No Debt Plan

1. Ashley @ Wide Open Wallet

   I like his snowball method and think the benefits outweigh the poor math. The highest interest rate I have is on my mortgage (5.75%). I certainly don’t think I should try to pay off my mortgage before I pay extra on my cars. I would much rather pay off my cars asap to improve my cash flow.

   of course, you have to do look at the situation as a whole, if you have a balance of $5,000 at 24% and a balance of $4,500 at 8% I think it’s pretty clear you should pay the larger balance first.

   Jul 1st, 2008

2. Michael Smith

   As far as the cashback incentives coming from people who are paying 24% interest on their outstanding balance: I use Discover card for most purchases and would gladly give up my 3-5% cashback incentive if it meant that everyone was managing their credit well. (I’m sure Kevin would agree since this blog exists to help people manage their finances better.) But everyone is not managing their credit well, so I would prefer to use a card where some of that extra interest goes back to cardholders instead of all of it padding the corporate bottom line.

   Jul 1st, 2008

3. Kevin

   @Ashley: I guess that is kind of my point. His system says “you must do this” rather than “think smart and make a good decision.” Granted, some people seem incapable of that…

   @Michael: I want my cash back. Show me the day that no one pays any interest to any credit card company and I’ll show you utopia. But! His point of 5% versus charging the vendor 3% and other “poor victims” paying the other 2% is incorrect as well.

   For starters, the first $6,500 of my purchases earn 1.5% and 0.5% of cash back depending on the purchase. Those fees could come straight from the vendor I purchase my goods from and still leave money left over to start paying me when I reach the 5%/1.5% mark.

   Secondly, once I hit that 5%/1.5% cash back mark, only gas, groceries, and drug store purchases are 5%. So there are a limited number of transactions that require “other victims” to finance the extra 2%. On top of that, every other purchase I make is only earning 1.5% cash back. If AMEX charged the vendor 3%, then that’s 1.5% that can be applied toward my 5% cash back.

   Jul 1st, 2008

4. Jeff

   I can agree with your 3rd issue. There is a time and place for using credit cards. The tool is not evil, using it poorly makes it seem that way.
   Your 2nd issue is really a matter of priority. I think his step 4 is building retirement at a respectable pace and step 7 takes care of the rest. Step 5 builds your kids’ futures for them, and step 6 allows step 7 to move ahead quickly.

   But I have to disagree with your beef with the debt snowball being a bad thing. It looks to me like you - a person in control of spending and debt - are not willing to accept that there is more to paying down debt that pure mathematics. Humans are creatures with emotion. Sometimes we need motivation. Another flaw in your thinking is that the folks that are buried in debt are obviously not comfortable with the pure math. They wouldn’t be in the predicament that they fell into if they understood that a $2000 TV costs $6000 after paying minimum payments for years.

   Getting someone to change a major facet of their life requires some small wins to keep them in the longer game. The debt snowball gives them the chance at making those wins.

   Jul 1st, 2008

5. Kevin

   @Jeff: Thanks for commenting! I see what you are saying about 4-7. I can buy that, fair enough.

   On the debt snowball, I’m not saying that there isn’t some psychology involved in paying off debt. But what if you’re in the situation Ashley described? $4,500 @ 8% and $5,000 at 24%? That seems pretty cut and dry to me — pay off the $5,000 first.

   I guess I just don’t like how he draws a line in the sand. Either way, as long as people are paying off debt we’re making progress, right?

   Jul 1st, 2008

6. Christine

   I am a Dave Ramsey fan. I do agree with your opinion though. I think the reason why he “drew a line in the sand” is because there are people out there that are so over their heads… they just don’t know where to begin as far as paying off debt goes.

   Its a great plan but I do agree with the logic of paying off the credit card with the higher interest rate first.

   Jul 1st, 2008

7. Vinayak Kulkarni

   Here is what I think you are missing the whole point of of DR’s process:

   1. First, Dave wants you to pay off all of your debt with the debt snowball…. “Dave wants me to keep paying 23% interest while I knock out the first card. That makes absolutely no sense and is costing me money along the way.”

   If you {any credit card borrower} were so math savvy you would not be borrowing on 9% or 23% interest in the first place. I believe this process is designed just to be a moral booster instead of saving money, which you already understood and quoted.

   2. My second beef with Ramsey is that he wants you to do steps 5 and 6 before step 7

   May be you are exception or part of a minority, may be you retire first before your kids go to college. But generally what I have seen (including myself, my friends and my neighborhood) people have their first kid when they are less than 30 years of age, so its quite logical to prioritize college funding first before planning for retirement. I agree with your point that you cannot borrow for retirement but you can for education. Heck going with the same thinking - why not settle for you kids flipping burger their whole life instead of saving for their expensive college education or putting your kids under debt when they have no income or no potential to earn any income.

   I am not sure of you or others in general, but one of my goals in life is to see my kids get all the things in life that I couldn’t get or enjoy during my life time { be like those fancy shoes that my dad couldn’t afford when I was in school or the car I just wished I could have had during college but couldn’t afford or the medical school I couldn’t attend because I couldn’t afford }

   Same principles for number 6 before 7 - he preaches a 15 year fixed mortgage which usually gets paid off well before you retire. So why wouldn’t you be happy with a paid off house that you could very well use as a money source during retirement?

   The way I see this is - plan to shoo off your kids to college with enough money so that they won’t come back to your home and you live happily in a fully paid off home

   3. The third concern I have with Ramsey is his anti-credit card stance. This is my largest issue with the Dave Ramsey system.

   I am surprised why this is so difficult to understand. How is this different from the title of your website, may I quote “nodebtplan” ? Please remember this system is not for sane people who are able to manage their debt sincerely. Think of DR as the meeting organizer of your local AA chapter. For people who recognize themselves as Alcoholics “drinking in moderation” is not a solution. Being a teetotaler is the only answer.

   These credit card companies of today are no different then the Marlboros of 1930s. Once you are sucked into revolving credit for many its very difficult to come out - The only solution is to pay them off and quit using them to avoid a relapse.

   Your point of earning points/cash back is well and good only until you miss a payment; miss one payment and you are off begging to the credit card company to excuse you for being late {else all your 0% offers are due in full immediately}.

   I am not denying that there is a potential to earn money off of credit cards and credit card offers { for dare devil examples go to the finance section of fatwallet.com and search for AOR } All it takes is one missed payment to crash your whole earnings plan. But this is like playing the casinos - the house always wins, may be you won’t lose with your hi-tech bill payment and sms account alerts but there are a large number of average people suckered into it.

   There are some finer points of Credit cards like payment protection, charge back abilities, fraud liabilities protection which when used prudently will help you.

   For the record:
   * I am no way related to DR and don’t work for him in anyway.
   * I have one credit card from each type {A/V/M/D}
   * Don’t use cash or debitcard {except for cash withdrawal}
   * Charge everything to my credit card.
   * Earn cash back
   * Charitable giving are more than than cash back earnings. So no guilt.

   My passion for Dave Ramsey’s style stems from the success of his program, the joy of people getting out of debt and the proof from the radio and TV shows that his plan works so well.

   Do something that touches and improves other people’s lives and prove that you can do it better than DR’s plan and may be then you have earned a right to call him wrong.

   Jul 2nd, 2008

8. Debt Free Earth

   Kevin,
   I follow Dave Ramsey on the radio and on Fox Business and admire his work. While his math may not be perfect, it’s the “instant gratification” of paying off the first debt that keeps people going. In addition, once the priciple gets paid in large chunks, the difference in interest becomes considerably less anyway.

   Like you however, I disagree with his baby steps and the order of them. I do agree with paying off debt, including the mortgage, as soon as possible before anything else. The amount of wealth that can be accumulated in a short time is staggering if you have no debt. Saving up for a kids college education won’t take long, if you are debt free (they should be helping to contribute too). And the 6-month emergency fund that might take 3-4 years to stockpile only takes 6 months when you are debt free. What if an emergency happens? Charge it, but work it back into your “debt snowball”. At this point, if the system is being worked properly, a person has the education and discipline to do this properly. In addition, the debt snowball is a built in emergency fund as it grows. If something happens, you might not be able to pay back debt that month, but can pay cash with that month’s snowball payment for that emergency.

   As far as the regular credit card usage to get cash back, the problem is most people spend more when using credit cards (or even a debit card) because they don’t “feel the pain” that they would by using cash. Think about it, if someone wanted a new TV, would they walk into Best Buy with $1000 in cash to get that nice new Hi-def version? Probably not. They would think long and hard about it and either settle for a less pricey model or not buy it at all. But with a credit card, they can just swipe and go. Even on a smaller scale, people make these decisions every day. Can discipline be exercised? Of course, but the credit card companies are counting that it is not. And usually they are right.

   Jul 2nd, 2008

9. Kevin

   @Vinayak: We are on separate sides of the fence. You can say you are surprised why I don’t seem to be “getting it”, but I can say the exact same thing to you. Why don’t you “get it”? You even admit you are an avid credit card user, so you obviously get it, but don’t seem to think other people that have been in debt before could ever understand how it works safely.

   Yes, Ramsey is like the AA group leader. But he teaches people to fear credit. I don’t think teaching fear is the way to go. His system obviously works and he has pulled many people out from the debt pit. But at the same time, once they are out of debt, I think he should **extend** the plan to show them how to use credit responsibly.

   It’s like saying going 80% of the way is “good enough” when you are leaving people open to frustration (try flying or renting a car with a debit card — yes, it can be done, but yes it is annoying compared to using a credit card), fraud (can I borrow your debit card and pin number, please? Or just your wallet full of cash?), and missing out on some free money (the rewards we have discussed).

   So why go 80% of the way, when you could go all the way? Because it sells more books and brings in more devout followers? Ramsey isn’t known as the guy who teaches you how to responsibly spend and save money in our society. He’s the anti-credit, anti-debt guy. A slight change, but significant in my eyes. You don’t get to hear the stories of people who have had all of their money stolen due to fraud/burglary, or who have tried Ramsey’s system and it doesn’t work for them. Then again, if I was making millions off of my book program, I might not let others share that either.

   Granted, I’m looking at this from the eyes of someone who manages and uses credit safely and always has. I’m not getting calls from collection agencies. I’m not under that stress. Yes, some people need a drastic change in their lives. But I’d like to think there is a light at the end of the tunnel where having a mortgage and using a credit card are acceptable and safe.

   For those that are pitching the 15 year mortgage, I’d rather have a 30 year and plan to pay it off early. The payments are automatically higher on a 15 year, which might put you under more stress.

   And a final note, last time I checked in the United States I didn’t have to “earn” my “right” to say someone was wrong. It’s called an opinion. And I’m sticking to it.

   Jul 2nd, 2008

10. Livingalmostlarge

    15 year mortgages are dumb. You should always get a 30 year mortgage and just pay it like a 15. When in trouble you can back up to the 30 year payment. NOT so with a 15 year. Until you own the house in full you don’t own it, the bank does.

    So, prepaying a house is dumb. Don’t prepay the house, if you want to stick it into a money market savings account. Then pay it in full 100%. Again if anything happens like Ashley’s husband dies (god forbid), she owns 50% of the house, gee too bad if she only has her 6 month EF. They’ll boot her when the money runs out and if she can’t afford the house?? Oh well. You don’t own your house till you own it 100%. It can be taken away.

    Third, dave ramsey preaches fear. Fear credit. Gotta agree because most of the people following him are so in over their heads that they wouldn’t have gotten there if they had a drop of common sense. But they don’t, so they should never use credit.

    Jul 2nd, 2008

11. Laura

    Actually, Baby Step #4 is retirement. #7 is building up your wealth (in addition to retirement). This wealth can be used for Charitable Giving, for example.

    Jul 2nd, 2008

12. John

    I agree with DR that it’s a good idea to cut up the credit cards if you have been a slave to debt in the past. The analogy to “AA” is good. If you are a recovering alcoholic you shouldn’t keep a bottle of vodka in the house. Same for someone with an irresponsible spending past and having a nice new credit card with zero balance. They shouldn’t have a credit card.

    But I agree that responsible people who never run a balance should use the free money offered from cash back cards. I used my personal credit card for a lot of business travel and paying regular monthly bills. In 3 years, I got over $2000 in free money from credit card rebates.

    Other than the credit card issue and order of snowballing (you should pay the highest % first), I think his overall plan is good. More people than not will benefit.

    Jul 11th, 2008

13. JoeTaxpayer

    I think the note you got was on target.
    You see, I agree with your approach 100%. Dave’s order is wrong for you and me, and anyone who is reasonably good with money. In fact, one can load up on available credit, and instead of having any emergency account, put all their money into their retirement account. When I had a true emergency, I was able to borrow from my 401(k) and pay it back over a year’s time. Same with the 0% CC offers, I’ve done them a few times to pocket nearly $3,000 total. My regular card gives me 2% back into a college (529) account.
    But most people aren’t as sophisticated as you or me, and need Dave’s simple approach to get out of their mess. That’s too bad.
    Joe

    Jul 12th, 2008

14. Dave

    I may not be as “anti-credit card” as Dave Ramsey but I think you are probably better off in today’s day and age avoiding using them, simply because the credit card companies have become predatory over the last 10 to 15 years.

    When my wife and I were first married (mid-80s), credit cards came from your local bank after you filled out an application and they reviewed and checked it (if you really had your act together, you may get an American Express card that required full payment each month). If you tried to charge something over your credit limit, they declined the charge, today they approve it and add a $39 over-the-limit “fee”. A day late paying? — $39 late “fee”.

    Not to mention this whole concept of penalty interest rates and the recent example of Bank of America unilaterally raising rates on folks that *did* pay according to their agreement with the bank.

    Credit cards are a financial tool, but using them improperly in today’s environment can cause you tremendous problems, much better off using debit cards - its paid immediately and you don’t have to think about it any more.

    Aug 8th, 2008

15. Kevin

    @Dave: I agree to disagree.

    Yes, there are fees if you misuse a credit card. However, it is all in the fine print. Read the fine print, don’t over-charge, and pay on time. End of all of the problems you mention. For overcharging, unless you’ve already misused credit in the past you shouldn’t have much of a problem getting a huge credit line — our current line on an AMEX is 50% of my base salary (not that we would ever use it).

    The BoA is not indicative of all credit card companies, at least to my knowledge.

    I’ve stated time and time again that credit cards trump debit cards in almost every situation. In most instances where you compare, the credit card can give more protection that debit cards. The only instance where it doesn’t is overspending. And that isn’t the credit card’s problem. That’s the person’s spending problem.

    Aug 9th, 2008

16. Sam

    I do agree that credit card per-se is evil and should be avoided. I believe its neither good nor evil. It all depends on how people use it.

    As with Dave’s avoidance of credit card, you have check the kind of people he’s trying to help. Most of the people he dealt with have huge credit card debts. By trying to tell them to get rid of credit card, he’s probably helping them avoid stepping into their “old” temptation of bad credit card usage.

    But I agree with you, maybe Dave can include in his steps how to use credit card effectively instead of avoiding them.

    Sam
    Fix My Personal Finance
    http://fixmypersonalfinance.com/

    Aug 13th, 2008

17. The Happy Rock

    I am not into arguing Dave’s right or he is wrong, I don’t really think it serves to much purpose and would rather see people put their energy to better use like destroying debt.

    With that said, I think Dave Ramsey has a great plan. Personal finances are about behavior. His whole system is designed to change behavior and pave your financial future so that you can be free to use your money, energy, and time in positive ways. If you follow his advice to the letter, you will do well no questions asked. It works for the masses and is designed to reach the masses. The more radical you are the more your financial future changes. A couple of dollars in interest or credit card rewards even hundreds are insignificant in the big picture in my opinion. It is about changing your life and your mindset so that you don’t have worry about the little things and are free to focus or things that are much more important than money.

    Can any system be 100% right when finances are personal? I think a plan can not be right 100% of the time and still achieve its goal 100% of the time.

    Aug 17th, 2008

18. Ginger

    I think your views on Dave Ramsey are a bit short sighted. There are segments of our population who need not look at a credit card. Period. Why? Because they can’t handle the responsibility. They have lived their lives using credit cards for the most basic of necessities with little consideration as to how the bill will be paid off.

    The overall benefits to his babysteps outweigh the math.

    Also, who says that one must follow the baby steps in the order that he prescribes? If you can read and have an insightful approach to your finances and able to compute the math, you’ll be fine.

    I think hte bottom line is this, we have to be responsible with what we promote and yes his math is wrong, but overall the guy has a really good system that’s gotten most people out of debt and I cant knock him for that.

    Psychology is a big part of it so getting caught up in the math makes no sense to me.

    Aug 17th, 2008

19. Kevin

    @The Happy Rock: Excellent point. Thanks for the comment.

    I still think he should include safe credit card use if not for the cash back reward possibilities, but for the simple fact that they can be beneficial in certain situations.

    Aug 17th, 2008

20. Kevin

    @Ginger:
    To your points:

    1. Did I not write this at the beginning of the credit card section? “I understand that there are people out there in the world that simply cannot manage a credit card safely. For those folks, I have no problem saying you should use cash and debit cards for the rest of your life.”

    So yes, there are people that simply shouldn’t use credit.

    2. What if you followed the baby steps but adapted to the math? Then you get the benefit of both.

    3. I also said at the end I like Ramsey. But like any plan, it does have its flaws.

    4. Okay. The psychology dart people throw. I love it. If it’s all about the psychology… then why not look at it like you would a victim of some other crime? If someone is deathly afraid of credit, why not rectify that? It’s like not letting an alcoholic go to AA meetings.

    Why leave folks afraid of credit when it has it’s place in the world? Why not make the last step “re-learning how to safely use credit”?

    In that vein, I think Ramsey’s plan is short sighted. Credit isn’t going anywhere. It isn’t evil. Misusing is the person’s fault. Let’s train them how to use it.

    Seriously, does Ramsey think everyone can pay cash for their next home? No? Then they’re going to use credit at some point. Even using a credit card for $100 per month and paying it off each month would help build their credit profile.

    I agree to disagree.

    Aug 17th, 2008

21. Ginger

    I never said the plan was perfect, but I think posts like these only serve to sway others looking for something that may actually work for them in the wrong direction.

    Yes, credit is evil to those who cannot manage it and thus Ramsey does not recommend usage for anyone who isnt able to manage or handle the responsibility.

    There are people such as NCN who do NOT use credit and live just fine. So there are actually people who live off the credit grid and are just as OK. I dont have a preference for either but I think your post was shirt sighted in this aspect.

    And what psychology dart do you speak of? Did you not understand what I wrote do you felt the need to throw that in there? If you dont understand it, say that but what is there to love when you lackk understanding of this aspect?

    I know many people who paid cash for their homes. If Jonathan from Mymoneyblog didnt live in CA, the he could have bought 1-4 homes depending if he lived in a lower cost of living area.

    You dont have to go point by point, you don’t know it all lol I am making comments based on my understandings and observations on your post, please spare me the attitude in your response, I don’t need it. It wouldnt kill you to tone the base in your response, just a little bit.

    Please and thank you.

    Aug 17th, 2008

22. Pete

    Couple of points, you talked about saving for kids college coming before retirement. Actually in Ramsey’s plan you do retirement first, and then for kids college. So your retirement DOES come first. The step seven is just building more wealth and giving to others - not necessarily saving for retirement.

    As far as the debt snowball part, i understand how the math isn’t always 100% the best, but even Ramsey himself says exactly that. But a lot of personal finance is about psychology, and what way is the most effective at getting you out of debt, and keeping you out of debt. The debt snowball is a great way to do that because it takes into account the emotional part of debt reduction. Again, as the happy rock said above, personal finance IS personal, so if you have two debts, one larger with a higher interest, you may want to pay that off first. It is your personal choice. It just happens though that a lot of people have more success using the debt snowball because the cumulative effects of paying of a bunch of small debts in succession keep them motivated to keep going and pay off the rest.

    I had an audio post from dave ramsey’s show recently talking about why the debt snoball works HERE

    As far as credit cards and responsible use there-of - i think it is possible for some people to have and use credit responsibly, and others should cut up their cards and never get another one. The people that Ramsey’s program is geared towards probably should not be using credit - and I think his leaving responsible use of credit out of the program is a wise idea. Kind of like teaching an alcoholic responsible ways of drinking

    For me I keep one rewards credit card that I use rarely, and ALWAYS pay off right away. For other stuff we keep an emergency fund and 3-6 months of expense.

    Great post to get the discussion going!

    Aug 20th, 2008

23. Deb

    The problem with no credit card in your name is that if your car dies and you have to get to work without public transportation you cannot rent a car from anybody so you lose a day’s work. Not a good option. The other issue, which won’t apply to everyone, is distant child or parents get sick or die and you can’t buy an airline ticket quickly to rush to the bedside. Cash is nice to have on hand to cover it when you get back but you need the ticket today.

    We agreed to pay for private high school but it was clear to the children that it meant they paid for college; and they did and all except the youngest (who just graduated) are free of college debt (and he will be very soon).

    Excellent topic even if I have no clue who Dave Ramsey is; but it seems I disagree with his sticking points. Oh well.

    Aug 21st, 2008

24. Kevin

    @Deb: Thanks for the comment. I completely agree. I used to work for a rental car company. Credit card… much easier.

    @Pete: You are right. It is personal and people can make their own choices.

    I don’t buy the psychology bit. Well, I buy part of it — people do things they know they shouldn’t. But I think if he is going to claim psychology as a defense for his incorrect math, then I think it should be used to properly correct behavior and teach people how to use credit (rather than fear it).

    Aug 21st, 2008

25. Pete

    I wouldn’t have bought the part about the psychology of it either if i hadn’t witnessed it first hand in our financial peace university class. Using the debt snowball people who had never been able to get out of debt before (and who DID understand that it is mathematically better to pay the highest interest first) were finally able to make a dent in their debt, and during the class (6 couples) the group paid off a combined 50,000 in 3 months.

    The debt snowball works - but like dave ramsey said in the audio clip on my site - “you can’t go wrong getting out of debt”. So however you want to do it - go for it!

    Again as far as the credit - i don’t think he includes anything about that because it’s a slippery slope to begin teaching about the “proper use of credit” when most of the people he’s teaching to probably shouldn’t be using credit. His whole philosophy is to get away from the place where you NEED to use credit. I don’t think it’d be particularly helpful for him to be teaching about that.

    Aug 21st, 2008

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