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Response to SA Blog

May 19th, 2008 at 09:52 am

I believe the author of the blog made few incorrect points and with my rambling still I thought a blog might be needed to encompass what I wanted to say.

So the major assumption that Dave makes is that the individual is not making enough to attack all the goals on has (reducing debt, saving for college, saving for retirement, emergency fund, etc.). So he lays out a road map to get you to a stable base as quick as possible. These are the first three steps (1,000 emergency fund, all debt paid off but house, and fully funded emergency fund).

And, he wants these three steps not to linger. You want to get on them and knock them out. He wants you very focused on these steps. Once you get through step three, he usually letís people loosen up. You want a vacation? Go ahead but pay for it in cash. You want to go out for dinner and a night out. Go ahead, make sure itís in the budget.

As for step 4, 5, and 6; these should all be done at the same time (15% in retirement, college for kids, and pay off home).

As for the compounding argument made by the author, it really doesnít hold much weight. Isnít the compounding on your debt working against you? And arenít those interest rates generally higher then what you are earning in your retirement accounts? Also, Dave Ramsey has said that the first 3 steps should only take a couple of years and not longer.

In general, people who are trying to reduce their debt are not saving 15% towards requirement. In fact in general, I would argue that most people are not saving 15% of their income.

The argument I make is that if you could get out of debt and live within a budget, it is far easier to reach that goal then if you have to make debt payments.

And if you look at his plan as a diet, it is an intense diet for about a year. During that time, your doing things like changing your attitude and habits with a small safety net to catch you. And after step 3, itís all about maintaining.

And, step 7 is all about getting to the point in life where your money makes more then you and you can coast. Do what you want. And that is living like no one else.

Now in all honesty, if I was following Daveís advice. I would dropped my emergency fund to $1,000 and stopped contributing to 401(k). I didnít do this, but I am on a budget and intense on getting rid of my debt. And I will be through step 5 by the end of the year.

9 Responses to “Response to SA Blog”

  1. Broken Arrow Says:

    I guess it was deliberate that you did not want to name this author out-right? It's most likely not me since I rarely discuss Dave Ramsey in specifics... so I should probably stop being paranoid. Big Grin

  2. merch Says:

    I would probably mention you by name. LOL

    Target up 76 cents .. nice.

    It was "the" SA Blog not "a" SA blog.

  3. Broken Arrow Says:

    Sure, freak me out, why don't you. Big Grin

    Yeah, the day is ticking up so far... momentum probably by a soft but still positive earnings preview. I kind of guessed that might happen... and even if I was wrong, I figure the risk of a serious loss is still unlikely (short of a big wheel making a huge sell).

    But I'm not going to lie. This is me speculating on the future, and even I realize how dangerous that can be.

    Still, relative to the rest of the portfolio, the money is only a small percentage of the total involved, so the risk isn't as bad as it may seem.

    Hey, everybody needs a hobby right? For once, at least this one is posting a paper gain... even if it's only been for one day.

    Oh, but but didn't mean to hijack your entry. Big Grin

  4. Broken Arrow Says:

    I think I spoke too soon. Big Grin

  5. sagegirl Says:

    Merch--I agree with you about the SA article. I think it was a bit harsh. I think Ramsey just wants you to FOCUS, which some people can't do unless they are given step-by-step instructions. You are correct in that the majority of people who are reducing debt cannot or don't invest the 15%. It is a place to get started and he has repeatedly said on his radio show that it is a guideline to get you started but you must evaluate your own situation. Yes, he is a firm believer in the fact that you should get rid of debt ASAP, but since when is that a bad thing?

  6. disneysteve Says:

    I have yet to find a personal finance guru who I agree with 100% (Suze Orman and Jean Chatzky are probably the closest). There is a lot of DR's advice that I disagree with, but just because it doesn't work for me doesn't me it can't work for others, and I realize that. When the topic comes up, I do like to point out why his advice isn't always the best financially, even though it might be motivational and give people a psychological boost that they may need to stick with the program.

    sagegirl - Why is getting rid of debt ASAP a bad thing? Because sometimes it makes more sense financially to invest rather than pay off debt. Mortgages are the perfect example. I could pay off my mortgage tomorrow with savings if I chose to, but our investments earn far more than our mortgage costs us. We would lose money if we paid off our debt and that just doesn't make any sense.

  7. sagegirl Says:

    DisneySteve--in the example of Dave Ramsey, I wouldn't be talking about the mortgage since that is way down on the list (#6 of 7). Debt snowball then investing then paying off your house is not bad advice.

  8. disneysteve Says:

    sagegirl - Let's say you owe money on a credit card at 18%. Should you pay the minimum and invest the rest in your 401k to get the company match? The company match, usually, is an instant 50% return on your investment. That beats prepaying the credit card by at least a 32% margin. Even more when you add in the investment performance and the value of the tax shelter.

    Personally, I think you should do both. Pay more than the minimum so that you aren't carrying that debt forever, but also be investing at least enough to get the full company match.

    If you don't have a 401k, at least fully fund a Roth.

  9. scfr Says:

    Thanks for the perspective.

    To tell you the truth, since I've never had debt (other than mortgage), and by the time I heard of Dave Ramsey I was already well on my way to knocking off Step 6, I have never read any of his books....Not because I thought his advice was bad, but just because I thought it did not apply in my case.

    It's good to hear that he allows for some flexibility ... I do have a problem with "my way or the highway" approaches. Since there are so many variables in personal finance, I cannot imagine any one approach that could fit all people.

    My mantra is that the "best" financial plan is the one that works for you!

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