely correct. Payoff of the mortgage is, therefore, step 6 of the plan. After all other things are handled.
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Old 12-18-2008, 03:12 PM   #52
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Re: Dave Ramsey: get debt free

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It's not really a low price though, is it? Look at amortization tables. First year, you pay ~$8500 in interest
Are you talking about my 100k example? Because if you pay 8.5k interest on a 80k mortgage you're paying too much.
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Old 12-18-2008, 03:12 PM   #53
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Re: Dave Ramsey: get debt free

Yeah, if you have 100K and looking at 100K home, THEN it's totally stupid to buy the house outright...but seriously, how many people can do that these days?!! Ramsey is talking to normal people who would only have 10% IF THAT.
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Old 12-18-2008, 03:13 PM   #54
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Re: Dave Ramsey: get debt free

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Are you talking about my 100k example? Because if you pay 8.5k interest on a 80k mortgage you're paying too much.

Talking about my 175k mortgage example...1k/month payment.
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Old 12-18-2008, 03:15 PM   #55
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Re: Dave Ramsey: get debt free

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Leverage is essentially borrowing money at one rate and investing it at a higher rate for profit. If you're debt free enabling you to pile up cash, you can then invest that cash for additional profit.
Except it isn't "additional" profit.

If you borrow you pile up the cash now. If you don't, you pile up the cash later. Cash invested now returns more than cash invested later. Does it return more than the costs of borrowing? Maybe.

There isn't a "right" answer, and that's where you go wrong by claiming paying off the mortage is "not -EV" and it's a "myth" that you shouldn't do so or that the tax savings don't make it the right decision.

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Old 12-18-2008, 03:25 PM   #56
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Re: Dave Ramsey: get debt free

Okay, first. You don't pile up the cash if you get a mortgage. We're assuming that you're a NORMAL person who doesn't have the cash up front to pay for the house in full. This person has say 10% DP which is good in today's world where people are bad at saving. So,k there's no piling up front of the home's purchase price. Unless you mean that Scenario 1 gets a 9yr head start of 12k/year investing, then sure, and I showed how much that changes the total portfolio value (not including house price). So, there's a headstart, but no 'piling up' like I think you're referring to.

Second...you have to take variance/risk into EV calculations. That's why you're wrong that there is a clear 'right' decision (at least in terms of rationality). There's extra risk in not paying down the mortgage that you have to take into account to the decision...to not do so is oversimplifying. I study decision theory (psychology, economics, philosophy) and this is just the way it works when you're talking about investing strategies. There isn't a clear right decision...at some level you have to define a risk tolerance (which is a arational decision - not to be confused with irrational).
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Old 12-18-2008, 03:26 PM   #57
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Re: Dave Ramsey: get debt free

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Except it isn't "additional" profit.

If you borrow you pile up the cash now. If you don't, you pile up the cash later. Cash invested now returns more than cash invested later. Does it return more than the costs of borrowing? Maybe.

There isn't a "right" answer, and that's where you go wrong by claiming paying off the mortage is "not -EV" and it's a "myth" that you shouldn't do so or that the tax savings don't make it the right decision.

eastbay

My point is this: without payments, you have more cash to invest. Depending on the specifics, this could result in more (or less) returns later. Not to mention the peace of mind that comes without having debt. Not having a credit card statement, a car invoice, etc coming in the mail every month is a pretty attractive scenario in my humble opinion.

I agree there is not a "right" answer for everyone. I'm choosing to go with being debt free and mortgage debt free is +EV. Others need to make their own decisions obviously.
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Old 12-18-2008, 03:30 PM   #58
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Re: Dave Ramsey: get debt free

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That's why you're wrong that there is a clear 'right' decision (at least in terms of rationality).
Re-read. kthx.

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Old 12-18-2008, 03:35 PM   #59
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Re: Dave Ramsey: get debt free

Then be more clear...cuz you seem to be either contradicting yourself or mis-attributing a statement to my argument. I'm not claiming that either situation is 'right'...I was laying out what things people should take into account. I didn't say which to do. I never said "yes, absolutely pay off mortgage debt as fast as possible"...never said that. I just brought up counter-arguments to the claim that you "should not pay off mortgage debt as fast as possible"!

edit: Personally, I'd pay off the mortgage AND invest...but that's because my risk tolerance is in the middle.
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Old 12-18-2008, 03:41 PM   #60
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Re: Dave Ramsey: get debt free

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Then be more clear...
Me: "There isn't a "right" answer"
You: "That's why you're wrong that there is a clear 'right' decision"

Clear enough?

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Old 12-18-2008, 03:51 PM   #61
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Re: Dave Ramsey: get debt free

Can consumer debt be good in some cases?

For example, I have a 5yr 0% loan on my truck. I also had the option to get $3000 cashback and take financing - I did the math and it was exactly equal (not surprisingly).

Isn't it good to have consumer debt if the interest rate on that debt is less than, say, the interest rate you can get with a savings account at an online bank?

D.
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Old 12-18-2008, 04:03 PM   #62
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Re: Dave Ramsey: get debt free

i think max raker brought up a great point: a better position would be to learn how to responsibly use credit cards

If you pay the balances in full, or only carry 0% balances, the benefits are amazing.

One, the credit card companies give you a kickback on your spending.
It's standard to get 1% back. Many will give you up to 5% back on certain goods. I have a discover gas card that allows me to get 5% of what I spend on gas back. I have a citibank master card that gives 3% back on groceries. I have a JPMChase visa card that gives 3% back on superstores (Walmart, Meijer, etc.). I travel quite a bit, so I have cards geared specifically for that. I usually sign up for one every year or two that have no annual fee and give huge initial gifts. My latest American Express Blue Sky gave me $400 in travel credits for transferring a balance at 0% ($99 max fee) and making $500 in purchases within the first 60 days on it. Since I knew I would be traveling, that was a huge boost to my wealth level with about 15 minutes of 'work.' In a world where everyone gives a nut to boost their ROI by 2% per year, I'm amazed how few take advantage of easy ways to lower their yearly spending by that amount and more.

Two, using credit responsibly will help when it comes to home mortgages and other large asset purchases. I don't have a home yet. But, when I do purchase a home, it will be nice to go in there with a FICO score above 750.
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Old 12-18-2008, 04:10 PM   #63
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Re: Dave Ramsey: get debt free

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Originally Posted by eastbay View Post
Me: "There isn't a "right" answer"
You: "That's why you're wrong that there is a clear 'right' decision"

Clear enough?

eastbay
Quote:
Originally Posted by durkadurka33 View Post
cuz you seem to be either contradicting yourself or mis-attributing a statement to my argument. I'm not claiming that either situation is 'right'...I was laying out what things people should take into account. I didn't say which to do. I never said "yes, absolutely pay off mortgage debt as fast as possible"...never said that. I just brought up counter-arguments to the claim that you "should not pay off mortgage debt as fast as possible"!

edit: Personally, I'd pay off the mortgage AND invest...but that's because my risk tolerance is in the middle.
re-read, kthx
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Old 12-18-2008, 04:11 PM   #64
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Re: Dave Ramsey: get debt free

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Originally Posted by dlgilbert4 View Post
Can consumer debt be good in some cases?

For example, I have a 5yr 0% loan on my truck. I also had the option to get $3000 cashback and take financing - I did the math and it was exactly equal (not surprisingly).

Isn't it good to have consumer debt if the interest rate on that debt is less than, say, the interest rate you can get with a savings account at an online bank?

D.

Great question and one that will probably bring a lot of debate. Makes sense (and possibly cents - lol) to take a 0% loan and invest the $30K you spent on the truck and earn money on that, right? Wrong.

That said, let me give you the inside story. I worked for Ford Motor Co. for 15 years in their credit arm Ford Motor Credit Co. The Motor Co. paid the Credit Co. to finance these vehicles at the subvened APRs (0.0%, 1.9%, 2.9%, etc.). They then passed the cost of rate subvention onto the dealer in terms of hire invoice prices which are then passed onto the consumer. In other words, that $30k truck you bought would have been the equivalent of $25K or $26K or so if subvened rates did not exist.

That's why Ramsey says when making a purchase, especially a high-ticket item, walk in with cash or cash equivalent and ask for a deal. Tough on a auto because the cost of rate subvention is already built into the dealer's invoice cost. But, there is also holdback and other incentives the dealer receives from the manufacturer upon sale of the vehicle.

Same concept applies when you purchase something at BestBuy, a furniture store, etc for "no payments, no interest for 6 months or 12 months." The cost of money is built into the price you buy the goods for.

A caller to Dave's show actually shared a story that he was at a store and when checking out (with about $800 in merchandise) was asked if he wanted to apply for a store credit card to receive 15% off. He said no but that he would pay cash if he received that same 15% off. Long story short, the cashier called the manager over and the guy got 15% off.
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Old 12-18-2008, 04:16 PM   #65
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Re: Dave Ramsey: get debt free

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It's not about having nerves in investing. Ramsey suggests investing in mutual funds with at least a 5-10 year history using a 25% split among growth, growth and income, aggressive growth and international. These type funds will generally show a 12% rate of growth/return.
BZZZZZZZZZZZZZZZZZZZZZZZZZZZZz wrong wayway wrong.
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Old 12-18-2008, 04:17 PM   #66
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Re: Dave Ramsey: get debt free

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Can consumer debt be good in some cases?

For example, I have a 5yr 0% loan on my truck. I also had the option to get $3000 cashback and take financing - I did the math and it was exactly equal (not surprisingly).

Isn't it good to have consumer debt if the interest rate on that debt is less than, say, the interest rate you can get with a savings account at an online bank?

D.
If you pay off your truck in 5yrs, then 'debt' isn't bad. What's bad are liabilities that don't increase net worth...debt isn't bad if it increases net worth.

Also, some things you just HAVE to have and you treat them as expenses, not investments. A vehicle is one of them. BUT, you bought new, which is a terrible idea. So, if you can figure out what a "reasonable" expenditure on a necessary item like a vehicle is (that's sure dependent, but new is almost always a waste of money...big time...unless you can literally BURN half the value of the vehicle, you shouldn't buy new). Then, any debt you take on (hopefully you don't pay interest!) isn't really 'debt' but a necessary expenditure and can be treated as such.

So, if you had the cash to buy up front for that truck, you have basically some free money to invest elsewhere...but you didn't. So you're in the same sorta boat as "pay down mortgage vs invest" except that you're not paying interest for 5yrs. I say that in that you don't have the 30k to invest elsewhere, you only have the difference between your monthly payment, and what your monthly payment would be +interest. Not much.

So, in GENERAL consumer debt is bad...cuz by it's definition (basically) it's for liabilities, or at least net liabilities. However, things change a bit if it's a necessary expenditure like housing/transportation.
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Old 12-18-2008, 04:19 PM   #67
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Re: Dave Ramsey: get debt free

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Great question and one that will probably bring a lot of debate. Makes sense (and possibly cents - lol) to take a 0% loan and invest the $30K you spent on the truck and earn money on that, right? Wrong.

That said, let me give you the inside story. I worked for Ford Motor Co. for 15 years in their credit arm Ford Motor Credit Co. The Motor Co. paid the Credit Co. to finance these vehicles at the subvened APRs (0.0%, 1.9%, 2.9%, etc.). They then passed the cost of rate subvention onto the dealer in terms of hire invoice prices which are then passed onto the consumer. In other words, that $30k truck you bought would have been the equivalent of $25K or $26K or so if subvened rates did not exist.

That's why Ramsey says when making a purchase, especially a high-ticket item, walk in with cash or cash equivalent and ask for a deal. Tough on a auto because the cost of rate subvention is already built into the dealer's invoice cost. But, there is also holdback and other incentives the dealer receives from the manufacturer upon sale of the vehicle.

Same concept applies when you purchase something at BestBuy, a furniture store, etc for "no payments, no interest for 6 months or 12 months." The cost of money is built into the price you buy the goods for.

A caller to Dave's show actually shared a story that he was at a store and when checking out (with about $800 in merchandise) was asked if he wanted to apply for a store credit card to receive 15% off. He said no but that he would pay cash if he received that same 15% off. Long story short, the cashier called the manager over and the guy got 15% off.
You are/were an insider so you know, but I read a great book on all this and it's the same info. Cash talks...you only get that great financing rate because they're overcharging you! No free lunches.
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Old 12-18-2008, 04:20 PM   #68
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Re: Dave Ramsey: get debt free

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That's why Ramsey says when making a purchase, especially a high-ticket item, walk in with cash or cash equivalent and ask for a deal. Tough on a auto because the cost of rate subvention is already built into the dealer's invoice cost. But, there is also holdback and other incentives the dealer receives from the manufacturer upon sale of the vehicle.
when i bought a car some guys in the car forum here (which may or may not exist) told me to get it financed because if i did that they could maybe cut the price more since the dealership gets a kickback on that.

so i did that and did other stuff these guys recommended got an absolutely amazing deal, walked into the bank with the loan the next day and cut a check.

this guy sounds like a huge nit, i have no idea why you need a guru to tell you "don't run up consumer debt" and "save money." how is this not self-evident?
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Old 12-18-2008, 04:21 PM   #69
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Re: Dave Ramsey: get debt free

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re-read, kthx
Could this be more boring? You made a false statement about what I said. I put it before you, and you reposted a bunch of irrelevant rambling. I don't think what you're saying is wrong, so much as I think what you're saying about what I said is wrong. Oh well.

Have fun with this thread.

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Old 12-18-2008, 04:22 PM   #70
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Re: Dave Ramsey: get debt free

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Could this be more boring? You made a false statement about what I said. I put it before you, and you reposted a bunch of irrelevant rambling. I don't think what you're saying is wrong, so much as I think what you're saying about what I said is wrong. Oh well.

Have fun with this thread.

eastbay
What? I admitted that I misread you! Then I expanded on what I misread and that you still weren't being clear. Then you responded by not actually responding to that part...so you didn't clarify anything because you still seemed to miss MY point. Again, I admitted that I misread you...so reread
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Old 12-18-2008, 04:24 PM   #71
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Re: Dave Ramsey: get debt free

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this guy sounds like a huge nit, i have no idea why you need a guru to tell you "don't run up consumer debt" and "save money." how is this not self-evident?
LOOK AROUND?!!?!
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Old 12-18-2008, 04:30 PM   #72
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Re: Dave Ramsey: get debt free

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when i bought a car some guys in the car forum here (which may or may not exist) told me to get it financed because if i did that they could maybe cut the price more since the dealership gets a kickback on that.

so i did that and did other stuff these guys recommended got an absolutely amazing deal, walked into the bank with the loan the next day and cut a check.

this guy sounds like a huge nit, i have no idea why you need a guru to tell you "don't run up consumer debt" and "save money." how is this not self-evident?
You are correct that the dealership makes money if they handle the financing for you. But why would they give up their profit to give you a sweetheart deal? Finance & Insurance managers generally make money on the interest rate spread (e.g. you sign a contract at 8.00% which they send to a bank charging the dealer 7.00%. The 100 bps spread represents the dealer profit). On subvened deals, the F&I manager receives a small percentage of the amount financed. They also sell warranties, gap insu, credit life and disability insu, etc.

To the dealer's disadvantage, most sales manager and finance managers are on different pay plans and, therefore, have different goals. Sales are paid on gross (difference between dealer invoice and the price you pay) and finance managers as described above. The sales manager doesn't care (typically) if you finance it there or pay cash and screw their F&I guy.

Incidentally, if the loan is paid off early, the money earned by the F&I manager for rate spread is charged back by the lender.

Ramsey = Nit? I'd say so (lol). A debt-free, multi-millionaire nit! If it was so self-evident, wouldn't more people be debt-free. Consumer debt is running rampant in America.
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Old 12-18-2008, 05:21 PM   #73
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Re: Dave Ramsey: get debt free

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<snip>

On your other point: I think that's a lesson for the capitalist west - the economic model is cancerous. It's unsustainable (it's sustainable, but at the cost of people's well-being)...so at best it can be said to be sub-optimal, but in a prescriptive sense: it's so deficient that things should change. Any economy built on consumption is bad and doomed to fail. You can sustain SOME consumption, but not anywhere remotely close to what the west (specifically the US and slightly less Canada).
l-o-l. so it was the evil corporations that forced the americans to try and "keep up with the joneses". give me a break.

I'll blame the government and the public before I blame FREE MARKET CAPITALISM for this mess.
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Old 12-18-2008, 05:21 PM   #74
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Re: Dave Ramsey: get debt free

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Don't you see that it's MORE likely that people will start abiding by this advice given economic times?
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Definitely validity to this point. But more and more people are "seeing the light" at least in the circles I run in. A bad economy doesn't impact the regular guy that much if that guy doesn't have payments.
cleary you two over estimate the gold-fish-like memory of the average american.

Summer08 - Oil rises to 150ish, media cries end-of-world, people by the metric-****-ton start buying up all the hybrids, economy looks to investing in alternative energy.

Fall/Winter08 - Oil back down to 50ish, media rejoices "$350 billion 'effective' tax cut to the US", people are content with their SUVs, lol-alternative-energy-aments.

like a ****ing gold fish. we are doomed.
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Old 12-18-2008, 05:23 PM   #75
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Re: Dave Ramsey: get debt free

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I'll blame the government and the public before I blame FREE MARKET CAPITALISM for this mess.
One of the things you will blame = the one thing you won't
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