Love him or not, Dave Ramsey is a financial planning phenomenon.
Consider his popularity: Ramsey’s syndicated radio program, The Dave Ramsey Show, is heard on over 325 radio stations throughout the United States and Canada. Besides being a radio personality, he’s written almost 15 books, three of which have been on the New York Times Bestseller list. More recently, Ramsey’s also launched a popular show on the Fox Business Network, The Dave Ramsey Show. And yes, he’s a semi-regular on Oprah š
Ramsey’s core message is consistent. More than anything, he evangelizes his seven steps to financial independence:
- Start an emergency fund
- Pay off all consumer debt from smallest balance to largest
- Three to six months of expenses in savings
- Invest 15% of household income into Roth IRAs and pre-tax retirement accounts
- College funding for children
- Pay off home early
- Build wealth by investing
Simple, no? And yet, many find Ramsey’s advice simplistic, misguided, or just wrong. Ignoring conventional wisdom on many topics, he draws upon his personal experiences to craft financial and life advice that’s often, to say the least, controversial.
So where do I stand?
I’ll surprise some with this, but Iād say I agree with about 90% of what Ramsey talks about. While he sometimes strays too far from what he knows best — human psychology — I still feel that Ramsey offers an incredibly valuable service to his listeners. While we pride ourselves here for going “beyond common sense”, we shouldn’t forget those just starting the personal finance journey. Kudos to Ramsey for seeing this group’s need for straight advice and the honor in serving them.
In this show, Iād like to take some of Ramsey’s thoughts and processes, expand on them a bit, and even go a little farther in depth than he does on some investing topics. Iāll share my feelings on his steps to financial independence, his approach to investing, the difference between risk tolerance and risk capacity, the emotions associated with investing, and some of the benefits of saving for retirement early.
Thanks for listening! If you enjoyed the show, please visit the Apple iTunes website and leave us some positive feedback. They often feature shows like this one that have consistently good feedback. If we can do a better job, drop me a personal email. See you next week š
I am a big Dave Ramsey fan and listen to his podcast almost everyday. My wife and I are debt free and hope to stay that way.
Dave also says cut up your credit cards, bankruptcy only as last resort.
He is no charletan, speaks from experience. (I am wondering how long his TV show of Fox Business will survive).
Hello Brian,
I’m involved with a small group of friends in Denver interested in becoming financially literate. We consider ourselves a step past Dave Ramsey, but not quite ready for Jim Cramer. Would you consider creating an episode regarding Investing Clubs and potential topics for discussion? We’re interested in trying to learn more about markets by paper trading along with increasing our overall financial savy.
Here’s a more grandiose idea. Have you kept up with Oprah’s book club success with her Monday evening web courses and Skype conference calls? How would you feel about starting a monthly/quarterly virtual Financial Club via webcast or conference call for us “Beyond Common Sense” devotees?
Just a thought…
Kristy Ann
Denver, CO
We are not big fans of Dave Ramsey. We do agree with some things such as having an emergency fund and 3-6 months in savings. But that’s pretty much it.
Paying off your home early – One of the things we have learned through increasing our financial IQ is that equity has no rate of return. If it is in your house, it is idle, doing nothing. As you increase payments to pay off your home, the chances that you’ll ever get that money out is slim to none. You’d have to sell, refinance, or take out an equity loan/line. Keeping the equity separate keeps it liquid, safe, and you are able to earn a rate of return on it.
Life Insurance – We like whole life insurance policies. Dave hates them. He likes term policies because they are cheap. But there is a reason. Ever heard of the phrase āGood things are seldom cheap and cheap things are seldom good.ā Less than 1% of all policies ever pay the death benefit. Why? Either people cancel their policies or they donāt die in that term. I guess thatās a good thing.
There is a time and place for term insurance, but my money goes to whole life policies. Picture this, the time you can get your greatest return on a term policy is if after you sign the document you are killed that day. Sorry, maybe too morbid. But everyday after it keeps getting more expensive. Not that the premiums go up, but you never see that money again. Itās a pure expense.
Whole life, however, can be used as a living benefit. It velocitizes your money, doing several things as once. It acts as a savings vehicle, earns interest, and has a death benefit, along with other benefits as well. But if you truly learn how to utilize this product, you can create your own banking system and recapture all the interest you would have paid to other lending and banking institutions otherwise. Itās a powerful tool of production if used correctly.
http://www.stewardsofwealth.com/
In response to 3.sow:
Whole life has huge fees (no fees for term).
Whole life only pays the face value (at the end, all your “savings” go to the insurance company and you keep paying the full premium.
Whole life premium can be 10x higher than term
Invest the premium difference between whole life and term in mutual funds (better return than whole life) and you will be way ahead.
Whole life is only good for the sales person (commission) and the insurance companies (fees).
Term life insurance is good for all of us while we build wealth.
Do not believe the whole life insurance salesperson. It is rip off.
@Kees,
1. “huge fees” – You have the ability to recapture those costs within a whole life policy. You can never recapture the premiums you pay for term.
2. “only pays face value” – You can add a rider to reinvest the dividends paid out from a life insurance. It increases your cash value and increases the death benefit (both of which are guaranteed). At the end, if you’re talking about death, if the death benefit is greater than the cash value, great! And you don’t have to keep paying the premium, that’s false.
3. “premium can be 10x higher than term” – I suggest you seek why. Why do banks invest in them? Why do wealthy individuals invest in them? It’s because they know how to use them to produce.
Best of all, we can use our polices as our personal bank.
thank for your response #3.sow.
You have me confused. Can you explain by comparing whole life and term/investing yourself why whole life is a better deal (for example 20 year level term/investing and 20 year whole life of $500,000) ?
Sow has not responded in 6 days. I guess asking for real numbers to compare term and whole scared him/her off.
(Dave Ramsey, Clark Howard, Brian Preston, Consumer Reports can not be wrong).
Sorry to reply so late. Rather than talk about “figures”, let me dive into the key differences between whole and term.
1. Term is a pure expense – Again, your greatest return occurs if you die the day you sign the policy. With whole life, there are guarantees such as the cash value, a rate of return, and the fact that dividends payed back into the policy are guaranteed their cash value.
2. Term gets more expensive as you age – Once you buy a whole life policy, the price of the premiums are guaranteed. So, as time progresses, term gets more expensive because of age and health, while whole live gets cheaper (paying with inflated dollars).
3. Term only has one benefit, the death benefit – Whole life velocitizes your money providing a death benefit, a savings vehicle, and earning a rate of return.
4. Self insurance is a fallacy – Dave Ramsey promotes buying term, investing the difference, and then “self-insuring” in the future. There is no such thing as “self-insurance”. Your are either insured or not. The reason is because what you are insuring is being used as the insurance at the same time. For example, let’s say that you have ended your term policy and now you want to “self-insure” yourself for $500,000. Then that technically means that $500,000 of your assets cannot be used since they are being used as insurance.
6. Whole life insurance can be used as a banking system – Consider this, you finance everything. You either borrow and pay interest or your pay cash and lose the interest that you would have gained if you invested those dollars. When correctly structured, you can create your own banking system with whole life and recapture all the interest that you would pay to other institutions (along with getting a rate of return on those dollars).
There are other differences but the issuet hat people mostly bring up is that fact that whole life premiums are expensive. But if we want to be rich, we need to think like the rich. Consider the returns from this tool. If you knew that you could get 10,000% return for your money, then would cost be a factor? The rich consider value and return first, cost second.
I hope this triggers some interest in investigating the benefits of this powerful tool.
I don’t think Dave Ramsey is a charlatan, but I don’t think he adds any value either. His advice is extremely simplistic, basically his audience likes to listen to him because he’s telling them what they want to hear – very simple ideas that everyone already knows. His audience tends to be very poor and uneducated, just listen to his show sometime and take note of the typical caller profile. They usually earn somewhere around the poverty line and have a bunch of credit card debt, most of them don’t even want to deal with the debt. They just want to file bankruptcy or get advice on “settling” on their debt for as cheap as they can. So basically, his audience is made up of poor, uneducated people who don’t want to make good on what they owe.
His view on debt is also ridiculous, he is like an ex-alcoholic who now thinks that people shouldn’t even have a drop of liquor. He bankrupted himself and did stupid things with debt, but most people don’t do that. You see these stats about the average credit card debt in America, but the numbers are misleading because the majority of people with credit cards actually have ZERO credit card debt. It is just that there is this smaller population of people like Dave Ramsey and his listeners who have a ton of it. I use my credit card for most purchases and always pay off the full balance each month, I use it just like a debit card/cash but with it I get various rewards as well as purchase protection, etc. which has come in handy many times. That is the way my parents have always used cards and virtually everyone I know uses their cards. Dave Ramsey is trying to get rid of the whole credit card industry just because people like him abused them, then he gets mad at the credit card companies and calls them crooks. While it is people like him who use them and then walk away from what they owe.
Sow,
I appreciate your explanation, which I have heard before from whole life sales folks, but that was not my question. I make decisions on facts, especially when 10,000% return on your money (as you write) is possible with whole life (and the insurance company and the sales person make a profit also….)
Can you answer my question?
Sow, why don’t you show us some factual numbers to compare term and whole life like kee said. If you think life insurance is an expense, then why the HELL are you even buying it? The reason you buy life insurance is so that your close ones will be taken care of financially if something were to happen to you. Life insurance IS NOT a savings account!
If you are looking for a better return for your money, why don’t you just invest the premium difference between whole life and term life into a low cost and broadly diversified mutual funds instead. The only charlatan I see is Sow’s sales pitch on how to get 10,000% return on whole life policy.
Kees,
Do you believe that people should get paid for what they do? I do. So, I don’t mind if my financial adviser and the insurance company make money when I get a whole life policy. At the end of the day, my return is far greater than the cost of the policy. It’s for this reason why I don’t mind paying other people in my mastermind group because when they make money, so do I. It’ s up to us to find those individuals that provide more value than what we pay them.
William,
If you read above, I wrote that “term” insurance is a pure expense. and it gets more expensive as time goes on. And my whole life policy DOES act as a savings account because of the savings component that’s tied into it. And the 10,000% return was just an example where if you knew you could get high returns on your investment, then would cost matter?
OK. So, let’s talk some figures then. But remember, we’re not talking about returns, we’re talking about how you finance your purchases (or investments). So, let’s say that two people invest $100,000 for one year and earn 20%.
Person A takes money from his pocket.
Gross yield – $20,000
Less taxes(30%) – $6,000
Net yield – $14,000
Person B builds $100,000 in cash value (dividend paying life insurance). He borrows from his “bank” for 8% (loan interest) and invests in the same product as person A.
Gross yield – $20,000
Less interest paid to banking system – $8,000
Taxable gain – $12,000
Less taxes (30%) – $3,600
Net yield – $8,400
*The interest is a business expense because I can loan it to my entity to invest it and have it pay interest on the loan.
But remember, person B has a banking system (dividend paying whole life policy) that earns interest on a non-taxed basis.
Net yield from investment – $8,400
Net yield from banking system – $8,000
Total yield – $16,400
Person B experienced $2,400 more by financing it through his own “bank”. Although there is a delay in getting this system started, it is only a one time event. Consider this the time to start a “banking business” that never existed. But the delay in time is well worth it if you know how to utilize this process.
To “JD”
My friend, you may have listened to the wrong show. I hear a broad range of people calling in from business managers and professionals making 100-200k a year to grandma’s making 6k.
If you’ll also listen enough or read his books, you’ll find his reason for not using credit cards and simply paying the balance off is actually based on facts. For instance, your statement that a majority of card holders pay off their cards is wrong. In fact, 60% of Americans carry debt on a credit card from month-to-month.
Likewise, people who use credit cards on average spend more than they would had they used cash. McDonald’s and other fast food companies introduced credit machines because they found people spent 50% more on credit (and check cards) than they did when using cash. I am not sure of the exact number, but I’ve heard the average a person spends on credit cards is around 7-10% more than if they had paid cash. It’s just easier when you’re not writing in a check register immediately or taking the cash out of your wallet and looking at the remaining balance.
If you spend more on your cards, you negate every benefit you gain by using a card. Also, when was the last time you actually called the credit card company to use the insurance for a rental car, or called to get $25 bucks back for a bad item? If you did, they’d tell you to go to your auto insurer first, or go return the item first, and then they’ll refund your money. Guess what? The auto insurer is going to pay, and the retailer is going to give your money back anyway. And airline miles? A few airlines have stopped honoring them, and the black-out dates are tough to deal with. And I bet you didn’t know that when you use a credit card, the companies you buy from are having to jack up their prices 2-3% to cover the cost that Visa/MC/Amex are charging the sellers. My wife owns a retail shop, and she factors that back into her cost-of-goods. So, you’re actually paying for every benefit you think you’re getting.
So, my suggestion is to save 7-10% on your purchases, and use cash. Oh, and quit the name calling like a bully on a playground.
Brian, I’ll challenge you on one point in your podcast: that Dave is missing the boat slightly by telling people to always avoid investing for retirement when in the first three baby steps.
You’re right that in very special circumstances, like when someone’s income is about to shoot through the roof, they could take advantage of their current Roth IRA limits and invest now. However, you may have missed Dave’s point in limiting people’s investment activities at this level.
Brian, his main reason is that while you are running the numbers, he’s evaluating the risk which can’t be calculated. You gave the example of the rising Attorney who in two years will pass the income limitations for the Roth IRA. But, what if this rising attorney doesn’t rise, but instead gets on a case that destroys his career? He’s got a maxed out IRA, but still also has debt while he finds another career. What if he/she has a baby, and the new responsibilities cause him/her to scale back their ambitions? Even risings stars often over-estimate how much they’re going to make in near term (1-5 years), so they’re probably not going to pass that income threshold as soon as they expect.
A second element is the emotion surrounding debt. People try to ignore it, which is very easy to do until it becomes a scary monster on their balance sheet. Since it is so easy to ignore, when you start adding other big ticket expenditures like investing onto your budget, the debt can take a back seat to other things that seem sexier. You get back into the mindset that the debt is almost done, so it’s now okay to start moving on to other things. The problem becomes that you begin to think again that consumer debt is okay. So, before long it can be the strange scary monster as you ignore its hazards while trying to max out your IRA or get the company 401(k) match.
Dave’s point here is that you want to get over the hurdle of having debt period. Once you pay it off, you’re done. Bam. It’s gone. You can get rid of the credit cards, avoid car loans, etc., and thus avoid debt in the future. You’ve passed a significant emotional hurdle. But, even you have just $2,000 sitting out there, it can come back to bite you like when you forget to pay one month, or some emergency happens, and before you know it that $2,000 has ballooned into $5,000, or worse. While that still sounds like chump change, it’s all about the emotions we have surrounding debt.
It’s a lot like smoking. Some people can quit cold turkey. But, most have to scale it back or use a patch or gum while the addiction is getting cleaned out of your system. During that cleansing period, and shortly thereafter, if you pick up one cigarette, you can fall off the wagon and get right back where you were before. Debt has the same addiction because it’s just so easy to use! Once you get it out of your household, you can be done! You eliminate the risk.
Likewise, with building up a safety reserve of 3-6 months of living expenses, you get a nice safety net that will help when that rising star attorney loses his job. The IRA will be heavily penalized if used. Your liquid savings won’t. And like you said in your podcast, if it’s only going to take another 4 months to dump the debt, and then a few months more for the rainy day savings fund, then an extra year dedicated to that early in a person’s career will outweigh any benefit gained by one $5,000 maxed out IRA growing tax deferred.
Finally, moving money down a bunch of different avenues begins to dilute the benefits for all but a few high-income earners. The person you described is still paying minimum payments on debt while trying to fund an IRA. So, for most people, they’ll likely never hit the maximum. What Dave also does by using these steps is make the learning curve more like a straight line. While you’re paying off debt, you can concentrate on strategies to boost your income to fund the debt, and finding strategies to cut costs to boost your budget, and to learn how to deal with creditors. Then, when the debt snowball is done, you don’t have to deal with the creditors. You can now concentrate your self-education on learning what liquid investments are (savings vs. Money Markets vs. CD’s), and where to invest in them for your emergency fund. Finally, once that is funded, you can concentrate your learning on IRA funds, 401(k) funds, etc. It hones your attention instead of having to be a jack of all trades. Sure his investment strategies are simplified, but 98% of his listeners will never understand how to know a good fund from a bad fund or a good financial planner from a bad one.
In a perfect world, you’re right, Brian. In an imperfect world, Dave’s plan is a lot more likely to work right.
Sow, thanks for your reply. Everybody is allowed to make an honest living. People that sells insurance and securities should have fiduciary responsibilities (have the clients best interest in mind).
Your example does not answer my question. You introduce borrowing money at 8% and returning 20% (at what risk, I might ask?????).
Your example is not realistic (borrowing 100,000). No investment has returned 20% over the long run. Huge risk, unrealistic.
Please answer my question (comparing apples to apples, comparing term/investing vs. whole life.
Since you claim it is such a good deal, it must be easy to show this with the numbers.
Rainer:
First get your facts straight and don’t just quote inaccurate numbers like those spewed by fear mongers like Dave Ramsey. According to the Federal Reserve as well as the credit card companies themselves over 60% of card holders carry NO balances. Of the ones who do virtually all of them carry less than $2000, there is this small minority of around 5% that carry very large amounts of over $10,000 and they distort any numbers that incorporate “averages”.
As far as the argument that using a credit card causes you to purchase more that just afflicts weak-minded people who will always find some excuse to explain their spending. I use my credit card just like cash and I have used those benefits you dismiss regularly. I travel extensively overseas and my card has a lot of travel benefits that I use, I’ve used the extended warranty feature at times, purchase protection, and of course get cash back on all my purchases as well.
What you are talking about, and what Dave’s audience is made up of – are the weakest, poorest, and least responsible portion of society. And no, you are wrong when you say he has a lot of callers who make over $100k, he doesn’t. I have listened to many of his shows and most are making next to nothing. There are almost no true professional middle-class callers. If an alien came down to this planet and listened to his show he would think that the average American is a poor dumb country bumpkin. So for anyone to tout Dave Ramsey’s as a personal finance guru just makes me laugh, he’s a charlatan catering to the lowest segment of the population and teaching them that credit card companies and lenders are EVIL. Sure Dave, why not just say America is evil since America runs on banking. He is a charlatan pure and simple, the people who listen to him like to listen to him because they like to listen to anyone who tells them it isn’t their fault and throws in Christian theology. These are the same people who watch Jerry Springer and Judge Judy. Dave Ramsey is just the personal finance equivalent of these other sensationalists – and to top it off his financial history is made up of him going bankrupt, something no one I know personally has ever had to do.
JD:
Alright, I will get my facts straight. “Approximately 40 percent of credit card users paid their balance in full every month in 2006 (Source: Federal Reserve Bank of Philadelphia)”. That means 60% carried a balance at some point during the year. When I wrote my first post, I actually deleted a parenthetical statement saying that some card users only carry a balance for part of the year because I was already getting too long winded. So, you are also partially right, “The majority of U.S. households have no credit card debt.Ā About a quarter have no credit cards, and an additional 30 percent of households pay off their balances every month (Source: Federal Reserve).” And, you would also have been right had you pointed out that I said 60% of Americans carry debt instead of 60% of cardholders, so I correct that statement.
Also, according to myfico.com, about 40% of card holders carry a balance of less than $1,000. About 15% (not 5% as you quoted) have total balances in excess of $10,000. That’s credit cards. Now, when you throw in other “nonmortgage debt”, “Nearly 37 percent carry more than $10,000 of nonmortgage debt as reported to the credit bureaus.”
Secondly, I never said that having a credit card “causes” you to spend more. Statistics indicate you simply do so without thinking about it. You are right that it is a choice, and whether you like it or not, you probably have spent more than you intended or would have had you paid cash. If you have not, then good for you. I did not dismiss the benefits of the credit cardsā¦they are valid benefits. However, a good portion of the population does not use them regularly enough for them to provide value. And, as you mentioned, you are able to use the benefits more because you travel overseas. Not many people I know travel regularly enough overseas to realize that benefit. The cash back is more frequently the benefit people have used, including myself.
Now, Dave’s audience: At this point I’m getting the impression you’ve already made up your mind what you’re going to believe. That’s fine. But, don’t call me wrong when I listen to at least one to two hours of his show via podcast every week, having done so for several years. Almost every show includes one or two people who make significant income. The one I listened to last night had someone making 120k. A second caller had a spouse making 80k. A few others made 20-30k, and one barely made 10k, but that one was retired and “doing real estate” on the side. So, it is the full spectrum. Since high income earners above 100k are a minority in America, he will have more people that make less call in. I never said otherwise.
Also, make up your mind on Dave being a Charlatan. In your first post you said, “I don’t think Dave Ramsey is a charlatan, butā¦” ā¦now he is. Which is it? Dave Ramsey is not a financial planner in the sense that Brian Preston is. But look at who need his adviceā¦They are people as you described that are poor, to the people who are high income earners that do call his show, and they are rarely in a position to hire Brian to do personal advice. They need a plan to help them get out of their rough financial situations, and he fills that niche well. You said, “They like to listen to anyone who tells them it isn’t their fault and throws in Christian theology.” Again, this isn’t the case. He has never told a caller that I’ve heard that it wasn’t their fault. He consistently beats up people for making stupid mistakes. He always blames the person doing the spending, not the credit card company.
Now, he does blame the companies for aggressive, and sometimes illegal collection activities which is something that is their fault. He also doesn’t teach that lenders are evil since he even has a mortgage lender advertise on his show. His emphasis on the bad side of the companies is almost always in regard to their collection practices.
Finally, America doesn’t run on banking any more than America runs on oil as a singular economic entity. Sure, it’s a significant part of our lives that would be nearly impossible to remove from our economy now. But, things worked just fine 60 years ago when there was no credit card industry. In fact, we made it all the way through 180 years of our country’s history without the credit card. Did it help accelerate our economy since the 1950’s? Possibly. It’s arguable that had the investors who provide the financial backing for credit cards not gone down that route, and instead invested the money directly into business ideas that we would be in the exact same spot economically speaking. But, who really knows? It’s just guessing. We do know that credit cards, when used improperly, can be a horrible curse to the user, but it is always that person’s fault.
JD, good luck in life. The people you just ripped to shreds may be your customers or your employees some day.
Kees,
“…should have fiduciary responsibilities (have the clients best interest in mind)” – This really should apply to all (whether in the financial industry or not) right? =)
Backed to the comparison. What I’ve tried to stress here, as an advantage of whole life insurance, is the banking component. I’m not talking about investing, I’m talking about financing.
So, forget about investing for a moment. I’m talking about using a whole life insurance policy to finance a car, boat, home, student loans, etc…and even your investments. So, I’m not talking “buy whole life vs. buy term and invest the difference (in product A,B,C)”. I guess it’s sort of like “buy whole life, and use it to finance your car, boat, home, student loans…AND investments (in product A, B, C) vs. buy term and invest the difference (in product A,B,C)”.
The investments A,B, and C are the same in both scenarios. So, they are irrelevant. The difference is how you finance them.
Sow,
Thanks for your reply. But, but, it does not answer my question. One more time, OK?
It has been 9 days since Sow replied.
I guess s/he can not answer my question (term/investing vs. whole life).
Probably best. It would be embarrassing for him/her.
This is a very frustrating debate on term vs. whole life; whole life is a sucker’s bet EVERY TIME. The only people who espouse it are those who sell it, and those who don’t undestand the concept. Buy TERM and INVEST the difference; you will be the whole life policy every time. There is nothing magic about whole life; the net premiums are invested in stocks and bonds.
Dave Ramsey is not what he is cracked up to be, BUT his advice has never hurt anybody. He is mathematically wrong, but I believe he is correct on human psychology. And his mathematic errors would only cost hundreds of dollars, instead of thousands (millions?) that his advice saves.
Rainer:
“What you are talking about, and what Dave’s audience is made up of – are the weakest, poorest, and least responsible portion of society. ”
I make over 300k per year and have run a multi-million dollar income producing business, I listen to Dave Ramsey’s radio show and know plenty of my peers that know of his show – FYI
Mortgage Pro: I believe you were quoting JD, not me.
I agree that usually the weakest, poorest, and least responsible portion of our society are clearly NOT listening to Dave, and are more likely listening to music stations. Educated and responsible individuals are listening to Dave to help understand money, which was never taught to any of us in school. Often we can’t get enough of it! š
An interesting podcast. I’d like to hone in on one part of the podcast where Mr. Preston disagrees with Mr. Ramsey about foregoing Roth IRA contributions and 401(k) matches during the first three steps of the “Total Money Makeover.”
With all respect, I think that Mr. Preston is focusing on the twigs on one tree and missing the forest. Let’s look at Roth IRA’s first. Mr. Preston expressed concern that professionals may lose the ability to contribute to Roth IRAs and hence lose the compounding on those funds in future years. We’re talking a relatively small portion of the population that is going to be in this “dilemma” such as it is. If you look at the statistics for 2006 (source census bureau), the lower limit for the top 5% of household income is $174,012. Said another way, 95% of households earned less than $174,012 in 2006. Given the current economic situation, I doubt that number has changed much. The phaseout for Roth IRA’s for 2009 for married couples is $166,000 to $176,000. So to put this all in perspective , we talking maybe 5-7% of households are in the situation where they can’t contribute to a Roth IRA. Perhaps due to the nature of his clientele Mr. Preston is used to running into these individuals, but from the point of view of the population as a whole they’re a relative rarity. Mr. Preston is also failing to note the other side of this equation. If someone is using the $5,000 or $10,000 they would otherwise contribute to a Roth IRA to pay down debt, they’re saving the interest on that amount. Since the average credit card rate is 14.03% (source credit card monitor), you have to take a look at the amount of interest saved when doing this. I’m not aware of any investment that is paying a consistent after tax return of 14.03% or even 10%, so that’s something that Mr. Preston’s analysis is missing. And keep in mind that most interest paid except for that on a mortgage is not tax deductible.
With regard to 401(k) matches, Mr. Ramsey has a tougher sell in my view. Yes, it’s tough to make the argument that giving up a 33% or 50% or even 100% return on investment makes sense. And in truth, I disagree with Mr. Ramsey on this for people in a situation where they have relatively low amounts of manageable debt. But keep in mind that the people that Mr. Ramsey speaks to are often in well over their heads and need a dramatic approach. Mr. Ramsey is indeed correct when he notes that most of personal finance is psychology. And if the thought of losing that return on investment represented by matching contributions to your 401(k) is enough to motivate you to dive in and pay off your debts, I think it’s a relatively small price to pay given the long term benefit of being out of debt.
This debate between term and WL is unproductive because both parties believe the other one is wrong. WL is not for everybody. I have to side with Sow on most cases, EXCEPT the “be your own bank” thing. This is a dangerous concept, because when our socialist government starts taxing the loans you take against your policy’s cash value, this concept will be destroyed. And WL from any company other than the top 3 or 4 mutual companies is not to be compared. WL is about the permanent death benefit, that allows people to unlock other forms of income. A person with 1 million of assets and 1 mil of WL will outspend and live a much more fruitful retirement than someone with 2 mil of assets and 1 mil of term (and most likely that will be cancelled when they turn 65). Those of you that drink the buy term and invest the difference koolaid might end up okay (if you are disciplined investors), but the guy next to you that used WL (and NOT as a banking system) to leverage his other assets and perhaps avoided the 401k trap, he is going to feel bad for you.
It is about DISTRIBUTION folks, people focus on accumulation too much with no idea of how they are going spend it or distribute it in retirement so that they are getting the most efficient and maximum use of every dollar.
BEGIN WITH THE END IN MIND.
Well,
My first question to SOW has still not been answered (a side by side comparison of cost and benefits).
My guess is that we will never see it.