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[raoul]

Just wondering if anyone read Megan McArdle's profile of David Ramsey in the Atlantic this month? Since his name comes up here a lot. I thought it was a pretty fair and balanced account. He does a lot of good but some of his beliefs seem a bit rigid or founded on a sense of a "moral" way to deal with money that doesn't necessarily need to be shared by everyone. I think his advice to get out of debt is probably a big improvement over the way a lot of people live, but talking about debt as though it is some kind of moral stain seems a bit over the top to me. Following his advice to the letter would make it impossible for the vast majority of people who live in high cost of living areas to ever own a home, for example (since they could never afford a 15 year mortgage with 20% down).

Let's imagine two tenured professors who live in the Boston area. They want to buy a home but on two professors' salaries they know they can only but a decent house if they put in 5% down on a 30 year mortgage. David Ramsey would say no way, but I think everyone has to analyze their own situation and make a rational judgment based on their level of job security, where they live, and what's important to them in life.

[fizmath]

Ramsey always advises against bankruptcy but he himself went through one.  Big corps walk away from their debts and the CEOs don't give back their bonuses.  We serfs are expected to work 80 hours a week until the debt is paid off.

Yes, his views on borrowing are too simplistic.  Borrowing for a plasma screen in not a good idea.  School and homes are another matter.  I don't think any surgeon who loves his/her job regrets borrowing money for school.

[aneumey]

He advises against it if it can at all be avoided because of what an awful experience it was for him.  Not to mention he eventually paid his creditors. 

[punchnpie]

Ramsey always advises against bankruptcy but he himself went through one.

He *almost* always advises against it. Most people who are contemplating bankruptcy can pay their bills if they make a plan. Most don't want to make a plan - and I say this as a lawyer who's handled personal and corporate bankruptcies.  I listen to him regularly and there are some people who just can't be helped, other than by bankruptcy, but many others can deal with their debts.

I get the 'debt as a moral issue' thing and am still not sure how I feel about it. I know that I am unsure about the economy and a sweeping set of regulatory changes that may well change the American economy for the worse, for a long time to come. I know I don't want to be in debt during this time of change and am working a Ramsey 3 yr plan to be out of consumer debt.

I don't agree that debt is almost always wrong. I keep a Sears and Penneys card because I can access these stores all over the country, there's a ton of household and car stuff I can get from them if necessary, and I get good deals for being a card holder. I also keep a 0 or near 0 balance on them, paying off big purchases w/n 3 months or i don't get them. I am paying off a consumer loan I got years ago and, if I hadn't gone back to grad school, would have been paid off by now. I can't wait for that monkey to be off my back and I will never get into one of those again.

People think of bankruptcy as a life-altering financial disaster, but in the US, it isn't. You can get another credit card, you can get a house, you'll just pay higher interest rates. So, many people file for bankruptcy and wipe the slate clean, then go back to the same ways that got them into bankruptcy in the beginning. This is what Ramsey warns against and I agree. Once one makes the mental shift to become aware of what one is buying and why, what does shopping and credit card use mean to one on a psychological level, I think you can have smart credit card usage, so I disagree with him there.  As I said previously, most people don't want to make that mental change; it's easier to shop.  Note - obviously I am not talking about bankruptcies caused by medical bills or long term unemployment (and we'll be seeing lots of this) after people run out of benefits and can only find $7 an hour retail jobs.

[parispundit]

Bankruptcy means you are breaking a promise to pay. Sometimes we have to break promises because of circumstances outside our control. But when the circumstances aren't out of out control, then it is immoral.

Debt? The rule I was taught for debt was never borrow for something you don't expect to increase in value. Mortgages, Those two professors in Boston, if they will accept a European amount of living space, and save a reasonable proportion of their incomes, CAN afford to buy a place with 20% down (although I see no reason not to take a 30 year mortgage - and try to pay it off early). Of course, this might entail bringing your lunch to work, and not eating out more than once a month, in other words, normal life for our parents.

[soymilk]

I often listen to Ramsey on my commute home from teaching. He is on a very conservative Christian radio station, so I have to listen to all kinds of stuff I don't agree with (such as--anti universal coverage rhetoric) on the breaks from Ramsey. However, I do agree with his overall approach.
The 30 year mortgage does not make much sense to me--who, other than maybe tenured faculty, can project a steady income 30 years into the future? I think anyone in a reasonably low cost area (eg, most of the Midwest and many other areas other than the coasts) with steady income *for now* should consider a small house or condo and paying it off ASAP. We plan to pay off our mortgage within 7 years.

[clean]

Ramsey always advises against bankruptcy but he himself went through one.

He *almost* always advises against it.

I had a hernia operation as an outpatient.  Even though I did it, I would never recommend anyone else do it!  In fact, given that I did do it, I would hope that my recommendation to NOT do it would have a little bit of weight.

One problem with filing for bankruptcy is that it does not usually fix the true problem.  If you have been laid off or otherwise suffered in the current economy, forgiving your debt does not produce an income.  With no job, but no debts today, eventually you will be right back in the mess.  Financial problems are just the effect.  The cause is usually something else. 

[cgfunmathguy]

People need to actually read Ramsey's work. In it, he very matter-of-factly states that you won't build REAL wealth until you are out of debt. He points to the truly wealthy, especially those who started with little to nothing. He notes that the very vast majority of them carried no debt (other than a house) and that even they say that paying off debt is necessary to build wealth. He PREFERS that you do not accumulate any debt, but he acknowledges that a single mortgage is different from the consumer (credit card, furniture, car, TV, etc.) debt. Thus, he treats it differently.

Yes, there is a "preachy and moralistic" bent to some of his writing, but you can ignore to get to the larger points that Ramsey makes.

With some work, I think I can be debt-free in a year*, and I intend to start the process with Friday's paycheck using Ramsey's system.

*I've actually run the numbers through a spreadsheet, and I'm pretty sure that this can work. Of course, it won't be easy (nothing worth doing ever is), but I'm excited to actually be getting rid of debts I accumulated several years ago.

[alshealy]

He points to the truly wealthy, especially those who started with little to nothing. He notes that the very vast majority of them carried no debt (other than a house) and that even they say that paying off debt is necessary to build wealth.

I like Dave, have no credit cards (I use a debit card), and will pay off my house next year. But I've always wondered about this. Are people/businesses really more likely to build long-term wealth by staying completely debt free? I have no idea about Bill Gates' personal finances, but Microsoft has about $6 Billion in debt and over $8 Billion in cash. Berkshire Hathaway (Warren Buffett's company) has $38 Billion in debt. I'll bet there's some research out there on this, but reading it would make my head explode. Does anyone know if there's a straightforward answer?

[cgfunmathguy]

He points to the truly wealthy, especially those who started with little to nothing. He notes that the very vast majority of them carried no debt (other than a house) and that even they say that paying off debt is necessary to build wealth.

I like Dave, have no credit cards (I use a debit card), and will pay off my house next year. But I've always wondered about this. Are people/businesses really more likely to build long-term wealth by staying completely debt free? I have no idea about Bill Gates' personal finances, but Microsoft has about $6 Billion in debt and over $8 Billion in cash. Berkshire Hathaway (Warren Buffett's company) has $38 Billion in debt. I'll bet there's some research out there on this, but reading it would make my head explode. Does anyone know if there's a straightforward answer?

I suppose this depends on the definition one uses for "wealth." My definition has always revolved around net worth, not cash on hand. I think this is how Ramsey uses the term, but I could be wrong. Think about it. If I have two million dollars in cash on hand (in bank accounts, whatever) but have debts of $1.99 million, am I wealthy?

[oldadjunct]

I suppose this depends on the definition one uses for "wealth." My definition has always revolved around net worth, not cash on hand. I think this is how Ramsey uses the term, but I could be wrong. Think about it. If I have two million dollars in cash on hand (in bank accounts, whatever) but have debts of $1.99 million, am I wealthy?

Skip "wealthy", if you have to ask, you're not.  The question is good debt, bad debt.

Start with credit card debt, bad but sometimes unavoidable particularly in certain stages of life.  Even credit card debt, properly managed, is not inherently evil.  The goal is to avoid it whenever possible; sometimes it is not avoidable.  Sometimes I do want the carpeting now and am willing to pay for that "investment" in comfort and home equity by way of some interest payment.

Next, home ownership.  Two scenarios:  you own your home free and clear (I do), but have accomplished that at the cost of investing in stocks and bonds (I haven't); or, you have equity (ie: maybe 50-60% equity to debt with a relatively low monthly payment) in your home.

So, you retire and completely own your home.  That's good, but your home (or mine) will never provide an income stream until it is sold.  Or, you owe some money on your home, a docile investment, and you have instead invested in instruments that give you an income stream that both pays for your home and gives you a bit more.

Sure, ideally you own your home outright and also have significant (naw, I don't yet) money stream investments.  But that doesn't seem to be the question.

Which situation would you prefer to be in?  I would rather owe some money on a mortgage, obviously not 95% or anything close of value, and have money stream investments than to "own" my home.  I also don't regret the time that I have used credit, and paid reasonable interest, to get what I wanted when I wanted it, though I always factored in the cost.

[raoul]

Those two professors in Boston, if they will accept a European amount of living space, and save a reasonable proportion of their incomes, CAN afford to buy a place with 20% down (although I see no reason not to take a 30 year mortgage - and try to pay it off early). Of course, this might entail bringing your lunch to work, and not eating out more than once a month, in other words, normal life for our parents.

This is the stereotype that middle class people are all going into debt because of a desire for McMansions and fine dining. I live in a mid-size city that is cheaper than Boston (about 1 million metro area). My wife and I started looking at houses here in the low 200K's, and gradually worked our way up to the cheapest place we could find that was minimally acceptable to us, which we bought for $303K. This is a small three bedroom house, for which we pay about $2300 a month in principle, interest, taxes, and insurance. The places that were $200K either needed tens of thousands in immediate repairs or else were newly built tract homes of obviously shoddy quality, very far from work so adding lots of commuting costs and time anyway. For $300K we were able to get a 100 year old detached house within walking distance of the university. I feel that this is a better value in the long run. I expect a similar house would cost about $500K in Boston--that's about the entry point for a "European amount of living space" in a major metro area in the US if you don't want to live in tract housing in a former cow pasture--so I'm skeptical that the hypothetical academic couple there is going to be able to save $100K in cash for their downpayment anytime soon. We did pay 10% down on our house, by the way, but for us the main obstacle to saving yet more tens of thousands in cash to make it to the magical 20% is that we have two small kids so we pay around $2,000 a month for childcare. (Despite this, we also do save several thousand a year in retirement and education savings plans.) We rarely eat out for lunch or dinner; we still have much of the same furniture we had as grad students ten-plus years ago; we drive a 1998 Honda. For those of us in even middle-tier cost of living areas the money typically all goes to housing and child care costs. We did look into renting, by the way, and to rent a place large enough for a family of four would have been at least $2,000 per month, so it didn't appear to represent a good economic choice. I think most of the people I know in the mid 30s to mid 40s age group are in the same boat--we are spending almost everything we make just to be in a small house and to have kids. The light on the horizon is that when the kids are in school full time childcare costs will go down a lot.

[cgfunmathguy]

My question about "am I wealthy?" was purely hypothetical and rhetorical.

As far as debt is concerned, I think people misconstrue Ramsey's take on it. Having just read his book twice, I'm not sure he sees debt as "evil" so much as he sees it as "limiting." He doesn't think reasonable first mortgages are bad, but a reasonable one is based on 20% down, a fixed interest rate, and a fifteen-year term. Anything else is a crisis waiting to happen.

Consumer debt is limiting in that you are paying more than the actual purchase price on something going down in value the moment it leaves the store. If you were willing to wait to pay cash, the extra money you throw away on interest could actually be making money for you instead of GMAC, your bank, VISA, or the store. Thus, it limits your ability to build wealth, and through the interest payments, it actually destroys the wealth you currently have.

[raoul]

Well, the rationale for this thread was to discuss the Atlantic article on David Ramsey, but I guess no one has read that so we've wandered far afield! Not that there's anything wrong with that....

[oldadjunct]

My question about "am I wealthy?" was purely hypothetical and rhetorical.

As far as debt is concerned, I think people misconstrue Ramsey's take on it. Having just read his book twice, I'm not sure he sees debt as "evil" so much as he sees it as "limiting." He doesn't think reasonable first mortgages are bad, but a reasonable one is based on 20% down, a fixed interest rate, and a fifteen-year term. Anything else is a crisis waiting to happen.

Consumer debt is limiting in that you are paying more than the actual purchase price on something going down in value the moment it leaves the store. If you were willing to wait to pay cash, the extra money you throw away on interest could actually be making money for you instead of GMAC, your bank, VISA, or the store. Thus, it limits your ability to build wealth, and through the interest payments, it actually destroys the wealth you currently have.

I was too brusque on your comment about wealthy.  I apologize.

Though "clean" and many others including Ramsey may disagree with me I think computing debt as only the ultimate price of the product is overly simplistic, and perhaps paternalistic if not reminiscent of sumptuary laws.

Leave aside some undefined notion of over extension which would be purely numerical, and indisputably a bad idea, and take instead a newer, more reliable car for new parents.  The existing paid for car is "OK" but breaks down at odd and inconvenient moments.  No problem for the young couple sans children.  But at some point in a pregnancy the awareness dawns than the car is not just a car; it provides more than the value of the product itself and that the qualitative value(s) of, perhaps, reliability and/or safety and/or the sense of calm in an otherwise stressful situation have value worth more that the product itself.  At that point interest, the price one pays for immediacy above the price of the product, makes sense.  This is not hypothetical.  I lived through exactly this situation of an OK-paid for-but-iffy car and an three month pregnancy.  Interest on a loan is often an insurance premium for intangibles, not a cost of the product.

Sometimes the intangibles add a value that can make an added price in reasonable interest at the right time, for the right thing, appropriate.