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Follow Up to Dave Ramsey Post

27 Mar

I am grateful for all the insightful comments and good discussion that was generated by my last post. I thought I would respond to them all in a new post.

First, let me clarify that Dave Ramsey encourages people to do Baby Step 4 (save for retirement), Baby Step 5 (save for children’s education) and Baby Step 6 (pay down your mortgage) simultaneously. He doesn’t necessarily advocate that one is more important than the other. I do believe that saving for retirement is a higher priority than saving for your children’s education since, you can’t borrow for retirement like you can for education. I think Dave believes that saving money in a conservative mutual fund will end up benefiting you more than paying off your mortgage early. Mortgage interest is generally 6% or so, while a good mutual fund historically can earn an average of 8-12%. Obviously the market has been hammered recently so we’re all somewhat leery into putting our money there. However, it has performed very well over the long term, despite the bubbles and busts.

Once you have no high-interest consumer debt (credit cards, cars, etc.), you can start on the path to wealth building and saving for the future. But Dave believes  that if you’re paying 18% on a credit card and, instead of paying that off, you put it towards your mortgage or into a 529 for children’s education, you’re making a mistake. Free yourself from the bondage of debt FIRST before you start down the path to wealth building. Of course, if your company offers a 401(k) match, I believe you should try to contribute at least up to the company match, otherwise you’re foolishly leaving money on the table. But before you contribute more, pay off those high interest rate loans. Believe me, debtors are slaves to their lending masters.

As for the emergency fund, it is really important to have that money saved up for a rainy day. Unemployment, health problems, car issues and other unforeseen events WILL happen. The cushion needs to be there. If you’ve sunk all your money into paying down your mortgage, you can’t take part of your house to the bank to get cash. Sure, you can get a home equity loan (assuming you still qualify), but that’s debt and you’ll be paying interest on it. So I agree that an emergency fund of 3-6 months of cash is really important. All the financial advice I’ve been hearing lately supports this position. It provides peace of mind in difficult times.

Dave advocates not buying too much house. The payment should be 25% of your take-home pay. And he thinks no one should have more than a 15 year mortgage, since a 30-year mortgage will cost so much more in interest. Now that’s tough. Most people can’t or won’t do that. But ultimately, it’s better to buy less and have more in cash if at all possible.

As for giving (tithes, offerings, help to friends and relatives), Dave Ramsey believes that tithing is essential to pay all along, not as a final step. I agree with him. Tithing means 10% of income and I know I’ve been blessed for paying it faithfully, even when I was unemployed and not making much money. The Bible says the Lord will “rebuke the devourer for you sakes” if we pay an honest tithing. Dave believes that offerings are also important, but that it is essential to take care of your own household first. Once you have the necessities of life covered, find opportunities to give. I believe  that an important element in giving is sacrifice. C.S. Lewis put it bluntly and powerfully in his book Mere Christianity when he said:

“I am afraid the only safe rule is to give more than we can spare. If our charities do not at all pinch or hamper us, they are too small. There ought to be things we should like to do and cannot do because our charitable expenditures excludes them.”

That quote from a person I highly respect (and who is quoted frequently in general conference), really makes me think. Once I have properly fed and clothed my family and have provided them with shelter and medical care, then I need to give to those less fortunate. Perhaps that means not going out to eat as often, or spending less on discretionary things. It’s hard though. But I guess that’s the way it’s supposed to be.

So what are your thoughts on giving? How do you determine how and to whom to give?

 
5 Comments

Posted by on March 27, 2009 in Finances

 

5 responses to “Follow Up to Dave Ramsey Post

  1. Russ Sperry

    March 27, 2009 at 2:03 pm

    Could’nt agree more on the debt side. One consideration that is often ignored too, is the risk factor. Sure putting money in a Mutual fund will “most likely” get you a small return. But how much is dependent on the markets – i.e. market risk. Paying off debt ALWAYS has a guaranteed return…and credit card debt is a very high rate or return – if you think of debts along the same line as investments.

    That insight on 3-6 months savings vs. paying the mortgage down is very relevant too. I wonder how many people in foreclosure initially had some equity in their homes, and thought they could just get a heloc to take out equity if they ever needed it and then realized too late that they were underwater when the housing market shifted, or lost their employment unexpectedly. Once paid into equity, does not always mean you can get it back out easily later. Besides, it is typically not very hard to generate a return that matches a mortgage rate (i.e. keep it outside and saved up in that rainy day fund that’s earning a moderate return).

    The trickier question on my mind has been student loans. While I am not a big fan of keeping debt around, it is hard to justify accelerating any payment schedule with such a low rate (mine consolidated at just over 3% after ajustments for regular payments). In real terms (post inflation), that’s a zero percent loan. I have a mortgage now, so that takes priority over the SL in repayment (higher rate), but when we rented and had extra….it was very hard to look seriously at paying those off any faster, or even taking a standard repayment plan vs. graduated. any thoughts on there?

     
  2. Chris

    April 1, 2009 at 8:50 am

    Interesting question to consider Andrew. Generosity is one of those things that it doesn’t seem you can do enough of. It’s like enduring to the end. You do the most you can handle. In a way that never relieves you of the question. “Am I giving enough?” This seems like it could create a lot of guilt. It’s something that everyone needs to pray about and decide for themselves. I think the fast offering approach is a good one. Asking “What would your family have spent on food today?” That approach is almost like not extending your finances anymore than you can handle but rather skimming off your own share and giving it to others which is something that we can all do. If it seems we can’t give very much extra money, we can always take from our allotment. I don’t think that tithing should be viewed as the same as generous giving. I think handing over money makes us feel relieved of the burden to give but our tithing is going to build temples, maintain meeting houses etc. It’s not necessarily going to directly benefit the needy. I think we need to view that as a separate thing. I heard about a study that showed that of many christian sects, Mormons pay very little to charities which I thought seemed odd. Mormons have disciplined themselves to give much more than is commonly encouraged in many faiths. I realized that this study was seeing tithing as a donation to the church and not a charity. It’s easy to see why we might think that we have done a sufficient amount of giving after tithes but I think there should be more. But it is a personal question. One that I don’t think should ever have a standardized answer.

     
  3. Pmom@chocolateandgarlic.com

    April 2, 2009 at 10:13 pm

    I wanted to respond to your post sooner. In fact, I was right in the middle of responding to your post, when an unfortunate event interrupted me: http://www.chocolateandgarlic.com/2009/03/domestic-terrorist-attack/

    What I wanted to say is that I think that any mutual fund that one can reasonably hope to have an 8-12% return on is not THAT conservative a mutual fund. I am not any expert on this, but I think funds aiming for those types of returns will always be putting your principal at risk. And since your debt (home mortgage) is not at risk, that is an equation I am uneasy with. In what other situation would it seem prudent to borrow money on the one hand (home mortgage) while lending out that money hoping for a higher return on the other (mutual funds)? [This is something that banks do all the time, but it seems crazy for me to take on that role.] Win or lose that mortgage debt is still there and still needs to be paid.

    Since I think it makes sense to be reasonably (but not extremely) pessimistic about any hoped for investment returns, I look at it as possibly being able to get 8% interest on my mutual funds while paying 6% interest on my house. Is the 2% differential worth my loss of peace of mind? For the risk averse (and I realize that there are plenty who are not), the answer has to be no. Especially because there is good reason to believe that the future will not look like the past.

    I do not say that to suggest that the future will look worse than the past, but just to point out that we have an entirely different economy than we did 80 years ago. Companies like Google and Facebook did not exist. Collateralized debt obligations did not exist and no money down mortgages did not exist. I have no idea what this will mean for the future in terms of how investment returns will look, but I know that I can’t be sure that because the market provided 8-12% in the past it will provide 8-12% in the future. I do know that in the future it is extremely likely that my bank will continue to expect me to make payments.

     
  4. Kristy

    April 3, 2009 at 11:23 am

    I’ve sure heard this guy’s name flying around here, there, and everywhere lately. Thanks for the info and summary about what he teaches. It all sounds like pretty sound advice…which actually means nothing, coming from an ignorant one like me.

     
  5. andrewalma

    April 8, 2009 at 10:14 pm

    Thanks for your comments all. I don’t know if you’ll see my response, but here’s the quick version.

    Russ, I too struggle with whether to pay off low interest student loans. I have to admit that I’m paying a little extra each month, but not much more than is required. I have other priorities for my $$.

    Pmom, I see your point. However, most of us at our age don’t really see paying off our houses as a tangible goal in the near future. As we get closer, we end of refinancing and resetting the clock, or we upgrade and buy a newer, more expensive house, not really thinking we’ll ever be mortgage free. However, wouldn’t it feel good to not have that mortgage hanging over your head.

    Chris, I hear what you’re saying about tithing and fast offerings eclipsing other charitable giving. I think the same could be said for LDS people and volunteerism in the community. Many of us give SO much to the Church in terms of time, talents and resources, that other worthy causes do not get as much attention. I admit that all of my spare volunteer time is given to the scouts and other church-related activities. My brother Matt seems to find a way to give to the community (food bank, soup kitchens, etc.) and he gives to other worthy causes like the United Way. Very cool. How much can we give? Where to give? As you said, it’s very personal and important to maintain balance.

     

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