Dave Ramsey’s Been on the Air for 15 Years!

Chris, a Dave Ramsey employee and blogger from PourOut blog, sent me an email this afternoon regarding an announcement. To celebrate his 15th anniversary of being on the air, Dave Ramsey is giving away an iPod every hour of every show this week. Click on the link to find out the details and how to enter to win an iPod.

I don’t always agree with ol’ Dave but I have to respect the fact that he has been on the air for 15 years. That’s pretty amazing. Anyway, head over to PourOut for more information if you’re interested.

My Thoughts on “Maxed Out”

These are MY THOUGHTS, which might not be your thoughts so keep that in mind when you read my review. I would love to hear your thoughts too.

Okay, I just finished watching “Maxed Out,” the documentary about debt. Here’s my very broad summary:

America is in debt and it’s the Republicans’ Fault!

Seriously. The “documentary” was full of snippets of nasty, mean Republican’s siding with credit card companies and nice, responsible Democrats standing up for Americans. There wasn’t much balance in this “documentary.” They did at least include some commentary from Dave Ramsey, who is a huge proponent of personal responsibility.

I found it both sad and disturbing at the amount of ignorance people have towards credit cards and debt in general. The 57-year old widow who was in the process of losing her house was pitiful. She got into debt easily enough and just kept taking on more and more debt because the loan companies kept giving it to her. In fact she even said something to the effect of, “I thought since they were giving it me, I could afford to pay it back.” I don’t think people realize just what they are getting themselves into when they sign a credit agreement. I really felt sorry for her (I even teared up during her last segment because I felt so bad for her), but the sad fact is that she got herself into her mess because she was playing with fire and didn’t realize it.

Another segment interviewed two moms whose kids got into debt while in college. Both of the kids ended up committing suicide because they found themselves so far in debt. Sadly, neither of the women took any responsibility whatsoever for the situation. Rather, it was all the credit card companies’ faults for issuing their kids credit in the first place. Granted, these kids had NO BUSINESS signing up for a credit card, but they did. Why didn’t these women talk to their kids about credit cards before they went off to college? They said they didn’t think about the fact that their kids could get credit cards while in college.

Folks, credit card companies are in business to make money. That’s it! It’s sad that companies will take advantage of people, but that’s the way it is. It’s up to us to decide how much they are going to make from us.

If I felt that this “documentary” was a little more balanced, I would recommend that it be watched by every high school class in America. It’s not balanced because it leaves personal responsibility out of the equation and is simply another tool to teach us that we are just victims in a massive credit card conspiracy.

A Follow-up to the Dave Ramsey Mortgage Post – This is Interesting!

Chris, an employee of Dave Ramsey and a blogger at Pour Out, left this comment on yesterday’s Dave Ramsey post about mortgages (I truncated Chris’ comment in order to emphasize what I want to talk about):

He [Dave] doesn’t want you to pay off your home in 15 years; He wants you to pay it off in 12 years, or 10 or 7 or 4!!! Add those extra years of investing the $1700 house payment monthly and it’s probably a different picture. Digest the entire plan, not just bits and pieces, and you’ll end up ahead of the family in that right column. Good conversation you have going on here.

What would happen if you paid off a 15-year mortgage in 4 years? Would that change things? Let’s see…

In order to do this little calculation, I had to make some assumptions:

1. Taxes are ignored. There’s too many tax brackets and too many different scenarios. So, I decided to ignore taxes on both investments and the deductibility of interest.

2. I used the interest rates of 6.08% for the 15-year mortgage and 6.30% for the 30-year mortgage from yesterday’s post.

3. To pay off a $200,000 mortgage in 4 years, it would require an additional payment to be made of $3,000 per month, bringing the total monthly payment for the 15-year mortgage to $4,696 . The monthly payment for the 30-year mortgage would be $1,238.

4. I assumed that both families had an extra $3,000 per month. The family with the 30-year note is investing their $3,000 per month and getting an average return of 8% per year (or .67% per month).

5. After the 4 years is up, the family that paid off their mortgage early invests their entire payment of $4,696 per month and also gets an 8% annual rate of return.

Here’s what I came up with:

Mortgage Payoff

This all boils down to the fact that we have to make choices as to where we allocate our money. These choices involve picking one “return” for another. If you choose to pay an extra $3,000 per month on your house note so that you can be mortgage free in four years, then you also are making the choice NOT to invest the money elsewhere. This kind of thinking requires you to look at your personal finances like a business owner looks at their business.

Check Out the Latest Dave Ramsey Poll

I found this interesting. Below is a snapshot of a recent poll on DaveRamsey.com:

Dave Ramsey Mortgage Poll

81% of the pollsters think a 15-year mortgage is the best choice?

Being that it is on the Dave Ramsey website, these results don’t really surprise me. And, I suppose if you are looking at just the amount of interest paid, then yes, the 15-year mortgage wins. However, I think this is an awfully simplistic way to look at things because it totally leaves out the opporunity cost of going with the 15-year mortgage.

Remember the old saying that the A. L. Williams Insurance sales guys used to say, “Buy term and invest the difference?” Well, I have a saying when it comes to mortgages:

If the rates are right,…

“Go long and invest the difference.”

According to my conservative numbers, you’ll come out about $90,000 ahead over 30 years. To compute that number, I used the following numbers:

6.08% APR for 15-year fixed mortgage (found on HSH Associates)
6.30% APR for 30-year fixed mortgage (found on HSH Associates)
8.00% Annual ROR on investments
3.00% Annual appreciation on the house

Then, I simply plugged the numbers into my Mortgage Comparison XL Calculator, and came up with the following:

Mortgage Comparison Snapshot

Oh, and my results don’t even take into account the tax-deductibility of mortgage interest. So is a 15-year mortgage really a better deal?

Comment From a Reader Regarding My Dave Ramsey Post

Remember the Dave Ramsey: Give up the 401(k) Match in Order to Pay Off Debt post from a couple of weeks ago?

That post received some excellent comments, one of which was this one from a reader named John:

What I saw my dad do was keep funding his 401k and still using credit cards, without paying off the debt. As his minimum payments went up and up he wasn’t willing to stop the contributions to quit using the cards, and he wasn’t willing to cut his lifestyle either. He ended up with about $65,000 dollars in credit card debt and he had to file for bankruptcy because all his payments were MORE than his paycheck. At this point he was STILL making the employer match. He just retired, and he only has $250,000 to live on. If he had just cut his lifestyle, cut his 401(k) funding for a few months, paid off those cards, he could have started putting in EVEN MORE, and STILL enjoying his luxurious lifestyle without those credit card payments. If you are DEEP in 20-30% interest debt you understand how much damage it does, it’s UNIMAGINABLE.

Personally, I think the cutting of the lifestyle is the key. However, it is one of those things people simply don’t like to do. It sounds to me like John’s dad just didn’t want to pay off the credit cards. In order to get out of debt you first have to WANT to do it.

I guess if you want to look at the good side of things, we should be happy that his dad was able to save up $250,000. Lots of retirees have nowhere near that much money at retirement.

What do you guys think?

Does This Make Any Sense?

A reader left the following comment on my Dave Ramsey vs. Suze Orman post:

If you are in debt, you haven’t been living life by the math, so you are unlikely to get out of debt that way. Dave’s plan harnesses the motivations you already have and aims them toward debt reduction.

Something about this thinking doesn’t make sense to me but I can’t quite put my finger on it.