Thursday, June 7, 2007

Not a Strict Dave Ramseyian

I enjoy listening to Dave Ramsey's radio program (listen to his archives here:

I've also read his books.

I follow his "debt snowball" plan and I can attest that it works.

But I do have my criticisms. First, and most obviously, he is way too conservative politically for me; second, I could do without all the overt religious messages. But those are trivial compared to the third: I disagree with his advice to fore go payments to a retirement fund in favor of paying debt.

I think that for someone like me, who is getting such a late start on retirement savings, I cannot afford to put off those payments even longer while I pay my debts. Right now, I contribute $1000 pretax per month to my retirement 401 (k). Theoretically, if I paid that same amount toward my credit card debt, I could get rid of the indebtedness in the next 14 months. It doesn't quite work that way because I do use pre-tax dollars for the 401 (k). If I stopped the contributions tomorrow, I would not have an extra $1000 per month in my paycheck to apply to my credit card debt. But more importantly, I would also lose the advantage of 14 months of compound interest and (I hope) increased value in my stock mutual funds.

I can see why, for simplicity if nothing else, Ramsey sticks with a "one size fits all" financial plan. But I can't see that his entire plan quite fits me.


NCN said...

Have you added up the TOTAL interest you pay on all accounts and compared it to the TAX savings? If you are paying more in interest than you are saving in taxes, then you might want to rethink this strategy...

Just from my own situation, I focused like a laser-beam on my debts, and managed to pay off more than 11K in less than a year (making slightly less than you do...) It looks like you have, what, about 19K in non-mortgage debt? So, debt free in less than 2 years? (Taking the extra 1K that you are putting into retirement, that's debt-free in 19 months, or less!)...

After getting out of debt, I managed to save 20K very rapidly, and am on my way to putting 48K in retirement, this year alone...
more than making up for the tax savings and 12 months worth of waiting to up my retirement contributions...

(Crazy me? Shoot, I'd sell the rental and be debt free tomorrow and then put mega bucks in retirement accounts...)

Just some thoughts... whatever you decide, doesn't it feel good to 'be in control'? Getting out of debt ROCKS!

(I know this is a long email, but I keep going back and rereading you earlier posts... mind if I add one more thing...
You make 73K, right... So, why not live on, say 43K, and use the other 30K or so for debt reduction? Totally debt free in less than 4 years? Orlive on 53K, and use the other 20K to be totally debt free in about 5 years? I love thinking about big, bold goals and then shooting for them... keep it up, and I can't wait to read about you being debt free... in fact, i'm adding you to my blogroll so I'll remember to check in from time to time..)
NCN (FINALLY signing off...) :)

Grace. said...

So nice to hear from you. I've read your blog for some time now, and was celebrating right along with you when you paid off your debt.

I've got lots of excuses as to why I don't want to live on $43,000 which include the wonderful but relatively expensive large city where I choose to live and a 17 year old daughter who attends a private school for the learning disabled.

But the real reason is that my needed "Gazelle-intensity" (as Dave Ramsey wants us all to have)is currently more like that of a dormouse!

Living Almost Large said...

NCN is wrong and so is DR in this case. In your 50 the tax benefits by far outweigh the CC %. You need to be saving into retirement accounts.

I don't know the whole situation however, but I would never stop retirement for sure. Unless CC are above 25% (guessing your tax bracket if you are single making $73k), then it's not worth it.

As a very smart man Phil says the objective isn't debt free, it's about being rich enough to afford your debts. He is worth a few million, retired and leverages all of his rental properties on 30 year fixed loans at 6% (he refi) and pull the money out and puts it into the stock market.

So what would I do? Max out retirement always. But I do that now in my 20s. DR would say I shouldn't because we have debt (student loans accruing currently), but we'd lose the imperative tax break of 30%. Can our student loans at say 6% make up that difference? nope. Doesn't even count if my investments make 10%, that's icing. The tax break on our income is important.

Engineering My Finances (EMF) said...

From what I see on your blog, I think you're generally on the right track by continuing to fund your retirement while you pay down your debt, with the understanding that you'll be debt free when you do retire.

I recommend that you consider putting some of your retirement savings into Roth IRAs instead of your 401(k). You may not actually be in a lower tax bracket when you retire.

If you look at line 20 of the 1040 tax form, you see where some of your Social Security benefits can be taxed. How that works is that a test amount which is 50% of your Social Security income is added to your other taxable income. If the test amount exceeds $25,000, then some of your SS benefits are subject to being taxed at a ratio of $.50 of SS for each $1 of other income. If the test amount exceeds $34,000 then $.85 of SS is taxed for each $1 of other income. Roth IRA withdrawals do not enter into this computation.

Further more, the $25,000 and $34,000 thresholds are NOT indexed for inflation.

You're probably in the 25% federal tax bracket, and think you'll be in the 15% bracket when you retire. But if $1.85 gets taxed instead of $1, you're effectively in the 27.75% bracket when you retire.

Anonymous said...

Hi to EMF--I appreciate your input, though I'm going to have to call upon some of my more mathmatically inclined friends to interpret it for me.

Right now, I am focused on debt reduction and retirement saving. But I do worry that you are right about Roths and that I need to consider them more seriously. I plan to research that more carefully, but probably not till after the first of the year.