mad anthony

Rants, politics, and thoughts on politics, technology, life,
and stuff from a generally politically conservative Baltimoron.

Tuesday, November 01, 2005

Why I think Dave is wrong and some debt is fine...

Insty links to this NYT profile on his old clasemate, Dave Ramsey, who is a self-described "anti-debt crusader".

The dude hates debt - including credit cards, student loans, and mortgages. Yes, mortgages.

Now, much of what he says in the article makes sense - don't run up credit card debt for stuff like a wedding, work extra hours if you need to to pull yourself out of debt, read books instead of watching TV (although I don't do as much of the last one as I should).

And I realize that most of the people that Dave is aiming at are not the most responsible with money, and keeping them on an all-cash budget may be the best way to keep them from running up debt.

But credit cards can be good if used properly. I try to put all my gas on my Discover Gas cash back card (5% back for the first $1500 per year) and everything else on my Amex Blue Cash (tiered, up to 5% on certain purchases after I hit $6000 in charges in a year). This is basically free money - I pay off my bill every month, so I don't carry a balance or incurr intrest, and they basically pay ME to buy stuff.

Other people (ie many of the posters on fw finance like to take advantage of 0% balance transfer promos. Even if you don't need money, you can borrow the money, put it in a savings account, and make money for nothing. I haven't done this, because I'm hoping to buy a house in the next 6 months or so, and I want to keep my debt down.

Speaking of houses, Dave also advocates paying cash for a house if possible, and if not taking out a 15-year fixed rate mortgage with at least 50% down. While I am no fan of some of the wierd financing vehicles out there now (ARMS, zero-down, interest only, less-than-interest only, ect)- if only because the people using them are pricing first-time buyers like me who don't want to take the risk- out of the market. But with housing prices the way they are, putting 50% down is unrealistic. With the amount I have saved, that would put me in the market for a $50,000 house. What kind of house can you get in Baltimore for fifty g's? The kind with no windows, floors, or plumbing, and that comes with a homeless guy pooping in the basement.

With housing prices rising the way they have been, someone who isn't willing to go into a conventional mortgage is going to have trouble saving because prices have been climbing faster than most people's savings rate. That may change if/when the "housing bubble pops" - but my thought is that if you buy a decent house in a decent neigborhood and hold it long-term, you will probably be ok. Waiting 10 years until you have 50% down saved up - and paying rent all that time - doesn't seem like a great idea.

Edit: Be sure to read the comments, in which I respond to a reader comment with an analogy that uses the phrase "bash someone's head in"


At 2:14 PM, Blogger Sponduliqs said...

Thank you for this blog, and the opportunity to comment.

While I think you are doing well for yourself right now with your credit cards and debt, you have missed the boat.

Dave Ramsey is not aiming his views to the financially challenged. Factually, over 50% of those that have filed for bankruptcy are actually folks that make over $50,000 a year and are upward mobil. That 50% actaully filed due to unforeseen medical expenses.

The next group would men an woman that have divorced.

The people needing help with their debts are not "deadbeats" at all or financial losers as you would like to claim.

It is true that there are those that do and have abused credit -- There always will be. But they are not the majority.

While you are doing well now, how many paychecks do you have to miss before you on the street? One? Two? So before you critize Dave Ramsey realize he is providing a good service for those that need it.

However, I am also very aware that he method is not for everybody.

Jae Burnham

At 4:18 PM, Blogger mad anthony said...

First of all, I did not use the words "deadbeat" or "loser" anywhere in my post. The closest I said was "irresponsible", and while you are correct that many bankrupt people found themselves in unfortunate circumstances, I'm sure at least some have made some poor financial decisions that are responsible.

As far as the "50% of bankrupcies are caused by medical expenses", Orion Kerr at Volokh has thrown some doubt on that statistic - it's based on people who either self-reported it or had over $1000 in medical bills - which may have been a contributing factor but not probably not the only cause of many bankrupcies.

I think for certain groups of people, Dave has a point (except for the mortgage thing). But debt is a tool. It's not good or bad by itself - it's how you use it. I can use a hammer to build something or bash someone's head in. By the same token, I can use debt to buy a bunch of crap I don't need at a high interest rate, or I can use it to earn free money (through rewards and float on credit cards) and home equity (thru mortgages).


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