Ramsey never suggested everyone stop spending. Ramsey suggests you stop spending with money you don't have (credit in other words). If the whole US started at Step 1 today and went through the entire process step-by-step with each step occuring at the same time then yes, the economy would come to a halt. But that could not ever happen.

Would this be the end (or near end) of companies like Capital One, American Express, Visa, MC, Discover, etc? For the most part, yes. But people would still buy electronics, automobiles, airline tickets, meals at restaurants, etc.......with cash.

This seems so wrong, since if you always pay off your credit card in full every month they have great benefits. I guess if can help people who just can't control themselves or are unwilling to do the math when it comes to money.

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.

That's only true if you get comparable cost-of-living raises in wages...otherwise you still have that debt AND you can't afford normal **** anymore. So, I disagree...it seems likely that inflation will really hurt people and the only result will be increased bankruptcies - not benefits from high inflation.

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.

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'.

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.

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.

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

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.

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.

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?

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.

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.

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.

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.

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.

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

Thanks

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.

eastbay

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.

eastbay

I'm not part of this 'debt free' mantra group you speak of. I gave an analysis and said that either decision is 'rational' but that there isn't one decision that dominates. And, I made no straw man claim. Both people buy a house...so, they both have to pay it off, and I put my assumptions very clearly on the table. One takes a 25yr amortization and takes 25yrs...the other 25yr amort and pays off in 9yrs. The alternative is to keep refinancing to your GRAVE in order to leverage and never actually 'tie' up any principal over a small percentage.

So, maybe you can help me with your point. There's opportunity cost with every single decision you make in life...that's the nature of being temporal beings. So, even in the 2 scenarios I put forth, there are others whereby following either of these produces opportunity costs. So, what alternative are you suggesting that I'm missing?

edit: I guess you missed my 2nd post where I think I should have addressed your concern.

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. Simplistic I know - but that's the point. The theory behind this whole post is simple, not easy necessarily, but simple when employed.

Ultimately, to each his own. I have chosen to become debt free and I am very comfortable with that decision. It's not for everyone. Just wanted to put this out there so folks can see there is another way.

hoyasaxa - I responded to your PM.

It's not about the deduction on the taxes but about the net payment. It's very low and a very low price to pay to be liquid. Also, if you don't have to nerves to invest the money you could put that money you would use to pay of the mortgage in a high yield savings account making the price even less.

There are other people who can explain it better than me. All I know is that if I had $100k cash and wanted to buy a home for $100k I would pay 20% cash and keep the rest in my pocket.

It's not really a low price though, is it? Look at amortization tables. First year, you pay ~$8500 in interest, $3500 principal. So, you have that extra $12/year to either pay down mortgage or invest. You're paying $8500 in the first year to keep $12k liquid...you think that's CHEAP?! It's expensive because it's anti-leveraged. You have a 10% DP on the house, you can't go and invest the 90%. It's true that you're leveraged when you have a mortgage, but that's ONLY for the increase in the property's value. You're not leveraged such that you can extract the price of the home that isn't equity...the only way to do that is RE-finance in the future. So, you certainly can't do that the first year (not wisely, anyway...unless the house's value rockets). So you're paying interest on the whole 90% of the house's value, only to invest that $12k at a higher rate.

So, you're really only coming out with $3500 in additional investing power each year. Compare that to the guy who pays down his mortgage faster...he's going to save a bundle on interest. Not enough to offset a GOOD investing run of the other guy...but if the other guy's investments don't do so good...then the situation changes.

Moral: I don't think you're right that the mortgage is a CHEAP way to leverage...seems pretty friggen expensive, unless your house's value increases and you re-finance the money out.