Money, Mathematics, and Personal Behavior – Dave Ramsey is Right!
Dave Ramsey has had a great amount of success with his radio show that teaches good old fashioned common sense financial advice. He is certainly not without his detractors though. There are a lot of people who describe his advice as out of the main stream and mathematically incorrect. Both of these statements are true, but that is precisely why he has gotten so popular. Ramsey has made an observation that very few people have. Personal finance is much more about personal behavior than it is knowledge about money itself.
Ramsey is often criticized for teaching people to do things which technically defy mathematics. Recently one blog called Territory Michigan attacked Ramsey for suggesting that people pay off all their debt. The blogger gives an example in which a person with a low interest rate student loan can make more money in a money market and pocket the difference then pay the loan off payment by payment over the next decade.This is where this blogger and many other of Ramsey’s critics get it wrong. Ramsey often makes the statement on his show that, “If we were doing mathematics, you wouldn’t have borrowed money in the first place!” Often people will ask him if they should pay off their debt largest interest rate to smallest, but he teaches that you should pay off your debts smallest principal balance to largest. The reason he teaches this is because personal finance is much more about behavior than any knowledge you know about finance. Paying off a few small debts first will give you some easy wins, making you feel that, hey, this plan really works, and will encourage you to continue!
People who criticize him often aren’t thinking straight, because they do not factor in risk which is a needed part to any financial calculation. You could go to Vegas and put all of your money on 28 black, but you know you wouldn’t do this because there’s so much risk of not winning, even though the rate of return would be enormous! Whenever you borrow money, there’s risk involved that somehow you will get behind because of a financial problem, or that the company will mess with you financially (it does happen!).
These critics often also use very unrealistic examples. The blogger at Territory Michigan uses an example of a 3% student loan, which almost no one has! Dave Ramsey’s mathematics may be incorrect, but they actually work! He has over 3 million listeners and is a multi-millionaire. His teachings have gotten hundreds of thousands of people out of debt, they work! Who are you going to listen to, a critic with a Weblog, or a guy with a lot of money and thousands of success stories?
I doubt very much that you can find an interest rate in any money market that beats an interest rate on a loan you have. You probably could in an investment (i.e. S&P Index fund), but only over the extreme long term. In the mean time, your credit rating takes a hit and you’re biting your nails every night.
“If we were doing mathematics, you wouldn’t have borrowed money in the first place!”
That’s just false. Going into debt to go to college increases your future income, just like any business loan. There is risk involved, sure, but the expected return is positive. This statement is only true for consumption-loans, i.e., taking out a home equity loan to remodel your kitchen. You get no return on that money.
Ben Graham wrote that you can’t control the market, all you can control is yourself. Ramsey’s advice seems to be in the same vein. It certainly is good advice, but it doesn’t mean you shouldn’t do math on loans that are completely predictable.
uh, this is really stupid.
3% student loans are VERY common.
I have a 3.99% loan right now (just a general NON-secured loan from a commercial bank).
Secondly, If you can make more then the interest rate on your money in a “risk free” investment then it’s best to invest/save that money. Say you get 6% return; that is a 3%+ PLUS you have the Liquidity of that money.
If you have an accident and need cash; what is better? Pulling it from your investment or pulling it from your paid off debit… oh wait, that’s right; you can’t take money out once you pay it off so you would have to borrow that money, which more then likely would be a really bad rate since it’s short notice!
Good plan asshole.
50,000+ * 3% is a decent amount of money to just “give away” because you can’t do simple math. (hint: your lack of math skills are costing you
AT LEAST $1,500 for every $50K)
Secondly the liquidity of having cash on hand is also worth a lot.
Lastly:
“If we were doing mathematics, you wouldn’t have borrowed money in the first place!”
This is a stupid argument. There is good debit and bad debit.
Did you buy your first house with a wad of cash? Did you pay for 4 years of college with a trash bag full of bills? You never traded on margin?
Another thing, if we pretend this argument was true; then the answer would be to LEARN MATH, not to deny yourself of making money and having the security of liquid funds.
“MATH IS HARD! LET’S GO SHOPPING! YAY!”
Oh, another thing.
We have HUGE inflation right now (go look at food prices and gas prices). AND we learn [in ECON 101 that you obviously haven’t taken yet] that debtors benefit in high inflation.
Why? Because it’s better to pay it off tomorrow with LOW valued dollars then to pay it off today with HIGH valued ones.
Seriously guy… read a fucking book about this stuff before you going spraying your shit all over the internets.