Yearly net worth

[Phaedrus]

I don't know who Dave is, but given the tax benefits and employer matching [often] available for contributing to a 401k, this is incorrect advice. The exception may be if the debt is high-interest credit card debt.

Technically correct, this is psychologically flawed. People that get deep in debt don't need to find yet another justification for putting their money toward "investments". The actually dollar amount we're talking about that the employee "loses" is relatively inconsequential, provided they get out of debt as intensely as possible and start investing 15% immediately thereafter.

Especially since a bunch of people, once they get out of debt, kick their employer to the curb and do something they REALLY want to do. I've always been humored by how little "matching" actually accounts for. Especially since most 401(k)s are pretty crappy, choice-wise and with "vesting" rules.

 

[Cydkar]

So, I think we can all agree on one thing...buying a new vehicle is financially stupid.:smile:

 

[cloneluke80]

So, I think we can all agree on one thing...buying a new vehicle is financially stupid.:smile:

AMEN!

If you get your vehicles in your life under control, that is an awesome first step to financial freedom. By under control, I mean eliminate car payments period.

 

[dmclone]

Here is my opinion. I'm going to try and be decently frugal but I'm also going to live and do things that make me happy. I've always had a love for cars and I know that they are going to cost me money but that's what I want to do with my money. I usually try to buy used cars that have already taken the big hit but I know that I'm not going to be making any money on these cars. With that said, how many other things that you do could be considered wasteful?

Season football tickets plus donation?
New clothes?
Eating out for dinner?
New TV?
Cable?
Gambling?
Vacation?
High speed internet?
New PC?

 

[balken]

According to Dave, until you have all your debt paid off, you shouldn’t be saving for retirement. But this ignores the value that compounding interest brings over time.

Actually, the math does not necessarily favor investing over paying off debt. A number I pulled from Vanguard shows a 10.37% compounded annual return without adjusting for inflation over the period from 1926-2005. After adjusting for inflation the return is 7.29%. Obviously, the interest rate on your debt will make a difference, but consider some current national average loan rates:

Auto: 6.72% (rate for new, 36-month note)
7.17% (rate for used, 36-month note)

Credit: 11.34% (low-interest card average rate)

Mortgage: 5.50% (30-year fixed)

Home Equity: 8.49% (30K note)

Only the mortgage provides a less favorable rate of return than investing in equities, and that assumes you have the favorable rate listed above. Even after you calculate the interest rate reduction on federal taxes, your effective rate will be 4.125% if you are in the 25% marginal bracket. While this may appear logical on the surface, you must also consider risk. You get a 'guaranteed' rate of return by paying off your mortgage of 4.125%. However, to get the average return of 7.29% in the market, you must take on equity risk. I believe the risk-adjusted return in this scenario actually favors paying off the mortgage versus investing.

Perhaps the one caveat in this math is if you are employed and receive a 401(k) match from your employer. This would boost the effective return on your investment for the portion that is matched. Therefore, the math may favor investing up to the match level in that situation.

Finally, as has been pointed out by many others, much of this is psychological and about changing your lifestyle. In other words, many people must make the move from living a "buy now, worry about paying later" lifestyle.

 

[Bobber]

Here is my opinion. I'm going to try and be decently frugal but I'm also going to live and do things that make me happy. I've always had a love for cars and I know that they are going to cost me money but that's what I want to do with my money. I usually try to buy used cars that have already taken the big hit but I know that I'm not going to be making any money on these cars. With that said, how many other things that you do could be considered wasteful?

Season football tickets plus donation?
New clothes?
Eating out for dinner?
New TV?
Cable?
Gambling?
Vacation?
High speed internet?
New PC?

The question isn't if you can have those things, it's how you buy them.

New Car? Probably not a good idea. Used and particularly one with some miles on it is a great idea.

New Clothes. Yeah that's fine, but I can tell you what I have in my closet have lasted me a long time.

Eat out. Sure once in a while. You can turn into a pretty good cook at home and still make it a social event by having friends over. Saves mucho $$

New TV. Sure. Just don't buy the latest greatest. I bought a 42 inch HDTV Toshiba a year ago for $1,000 when most that size were selling for $2,000.

Cable - I have it. However do just go with the basic plan and am happy. If you can't get a big game, good excuse to go out for a brew with some friends.

Gambiling - Used to do that, but now investing in the stock market is enough thrill for me.

Vacation - Been around the world several times. Very rarely stayed in star restorts. Mostly hostels, friends, and cheap motels.

High Speed Internet - Use it every day. DSl service works pretty good too however.

New PC. - Of course. Just don't be buying one every year.

I do all those things and still have been able to save and am happy.

 

[Cydkar]

Here is my opinion. I'm going to try and be decently frugal but I'm also going to live and do things that make me happy. I've always had a love for cars and I know that they are going to cost me money but that's what I want to do with my money. I usually try to buy used cars that have already taken the big hit but I know that I'm not going to be making any money on these cars. With that said, how many other things that you do could be considered wasteful?

Season football tickets plus donation?
New clothes?
Eating out for dinner?
New TV?
Cable?
Gambling?
Vacation?
High speed internet?
New PC?

Out of your things listed few of them are ego related such as a new car. I'm frugal about everything you have listed, frankly. I gamble but it's small time and i'm always ahead. If I get down I quit for a year. My clotehs are older than dirt and I vacation at my Uncle's lake cabin....free other than gas. Cable...I'm pushing it.:smile:

 

[Wesley]

So you're working for the wife, just like the rest of us!!:biglaugh::biglaugh::biglaugh:

Money well spent. Just ask Angie. The family that buys nice cars for the mrs is the family that smiles together.:yes::yes::yes:

 

[Wesley]

So, I think we can all agree on one thing...buying a new vehicle is financially stupid.:smile:

Unless you are Doing it for Detoit to save their union jobs.

 

[jamesfnb]

And you are ignoring the psychological element. Getting out of debt has nothing to do with math. It has everything to do with psychology. And someone who is deep in debt usually got there due to misbehavior. You don't teach a drunk to get sober by decreasing the amount they drink, do you? You teach them how to quit. And if you are serious about the method, you will pay off your debts extremely quickly, and really not miss out much. And debt compounds just like investments do.



It's called a "baby step" for a reason. $1000 is a quick win, and breaks the vicious cycle of going into debt every time the cat sneezes.



Because people don't work that way. The compromise you speak of slows down the process and the slow process will cause people to drop the program.



I'm just wondering if you have a point here, except to make a false analogy to support your straw man attacks on Ramsey's method, which incidently contradicts your world view.

I would suggest you read more of Ramsey's stuff to see exactly how longsighted it is. It is nothing close to "shortsighted."

BTW - I lost 70 pounds two years ago rather quickly and kept it off. Mainly by being intense. With intensity, you can lose weight safely and keep it off. Just like you need to be to follow Ramsey's method.

HA! If you need a psychological element to manage your finances than you have more issues that Dave Ramsey can solve. I'd advise these people see a psychologist first, financial planner second, Attorney 3rd, Accountant 4th, Dave Ramsey 5th. Perhaps we can agree on this though "The Dave Ramsey plan works best for people who have found themselves in severe financial debt/trouble".

Congrats on losing 70 pounds. That's awesome! But, you forgot to put an asterik by your statement (*results not typical). To think the majority of people can go extreme or "intense" like you or Dave Ramsey preaches is just silly. They may be "intense" for a short time but will eventually fall off the wagon. People need a life-long financial management plan that preaches moderation, not extremism.

Again, I congratulate you on losing 70 lbs. That is truly awesome and must have taken a lot of discipline along with discipline to this day.

 

[jamesfnb]

Gambling is the biggest "dummy tax" of them all!!!!!!!!!

 

[jamesfnb]

Unless you are Doing it for Detoit to save their union jobs.

yes, buying a new vehicle does not make financial sense.

But, if you have enough money to buy one as well as no debt and saving plenty of money for retirement does that make you stupid for doing so? It may, I'm not sure.

 

[Bobber]

Perhaps we can agree on this though "The Dave Ramsey plan works best for people who have found themselves in severe financial debt/trouble". .

Not really. I basically follow his plan, but have never been in that shape. Was just brought up to be fiscally conservative having lived through the 80's farm depression.

It's great not being in trouble...

 

[KCy]

I should have been more clear- I meant you will have the ability to pay off your loan at that point.
Believe it or not, the fastest way to have the ability to pay off your mortgage doesn'r usually involve making extra mortgage payments.

I get what you are saying, but, while you are investing and earning that extra money, you are still paying interest on a higher amount owed on the house. (worded weird I know.) Also, when the market is down (now) you have a dead period for a coupld of years where you are owing on the market and the house. It seems like a gamble. I am no expert, but I think a balance of extra mortgage payments and investing is the safest.

 

[Bobber]

I should have been more clear- I meant you will have the ability to pay off your loan at that point.
Believe it or not, the fastest way to have the ability to pay off your mortgage doesn'r usually involve making extra mortgage payments.

I get what you are saying, but, while you are investing and earning that extra money, you are still paying interest on a higher amount owed on the house. (worded weird I know.) Also, when the market is down (now) you have a dead period for a coupld of years where you are owing on the market and the house. It seems like a gamble. I am no expert, but I think a balance of extra mortgage payments and investing is the safest.

Read Balkins comments above and you'll understand why your premise may be incorrect. I can't say it any better then he did.

 

[jamesfnb]

Actually, the math does not necessarily favor investing over paying off debt. A number I pulled from Vanguard shows a 10.37% compounded annual return without adjusting for inflation over the period from 1926-2005. After adjusting for inflation the return is 7.29%. Obviously, the interest rate on your debt will make a difference, but consider some current national average loan rates:

Auto: 6.72% (rate for new, 36-month note)
7.17% (rate for used, 36-month note)

Credit: 11.34% (low-interest card average rate)

Mortgage: 5.50% (30-year fixed)

Home Equity: 8.49% (30K note)

Only the mortgage provides a less favorable rate of return than investing in equities, and that assumes you have the favorable rate listed above. Even after you calculate the interest rate reduction on federal taxes, your effective rate will be 4.125% if you are in the 25% marginal bracket. While this may appear logical on the surface, you must also consider risk. You get a 'guaranteed' rate of return by paying off your mortgage of 4.125%. However, to get the average return of 7.29% in the market, you must take on equity risk. I believe the risk-adjusted return in this scenario actually favors paying off the mortgage versus investing.

Perhaps the one caveat in this math is if you are employed and receive a 401(k) match from your employer. This would boost the effective return on your investment for the portion that is matched. Therefore, the math may favor investing up to the match level in that situation.

Finally, as has been pointed out by many others, much of this is psychological and about changing your lifestyle. In other words, many people must make the move from living a "buy now, worry about paying later" lifestyle.

The value of compounding is not the same when you are paying down debt versus investing.

There is risk in everything we do from walking down the street to driving to work to swimming. So, lets discuss some of those risks. What if you pay down your debt aggressively and save/invest nothing, then you lose your job and have no income, no savings, no liquidity. How do you measure that risk? In both your examples and my example risk cannot be accurately measured. It is purely up to the individual to assess what level of risk they are willing to take on.

After the tax benefit i am paying 4% on my mortgage. It will be easy to make much more than 4% on average annually after taxes by investing in a mix of stocks/bonds/real estate over the next 30 years. Add in the power of compounding and it's a no-brainer.

Obviously there is more than one way for one to manage their finances. To each their own I guess..........

 

[Bobber]

After the tax benefit i am paying 4% on my mortgage. It will be easy to make much more than 4% on average annually after taxes by investing in a mix of stocks/bonds/real estate over the next 30 years. Add in the power of compounding and it's a no-brainer.

Not over the last 10 years...

 

[KCy]

Read Balkins comments above and you'll understand why your premise may be incorrect. I can't say it any better then he did.

I still can't justify paying the majority of the mortgage to the bank. No matter how well I invest, paying a mortgage off is a guarantee in saving a lot of money. Right?

 

[Bobber]

I still can't justify paying the majority of the mortgage to the bank. No matter how well I invest, paying a mortgage off is a guarantee in saving a lot of money. Right?

My bad. I reread your comment and agree with you as I did Balken.

 

[jamesfnb]

Not really. I basically follow his plan, but have never been in that shape. Was just brought up to be fiscally conservative having lived through the 80's farm depression.

It's great not being in trouble...

I grew up on a farm and my parents also went through the farm crisis in the 80's. it was a bad time. If my parents had more liquid assets rather than everything tied up in the farm land (similar to putting cash in the walls of your house by paying down your mortgage), they would have made it through the mid-80's much better.