Debt snowball. For those that don't know: Pay off your smallest debt first. When that is done apply the money to the next smallest debt until they are all gone. It should be blatantly obvious that you want to pay off the highest interest rate first.

From my experience those people are never going to understand the time value of money.

This is a funny incongruity in Ramsey's plan. For those who don't know Ramsey's philosophy:

He talks about paying 6% for the mortgage and deducting 25% in taxes (so paying 4.5%).
Then you take the money and earning 10% and pay 25% in taxes (so earning 7.5%). He argues the 3% spread is offset by the risk inherent in investing. He wants people to acknowledge the risk factor. Paying off a mortgage is a guaranteed return, and more secure than investing in the market.

The incongruity is that when he talks about investing mortgage dollars, he treats it like investing is dangerous. Yet when talking about investing in retirement, it's a sure thing. His standard line is: "100% of the ten-year periods in the stock market's history have made money" and "97% of the five-year periods have too".

For me, I'd probably rather pay down the mortgage if I had to choose. But I can do both pay down and invest. And that's the most appealing option for me.

I don't know how you guys can be so sure there will be large inflation to come. Simple supply and demand in our weakening economy has lead many analysts to believe we may be headed for a deflationary situation. Just look at plummeting home values in many markets across the country.

There are more benefits to paying off your mortgage than the "feel good factor." There is underlying risk with any debt, mortgage or otherwise...check the country's foreclosure numbers this year if you are skeptical. There are now lots of people who cannot get out of their mortgages because their homes are worth so much less than the balance of the loans.

Ramsey's valid analogy is if your home was paid off would you take out a mortgage to sink the money in the stock market? I know I would not.

Peace,

KennyBanya

And now WHY Ramsey suggests this tactic: People who have student loan debt, car debt, credit card debt, medical debt, etc. are overwhelmed and feeling helpless. They need to change their spending habits, implement the zero-based budget, and so on. He acknowledges that mathematically it would be wisest to payoff high interest debt first. However, he believes it is more important for the folks trying to eliminate their debt to have early and frequent success in doing so which is why he suggests paying off the debts from smallest to largest.

When a person lists the debts out on paper and quickly pays off that $225 medical bill for example, they can cross that the list and experience success. Then, the $50 a week they were paying on that debt gets "snowballed" into the $75 minimum payment they are paying on their $600 Capital One Visa card. At $125 week/month or whatever they then quickly hammer out the Visa card, cross it off the list and "snowball" that extra $125 onto the $2200 car loan balance and so on.

Ramsey is trying to change behavior. If the debtor started paying heavily on the $25k, 26% interest rate credit card first, they would not taste success anytime soon and most likely become discouraged and give up.

Pretty good example here at around 7:30

http://www.hulu.com/watch/49570/the-...008#s-p1-so-i0

A female calls in about a mortgage problem with her "best friend" who she calls she when referring to her pretty clearly. He keeps calling the friend he (i thought on purpose) but then he realizes its a girl. At the end he makes a pretty funny comment on not buying a house with someone who you are not married to.

I think most of the arguments going on in this thread boil down to one thing: this guy's advice is directed to people that are terrible with money. Of course some of us are actually good at handling money and applying rational thinking to our finances and will come to different conclusions than what he is recommending. But keep in mind that there are lots of people out there who, at the first sign of trouble, will run out and spend $1,000 on their credit card to make themselves feel better. There are tons of people who run their finances purely by emotion and their only hope is a set of simple rules that will trigger their happy brain signals and eventually leave them in decent financial shape. If you try to develop a dynamic and rational plan for these people that they feel is beyond their means, they will get mad and then sad and they spend their way into oblivion.

Yes, great post. I didn't read every post in here because of redundancy but I don't see how you can argue paying the highest interest rate debt first, and the move on down the line. Obviously, paying a mortgage is essential to keep your home but paying the whole note off is the last thing I would do as I'm sure credit card rates are north of 20% and mortgage rate is less then 7%. Like I said, I didn't read every post but I sure hope that people are not arguing the contrary here.

OP I noticed the part about the leased car. I used to work collections for GMAC leases. We used to get huge debts sent ot us all the time for wear/tear and excessive mileage, nd 90% of the time the dealership never even told them about the charges when they took the car back.

Make sure when you take it in that you get a written statement that you dont owe anything. From what ive seen its very rare to flat out walk away from a lease without owing something, usually most people roll it into another lease without even knowing it and eventually they end up upside down on their loans.

This might be compeltely off in your case, but just wanted to throw that warning out there since I used to do this kind of stuff. Id hate for a random collections notice to screw up your plans 6-12 months from now.


My CCard debt is starting to get kinda out of hand (not a lot...like 3K at most) so I shuold probably start something like this as well to get rid of that payment. I havent had a real savings in years so thats probably a good idea too thanks

Sometimes, if the budget is tight, it's more important to eliminate a payment than it is to save on interest.

Back when I had large credit card debt, I would also use low rate balance transfers to keep the rates down on the largest balances. But sometimes that meant applying for new cards, while in the meantime existing accounts would keep raising their limits, and as a result I wound up with something like 80K in available credit. I'm not sure this is the best plan for the Ramsey audience.

The psychology of being able to see results is really powerful for people who can't think long-term. So, the waterfall strategy of just paying off the smallest debts first will be better for those sorts of people - they may pay more interest vs paying the most expensive debt, but they may SAVE interest if they'll fail unless they can see quick results.

I don't know (and don't really care frankly) if he is "cool" with gays. He consistently states never, never, never co-sign any type of loan with anyone other than a spouse. He has scolded people for co-signing with their siblings, children, parents and even fiancees.

Thanks for the post. I worked for Ford Credit for 15 years so I am well-versed in the lease-term process (I've terminated multiple leases over those 15 years). I'm actually pretty confident I will be able to get out for 50% or less of the amount owed since I will suggest if they ever want me to buy/lease again they will take care of me now. They can just check out the 7-8 Ford Credit tradelines on my credit bureau if they don't believe me. Of course, I have no intention of financing or leasing again, but they won't know that lol.

Even though I think this system is prety great and could help a lot of people....this is something that I dont really agree with. Each persons situation is different. I bought my house with my girlfriend/spouse when I was 21 and it was the most sound investement we've ever made. IMO if you've been with someone for a long time and anticipate marrying them then I see no issue with getting a mortgage or other loans together. I think anyone that has half a brain should get a mortgage as soon as possible. Renting is wasting money IMO.

From browsing their forums, this guy kinda seems to take a really conservative view on most things and seems really religous, which seems to tie into his advice. I would have reg'd on his forum, but hes charging to sign up and every other post I saw was about how "god" has provided for these people...yadda yadda....but I'll leave that to the Psych/religion forum

Common myth that 'renting is wasting money' Actually, owning is generally 2x the mortgage price. That includes property taxes, extra utilities and maintenance. So, if you rent for 1k/month, and a mortgage will be 700/month...then the ACTUAL cost of owning is around 1400/month. So, with a mortgage of 700/month you're MAYBE building 50-100/month in equity (prolly the lower), so you're doing BETTER by renting than owning...so it's not wasting money.

Owning is wasting a lot of money to interest/taxes/maintenance. It's often ofset by appreciation, but you can never ever bank on that. So, you're probably wrong to view renting as 'wasting' money...because most of the time, when you look at how much equity you're actually building by owning, you're better off renting.

I can see your point here....but if something happens and I need some major cash for something, I cant refi an apartment.

My payments build equity. So even if Im spending a few hundred a month more than I would with an apartment, I get the majority of all that money back as a DP to a new house. Plus when my house is paid off, I might still have a few hundred a month in expenses (I still think this is too high an estimate...but I'll concede that it depends on the area you live in) but I can start investing with that house payment.

Factor in appreciation (which over the long run IS gauranteed unless the house is neglected), the security of having loan collateral, the freedom of doing what I want with my house, no noisy neighboors, plus the expected return of my investments once I can start investing my house payment...IMO that far exceeds the small amount "extra" I pay per month.

Gotta stick by my view on this one.

I had read one time that someone who rented for 30 years as opposed to buying a house in 1975 (and paying a 30yr mortgage) and invested the savings in the DOW would have TWICE the net worth of the home buyer. Plus they probably didn't have to worry about lawn mowing, snow removal, fixing broken stuff, etc.

I think this would be highly dependent on property value fluxuation (neighboorhood ect), development of the property and appreciation.... which is different everywhere. I dont think its possible to get any sort of realistic numbers from that quote since all the variables invloved. You could be 100% right or wrong...it would depend on the area, and what you invest in. I dont think its going out on a limb though to say that investing in real estate is much safer than the markets.

....and when I rented I had to shovel snow (landlord was lazy) mow the lawn (the same) landlord took forever to fix anything, had the IRS knocking on the door...Im sure this is doesnt apply to every renter though. There are +'s and -'s for both.

One of the biggest factors for me is the privacy and pride of owning a home at a young age. I'll have my house paid for many many years before I retire....which will allow me to play the markets instead of paying rent until I die.

also we havent mentioned anything about yearly tax cuts for property owners...or people that run businesses from their home.

Don't get me wrong, I'm not saying that owning a house is bad. Nor am I saying that you can't do better owning a house. However, the way you're thinking is just wrong.

Appreciation: depending where you are, it's right around inflation (maybe slightly higher) in the LONNNG term. So, no point counting on that. Short term it's speculation, long term is around inflation.

Building equity: You're usually only be putting away 25-30% of every dollar towards equity at best. So, on a 1k/month mortgage, you're putting away about $3500/year in equity for the first few years. So, if you have a 1k mortgage, vs say 1400 rent, your house taxes/maintenance etc will make your true monthly costs of owning around 2k. So, you're putting away 300 equity, so it's really only paying 1700...vs 1400. So, you're worse off buying the home in the first few (~7) years.

So, actually, you're paying more/month AND you're not going to see a penny of most of that extra money again in equity because it's gone to maintenance and property taxes etc - those don't build equity.

When your house is paid off, I can flat out guarantee that you'll have at least a few hundred/month in expenses. Again, you have to fix things - and you have to amortize for big costs like the roof, HVAC, driveway, etc - and property taxes. Those won't change...figure for 3%/year in maintenance and then about 1%/year in property taxes. So, you buy a 200k home with 25k down around 5% 25yr amortized and you're looking at 4%/year down the toilet (figurative, and probably literally at some point!) = 8k/year. So, not only does your house have to appreciate long term better than inflation, but it ALSO has to beat that added 4% of house value in perpetual costs...they never go away, and the property tax will keep pace with the value of the house.

So, even if you pay off your house, you're looking at at least 600/month in expenses when you just got RID of a 1k/month mortgage! Owning a house is NOT cheap and it's these "hidden" reasons that put so many people into difficulty...and it's an uber common mistake that damn near everyone makes.

...if you think that you can always just refinance out your equity if you need the cash, think again. First, there are costs associated with that. Second, you assume that the house doesn't depreciate. You're unlikely to get anything more than what you build on TOP of your downpayment (and any appreciation). So, you're probably only looking at a few hundred/month. We already established that you're basically 300/month worse off in our example just by owning...so you have to overcome that in appreciation MINUS costs of refinancing. That's basically short-term speculation. Not a sure thing, not even a 'confident' thing...so you shouldn't expect to be able to do that - so, bad argument.

See how the thinking is bad?

Yes...we...have...read the rest of the thread. The tax savings are marginal.

That is totally arbitrary

Confessions of a gruncher. lol

I guess we can agree to disagree....

Anyone spending 600 a month on house repair bought the wrong house. Ive had my house for 5 years and even with replacing my furnace and water heater, and a few other random things....Im no where near that kind of money.

Also... I still say these numbers change dramtically depending on where you are, the amount of development in the area, and the overall "niceness" of the neighborhood, which changes over the years.

I also think if you're smart then you'd avoid the majority of large expenses by doing a little more work in the inspection process.

As far as refinances go.....i worked in collections for over 7 years and worked hand in hand with hundreds of refi guys. Not sure why you think its difficult to get a refi...im doing it right now actually. The rates are sweet right now.

BTW....for basically saying that I could be right in several situations in the beginning of your post, you gave quite a few reasons as to why I would be wrong.

I will concede to saying that sometimes I wish I was still in my old aprtment....but I had some really cool neighboors.

Wait, did I just get called out for being intellectually honest? What a weird thing to call someone out for...

I didn't say you couldn't get refinanced, just that there are costs associated with that (which make wanting to do it a lot less attractive in the first few years of owning) and you're basically speculating that the house will appreciate because you're not building much equity from your mortgage payments...I showed how unless your house appreciates, you're losing money owning and trying to refinance (but that's with the assumed values).

3% of house price for repairs is an industry standard estimate. Of course some will be more/less but if you put away 3%/year of the price for future/current repairs, you'll never have financial problems. Need a new roof? No prob - you can pay it out in CASH and not have to incur more debt. That's why you put so much aside...so that basically no matter what, you'll probably be fine. It's conservative, but in a good way. You won't get away with <2%/year in most instances...and <1% is just laughable over 20yrs (probably even 10yrs, even 5yrs).

The main problem with all of this is that most people who rent instead of buying will wind up spending the extra money instead of investing it.