Ok, I just finished reading Total Money Makeover and really enjoyed the common sense advice that the book offers. Now I know that some people really get on Ramsey's case about his religious/ spiritual approach to his money and plan. However I only noticed about 3-5 bible quotes in the book that he related to the material on more of a phiolsophical context. This book is the only exposure that I have had to Ramsey so if he is ultra religious on his radio show I havent ever listened. So anyway I understand that some people have a problem with his Bible Hugging, Honk if you love jesus approach but I didnt find it to be that distracting in the book. So my question is what are some of the other complaints/ dissagreements about Ramsey's book. Are some of his ideas false. ie. Credit cards are bad, leasing a car is bad, the tax shelter that you get on a home really isnt that helpful. Is there anything in the book that Ramsey haters really dispise or dissagree with. From what I see Ramsey is one of the most discussed financial authors but I never really hear anyone attacking anything but his religious/spiritual approach. I would love to hear what the GRS readers have to say. LUKE

I think most of his detractors criticize him for advising people based on psychology rather than more mathematical logic. For example, his advice on the "debt snowball" repayment plan, and his firm line against credit cards, as opposed to advising people on the benefits of responsible credit card use, are directed at people who don't yet have a psychology of saving, who get into bad debt habits, and who need psychological self-reinforcement. People who don't have that psychology (who I suspect are the majority of PF-blog readers) critcize this for being mathematically inefficient--for example, that the "snowball" debt repayment plan will take longer than paying off higher interest rate, larger balance debts.

It's not a matter of right or wrong, but what kind of advice works best for different personal situations and life experiences.

Dave's advice is developed for people who have no control over money. Their debt payments + living expenses >= their income. Perpetually and intentionally. They wonder why they are always broke and either can't figure out on their own why or have no self-control (ability to save) when it comes to money. His followers are akin to alcoholics in that there can be no middle ground. Either you have alcohol or you don't - moderation or occasionally is not an option as there is no control. Either they have debt or they don't. A credit line with a zero balance is simply too great a temptation for a Dave follower to have. Because Dave followers are completely illogical when it comes to money, Dave has to offer illogical advice as a way to make sense. Like paying off debts from smallest to largest rather than highest interest to lowest. Illogical. No debt, no matter what. Oh, except for a house. That's illogical. Financing a home on 15 years and then accelerating it's payoff (no matter what interest rate you have). Illogical. Selling a car you are upside down on, borrowing the amount you are upside down plus a couple thousand more, and buying a "beater." Illogical (and expensive). Advising people who call and want to buy a business that they should "work a deal" with the seller in which they give the seller a portion of the profit every year until paid as a way to avoid debt and buy a business. Illogical. With certainty, if you follow his plan, you will resign yourself and your wealth to mediocrity. For those who cannot keep their hand out of the cookie jar, Dave is truely a blessing. However, if you do have a good handle on your personal finances and are building wealth on your own, you most definitely can and will do a better job than what Dave's plan will generate.

I disagree about Dave's House-Payoff Plan as being illogical. We can't just compare the interest rate you pay on your house to your expected return rate on an investment and say if a>B then do A. There has to be adjustment for risk, and then there's going to be an intangible psychological return on owning outright vs. not. For some folks that will be huge (that's me) , for others not so much.

So basically, to check illogicality, try Interest Rate + Risk Premium + Intangible Psychological Benefit of Owning >= Expected Return Rate on Investment + Intangible Psychological Benefit of Saving for Retirement

Despite having a fairly good handle on finances, I do enjoy listening to Dave's radio show. One, its uplifting to hear folks battle back from the abyss of monster debt. Two, that's self-affirming...We're not told enough in our consumeristic society today that saving and deferred gratification is a good trait. Heck, today I was talking to my fiancee about our soon to be combined finances and what our goals are. She's big into owning another property, but not before we pay off our current, which we agreed would be paid off in 10 years (more like 8 based on my plan). However, I showed her how, mathematically, we could save up enough money in 5 years to buy a house outright rather than get a mortgage. I rather liked the idea of paying myself interest and then using all that to buy a 2nd residence or rental property. So did she.

I do agree about the illogical and how then it becomes logical about the debt snowball. Its a purely psychological strategy, because then folks feel like they're making progress. I bet he borrowed that from weight watchers, or something

Well I'm sure I won't change your mind, but I do appreciate the opportunity to at least elaborate. . .

There were two points you made in favor of paying off a house early. First was due to "risk" and the 2nd was a psychological boost of owning a paid-in-full home. I'll have to assume the "risk" is the risk that you lose your job and are no longer able to make the payments? So do correct me if I've made a wrong assumption. The psychological boost being the somewhat euphoric feeling of no longer having a mortgage? Correct that if I'm wrong.

To the first point: "Risk". If I have $50,000 in the bank and owe $20,000 for a car, am I really in debt for my car? Am I taking a risk? Am I stupid for not paying off the car and reducing my cash to $30,000 and owning my car outright? Is there really a difference between having $50K in cash and owing $20K on a car or having $30K in cash and owing $0 on car? Transfer that scenario to a home. Let's say I owe $150,000 on a house and have $150,000 in the bank. Am I taking a risk? Is that position more risky than owing $0 on a house and having $0 in the bank? If one accelerates paying off a house by paying an extra $100,000 against principle couldn't they instead come to a point where they have $100,000 in savings and owe $100,000 on the house? That's rhetorical as the answer is quite obvious - there is no question that someone could save what would be accelerated payments until the day comes that the savings is equal to the payoff. There are two important things to consider. First is the actual interest rate on your mortgage. Let's say you have a 6% rate. Many people will realize a tax deduction which results in a tax savings which effectively lowers that 6% rate down to, for example, 4%. So, you've borrowed money at 4%. If you follow Dave, you'll pay extra principle and save the 4% rate. If you listen to Dave, but ignore his accelerated payoff advice, you'll save money at a 12% return (that's the rate he preaches you'll realize if you invest in "good growth stock mutual funds"). With certainty, if you owe $100,000 and pay a 4% APR while you hold $100,000 and collect a 12% APR you'll realize an 8% spread with virtually no risk. The risk is gone because you have saved enough ($100k) to pay off the mortgage ($100k). Haven't you heard him talk about how nice bank lobbies are? All banks do is borrow money at a low rate (your savings rate) and loan money at a higher rate (what you'd pay when borrowing money) - they buy all that nice stuff on the spread. . .

Quite simply: Save at 12% and payoff as slow as possible the 4% (or 5% or 6% - whatever). Why 15 years? It's safer, smarter, and you'll be wealthier paying off a 15 year note as slowly as possible. You'll be even more wealthier if you take 30 years to pay off that same note (even at a 1/2 percent or so higher rate).

Dave often mentions "risk" - but he never quantifies or even explains it very well. I'm not sure what he means, but from ever angle I can see it there is less risk in having a $100K in savings and owing $100K on a house than having $0 in savings and owing $0 on a house. If you owed $100,000 on a house and were given $100,000 dollars, wouldn't you put the $100,000 in mutual funds that earn $12,000 per year and pay the $4,000 in interest against your mortgage and come out $8,000 per year for the rest of your life knowing that with the stroke of a pen you can make the debt go away (along with your cash)?

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Now we can talk about the psychological benefits of having a paid-for house. Let's say you have a $300,000 house. On one hand, you can pay off that $300,000 and have $0 in cash or you can owe $300,000 and have $300,000 in cash. If the latter case, you'll owe 4% APR per year or $12,000 and earn $36,000 per year return (12%) - for a net income of $24,000 for doing absolutely nothing. That's $11.54 per hour for doing nothing. If you earn $18 per hour you can pay your house off in full and earn the same $18 per hour or you can save that extra money and earn nearly $30 per hour. Seriously, if you do the very simple math it's should be psychologically devastating to pay your house off an earlier than 30 years.

I've never listened to Dave Ramsey, only read his books. Though my religious/political ideas don't align with his, I think he has great financial advice for those who struggle with money. As Rush and UprightPolity noted, his target audience is people who need help with the psychological foundations of money management. I'm one of those people, so I've found his books inspirational. He's really helped me turn my financial life around.

I think that most critics complain about him because his methods are not the most mathematically sensible. If you pay down your low-balance credit cards before your high-interest credit cards, you'll pay a little more money in the long run. If you pay off your mortgage instead of investing in an index fund, you'll probably not make as good a return on your money. These things are true mathematically.

But psychologically, Dave's approach is awesome. In my opinion, it's much better to take his debt snowball method and actually get your debt paid off than it is to take the "correct" method and fail over and over. Also, I don't think paying off a mortgage is a bad thing. It's certainly one of my goals. If I didn't have a mortgage, I would have a lot more freedom in choosing my work.

When I hear people complain about Dave Ramsey, I think that people will complain about anything.

If people turn to Ramsey after running into problems with debt, and he helps them out, I'm not going to grouse if they choose an apparently suboptimal approach (low-balance snowballs, etc.). Sometimes the best is the enemy of the good.

My problem with Ramsey is that he then says EVERYONE should eschew credit, even if they've managed their money successfully.

And if you are a young person with no credit history, that can be disastrous.

There may be some nice employers and leasing agents out there who will take a chance on someone with no credit history to speak of, but the vast majority run credit checks as SOP. Young people have quite enough financial issues without credit scoring making it harder to get their feet in the door.

I've never paid one red cent in finance charges, and I've had credit cards for 6+ years (10+ if you count the years during which I was a secondary cardholder). So I resent being told that I should have to plead my case for jobs and leases, not to mention pay extra closing costs for manual underwriting in the event that I get a mortgage, just because some (or even many) other people have had issues with credit in the past.

Hi Rush,

You've mentioned a lot of points in your post. Just wanted to discuss one of those points here. There is a very significant additional risk in holding $100K in savings with $100K owing on the house, over paying off the house in full. Interest rate hikes. If interest rates rise, the situation with having $100K in "savings" can change quickly and dramatically. Not only do rising interest rates affect the rate of the mortgage, it can affect a lot of other things to. When interest rates rise, you can see a number of effects all at once:
* slowing economy => increased probability of losing your job
* bonds increase attractiveness relative to stocks => downward pressure on stock market
* re-emphasize that your mortgage rate will go up (either in short or medium term)

If you've paid off your house in full, you are sheltered from these effects. So for a while on paper your "investments" may have an annual 12% gain on paper, that can change in a hurry to a 3% gain, in which case one would have been better off paying the mortgage.

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Doesn't this presume that you took out a variable-rate mortgage?

I know that many people did in the past few years, but I think most of the people here would choose a fixed-rate mortgage as an inflation hedge.

I like to think I speak for the sensible consensus (even when I clearly don't). Dave Ramsey is good for the people he's good for. And he's not great for everyone else. If you've had a problem with money then following Dave Ramsey's plan is likely to lead you to not having a problem with money.

I think the dislike comes from a sort of 'zeal of the newly converted'. When someone encounters any new system / lifestyle which they like and start to follow, there is a strong tendency to try to foist it onto everyone else. And of course, what is good for one person may not be good for another, so you get dislike of the system. After a while as the new system / lifestyle becomes the norm for the individual they are often less intrusive in their like of it.

onebigmortarboard,

No, I'm not assuming a variable-rate mortgage here. Even if you've locked in your mortgage for a while, your rates could still jump significantly when you renew. On a 25-year mortgage with 7-year terms, that still means renewing three times.

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I agree in that if your investments no longer perform better than the interest rate you are paying on a mortgage, then take out the checkbook and pay off the mortgage. The beauty of having $100,000 in the bank and owing $100,000 on a house is the fact that you can relenquish the cash in exchange for a paid-off mortgage in a day. Those with a variable rate mortgage may find themselves making that exchange much earlier than someone with a low fixed rate, but maybe not.

Let's say I have a 30 year $100,000 mortgage @ and effective rate of 4.5%. My monthly payment is $506.69 or $6,080 per year. I also have $100,000 in savings that earns 10% per year, or $10,000. My $100,000 investment earns more than enough money to pay the mortgage whether I have a job or not. Heck, there is even enough left to pay the property taxes and/or the insurance bill. Should I find myself jobless (or take a much lower paying job), my mortgage payment is covered. Should a day come where my investments no longer outperform, then I'll simply write a check and pay off the mortgage.

There is a reason Dave advocates saving before paying off the mortgage more quickly (Baby Steps #1, 3, 4, and 5 are all savings steps - it's not until step #6 do you pay additional principle) and that is because he knows it's not a very good idea. He also knows that most people will not have any additional principle to apply as Baby Step 4 is perpetual and Baby Step 5 can last 20+ years and those two will eat up most everyone's last cent of disposible income.

Rush,

I think there is a significant failure in your theory. Let's say today I have a $100K mortgage at 4.5% and I have $100K in hand. You are advising me to invest my $100K "at 10%". Where am I going to invest my money? There are ZERO investments that will guarantee me a 10% return. There are a number of stocks that MAY yield 10%, but from the starting point I don't know which ones. So at the starting point, I could invest in some stocks, but there is a very real possibility that those investments could yield only 2% or less over the upcoming year. In that case, you've given me bad advice. There is absolutely no way to tell from the starting point which investments will outperform the mortgage rate. Anybody that claims otherwise is either a fool, liar, or criminal.

I am not speaking rhetorically here. Anybody that claims they can guarantee you exceptional rates of return in the short term are either:
a) a fool - they ignore the inherent fluctuations in the stock market over the short term
b) a liar - they are seeking to swindle you out of your money by getting you to invest in something that will benefit them, but not you
c) a crinimal - they are trading on insider information, which is technically illegal (although likely still very prevalent)

What you are advocating is simply a risk-reward trade-off.

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I'm confused about this. I've never heard of renewing a fixed rate mortage.

sandycheeks,

Sorry, clarification is in order. If you've got a 30-year fixed rate mortgage, this effect will not apply. I was referring to shorter-term fixed rate mortgage (i.e. 7-year terms), which I believe are far more common. I'm not sure about the States, but a 30-year fixed rate mortgage in Canada is going to cost significantly more than 4.5% in Canada. More like 8% here.

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