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I've been looking at a lot of Dave Ramsey's stuff over the past few months, and although I like a lot of what he says, and the order of his recommended baby-steps, there is one principle regarding paying off debt that I'm having trouble justifying mathematically in my particular situation. 17 months ago, we bought my wife a used SUV with low-ish miles in great condition. The car was $17,500 and we took out a $15K loan at 1.75% from my bank. We had the cash at the time to write a check, but I was also in the middle of grad school and chose to take the 1.75% car loan vs higher interest student loans. We have two credit cards for points that we pay off in full every month. (Dave wouldn't agree with this, but that's for a different post. :-) )
Fast forward to now: My household income is about $105K. I graduate grad school in 2 months, and my tuition payments are done. (Paid $70K completely in cash over 2.5 years). We only have two pieces of debt: Mortgage and my wife's car. We have a solid emergency fund, and 15% going towards retirement through my work 401K (maxing out the match plus some), my Roth IRA, and my wife's Roth IRA. Now that grad school is coming to an end, we'll have some extra cash that won't be going straight to school. We could strike a check, today, to pay off the car, which we owe $11K more on and 43 months left. If I'm following Dave Ramsay's snowball method, we'd pay off the car first, right away before we started paying extra on our mortgage.
No matter how many ways I look at it, I can't justify this as being a good idea. With 43 months left at 1.75%, I'll save approximately $310 (in today's dollars) in interest that would normally be paid between now and 2021. That's a lousy return for $11K. Even if I wanted to pay down debt vs. investing in a taxable brokerage account, I'd save more $$ on interest by paying down my mortgage faster. On top of that, as soon as the mortgage is paid down an additional $20K, I can stop paying PMI which is costing me $90/month. (I can probably do that in 6-12 months without dipping into my emergency fund.).
Anxious to hear any other thoughts on this. While I can get on board with the value of avoiding car loans, the fact of the matter is I have this loan now, and in the long run the numbers say my money is better utilized in other areas.
Last edited by mjedwards409; 02-18-2018 at 01:07 PM..
I know this isn't strictly a "money" aspect but it might tip the scale one way or another....are you planning to stay in your house long term? If there's a reasonable chance you might relocate once school is finished (if a different job comes up as a result), buy a different house because of kids, better area, better terms someplace else, maybe paying off that particular mortgage isn't top priority.
Last edited by Parnassia; 02-18-2018 at 02:45 PM..
I think Dave is right. Paying off the car gives you instant gratification and immediately starts saving you XXX per month. And if the car is paid for you can probably get cheaper insurance. Then...the very next month, you can start on the house. And you can afford to pay even more because you are no longer paying XXX for the car!
I know this isn't strictly a "money" aspect but it might tip the scale one way or another....are you planning to stay in your house long term? If there's a reasonable chance you might relocate once school is finished (if a different job comes up as a result), buy a different house because of kids, better area, better terms someplace else, maybe paying off that particular mortgage isn't top priority.
Right now we have no intention to move in the next 2-4 years. However, paying down the mortgage was just an example of something I could do instead of paying-off the car loan. I could also open a taxable brokerage account or start contributing more to my 401K. Basically my main hypothesis is that I can get a better return for $11K than $310. (Whether its market returns or avoiding mortgage interest and PMI)
Right now we have no intention to move in the next 2-4 years. However, paying down the mortgage was just an example of something I could do instead of paying-off the car loan. I could also open a taxable brokerage account or start contributing more to my 401K. Basically my main hypothesis is that I can get a better return for $11K than $310. (Whether its market returns or avoiding mortgage interest and PMI)
Ramsey's methodology has nothing at all to do with math - it has everything to do with psychology and his belief that most people aren't smart enough to think of the things you're contemplating.
There are absolutely times when you do really well with credit cards and there are certainly situations where you can make more money with your extra cash by putting it either toward mortgage debt or investments. Those pieces of advice for the majority of Dave Ramsey listeners would not be wise, because they generally don't have the discipline or education to understand them.
I equate Dave Ramsey's advice to AA. If you can't handle booze, don't drink. If you've shown that you can't handle credit, then use cash only. It's completely necessary for some people and I'm glad he's around for them, but if you question it, then you might have the discipline necessary to optimally handle your finances.
I would just pay off the car now. By the en$ of the year, you should be able to get the mortgage down close enough to get rid of the PMI if you really focus on it. After that, you can just keep accelerating your house payment with additional raises, etc.
Everyone is different and paying off something for the sake of paying something off does nothing for me. I'm greedy and would want to pay off the thing that is costing me the most. In your case, I would keep the scheduled payments on the car loan since it is so cheap at 1.75%. I would tackle the mortgage balance to get below the PMI threshold. If not the mortgage principal, I'd vote for investing the money into the Dogs of the Dow or just follow Buffett into some of his latest moves. I'm sure you'll have a much better return in 4 years with that than you would paying down the car payment.
I think Dave Ramsey's advice is for people that need help with money or people just learning to manage money. If you're drowning in debt his advice can help you change your habits and get out. If you're good with money some of Dave's advice will be less beneficial to you. Dave's way may not be the most efficient way to do things. I used to pay down my mortgage until I realized my investments were making 20%+. Which is far higher than my mortgage interest rate. Now the money I would have used to pay down my mortgage I use to add to my investments.
Ramsey's methodology has nothing at all to do with math - it has everything to do with psychology and his belief that most people aren't smart enough to think of the things you're contemplating.
There are absolutely times when you do really well with credit cards and there are certainly situations where you can make more money with your extra cash by putting it either toward mortgage debt or investments. Those pieces of advice for the majority of Dave Ramsey listeners would not be wise, because they generally don't have the discipline or education to understand them.
I equate Dave Ramsey's advice to AA. If you can't handle booze, don't drink. If you've shown that you can't handle credit, then use cash only. It's completely necessary for some people and I'm glad he's around for them, but if you question it, then you might have the discipline necessary to optimally handle your finances.
Outstanding post. Excellent observations.
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