The Dave Ramsey Method - Doable or Ideal? (funds, pay, debts)
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I have been an avid listener to Dave Ramsey for quite sometime now. I get really hyped about his program, the baby steps, but when it comes to applying some of them, I am left wondering if it's really practical.
My issue was holding off from contributing to a 401k until all debt's paid off,not including the house though. I can understand the concept though because I have witnessed several people using 401k funds for emergencies when they could have saved a little bit or paid of debt more. I tried the method of not participating in retirement savings if there's still debt, but after looking at my 401k balance and missing out on the tax break, I don't think it was the best idea for me.
I think there are a few threads about this already just FYI.
I think the people most in need of Dave's advice are best served following it. You don't bury yourself as far as they have if you have self control. Best to attack each step with "gazelle" intensity. But to someone disciplined most of his advice is sub optimal.
Like just about every question relating to personal finance, the real answer is "it depends"
If your employer offers a contribution match, you should definitely contribute enough to make that. That's usually 50-100% guaranteed returns over the vesting period. So if you vest over 4 years, $1000 contributed today with a 50% match would be worth $1500 in 4 years. That's on top of the market performance and the tax advantage. That's one of the few easy choices.
Beyond that, you have to look at what kind of debt you have. If you're dealing with low rate loans (car loans can be 2% in some cases) then you can probably look to up your 401(k) contribution a bit since you'll likely do better in the market over the long run, especially with the tax advantage.
If you're talking student loans at 8%, you might want to consider paying those down first, but this one could really go either way. It comes down to do you want the security of being debt free vs the security of having more wealth.
If you've got credit card debt at high interest rates, those are your top priority. With the credit cards, you need to think of it as a 17%(if that's your rate) guaranteed return for life(or at least however long it would take to pay down the card making minimum payments only).
Dave Ramsey generally offers an OK solution to life's finances. He doesn't have the best answer out there since the best one would be the mathematical highest rate solution to getting out of debt. But it's not the worst either since it keeps people from making the wrong choices and puts them on a path to getting out of debt.
To financial fitness to physical fitness, he won't get you running marathons, but he's really good at getting you off the couch. How much you listen to him should be based on what your goals are. You can definitely do better than his approach, but if you try to run a marathon, give up, and then go back to the couch, you would have been better having gone the slow and steady approach.
It's a good method for people that have no self-discipline and can't responsibly use tools. If you're incapable of picking up a hammer without using it to bash your hand repeatedly with enough force to cause serious damage, you should not use a hammer. That doesn't mean there's anything wrong with hammers. Same with debt. Not taking advantage of a 401k match from an employer so you can pay back a mortgage faster at 3.5% may be doable, but it's far from ideal. Now, if you can't responsibly use debt and bought too much house, then filled it with 0% for 12 month furniture, then leased a Lexus, and maxed out five credit cards on designer clothes, Dave Ramsey's method is more ideal than that. It's also better to hire a union carpenter at $90/hour with a two-hour minimum to hang a picture on the wall than it is to break your finger with a hammer. The Dave Ramsey method is that hammers are bad because he personally broke his fingers because he can't use them (declared bankruptcy). That might be true for Dave Ramsey, but many people can responsibly use hammers and spending $180 to hang a picture while doable is clearly not ideal.
Debt and hammer are tools. If you can't responsibly use them, it's better to not use them at all.
I've been a avid listener since 2005. I worked 3 jobs in my early-mid 20s, paid off all of my debts and screamed I was debt free in 2007. I now have $225k worth of mutual funds and no debt. I'm 31.
It's doable. It's 2 years of hell but totally worth it.
I have been an avid listener to Dave Ramsey for quite sometime now. I get really hyped about his program, the baby steps, but when it comes to applying some of them, I am left wondering if it's really practical.
My issue was holding off from contributing to a 401k until all debt's paid off,not including the house though. I can understand the concept though because I have witnessed several people using 401k funds for emergencies when they could have saved a little bit or paid of debt more. I tried the method of not participating in retirement savings if there's still debt, but after looking at my 401k balance and missing out on the tax break, I don't think it was the best idea for me.
What do you all think about the baby steps?
Assuming that you can contribute to a 401K and still maintain reasonable savings and pay down debt that is not overwhelming you, it is a mistake not to contribute. Aside from the tax issues, money that you forego into 401K is money that you will not be able to make up later as you will not have enough time to weather market volatility over time and reap the benefits of compound interest, which only amplify over a long time horizon. But then again, Ramsey's advice is fundamentally intended for people who do not have their act together when it comes to finances, so if they are that far in debt, maybe they have to forego the 401K. But it is far from ideal.
Location: Chapel Hill, NC, formerly NoVA and Phila
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Quote:
Originally Posted by ambient
Assuming that you can contribute to a 401K and still maintain reasonable savings and pay down debt that is not overwhelming you, it is a mistake not to contribute. Aside from the tax issues, money that you forego into 401K is money that you will not be able to make up later as you will not have enough time to weather market volatility over time and reap the benefits of compound interest, which only amplify over a long time horizon. But then again, Ramsey's advice is fundamentally intended for people who do not have their act together when it comes to finances, so if they are that far in debt, maybe they have to forego the 401K. But it is far from ideal.
This! I believe that you should continue (or start) contributions to your 401k because you cannot ever make them up. Once the window of opportunity is gone, it is gone.
I think there are a few threads about this already just FYI.
I think the people most in need of Dave's advice are best served following it. You don't bury yourself as far as they have if you have self control. Best to attack each step with "gazelle" intensity. But to someone disciplined most of his advice is sub optimal.
i don't think i could have said it better myself.
i'll add - putting off contributing to a 401k is bad advice. i recognize if you have high cost debt, you want to plow as much money as possible into that, but let's say you started taking his advice in 2008. instead of dollar cost averaging into the market over the past 6 years and making quite a nice return (around 25-30% almost every year) and missing out, likely, on a company match...you pay down some debt that has 5, 6, 9, 15% APRs....you're clearly worse off.
bottom line if you want to pay off debt, you have to follow a budget. pay off highest cost debt first, and then roll that payment in to the next highest cost, and so on.
David Ramsey's advice is for people who need those "wins" of paying off their $200 balance that costs 2% even if they have a $5,000 balance that costs 18%. it's incredibly silly advice.
This! I believe that you should continue (or start) contributions to your 401k because you cannot ever make them up. Once the window of opportunity is gone, it is gone.
exactly. unless you have an ungodly amount of debt at 25% rates or higher, you really have to be insane to contribute $0 to your 401k, given the tax advantages (but this is arguable, when considering tax implications 30 yrs down the road) and the compounding effect. throw in an employer match, and it's certifiably insane to forgo a 401k unless your debt is insanely high cost.
have a payday loan? sure, stop your 401k and pay it off. a mortgage? heck no.
Op. Dave Ramsey had helped a lot of people get out of debt. If you are buried in debt, you need a plan. Dave Ramsey offers a great plan for people to get started. Is allot of his advice simple? Yes, however there is a huge need in this country for simple advice.
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