Beyond Dave Ramsey's BS7

[Chris22]

Dave asserts that a really good option is to have no debt.

The problem is you soften it.  He prescribes that you should not have debt at all, ever, it's wrong.  And without nuance, which he does not provide, that's a stupid argument to make.  Is it something to strive for?  Possibly/probably.  Is it an oversimplification at certain points in peoples' lives?  Absolutely. 

For instance, everyone knows the math of retirement savings, investing from 20-30 and then stopping is better than investing from 30-65 based on compounding interest, etc.  But when are you most likely to have debt?  When you're 20-30, starting out*, may have financed an education, may need to acquire housing, a car, etc etc, and my point is to not be in such a crazy hurry to retire that debt from starting your life that you handicap yourself by not investing at that same time.  The RoR on a 401k is (marginal tax rate + company matching + market gains) which is going to dwarf whatever interest rate you have on your student loans or new Honda Civic to get to that first job, so maybe you don't need to be in such a hurry to pay those down that you fail to invest in your future. 



*yes, I'm well aware that the average MMMer popped out of the womb with a fully funded IRA and has been maxing his 401k since the days of his paper route, but I'm talking real world here

[Proud Foot]

I could be misremembering, but I think I have heard him tell someone that it was ok to contribute up to the max match to a 401k while paying off debt.  I think it was a case where it was going to take the person over 5 years to get all their debt paid off.

If you're looking at a year or two the lost growth is not as significant as sitting out a longer period of time.

[dandarc]

Baby step 2 pay off debt is really more like:

Pay off all debt except your mortgage.  Unless it is really big and going to take more than a couple years, then treat it like your mortgage and push it to baby step 6.

[TheOldestYoungMan]

For instance, everyone knows the math of retirement savings, investing from 20-30 and then stopping is better than investing from 30-65 based on compounding interest, etc.  But when are you most likely to have debt?  When you're 20-30, starting out*, may have financed an education, may need to acquire housing, a car, etc etc, and my point is to not be in such a crazy hurry to retire that debt from starting your life that you handicap yourself by not investing at that same time.  The RoR on a 401k is (marginal tax rate + company matching + market gains) which is going to dwarf whatever interest rate you have on your student loans or new Honda Civic to get to that first job, so maybe you don't need to be in such a hurry to pay those down that you fail to invest in your future. 

Everything here is assumptions.  These assumptions hold true for an incredibly high percentage of MMM folks, but for a vanishingly small section of the rest of the population.  It is not terrible advice to live debt free.  And in your 20-30, when you aren't saving anything because you are horribly in debt, having someone come along who focuses on that aspect of your problem, isn't a bad thing.  Most 20-30's (and this is the only thing I actually have seen data on) have debt that is objectively bad and should objectively be retired as soon as possible, even if it means not saving for retirement, or leaving company match on the table (and an incredibly small % of folks even have the option of a company match).

Look at the "investing from 20-30" vs. "30-65."

That is true only if the underlying assumptions hold true.  The way I see it, it's usually "$100/mo from 20-30 works out to more than $200/mo from 30-65"

But if the 30-65 amount is 4, 5, 6x the 20-30 amount it is no longer true.  Personal finance is a complicated topic, and it is a totally valid criticism that following Dave's advice you will end up with a sub-optimal solution.

But.

You probably won't end up in the poor house broke as shit, which was where alot of those folks were headed.

There's also something to be said for the quality of life of a debt free existence.  Leverage isn't for everyone and it isn't necessary for anyone.

[boarder42]

For instance, everyone knows the math of retirement savings, investing from 20-30 and then stopping is better than investing from 30-65 based on compounding interest, etc.  But when are you most likely to have debt?  When you're 20-30, starting out*, may have financed an education, may need to acquire housing, a car, etc etc, and my point is to not be in such a crazy hurry to retire that debt from starting your life that you handicap yourself by not investing at that same time.  The RoR on a 401k is (marginal tax rate + company matching + market gains) which is going to dwarf whatever interest rate you have on your student loans or new Honda Civic to get to that first job, so maybe you don't need to be in such a hurry to pay those down that you fail to invest in your future. 

Everything here is assumptions.  These assumptions hold true for an incredibly high percentage of MMM folks, but for a vanishingly small section of the rest of the population.  It is not terrible advice to live debt free.  And in your 20-30, when you aren't saving anything because you are horribly in debt, having someone come along who focuses on that aspect of your problem, isn't a bad thing.  Most 20-30's (and this is the only thing I actually have seen data on) have debt that is objectively bad and should objectively be retired as soon as possible, even if it means not saving for retirement, or leaving company match on the table (and an incredibly small % of folks even have the option of a company match).

Look at the "investing from 20-30" vs. "30-65."

That is true only if the underlying assumptions hold true.  The way I see it, it's usually "$100/mo from 20-30 works out to more than $200/mo from 30-65"

But if the 30-65 amount is 4, 5, 6x the 20-30 amount it is no longer true.  Personal finance is a complicated topic, and it is a totally valid criticism that following Dave's advice you will end up with a sub-optimal solution.

But.

You probably won't end up in the poor house broke as shit, which was where alot of those folks were headed.

There's also something to be said for the quality of life of a debt free existence.  Leverage isn't for everyone and it isn't necessary for anyone.

leaving company match on the table is almost always a bad idea and your lifestyle should be changed so you can get this even if it means not paying down debt as fast its a 100% ROI in most cases and at minimum 50%

[Chris22]

For instance, everyone knows the math of retirement savings, investing from 20-30 and then stopping is better than investing from 30-65 based on compounding interest, etc.  But when are you most likely to have debt?  When you're 20-30, starting out*, may have financed an education, may need to acquire housing, a car, etc etc, and my point is to not be in such a crazy hurry to retire that debt from starting your life that you handicap yourself by not investing at that same time.  The RoR on a 401k is (marginal tax rate + company matching + market gains) which is going to dwarf whatever interest rate you have on your student loans or new Honda Civic to get to that first job, so maybe you don't need to be in such a hurry to pay those down that you fail to invest in your future. 

Everything here is assumptions.  These assumptions hold true for an incredibly high percentage of MMM folks, but for a vanishingly small section of the rest of the population.  It is not terrible advice to live debt free.  And in your 20-30, when you aren't saving anything because you are horribly in debt, having someone come along who focuses on that aspect of your problem, isn't a bad thing.  Most 20-30's (and this is the only thing I actually have seen data on) have debt that is objectively bad and should objectively be retired as soon as possible, even if it means not saving for retirement, or leaving company match on the table (and an incredibly small % of folks even have the option of a company match).

Look at the "investing from 20-30" vs. "30-65."

That is true only if the underlying assumptions hold true.  The way I see it, it's usually "$100/mo from 20-30 works out to more than $200/mo from 30-65"

But if the 30-65 amount is 4, 5, 6x the 20-30 amount it is no longer true.  Personal finance is a complicated topic, and it is a totally valid criticism that following Dave's advice you will end up with a sub-optimal solution.

But.

You probably won't end up in the poor house broke as shit, which was where alot of those folks were headed.

There's also something to be said for the quality of life of a debt free existence.  Leverage isn't for everyone and it isn't necessary for anyone.

leaving company match on the table is almost always a bad idea and your lifestyle should be changed so you can get this even if it means not paying down debt as fast its a 100% ROI in most cases and at minimum 50%

100% + marginal tax rate, so 125%+ for most people. 

[sokoloff]

leaving company match on the table is almost always a bad idea and your lifestyle should be changed so you can get this even if it means not paying down debt as fast its a 100% ROI in most cases and at minimum 50%

100% + marginal tax rate, so 125%+ for most people.

Well, you still have tax due later on the withdrawals, so I don't think it's illustrative to add in the tax deferral, unless you're trying to model that you'll be making tax-free withdrawals on the back-end (because of having such low withdrawal rates).

[TheOldestYoungMan]

OK, lets look at company match specifically.

I was 25, making 70k/yr, company match was 0.5% per 1% up to 6% (for a total of 3%).

The mustachian would say, no matter what you shouldn't leave that on the table, you will absolutely be better off.

And then at the end of the year the company decided not to match.

I was there for 6 years and they never matched once.  You don't know what the future holds, and aggressive optimism is fine, but it isn't terrible advice to focus on those things you can absolutely control, like your level of debt and how aggressively you pay it down.

Did I still contribute to my 401k?  Yes.  Am I better off than if I had used that money to avoid buying things with debt?  That is a really hard thing to say, and the answer is probably: barely.  Marginally.  Not significantly I'm sure, and I might be worse off.  The math doesn't capture the nuances of the actual experiences of an individual.  It isn't any more wrong to dispense bad advice because mathematical models told you it was good advice than it is to dispense bad advice that will turn up a sub-optimal solution in certain scenarios.

What Dave is doing, and if I could figure out how to do it better I would, and you should too, is raise the overall financial literacy of a lot of financial idiots.

If I could figure out how to teach teenagers to manage their money properly and get them to actually listen, I'd quit my job now and do that instead.

[daschtick]

We started the Dave Ramsey plan when our first son was born (7 years ago).  The first year or so I had to pull my wife through it.  Eventually she did get onboard, but we never got aggressive on cutting down our spending.  We (I) instead worked very hard to increase my income.  I increased it by 100% and worked crazy amounts of overtime and continue to do so today.

As a Dave Ramsey listener, you should be very familiar with his phrase, "You can't out-earn stupidity."  I personally disagree with a lot of his views, however, he has some fantastic quotes like these.  You have a spending problem, not an income problem.  You need to come to terms with this, and even harder, your wife needs to join your team.

[ender]

leaving company match on the table is almost always a bad idea and your lifestyle should be changed so you can get this even if it means not paying down debt as fast its a 100% ROI in most cases and at minimum 50%

The biggest mistake people like you make is assuming the process for how people do their finances is:

• Make $X
• Spend $Y on basic needs
• Allocate $Y - $X on maximizing debt payoff/investing
• Spend $0 on discretionary

However, for the overwhelming majority of people, it looks more like:

• Make $X
• Pay minimums on debt
• Maybe put a bit extra towards debt/investing
• Blow the rest on discretionary

In a perfectly optimized finances such as the first, it makes no sense to pass up a company match. But the overwhelming majority of folks  do not live in this perfectly optimized world (including those who call Dave Ramsey). For most people, focusing 100% intently on paying off debt ASAP with everything you've got is a far better return on their overall financial situation than getting a relatively small match.

Losing out on a company match for 1-2 years as a side effect to completely change financial trajectory is more than worth the cost for probably 95% of people. Can it be done without this cost? Absolutely. But not for everyone. I would much rather be able to tell people to take FPU and do what he says verbatim rather than hoping/planning on them all doing the right things without someone else coaching/guiding them through everything. I have some friends who I would never tell to do FPU and will talk through a lot better ideas. But for many? The slight inefficiency in FPU's principles overwhelmingly outweighs the drawbacks of them trying to do it themselves.

It's easy to sit on an ivory tower of financial discipline and deride/mock Dave Ramsey as giving bad advice. But the overwhelming majority of people are better off by following his recommendations and plan 100.00% verbatim than they are doing their own thing.

[Tyson]

Every time I see FPU I think it stands for Face Punch University.  Not THAT would be very mustascian :P