No Debt Plan

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.

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.

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.

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

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.

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.

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.

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.

I am a Dave fan so I have nothing to say other than Go Dave!

great blog!

1. Empowerment of fear? That’s a new one. What you seem to be talking about is a healthy fear. There is a big difference between fear mongering and having a healthy fear. You want to liken credit cards to guns, ok. Both things that are reasonable to have a healthy fear of. So where is the problem?

3. This is awesome. We also have a post about why credit cards aren’t evil, but I’m betting that we took a little different approach to it than you did. My preferred method is not to do business with scum.

4. Absolutely false. Don’t think for a second that some of those collection agencies aren’t ‘first party’… because they are. Most, if not all of the major card issuers not only have their internal, branded collections departments, but also own outside collections companies under different names that they can hide behind while the immature idiots on the phones break federal law. Beyond all of that, owned or not, the fact that they do business with such scum says a lot about the companies.

6. What risk? Really. They guy who just likened credit cards to guns (and also illustrated a very on-topic, on-analogy fear of guns), is going to try to tell me that there are no risks involved. Really? Either your analogy stinks (I think it’s dead-on), you’re being facetious (possible), or you really, honestly believe that there are no risks (Hopefully not). Every sharpshooter (likely the best people in the world handling a gun) knows and understands every risk involved in handling, drawing and firing the weapon. If not, then they likely aren’t a sharpshooter for long. Sure, they can take every precaution to mitigate those risks, and it is possible to do - many are very good at it. All of those efforts are taxing to the individual, though. To take those risks for granted is a huge mistake, and can be absolutely devastating.

The risk here is life. It’s everything that can happen between now and payday. Charging up that card (within your means or not), and assuming that everything will be fine later is a multi-layered risk. It works great in the best-case scenario. Every cog in that machine to pay what once was a simple bill, is a risk. Now to compound that risk, is the number of cogs that are out of your control. The direct deposit paycheck being wrong or late, the auto-bill-pay system taking on a virus, the doufus at the store that charged you twice, the card issuer changing the rules midstream, the doufus CSR at the card company that claims to have fixed the problem, but doesn’t. This is not some perfect machine that always works without fail, and all of those things happen and more. Internet connections go down. Software has bugs, some associates are doufus’s, some CSRs are doufus’s, credit card companies have a very real interest in you NOT paying the bill. So establishing and engaging in this system is a better plan? No way.

I’m sure that if you worked really hard at it, you could use a credit card like a debit card. But why bother? That role has already been cast, and it’s called a debit card. Above you have steps 1-4 of hassle. All unnecessary and unneeded. Step 0: Pay with debit card or cash. DONE. There is no step 1, 2, 3, or 4. You can have your complicated way of paying for purchases, and I KNOW that you don’t get Ramsey.

I completely agree with you on his anti-credit stance.

I don’t like using cash or debit cards, and I’ve earned well over a hundred dollars in cash back in the last couple of months. And yes, I pay it off every month.

I think Dave Ramsey should encourage people to modify his plans if it fits their own situation better, but then again I understand that people climbing out of debt should maybe avoid the credit cards.

1. Not sure what show you are listening to. I’ve listened to his show a lot over the past 4 years - used to listen everyday. I’ve never heard him berate anyone or treat them like a child. That’s not his show. Dave is incredibly respectful. I also don’t hear people calling in to say “I’ve never, even had a problem with credit cards”. I just don’t. Anyone calling in just to say that is likely being passive aggressive anyways. Are you sure you are talking about the Dave Ramsey Show?

6. No. I’ve just seen and heard life happen a lot, and I don’t pretend that risk doesn’t exist. And it’s not that the credit card system is a cobbled together system. The system you have described is. You transferred all of the risk and work from the bank to you. You really have. Debit does all that for you. And just in an effort to get rewards (which you can now get with debit cards) and extended warranties (which Consumer Reports and every other reputable consumer advocate says are worthless).

Anyways, I’ve made my points. In the end, I really don’t care if you use a credit card. You’re going to do what you’re going to do, as will I. We don’t need to try to convince each other otherwise. What you are doing can be done. It is a slippery slope, it does involve added risk, and as statistics show, very few are effectively pulling it off.

enjoyed the debate
cheers

NTJS

Couldn’t agree with you more. There are very few people who get it. you are one of them.

RISK is what he discusses. That is the difference between CC and debit cards. Great job of pointing out the risks. Risk matters.

Kevin, if you are getting an MBA, which I have as well, then you are versed in risk assesment, or Beta.

Beta must be factored when assessing cost benefit. We could go into detail about this, or you can just take my following words.

Credit Cards exist for solely one reason. PROFIT. Not convienence, points, fraud protection, etc. Those are benefits, not purpose. The purpose is profit for the issuer. That means that a majority of users must result in a profit for the issuer, and a cost for the user.

Obviosly you already know this. that is why there are rewards and benefits, etc. It is redistribution. Most people pay, so a few can benefit, yet most thinnk they are or will be the ones who benefit, but of course the economic model will not support that.

CC are tools, just not for the user. they are tools for the issuer, and they are unnecessary. You can accomplish the exact same thing, with the same benifits, convienence, fraud protections with a debit card, so the only reason for CC is credit, and the incorrect assumption that using one is in your benefit because you can “beat” the system.

The issuer set up the system. It is their rules. Their money. their card with their name on it. They have the control, not you. They just let you think you do.

Love your site, by the way. I am all for no debt.

Kevin:

Of course there is a cost to the average user. The cost is interest. There must be a cost, or there would be no profit and CC would not exist.

Regarding your use of arbitrage, why stop the float at all. If you earn interest on the float and find benefit, why pay the balance off at all? Why not transfer the balance to another CC and continue this process in perpetuity?

See, I have heard virtually every reason why people use credit cards. Float, leverage, convienence, credit,rewards,points, protection, status, comfort, security, etc.

Every single reason except credit is flawed. It is a fact that the fraud protections for both major CC issuers are identical to that of their CC.

In addition, most major banks treat their debit cards with the same protections as their CC, so your reasoning of fraud is more of inconvience than protection. however, most are also more likely to catch fraud earlier with a debit card than a credit card.

Credit cards are debt. it maybe short term, it may be for just a few days, but it is still debt. Why would anyone go into debt for groceries,gas, etc if they have the money. It really makes no sense to me.

I have heard the argument for float several times. That argument matches yours in that you would rather earn interest on your money during the grace period. OK. First, that amount of interest is minimal. Second, as I stated earlier, if that is truly a reason, then the same principal applies to a perpetual float amongst several cards until the limit is maxed. Yet every proponent of Credit cards and the float says in the same sentence that they “pay their cards off every month”.

There are risks, and I know you understand them. Many people don’t, however. I know of no one that got into credit card debt on purpose. I know of no one whose aim was to bury themselves in debt. But it happens. Smart people get in CC debt every day. They think they can beat the system,and then life happens, as NTJS stated.

Risk from things that are out of your control, and risks from things that are. When you say NTJS must be the most risk averse person on the planet,I think you are missing his and my point. It is not that all of those things might happen,it is that one of those things will happen. It is one of those things has happened.

Rewards…they are carrots. I ask myself why are they so eager to give you rewards. We all know the answer.

Using a credit card is like gambling. A few people win, and those few create the illusion that more are likely to win, but most people don’t. Only the house consistently wins.

You maybe able to continue to “beat” the system but over 60% of the people who use cards don’t.

I enjoyed the debate,and I wish you luck with debt and with school

I enjoy Dave Ramsey’s radio program, and listening to the callers who call in to let him know they are debt-free continues to keep me focused and motivated on ridding myself of my debts. I do agree however that no system is perfect, and I’ve never had the feeling that Ramsey thinks his system is perfect either. He strikes me as a humble man who is out to help others out of their tough situations. As for his baby steps, I thinks the steps are fine, however I chose to build up MY emergency fund/6months of expenses ($12,000) all at once before going to Step 2. I’m on track to complete Step 1 on Feb 28th, 2009! The funny thing is that in mid-March of this year, my wife and I had exactly $132 in the savings account, and now we’re 4 months removed from hitting the unreal amount of $12,000!

It seems that it doesn’t matter much whether anyone agrees or disagrees with Dave Ramsey. What matters is whether he can contribute “a gem” to our pool of knowledge, and cause us to think anew. Clearly, for many, his has done this.

We should be focused on gleaning techniques and ways of thinking from various sources to build what works for us as individuals. I have my own rules, and I don’t expect them to work for everyone.

Clearly we’re on common ground, but will never be exactly aligned. Nevertheless, we can all sit on the same side of the table and be happy about such good company.

Good blog, good discussion and good fortune to all,

Clair

Okay, I haven’t taken the time to read all of the comments, but I thought I would leave my two-cents on this blog post. First off: THE ONLY WRONG WAY TO PAY OFF DEBT IS TO NOT PAY OFF DEBT.

A little background: 23 years-old, $100,000 student loan debt, $7,500 consumer debt, $7,500 debt to relative and just bought a house. The 8 total debts add up to $115K, $240K including mortgage. (I know, that all makes me sound hypocritical to my first note above.)

I recently read Dave Ramsey’s TMM book and must say that his plan–the snowball debt plan–is most appealing to me. I have 8 debt payments, including my mortgage, that are paying off debts with balances ranging from $750 to $67,000.

To make a long story short, I graduated with an engineering degree so I am all about the numbers. On top of that, I consider myself very productive with Excel. With that being said, I set up a very comprehensive spreadsheet equipped with macros that when executed: 1) created a list of permutations of the 8 debts–40,320 in all, 2) “plugged” in their current balance, interest rate, monthly payment, and “snowball” amount,
3) added up the entire amount of payments after debt = $0, and 4) sorted those total payment amounts for every permutation from least to greatest.

What I found was that difference between the least amount paid and the greatest amount paid was only $6,000 (compared to these totals of nearly $325,000)—so less than 2% difference.

If I were to pay off the loan with the largest interest rate (which happens to be the $67K student loan), then it would take nearly 5.5 years to pay off. However, if I knock some of those little consumer debts out of the way then I end up paying off 4 of them within 2.5 years. As always, the mathematical part of me tells me to do it “your way”, but the psychological part of me says to gain that debt reduction confidence and pay off those little debts—which is exactly what I am doing now. Note: once I obtain that “confidence” I fully intend to switch to the best mathematical solution.

Other than that I completely agree with your opinion of Ramsey. Specifically, I have thee rewards credit card that pays for utilities, select bills, gas, and sometime groceries WITH the money sitting in my account waiting to pay the credit card off when the statement arrives.

Thanks for the great blog post!

@TMS
My math has you losing (1,500-2763.6) in purchasing power!

Lets assume you have 2% rewards card and never make a mistake in paying bills. For the 1,500 you would have charged $75,000 (1,500/.02).

Now lets assume you were my only customer and I was your only “source of goods” . My merchant fees average 3.29% of credit card sales. 75,000*.0329=2467.50. My cost of capital is 12%. Since I am not in business to break even I am marking up my goods. 2467.5*1.12=2,763.6.

@TMS
You are so right that it is very confusing and easy to hide the true cost of that credit card. If you wrote a check to Visa for $2,763 to get $1,500 you would not do it. So it is hidden.

You get $1,500 from Visa (75,000*.02).
Merchants pay Visa $2,467.5 (75,000*.0329).
You pay Merchants 2,763 (2,467.5*12). So you are out .

Before rebate cards you could have bought 75,000 in goods now you can only buy 73,737 (75,000+1500-2763).

As the banks keep issuing credit to folks that cant pay the higher our fees will become. Visa passes the cost to the merchants who have to make a profit not just break even.

Sorry no website I dabbled in Economics while in college. I put the math out there for folks who are wiser can see if there is a flaw in the calculation.

Re: Credit Card Use,

I recently heard a clip of Dave arguing against the use of credit cards by saying something to the effect of “I don’t know any millionaires who use credit cards”, and people who use credit cards are “nerds” and “losers”.

I guess his experience early in his career has made him speak this way, but I find his attitude completely condescending. It is always ironic to me that some people who speak the most about their Christian faith are sometimes so degrading to others, and in Ramsey’s case, it does seem that he is wrapped up in getting money.

@LAL

I think you’re looking for an earlier study, but here’s one published in Septmeber 2008 - I haven’t evaluated it myself, and I’ve never agreed with the underlying principle, but here you go, just get the journal article:

A four-part study found what many financial planners already knew: People spend more money when using credit cards compared to cash purchases. People also spend less when they look at their expenses in detail, the researchers found.

Consumers simply feel the pain of paying more when they part with cash, the researchers, led by Priya Raghubir at New York University, write in the September issue of the Journal of Experimental Psychology: Applied.

* In one study, 114 participants estimated how much they would spend using cash vs. credit for a well-described restaurant meal. “People are willing to spend (or pay) more when they use a credit card than when using cash,” the authors wrote.
* In a second test, researchers highlighted the future pain of paying by having 57 participants estimate food expenses for an imaginary Thanksgiving dinner item by item, rather than just as a total. When they did this, the cash-credit spending gap closed. When people confronted the detailed reality of expenses, it no longer mattered whether they used cash or something else, the scientists conclude.
* Then 28 participants were given a detailed shopping list to work with. In a questionnaire format, spent more when they used a $50 gift certificate instead of $50 cash.
* Finally, 130 participants were given $1 cash or a $1 gift certificate to buy candy. At first, they were more willing to spend the gift certificate than the cash. But after holding the gift certificate in their wallets for an hour, they became less likely to spend it, indicating the the certificates came to seem more like real money.

“The studies suggest that less transparent payment forms [such as credit cards] tend to be treated like [play] money and are hence more easily spent (or parted with),” the researchers argue.

I found the clip on YouTube–http://www.y