No reason to fear debt, unless you listen to Dave Ramsey

On a forum I frequent was posted a list of books that couples should read before they are married. One of them was Dave Ramsey’s Total Money Makeover. In response to the posting, and another member praising the book, I called Dave Ramsey a salesman, saying he is not a financial guru.

And a recent article on his blog shows this, called “6 Common Money Myths to Avoid“. And what’s top of the list? (Emphasis theirs).

1. Debt is a tool.

The Truth: Some tools help you fix things. Other tools help you break things. So, in that sense, debt is a tool . . . consider it a sledgehammer to your financial future. Another way of putting it: Debt is the enemy of your income. The monthly payments you send to MasterCard are monthly savings you could be putting toward your retirement, your kids’ college, and your down payment on a new house!

Dave Ramsey’s philosophy is to avoid debt at all costs. I really, really wonder how much of what he preaches that he actually practices. Does he also pay cash for everything, and actually keep physical cash in physical envelopes and use that for budgeting? Yeah, I doubt it.

And the reality with regard to debt isn’t so straightforward.

Debt is a tool. But it isn’t the “enemy of your income”, unless you let it become that. Which for most of Ramsey’s audience, that likely is the case. What Ramsey and his contributors continually overlook is “leveraging“. Click on that link and you’ll see where I’ve responded to him before and is continual treatment of the concept as if it’s nonexistent.

As I make clear in that article, how you use debt determines whether it’s an “enemy of your income”. Unfortunately his next point shows as well how much he’s willing to treat “leveraging” as if it’s a concept that does not apply to personal finances.

2. Car payments are a way of life.

The Truth: If you believe debt is a tool, you’re just as likely to believe car payments are a way of life. The average car payment these days is nearly $500 per month, according to Experian Automotive. That’s $6,000 per year you’re putting into something that decreases in value. Instead, save that $500 every month for a year and buy a nice, used, $6,000 car. The best cars are the ones without a payment.

Let’s go back to my article on leveraging and personal finance.

There are two types of assets related to personal finances, since most of us don’t track assets to the same degree of granularity as a lot of companies. So to us, most assets are either appreciable assets — things that will go up in value — or expense assets. The latter goes by another name if you’re referring to a business: inventory.

Most people buy things with the intent of getting utility from them. Food. Utensils. Appliances. Power tools. And even vehicles.

Vehicles are a utility asset, not an appreciable asset. As such, the question that you need to ask before taking on a payment plan is whether you will get more out of the asset than you’re paying each month against it. It’s certainly great to have a vehicle without a car payment. I’m glad to be in that boat myself.

And most who pay off their loans will keep their cars until they’re no longer serviceable. Since there’s hardly any point in paying for a $2,000 repair on a 10 year-old car, for example.

Which actually brings up another part of the equation: opportunity cost. In short, what opportunity are you giving up with a particular decision versus the opportunity you’re accepting? In choosing to make the $2,000 repair, that is $2,000 out of your pocket up front to get your car a little more down the line.

Now if you can afford to pay that $2,000 out of pocket, congratulations. Now you could instead make that $2,000 a down payment on a newer vehicle, perhaps one still under warranty. Sure you’re taking on a monthly payment, but the newer vehicle will have several advantages over the clunker you’re trading in or leaving behind. You have a vehicle you won’t have to worry might break down on you at any point — including the day after you make the $2,000 repair. And peace of mind is difficult to label with a price tag.

But even if you can’t afford the $2,000 repair, again taking on the monthly payment for a newer vehicle buys you some peace of mind. And the cost could be offset in other ways, such as lower insurance rates and better fuel economy (depending on how often you drive). Having a more reliable vehicle could also lead to better opportunities since you’re not so paranoid about your car.

See what potential opens up when you’re not being so short-sighted about having a car payment?

4. You can’t go to college without student loans.

The Truth: You can. You absolutely can. Will it be easy? Probably not. Will it be worth it? Totally. Whether it’s college-specific aids and grants, or federal and state aid (that’s grants and scholarships, not loans), going to college without debt is absolutely possible. And what about paying for college out of your own pocket—or making your upcoming college student do just that? Rachel Cruze talks about college planning all the time. There are plenty of alternatives to loans when it comes to funding college tuition.

Yes there are plenty of alternatives. Few will be able to fund them to the degree that you need to get a college degree in a reasonable amount of time.

I know a few people who came out of college without any debt. And I would’ve loved to be them. But I didn’t have much in loans myself, not compared to what was considered average back then.

But I also studied a major that is worthwhile. If you study a major that is worthwhile, then you should have little difficulty paying off your loans out of college. At the same time, though, be smart about where you go. Get an Associate’s degree first to keep initial costs low. I had only a small loan coming out of community college that was easy to pay off.

Do well in community college to set yourself up for scholarships when you transfer to a 4-year school. Study a decent major and do well and you’ll come out of school employable. Which will make paying off your debt easier.

At the same time, depending on what you study, you may be able to find sponsors who would be willing to pay your way through college in exchange for a few years of work. And there’s always the military and the benefits you get from serving for a few years.

And before even considering college, ask yourself whether you actually need to go, or whether your time would be better spent in a trade school.

 

Well that’s it for this iteration. Don’t have much to add to his other points, so I’ll just call it here.

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