The Total Money Makeover: Debt Myths

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This is the second of twelve parts of a “book club” reading and discussion of Dave Ramsey’s The Total Money Makeover, where this book on debt reduction is teased apart and looked at in detail. This entry covers the third chapter, finishing on page 51. The next entry, covering the fourth chapter, will appear on Wednesday.

ttmmDave Ramsey is probably the loudest proponent out there of the “debt is bad” mantra and he makes the case for it loud and clear in this chapter. In his eyes, outside of a home mortgage (and that one should be paid off ASAP), all debt is bad.

I agree completely. The only problem comes in when this mantra is taken too far and overlooks the benefits of establishing a positive credit history. The positives of being debt free heavily outweigh the negatives of being heavily in debt, but being debt free doesn’t mean you should sacrifice a good credit history along the way. Let’s talk about this whole picture.

Not Using Debt Is Ridiculous?
The usage of debt for major purchases is definitely ingrained in the American psyche. At virtually every retailer you visit, there’s an offer to sign up for a credit card or finance the purchase you’re about to make. It seems so natural that many people assume it is natural. On page 19, Ramsey mentions this phenomenon:

[I]n the last several years, I have found that a major barrier to winning is our view of debt. Most people who have made the decision to stop borrowing money have experienced something weird: ridicule. Friends and family who are disciples of the myth that debt is good have ridiculed those on the path to freedom.

Given that financing usually means paying substantially more for the item over the long run, anyone who chides you for paying cash is actually chiding you for paying less – ludicrous, in other words.

My big issue here is how to deal with people who make comments like this. Whenever I’ve faced situations like this, I’ve found that explaining the truth doesn’t work – I’m usually met with a vacant, wide-eyed look that clearly indicates that the other person has no idea what I’m talking about.

Instead, my approach is to simply smile, nod, and do my own thing. Over the long run, my bank account will prove me right in paying cash as often as possible.

Risky Debt
On page 21, Ramsey argues that simply possessing debt is a risk, let alone paying it late:

My contention is that debt brings on enough risk to offset any advantage that could be gained through leverage of debt. Given time, a lifetime, risk will destroy the perceived returns purported by the mythsayers.

This is one of the most powerful arguments against debt, in my opinion. Most of the time, when people make the case for taking on debt, they make assumptions that involve a perfect, trouble-free life.

Sure, it’s easy to make a $400 a month payment given your current life situation, but what happens if you lose your job tomorrow? Or in a year? What if you suffer a major illness? What if your marriage falls apart? What if you get married? What if an unexpected child arrives?

Forecasting payments into the future can be smooth but the realities of our lives are quite bumpy, indeed. Lives don’t follow the smooth lines and curves of a debt repayment schedule, and saddling our lives with such lines and curves might enable us to get a car a bit earlier, but it also adds a lot of stress and worry if our life zigs when we expect it to zag.

Respect your complex, beautiful life and avoid unnecessary debt.

Relatives Shouldn’t Be Lenders
One of my biggest personal standards for money is to not lend money to family. If I decide to give someone a helping hand, it’ll be in the form of a gift, not a loan. Ramsey makes the case on page 26:

Hundreds of times I’ve seen relationships strained and sometimes destroyed. We all have, but we continue to believe the myth that a loan to a loved one is a blessing. It isn’t; it is a curse. Don’t put that burden on any relationship you care about.

Do you love your mortgage lender? How about your credit card company – do you look forward to getting together with them at Christmastime? Ever felt like inviting your car salesman to your New Years’ party?

The reason is that the lending/borrowing relationship doesn’t mix well with great interpersonal relations. If you borrow money from someone, you suddenly have a financial obligation to that person. You have to pay them back or incur some sort of retribution.

Retribution? That’s not exactly a concept that mixes well with close relationships and family events. Nor should it. No one wants to spend time with a person that’s demanding money from them. Thus, after a loan between friends or loved ones, it’s natural to expect that relationship to decay in some way.

No relationship is worth that decay. If you’ve decided that you really must help someone out, make that help into a gift, not a loan.

Look Good or Be Good?
On page 33, Dave digs into the difference between putting up appearances and actually having something to back it up:

Having been a millionaire and gone broke, I dug my way out by making a decision about looking good versus being good. Looking good is when your broke friends are impressed by what you drive, and being good is having more money than they have.

Something has always troubled me about the phrase “fake it ’till you make it.” I can understand it in some situations, where you have to put up a very polished front in order to further your career.

The problem comes when “fake it ’till you make it” becomes a life philosophy. If you find yourself leasing a BMW so that you can “fake it” and put up an appearance of being financially affluent when you’re really not, you’re entering into a trap.

Sure, you might be able to put up an appearance of “making it” with that purchase, but your income will be devoured by that car instead of being able to take advantage of other opportunities. In three years, you’ll have nothing in the bank and a car that just went off lease.

Instead, if you “fake it” a little less, buy a low end car and make it look as nice as you can, you can build up that bankroll, build some security, and eventually purchase that car.

You might be able to “fake it” now, but if you want to “make it” sooner, you’ll tone down on the fakery and keep yourself out of debt.

On Buying a New Car
On page 37, Dave makes a case against buying a new car:

A good used car is as reliable or more reliable than a new car. A new $28,000 car will lose about $17,000 of value in the first four years you own it. That is almost $100 per week in lost value.

I understand where Ramsey is coming from, but it doesn’t take into account several factors.

First, the only cars that depreciate like that were junk to begin with. If you have a car that depreciates 70% in the first four years, that car has a very poor record for long-term reliability. Reliable cars simply do not depreciate that fast.

Second, the first four years are the most worry-free for a car. During that period, they’re under warranty, meaning if something goes wrong, it doesn’t come out of your pocket. Once that warranty ends, you’re on your own. It’s during that warranty period that you can figure out whether the car is actually reliable or it’s not without a cavalcade of big bills.

Third, in a down economy, there are huge incentives to buy new. Sales, rebates, and other offers pop up all over the place, some of them impressive. There are often tax breaks for new car purchases as well, passed by Congress in a short-term effort to boost spending.

I am not saying that buying new is better than buying used. Instead, I am merely saying that it is a mistake to automatically exclude a new purchase, particularly if you can afford it.

Ramsey overstates his case here, though I understand why he does it. A forceful case on behalf of a good principle is a great tactic for convincing people of the principle. I do agree that buying used is often the best deal when buying a car, but to ignore new cars does the buyer a disservice.

Mortgages and Credit Cards
On page 39, Ramsey talks about why you don’t need to build credit to get a mortgage:

You will need to find a mortgage company that does actual underwriting. That means they are professional enough to process the details of your life instead of using only a Beacon score (lending for dummies). You can get a mortgage if you lived right.

Ramsey’s absolutely right here – you don’t need credit to get a mortgage, as long as you have a good housing history and a good record of paying your bills on time. A manual underwriter will dig these things out. An aside: if you’re in this situation, visit your local credit union first. They’re more likely to do manual underwriting.

The problem here is that a mortgage is not the only avenue through which good credit can help you. One’s credit score is used in lots of ways: determining insurance rates, aiding in many job application processes, and so on.

That’s why I think limited use of a credit card is actually a good thing. Leave the card at home most of the time. Only use it for specific purchases that you would otherwise make, like gas or groceries. Then, at the end of the month, pay off the balance in full, which should be trivial since you’re not buying more because of the card.

This accomplishes the big goal of improving your credit score without incurring debt. Having a good credit score improves your hiring chances and makes you eligible for better insurance rates, putting money directly in your pocket. Later, if you do get a home loan, you can simply trash that card if you so with.

If you’re already doing that, you might as well choose a card that helps you in other ways. For example, if you’re buying a card just to buy gas on to help your credit, get the Visa or MasterCard available from your gas station chain of choice (like BP). That way, you’ll get rebates on the gas you buy along the way – another way to save.

The trick is to simply leave the card at home. Don’t use it for any other purchases besides the ones you plan in advance, like gas purchases, and keep it somewhere safe outside of those opportunities.

Do you have any other thoughts on the third chapter of The Total Money Makeover? Please share them in the comments – and feel free to respond to any of my impressions as well. After all, a good book club is all about discussion!

On Wednesday, we’ll tackle the fourth chapter – Money Myths: The (Non)Secrets of the Rich.

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50 thoughts on “The Total Money Makeover: Debt Myths

  1. As the CC issue, it’s not a math problem. Most people don’t have the discipline to not use their card. Maybe a better strategy to help with the credit issue is to have a bill auto bill to the CC, then turn around and pay the CC at the end of the month. Keep the CC on ice otherwise. ;)

  2. When you buy the car you can afford with cash, rather than the car you can ‘afford’ with credit or loans, you don’t need to think about depreciation. It’s sort of like how people don’t go around calculating depreciation on TVs or mp3 players. Most people have been convinced, however, that car loans are natural and normal, and as a result, spend time figuring imaginary depreciation calculations instead of simply buying vehicles within their means.

  3. Book reviews aren’t my favorite of your posts, but I’m really enjoying this one – even though I’m not reading the book. I appreciate the level of thought you put into it, explaining where you disagree but most importantly WHY. Thanks, Trent!

  4. Great fleshing out of the book Trent!

    “Later, if you do get a home loan, you can simply trash that card if you so with.”

    “with” should be “wish”, I think.

  5. I have read the book few months ago and loved it. I am scared of debt ever since I was born I think.

    I like the book reviews a lot. Thank you for the good job you are doing.

  6. Regarding Jenny’s comment: If you *don’t* have the discipline required not to spend more money on your credit card than you can pay off at the end of the month, then maybe you really are a bigger risk to mortgage lenders, insurance companies, and so forth, than someone who does have that discipline. So maybe those companies are absolutely right not to give you the same benefits as they give someone who has a strong history of using credit responsibly.

  7. Trent, nice work with the book review. I look forward to reading the book some day.

    @Johanna: I like your comments. Sometimes they are tough to take, but they are always spot on, IMHO. Thanks!

  8. Excellent point, Johanna. I got in an argument with a friend the other day about the benefits of having a credit card for small purchases, to build credit history (we’re in our early 20s). He told me that he didn’t have a credit card because he didn’t think he could use it responsibly and would be tempted to misuse it, And that was fine–not using credit at all because you’re tempted to misuse it might be a good financial choice for someone in that situation–but then he started complaining that he is penalized by when looking for apartments, getting a car loan, etc. because he doesn’t have a strong (much of any) credit history. I didn’t articulate the idea quite as well as you did, but if you know you can’t handle credit responsibly, how can you complain that other people aren’t sure you can handle credit responsibly?

  9. I don’t agree that a mortgage is the only good debt. Despite the job situation in this country right now, a bachelor’s degree still can potentially double earning potential. I’m in my mid-twenties, and my education helped give me the tools in order to find a good job. I never would have been able to go to college without student loans. My student loan debt to me is worth every penny. And, unlike mortgages, government student loans are very forgiving if you fall on bad circumstances.

  10. “If I decide to give someone a helping hand, it’ll be in the form of a gift, not a loan.”

    EXACTLY! This one is also huge for me. Another aspect to this may be that if you can’t afford to give it as a gift, you shouldn’t be giving it at all. There are times when it would be wonderful to help someone along the way, but if it will put you in a precarious situation you shouldn’t do it.

    I have seen how an unpaid loan can change a relationship. It creates an awkwardness between the people, even close family members. It is worth it to make that happen.

    Give a gift, not a loan.

  11. Reliability is far from the only factor in car depreciation, or even the largest factor. Cars that experience significant depreciation are often priced higher due to the branding that surrounds them. Luxury cars are a perfect example. You pay more for the image and name that comes with most luxury cars, despite the possibility that their actual performance is available from less expensive models made by other companies. You aren’t buying the car, you are buying into a “lifestyle” sold by the brand, and you pay heavily for that lifestyle in the form of depreciation. Why? Used luxury cars still deliver the goods in many ways, except the prestige of owning a used car is far less than owning a new one in the context of the luxury lifestyle. This is but one example. On another note, there was a period of time where new cars were as cheap or in some cases cheaper than used models due to incentives, but those days are largely behind us. Current incentives are not nearly so generous as they were in March and April.

  12. @ Jenna, Student loan is not good debt at all. There are many ways for people to get an education without loans, its just that most people aren’t willing to do what it takes.

  13. Trent – I think Ramsey’s case on buying used vs new is used to help convince people to buy Used with cash rather than justifying buying new on credit. He states later in the book that if you have done the baby steps and have enough to buy a new car with cash, then there is nothing wrong with it. You should make sure when doing these reviews to keep things in context though I understand your opinion on this is most likely to continue justifying your recent purchase.

  14. “Jenna, Student loan is not good debt at all. There are many ways for people to get an education without loans, its just that most people aren’t willing to do what it takes.”

    Please, have you realistically looked at those options? Yes, there are ways – mostly military service oriented – to get a free bachelor’s degree, but unless you’re attending the service academies, you’re not getting an entirely free ride. ROTC will pay tuition *if you get a scholarship* and not room and board. If you aren’t an A student, in perfect health, and a reasonable athelete, you’re not getting a four year scholarship (2 or 3 scholarships are a little less stringent) Have any health problem crop up? You’re out – regardless of where you are in your degree – I knew a guy at West Point who was diagnosed with diabetes in the middle of his senior year and he was not allowed to finish his spring semester. I had a three year ROTC scholarship myself, and I developed hypothyroidism and it was take a student loan or quit school my senior year. It’s not just about “being willing to do what it takes”. A lot of the “free” opportunities do involve some major strings.

    Likewise trotting out the 12 or colleges with free tuition like Yahoo News does each year. If you *want* to major in agriculture, thats great. If you want to go to a school thats known for something other than the free tuiton, you may need to pay.

    I don’t resent my now fully paid off student loans because the education opened doors. I’m now debt free, with a nice safety net because of those student loans.

  15. Lending money to family can be an awkward situation. In general I don’t, but there have been times when I loaned some money to my immediate family.

    Even if they do pay me back, there’s an awkwardness until the money is paid back. My relative doesn’t call me too much until she gives me all of it back. When she does borrow (only for emergencies, like HR accounting mistake), she pays back on time. I don’t mind loaning her; I just wished the tension wouldn’t be there.

  16. Student loans, business loans, home loans – are okay, provided a person doesn’t go overboard with them, and then they should be paid off as quickly as possible. Credit cards are another story. Paying them off monthly, and living only on the money you make does require a lot of discipline, but it is the first step for most people to financial freedom.

    If you’re able to not spend much, then you’re not required to chase a high-salary job that stresses you out. Instead you can chase other goals, ones that are more in line with your passions and talents. (Just remember that debt lowers your standard of living in the future).

  17. Not buying something right away and waiting until you have the cash for the purchase takes great discipline. Most Americans do not have this kind of restraint.

  18. I agree with the avoid debt plan for the most part, but where I differ from it is in investments. I own or co-own about 12 rental units. I have a mortgage on all but one of those, which I paid off earlier this year. However, I have borrowed responsibly and put a significant amount down on each place. Now those rental units are creating a positive cashflow or holding their own, with the exception of one set. However, that’s because they are on a 20 year mortgage instead of 30 year, and I knew that it was possible that they wouldn’t cashflow because of the higher payments an planned for that. The moral of the story is that I have several units in which the tenants are paying the mortgage for me through their monthly rental payments. It does include more risk, I admit, that paying cash for real estate, but I don’t necessarily think that risk is always something to be avoided, but more something to be managed. I am willing to take the calculated risk I have assumed for the large upside potential. I think that Dave Ramsey, while very astute, fails to account for valid exceptions to the no-debt rule.

  19. JW, Dave’s target audiance is the “hand-to-mouth, woe is me, how did I get here?” crowd for the most part. Though there are some astute, high income types that fall into his listners/followers.

  20. Yes, (@#18) — its important to remember who his audiance is. Debt free is not really the best way to be for governments, corporations, and many investors.

  21. almost there-that is a pretty generalized statement. i would say that 99% of the people who took dave’s financial peace course were hard working americans who paid there bills on time and provided for there families. they were typically people who earned decent wages. they’re only problems were they bought into the lending institutions marketing that “you can’t possibly live debt free and without credit.” These people were just sick and tired of shelling out THEIR hard earned money. These people did the research (including myself) and seen the results. Thousands of people are using dave ramsey’s philosophies and are building a peaceful financial security and changing the way they handle money. They are rewriting their family trees. So before you generalize and label people you may want to do some research first.

  22. gerry, I wrote “for the most part”, no offence ment, but just listen to his radio show and the callers. Yes, most went into debt to chase the dream of having it all. He himself overextended himself, declared BK (thereby shirking his debts), reinventing himself as the guru that will help people get out of debt by saying no to further debt. You should read the book SHAM: How the Self-Help Movement Made America Helpless by Steve Salerno. The book points out how people become instant millionaires by telling people the obvious and marketing commen sense. I did read his book that Trent is reviewing. Nothing but anticdotal stories with the “victim” resulting into figuring out common sense solutions. Of course people go into debt that is the result of advertising and marketing. Everyone, be it religion, government, schools, or industry is sellilng someting to part on from one’s money. I did not say he didn’t help people, just who the audiance is-middle to lower class earners. The wealthy handle debt in vastly different ways using it to increase wealth-F

  23. Andy says “Debt free is not really the best way to be for governments, corporations, and many investors”
    Andy – corporations that are debt-free include Microsoft, Apple, SAP, Chik-Fil-A. Perhaps you’ve heard of them? It’s entirely possible for a successful company to run without debt, just as it is entirely possible for an individual to operate without debt.

  24. Rap says: Please, have you realistically looked at those options? Yes, there are ways – mostly military service oriented – to get a free bachelor’s degree, but unless you’re attending the service academies, you’re not getting an entirely free ride. ROTC will pay tuition *if you get a scholarship* and not room and board. If you aren’t an A student, in perfect health, and a reasonable athelete, you’re not getting a four year scholarship (2 or 3 scholarships are a little less stringent)

    Rap – I think you’re forgetting an obvious way to go to school without loans – pay cash. Either save up before you go, or work part-time and pay as you go. Or work for a company that has tuition reimbursement and go part-time. If you have a long time horizon you can invest the funds in a 529 or mutual fund for education.

    Obviously this is easier if you go to a state school.

    I took out loans for a private college and for grad school and I really wish I didn’t, at least for grad school. Having to make those loan payments is preventing me from making some life changes that I want to make. I am planning to go back to school for a career change that requires education before I can enter the field, and this time I going part-time to a state school, paying cash as I go.

  25. I think the looking good point can be explained by Robert Kiyosaki in the Rich Dad books. Kiyosaki basically says that you shouldn’t ignore your desires and such for better things because by ignoring them you shut off your brain and don’t give yourself room to think about how these things could be achieved. Putting on appearances aren’t always necessary, but it can help–especially in the business world.

  26. Erin — it may be possible, but its not always the best choice. I wonder how many of the corps you listed never used debt as a way to grow?

    There is a major differance between borrowing as a means of investment, and borrowing as a way to further consumption. The latter is the problem.

  27. @ Rap – Military is not the only way to get education paid for, and I wasn’t talking just a “free ride” but being able to get an education WITHOUT debt. There is a difference between those statements. There are many ways to pay for college. I worked early morning loading boxes and lived at home with a company that would “help” ( not a free ride but some help). Even now I work for a company that will pay for schooling, hell, even McDonalds will help pay for college. What you are talking about is free ride that pays for everything including your partying which is what most of the student debt goes for.

    Try seriously looking, it does take more than googling “free ride in college” but there are many ways to pay for college and not rack up debt.

  28. Erin Says “Andy – corporations that are debt-free include Microsoft, Apple, SAP, Chik-Fil-A. Perhaps you’ve heard of them?”

    Don’t forget the corporation that everyone loves to hate Wal-mart is debt free and without a doubt the most successful retail business.

    @ Andy, it is not good for governments and businesses to rack up tons of debt. how could anyone paying attention to our current economy even think that it is. The U.S. went from being the worlds biggest creditor to its largest debtor because our government spends, spends and spends more and what do you think will happen when China calls all the notes we sold them? You think our economy is bad now, just wait.

  29. Kris – it must be nice to imagine that most student debt goes to pay for “partying”. Mine paid the $8,000 in room, board and books that my earnings from part-time work and my $25,000 merit scholarship did not cover.

  30. I’ve worked for a few different corporations in my life, some public and some private. Both privately held companies were debt free. Both privates ones were not. What I learned was when you get on the hook of a bank or VC firm, they control your destiny and everything is managed to the next quarter, which is really no way to run a business. Customers pick up on it quickly and wait 3 months to get your product at the inevitable “make the numbers” price and you just keep treading water.

    When you have money in the bank, you control your destiny. Not Wall Street, not some guy in San Jose, not some bank, not a customer who knows he can get your product at half off when they wait at the most three months. You get more flexibility and more room to maneuver when money gets tight, and have the ability to walk out of a deal if it’s not going to bring in the money you would want.

  31. Clearly there are irresponsible debts, but I don’t like that the word itself is stigmatized. I feel like I owe a huge debt to my parents, to the schools I attended, the communities I’ve lived in, to my country and to God. I am indebted to all of these things for the wonderful life I have. These are lifelong debts and I’m not trying to “get rid of them” but to honor them and to repay them by living well every day.

    To be honest, I feel the same way about my mortgage: I love my house, and I’m grateful to the financial institution (a community bank) that made it possible for me to raise my family here. I thank that bank every month when I write the check. The people who work there aren’t “evil.” It is an honorable exchange.

    I think we need to move toward honorable debt, not toward seeing all debt as a bargain with the devil. When used honorably, it’s a mark of a strong, principled civilization.

  32. Re student loans: if people had to pay cash up front for all education, we’d only have a handful of doctors and lawyers. *insert lawyer joke here* Seriously, though, for the most part, the really huge student loan debt is for graduate school, not bachelor’s degrees.

    Wal-Mart is debt free? Wow…did not know that.

  33. I’d like to offer a different perspective on “fake it ’til you make it.” Think for a moment if you did have a million dollars sitting safely in 10 different FDIC-insured banks. Would you care if the neighbor had a nicer house? Would you need to buy the BMW to impress people? Or would you be confident enough in your net worth to drive what gets you from point A to B without worrying what others think? Fake having enough that you don’t buy to impress or to fill up your self esteem, and you’ll save more.

  34. Joanna #7 – brilliantly said.

    Kris #12,26 (re: student loans): explain how one would become a doctor, for example, without student loans unless one is very very rich. Hint: no scholarships AT ALL for medical school and medical school is full-time (really), not time for second jobs. Nope, not a doctor myself, but the daughter of a friend of mine is one and so is her husband.

    #27 – Wall-mart issued debt in the past: http://www.allbusiness.com/retail-trade/4292355-1.html
    It may be debt-free now, but it clearly needed the money in the past. Right now that it is rich it may not need to – it’s relatively easy for a retailer to use profits f

    @Erin (#23) – Microsoft just issued bonds, so nope, it is no longer debt free. In fact, a friend of mine bought Microsoft bonds i.e. lent money to Microsoft. Apple is debt-free now, but it did have debt in the past.

    Really, why do people keep saying how the company X is debt-free without checking it? Not everything you read is true. Additionally, every business is different. Name one biotech company which is debt-free for example? A bit easier for a retailer to keep profits from this year inventory than for a pharmaceutical company to finance years of research and clinical trials.

    @Andy (#25) — absolutely true. Not to mention that people who claim some companies don’t have any debt haven’t bothered to read the balance sheet and are just repeating what others said.

    For people with money credit is a tool, just like any other. I also don’t understand why people treat Dave Ramsey as a financial expert. Yes, he made money on sale of self-help books, good for him. He also helped some people to get out of debt (in most expensive way possible, by the way; in a way that ensures money wasted). But his investment advice is just awful. 12% yearly returns on the market? Yes, right.

  35. Oops, cut off some of the sentences while writing the post. When referring to Wall-mart and retailers I meant to say that for a successful retailer it’s fairly easy to use certain amount of this year (or quarter) profits to buy inventory for the following year (or quarter). It’s the original investment or during the initial growth when the company like this may use debt. Hence Wall-mart’s using debt in the past but not needing it now. In some other businesses e.g. selling software, you may start in the garage but use debt when you want to expand or in some situations. E.g. Google hadn’t needed credit in the past, but this year it did issue bonds. Yet in other businesses like biotech, it is impossible.

  36. Actually, I’ll have to correct that statment about wal-mart… according to their balance sheet, somewhere along the way they took out some long term debt… probably to make sure they have a wal-mart every 2 miles. sorry for the bad info.

  37. Re #21 “almost there” and Dave “shirking his debts”. Yes, he declared BK. But when he became able to do so, he went back to every single creditor and paid them what was owed. He says he doesn’t think that everybody that declares BK needs to do that, but that he felt God was calling him to do that because of the business he is now in.

    Re Trent’s comment – “Ramsey overstates his case here, though I understand why he does it. A forceful case on behalf of a good principle is a great tactic for convincing people of the principle.” I think Ramsey overstating his case for that purpose is a good way to describe his teachings in general. He tows a hard line on a lot of topics, but I think that is part of what makes him so successful. It makes his system much easier to describe and market. And giving some people permission to use a credit card responsibly can be like telling an alcoholic that there are a few times when it is ok to have a beer. If you listen to his show long enough, you’ll him give all sorts of caveats and advice that doesn’t tow the hard line. But to print all of that and try to explain it in text would take a million books (or blog posts!).

    I also don’t think that *most* of his target audience is “woe is me” type of people. Those people exist, of course, but may just fell into the ideas that some debt is good and just needed a KITA in order to get turned around.

  38. At Kris and Erin -
    It’s wonderful to work and get scholarships in school, but for professional degrees, in can be out of the question. I’ll be going to medical school, and it’s not realistic to expect that I can make the approximately $50k/year I’ll need for tuition and living while taking a really difficult course load. You cannot really do some schools part time and work. My undergrad institution did not allow part time students unless you were enrolled in one specific program (for older student), and I have not heard of any medical school programs that do that (some law schools allow students to go part time, so I cannot by any means speak for all professions). I simply will not be able to make the money to cover all of my bills. I would only be able to pay cash if I waited several years to go, and by then, I would be approaching forty as I finished my residency, and I would delay my physician’s salary as well. So while it’s great to encourage students to go forth and earn, keep in mind it’s not always possible to pay cash unless some rich individual will fund you or you qualify for and want to pursue military/government service.

  39. Wow… there sure are a lot of people making excuses here.

    1st of all, as another poster pointed out, Dave certainly does NOT have a problem with buying new cars instead of used. He has a problem with FINANCING a new car. If you are debt-free and have your 6-month emergency fund and are funding your retirement and kids’ educations and can still pay cash for a brand-new car, Dave consistently says “go for it!”

    2nd of all, you most certainly CAN get an education without incurring debt. I’m amazed at the closed-mindedness exhibited here in the comments. “How in the heck are you supposed to get an education without taking on debt, unless you join the military?” Well, how about you take a year or two and SAVE UP for it? Scholarships, money from parents, working full-time or part-time, there are lots of options. Sure, maybe you’ll have to settle for a state college, or maybe you’ll have to live with a roommate, or maybe you’ll have to put off having kids for a couple of years … so what? Those are the sacrifices you make if you’re serious about “living like no one else.” Think outside the box a little bit.

    Just the other day, Dave had a caller who wanted to go to medical school. In order to do it without taking on debt, he was going to sell his house, tap part of his emergency fund, and rely on his wife’s income to cover the bills. This guy was in his early 30′s with a wife and kids. He’s making sacrifices, but he’s going to do it, and without debt. Reading some of the naysayers in these comments, you’d think such a feat would be utterly impossible. And yet he’s doing it.

  40. Just because it is possible to get an education without taking out any loans doesn’t mean it’s the best choice for everyone. Not everyone wants to work their way through school – every hour spent flipping burgers is an hour not spent studying, which diminishes the benefit of going to school in the first place. And not everyone wants to delay their education in order to save up for it – every year you wait is a year of your life that you don’t get the benefit of a college education. (Also, in my experience, time spent out of school atrophies your brain, even if you’re working at an intellectually challenging job.)

    Student loans are not inherently evil. And they only become harmful if you take on more of them than you can comfortably repay on the salary that your education prepares you for. Liz Weston has a rule of thumb that you shouldn’t borrow more than you can expect to earn in your first year out of school. If you can limit your student debt to that level (which will probably require some amount of saving, working, and cost-cutting anyway), I say go for it.

    Yes, there’s an element of risk involved, because there’s a chance that you won’t find a job in your field right away, or you won’t earn as much as you thought you would, or disaster will strike and you’ll have to leave school early without a degree. But to some people, that’s a risk worth taking. If we all played it completely safe all the time – if that were even possible – the world would be a much less interesting and less prosperous place.

    Somebody raised a point recently in another thread that I think is worth repeating: The interest you earn on your “safe” investments – savings accounts, CDs, bonds, etc. – is coming from somebody else’s debt. So if everyone swore off debt entirely, there would be no more interest-bearing savings accounts. Rather, banks would charge you hefty fees for the service of keeping your money safe – and that’s if they didn’t close up shop entirely.

  41. Johanna,

    Thanks for the explanation, but I wasn’t looking for more excuses.

    Lots of people graduate with solid educations and no debt. Somehow, they still manage to find jobs, and their brains have amazingly not “atrophied.” So it CAN be done. It’s simply a matter of CHOOSING whether or not you’re willing to make the sacrifices necessary, or whether you choose to just follow the herd, pile on the debt, and complain like everyone else.

  42. Kevin,

    You’re welcome, but I am not sure what part of my comment you are construing as an “excuse” or a complaint.

    You will notice that I never said that going to college without going into debt was impossible. In fact, I did it myself (I had a full-tuition scholarship). So on that point, we agree: The people who say that student loans are *impossible* to avoid are just wrong. But the mere fact that something is possible isn’t, by itself, a reason to do it. It’s possible to live one’s whole life without ever visiting The Simple Dollar Dot Com. It’s simply a matter of choosing whether or not you’re willing to make the necessary sacrificies. Is that an argument for not visiting this site? No, it is not.

    You say yourself that getting a debt-free education involves sacrifices – that is, it has a downside. For some people, that downside outweighs the upside of being debt free. Therefore, they choose to take on the student loans. Whether there are other paths they could have chosen, or whether that means they’re “following the herd” or not is irrelevant. Sometimes the herd is right.

    Is there anything else I can explain for you?

  43. I’ll agree with Kevin on getting through professional/graduate school with some imagination. I think too often people don’t look hard enough or think about it long enough to really think it through, and take on significant debt without at least taking the time to know what it’s going to look like on the other side. Sure, doctors and lawyers make good money, but HOW do they make their money, and what are the basic expenses that are going to be incurred? You have living expenses, of course, but you might also need to spend money on malpractice insurance, bar/exam fees, etc — which probably means you should seek out someone on your career path who just got out of school and ask them.

    The idea of saving up for a year or two really isn’t that ludicrous, either. It may make you re-think your commitment to the law or medicine, and devoting another few years to paying off school. You could also look at things like taking prerequisites at a local state/community college, evaluating all the options for law/medicine (including state schools), assistantships, etc. Also you can really look at the expenses in your life and see if you can do without things like a car, vacations, etc.

    The student loan companies will be happy to loan you piles of money to complete your professional degree — but you should walk into that loan office already knowing what kind of money you need, not the other way around. And getting to that point means that you already know how to live on a budget and have fully explored what your budget will look like before, during and after school. There will, of course, be surprises along the way, but you should be able to adjust the plan accordingly as you go along.

    I think that’s a lot of the Ramsey method — know what you have, where it’s going and where you want to go. The main problem I see with having debt is that it puts a severe restriction on the “where you want to go” part of the equation.

  44. Kevin — just because someone disagrees with you doesn’t mean they are “making excuses”.

    When used appropriately, debt can be less expensive in the long run than other options.

  45. Johanna says “Student loans are not inherently evil. And they only become harmful if you take on more of them than you can comfortably repay on the salary that your education prepares you for. Liz Weston has a rule of thumb that you shouldn’t borrow more than you can expect to earn in your first year out of school. If you can limit your student debt to that level (which will probably require some amount of saving, working, and cost-cutting anyway), I say go for it.”

    I’m not going to say they are inherently evil, and you are right that if you can comfortably re-pay them on your post-grad salary then you will be okay. But things change. All debt equals a significant amount of risk, even student loan debt. You could graduate in a recession and not be able to get a job in your chosen field – the field that you based your salary and debt repayment assumptions on. You could become disabled and not be able to work in that field. You could find that you don’t like it as much as you thought and that you really want to do something that doesn’t pay as well. Many things can happen, and if you pay cash for school none of those scenarios I just mentioned will equal financial disaster or limit your choices in life, while taking on debt can easily do that.

    I did take out loans for undergrad and grad school. But I wish I didn’t because those payments are slowing me down from some changes I want to make in my life now. I am going to try to make sure that my kids don’t need to take out loans when they go to school.

  46. Erin — yes, the best thing is to plan ahead. Good for you to think about your children’s future education costs!

  47. @Johanna:

    “I am not sure what part of my comment you are construing as an “excuse” or a complaint.”

    These:

    “Not everyone wants to work their way through school”

    “I don’t want to” is an excuse. Life isn’t always about only doing things we WANT to do.

    “Every hour spent flipping burgers is an hour not spent studying”

    “I don’t have time to do both” is an excuse. Lots of people MAKE time to do both.

    “Not everyone wants to delay their education in order to save up for it”

    “I don’t want to wait” is an excuse (and, coincidentally, the basis of the entire business case for the credit industry).

    “Time spent out of school atrophies your brain.”

    Balderdash. Another excuse. Lots of people take a year or two off to work and save up for college and their brains don’t “atrophy.”

    “Is there anything else I can explain for you?”

    I could just as easily ask the same of you, now. I thought these “excuses” were obvious. I’m not sure why I had to point them out in detail.

  48. I appreciate your perspective on Dave’s book. The things he says I believe are what most people need to hear, although taking them all to the “nth” degree may not be necessary if you’re financially responsible (like using credit cards for cashback or buying new vehicles that don’t depreciate at warp speed).
    thanks for the great post. I gave you several social bookmarks.

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