Getting Weird With Debthttp://www.fool.com/news/commentary/2005/commentary05111605.htm By Selena Maranjian (TMF Selena)
If you listen to one of 260 radio stations in America, you can enjoy three hours per weekday of "The Dave Ramsey Show." Ramsey discusses finances, which should put him on the radar of many Foolish radio listeners. But he's controversial, too. What's good is that he's against credit card debt. So are we. We differ, though, in some details.
A recent New York Times profile described his platform: "Ramsey rejects debt in nearly every form (credit cards, auto loans, 30-year mortgages, home equity loans), advising followers to pay for every single purchase (oatmeal, bath towels, dishwashers, even a split-level) with cash. He reserves one day a week for callers to join him in screaming the words 'I'm debt-free!'"
Sensible and... not so sensible
Another problem with avoiding mortgages is this: Ramsey does concede that people are going to get mortgages. But he advocates minimizing them. He likes people to save large down payments -- as much as 50%, 70%, or even more of the home's value. He recommends 15-year mortgages over 30-year ones. This is troublesome to me.
Let's say I'm saving like crazy for a big down payment, perhaps $100,000. As I accumulate that massive pile of cash, what do I do with it? If I invest it in stocks, the stocks might temporarily slump. The stock market is great for long-term investments, but it's risky for short-term ones. If I invest in money-market funds or CDs, I'll be earning meager amounts of interest. I'll be losing the opportunity to sock much of that money into better historical performers (stocks, funds) for the long haul. And one more thing -- if all this saving makes me put off buying my home for a few years, the average price of a home in my area may well go up. If I'd bought, I'd be enjoying the equity appreciation.
Success is possible
But back to Ramsey.
Opposition from academia and Fooldom
"Ramsey discourages his followers not only from filing for bankruptcy, but also from availing themselves of debt-settlement and consolidation packages, some of which allow for satisfying debt at 20-40 cents on the dollar, arguing that these packages cure the symptom, not the disease," the Times article continues. "Manning points out that such compromises are, for many people, the only hope of restoring stability."
On our discussion boards, Fool Community members have discussed Ramsey, too. Many Fools are fans -- with good reason, as he does seem to be very motivational and his bottom-line message -- paying off debts and living within or below your means -- is sound. But others take issue here and there.
Royinstl, for example, wrote on the board, "I also thought [Ramsey's book] was an excellent read. But, I have serious problems with his snowball method. Killing the lowest amount of debt [first, before tackling larger obligations] regardless of interest rate would cost a fortune in finance charges over time compared to [tackling the] highest interest rate [first]."
Bisonrules responded to this, saying, "You forget about the psychological portion of paying something off, though. It is a quick win... that sustains someone and lets them know that, yes... I can do it. It is not more expensive if the person feels better about where they are going and follows through. Eating away at larger bills may cost less, but there is no 'rush' or victory had by that. Many people need the boost of paying something off early to sustain any momentum."
Alstroemeria added: "Another reason to consider paying off a small [credit card] debt first is to (hopefully) get better [balance transfer] offers and more 'Yeses' to requests for lower rates."
It's a complicated situation. Sure, many people with debts have discipline problems when it comes to money. But they're -- we're -- all working within a tough environment. Credit card issuers are quickly hiking rates whenever they can. Those with maximums recently between 24% and 30% include MBNA(NYSE: KRB), JPMorgan Chase(NYSE: JPM), Morgan Stanley's (NYSE: MWD) Discover, Capital One(NYSE: COF), and American Express(NYSE: AXP). As I described in another article, it's not so hard to end up owing $40,000.
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Selena Maranjian is Senior Worrywart at The Motley Fool. She owns a few shares of Microsoft. The Fool has a disclosure policy. For more about Selena, viewher bio andher profile. You might also be interested in these books she has written or co-written:The Motley Fool Money Guide andThe Motley Fool Investment Guide for Teens. The Motley Fool isFools writing for Fools.