Extra, Extra: No Credit Needed Disagrees With Dave Ramsey
I’ve been a fan of the Dave Ramsey Show for more than four years. I’ve listened to Dave’s advice, read Dave’s books,attended Dave’s “live event”, and called Dave’s show. Readers of my blog can tell that I’ve been heavily influenced by Dave’s ideas about credit, debt, money, investing, and budgeting. I love the concept of the “Baby Steps” and I strongly agree when he says that personal finance is more about behavior and less about math. I agree that debts should be paid, smallest-balance first. I agree that people should buy used, not new, cars. I agree that term-life is better than whole-life. But, I have found a few instances where I, yes, good old NCN, disagree with Dave.
Dave suggests that you postpone 401k/403b contributions until you are debt-free, including amounts that would be matched by your employer. (I’ve actually hear Dave say this, at a live event I attended in Atlanta.)
I reduced my 403b contributions to a bare minimum while I was getting out of debt, but I wasn’t about to forfeit an employer-match. If I found myself in a situation where I was missing payments or falling behind, then I’d consider canceling all retirement contributions. But, as long as I could reduce my debt AND fund my retirement so that I could receive the match, that’s what I would do. I’m all for getting out of debt, but leaving matching funds “on the table” strikes me as unreasonable. If your company matches 50% of the first $2000 you contribute, that’s an automatic 50% return on your investment! I don’t care how high your credit card rates are, giving up a 50% return would be ridiculous. Please don’t misunderstand. I fully agree that, while reducing debt, retirement contributions should be temporarily lowered, but not below the amount an employer will match.
Dave suggests that you sell your car, unless you can pay it off in 18 months, even if this means that you have to borrow the difference between the amount for which you sell it and the amount you owed for it, and buy a cheaper, used car.
I’ve run the numbers, over and over, and there are times when simply taking a few extra months to pay off the car makes more since than selling it, financing the difference, and buying a junker. Personally, I was able to payoff my car note in less than 10 months, but I know, for a fact, if it had taken me more than 18 months, my wife would NEVER have gone along with the idea of getting rid of her car and replacing it with another, especially if it meant getting another loan for the “difference”. This is one of those ideas that turn people off to Dave and his message. I realize, trust me, that Dave, like me, is excited about helping people get out of debt. Instead of a hard and fast “rule”, may I suggest that you analyze the “total cost” of owning the automobile that you are buying and make an informed, rational decision about whether or not to sell it? In some cases, you should sell the automobile “you cannot afford”. In other cases, you might be better off paying for the car you already have and driving it until the “wheels fall off”.
After completing your emergency fund, Dave suggest putting 15% of your income into retirement. Dave always uses 12% when calculating anticipated returns.
I’m just not a fan of using “percentages”. Instead, I like to focus on the concepts of “fully-funding” or “maxing out”. But, the single, biggest problem I have with Dave is that he assumes a 12% return on retirement investments. I’ve heard Dave’s rational for using the “12%” figure, but, there are SO many factors that go into determining exactly how much an investment will return, that I think it’s somewhat “reckless” to assume that “everyone” can depend on a 12% return. Trust me, I know very, very little about investing, but I DO know that markets fluctuate, meaning that they go up AND down. I’m a big-time proponent of investing for the long-term over a long-time, but I worry about using such, in my opinion, an aggressive percentage. Call me pessimistic, but I always use 8% when I calculate anticipated returns and then HOPE that I’m off by 4%.
Whew. This has been a difficult post to write, but I’ve been thinking about these things for more than two years. I don’t believe in “throwing the baby out with the bathwater” so I’ll continue to listen to Dave’s show and read his books, but on these issues, I’ll have to “disagree” with Dave.
Check out these posts over at My Two Dollars and The Simple Dollar and All Financial Matters and Five Cent Nickel.
They’ve written articles about various aspects of investing, saving, and debt reduction.