My fiancee and I, at present, have over $100,000 of debt between the both of us. The vast majority of that is student loans, with about $12,000 of it being a car loan, because we had the audacity to get college degrees in the United States without having rich parents.
A bit scary to live with, right? It absolutely is. My fiancee’s student loans are just entering repayment; mine are already in repayment to the tune of $600/month. It makes finances a lot harder. If our rent would normally be $1000/month (dirt cheap in Northern Colorado), we may as well think of it as $3000—$1000 for the actual rent, $600 to my student loans, $400 to the car, and another $1000 into what was our “debt snowball.”
That term was coined by Dave Ramsey, the smiling man in the picture below. He’s a financial advice guy with several books, a podcast, live events, the whole nine yards. When I got frustrated with my student loan payments, he was one of the first people I was told I should listen to by the people around me.
The reason is that Ramsey hates debt, passionately. His business is built on a one-size-fits-all financial solution to building wealth: save $1000, pay off all of your non-house debt, save a bigger emergency fund, invest lots of money, pay off the house, and live comfortably forever.
For the most part, this is good advice. You could certainly do a lot worse, and spend a lot more money on sleazy financial advisors than it’ll cost you to explore Dave’s website or read his book (he doesn’t pay me, by the way).
But doing some simple math, you’ll probably observe that this approach of paying off all of your debts before ever saving and investing is leaving a lot of money on the table for someone like me. That’s several years of debt payments with absolutely no saving accumulation that I’m choosing to do. I could probably get a down payment together for a rental property, invest in the S&P 500, get into some REIT’s, and buy some shares of healthy dividend-paying blue chip stocks on Robinhood, and start building myself a nice passive income instead.
Of course, this is the problem with one-size-fits-all solutions in general: it sort of fits everyone, but perfectly fits almost no one.
In fairness, there are a few grains of salt from Dave himself that you should bear in mind before going hog-wild eating nothing but ramen for three years while you pay down your student loans. First of all, when people call into him and say they make $10/hour at Walmart, the first thing he (correctly) tells them is that their problem isn’t the debt, their problem is the income. You have no leverage if your income is next to nothing, and make no mistake, $10/hour is next to nothing in 2019.
Fortunately, my household is sitting around $96,000/year right now (feeling squeamish hearing about other people’s finances yet? Don’t worry, it’s just the America in you). That’s not “rolling in it”, exactly, but with a reasonable lifestyle, we have about $2000/month that we can throw at debt, savings, or whatever other financial goals we have.
I observed this flexibility in action because we’re getting married this year, so having some money set aside seemed like a good idea. And the thing is, it makes more mathematical sense for us to build some passive income streams now, when we’re young and in our mid-twenties, than to keep eating ramen for several years until the debt goes away (speaking of, this blog could be a great income stream for us if you like this article and want to help me get rid of the ads).
Another grain of salt is that if you read that book I linked above, The Total Money Makeover, it feels as though Dave has made several assumptions about you before you started reading. He tends to assume that you are middle-aged, are already married, have a house in suburban America, probably have a few kids, and, again, have a respectable income to begin with.
Many of these are not true for our household. We’re younger, meaning we can leverage time better than many of Dave’s readers, who are trying to fix a financial crisis in their 50’s rather than a big, but not-insurmountable problem, in their 20’s. We also aren’t married, don’t have a house, and don’t have kids. We only recently built a respectable income (I got a job as a software developer; my fiancee got a job as a teacher. The two combined equal one reasonable household income at present).
I’d also argue that Dave’s solution is designed to be stupid-proof, again by necessity, because he’s speaking to everyone. And if you’ve ever worked in a restaurant or a retail environment (which is to say you’ve dealt with the public), you know there are a lot of dumb people around.
So, there are a few things he says that I don’t strictly agree with, but I understand why he says it to people who constantly make bad financial decisions. For example, in his book, Dave says you should never use a credit card, because then you’ll never spend money you don’t really have. I say you can use a credit card (especially cash-back cards, where the rewards are more likely to be put to use than flier miles) if you are conscious of your budget and don’t go and blow money constantly. Be smart about it and it’s not a problem! For reference, I tend to use just one credit card with no annual fee and a consistent cash back rate for all transactions, then pay it off with every paycheck. For me, that means a free meal with my fiancee or a free tank of gas pretty much every month.
Dave also suggests saving $1000 for a rainy day, but not saving any more until you pay off all of your debts. I have a wedding coming up, we need to get another car soon, and we’d like to buy a house sooner rather than later. $1000 won’t do squat to solve those problems. I have $12,000 saved up right now in savings and investments, and plan to add more. Eventually, I’d like these to build up to a stream of passive dividend income so I can worry less about how much my job pays me. Dave does admit that there are times to halt the debt snowball, but I’m not sure we’d agree on how often that should be.
Mostly, I notice that Dave’s advice tends to assume you can’t figure out how to build passive income streams in general without a financial advisor, which is patently false. I’d rather devote my money to investments that pay me for no work than save a few hundred bucks by paying my car loan down faster. It may take time, but I’d rather have doubled my monthly income in ten years than be completely debt-free.
All in all, Dave’s advice isn’t bad. It’s actually pretty good in general. But it’s worth remembering that it makes more sense for people with small debt balances ($5000-$10,000, for example, is small in my book) and folks who are older. For me, there are more pressing things to do with my money.
Post number 58.
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