Complex Numbers

A Wealth of Information

Okay, I'm going to tackle this now.

https://www.debt.org/advice/the-truth-about-dave-ramseys-baby-steps-do-they-work...

The Truth About Dave Ramsey's Baby Steps
If you're trying to eliminate credit card debt, find out how a debt management program stacks up against Dave Ramsay's "Baby Steps" approach to solving your problem.

Keep in mind I don't claim to be an expert, let alone a "guru," at this stuff. My experience comes from 30 years of reading about debt and its effects, as well as digging myself out from under it. Nor do I claim that I have no debt, but I believe what I have is "good" debt; essentially, I'm not paying any interest on it; on the contrary, the banks are paying me for the privilege of allowing me to use their cards.

If you’re smothered under an avalanche of credit card debt, radio financial guru Dave Ramsey says don’t panic – just make snowballs.

The "snowball method" is hardly unique to Ramsey. It's one of the first ideas I encountered. Explaining it here would take time (and math, and I know how some of you feel about math), but if you're interested, feel free to Google it. There's basic information at the link above. Or, well, I suppose I could provide another link  

We asked Indiana University Professor Kristoph Kleiner, an assistant professor of finance at IU’s renowned Kelley School of Business, to help us evaluate Ramsey’s "baby steps."

He doesn’t agree with all of them.

Definitely someone who is more educated in this sort of thing that I am -- however, remember that the kind of knowledge you get from becoming an assistant professor isn't necessarily the "boots on the ground" kind of knowledge.

I'll skip the bits I agree with.

Baby Step 2: Pay off All Debt Using the Debt Snowball Method

But “Here’s where I disagree,” [Kleiner] adds. “Sometimes interest rates matter. Some borrowing is very costly, like pay-day loans. If you regularly depend on pay-day loans to cover your bills, be sure to pay this debt first.”

And here's where I'm going to disagree with both of them... sort of. Sometimes we're faced with choice-paralysis: Should I use Method A, Method B, or Method C? Which one is the best? I can't get started until I know which one will work best. My response: don't over-think it. Read up and pick one and then stick to it.

Baby Step 4: Invest 15% of Your Household Income into Roth IRAs and Pre-Tax Retirement Funds

There's a lot under this heading, and I'm not going to copy/paste it all. Couple of points:

1) Always sock enough money into your 401(k) plan to get your employer match, if there is one. The stock market can be volatile, as we all know, but an employer match is an instant return on your investment. This requires some delayed gratification, which we all know I'm not good at, but ideally, this maximizes your return.

2) Those quoted returns on the S&P 500 are misleading at best; they don't take inflation into account, for one thing. I use an 8% average annual return as a baseline. Naturally, some years (like last year) will see greater returns, while others will see less, potentially even into the negative range. That's what an "average" is.

3) The psychology of investment is, I think, just as important as the raw numbers. It's one thing to know that it's theoretically possible for the stock market to lose 20, 30, even 50% in a given year; it's another thing to maintain equanimity while you're watching your hard-fought net worth plummet. A lot of people start panic-selling when this happens; they end up selling at exactly the wrong time and don't get back into it until it's already on its way up. You miss out on a lot of gains this way. The important thing to remember is this: until you sell stock, you haven't lost any money. In the past, the market has always recovered after a few months or years. And if you don't have "years" to wait, that money shouldn't be in stocks.

4) Investing in an S&P 500 index fund is, at base, great advice for people without the time, knowledge, or aptitude for selecting individual stocks. There is absolutely nothing wrong with doing that. Don't get greedy and think that someone has the Key to Success and can always beat the overall market. Even if someone does so for 3, 4, 5, whatever years in a row, there's no guarantee they'll be able to do it this year; besides, even if they could, they can start charging premium fees that eat into any potential relative gains and compound any losses. So unless you're fascinated by corporate balance sheets and have the time to do the research yourself, SPY is your friend.

5) I'm talking about investing here, not "playing the stock market." There's a difference, but I don't have the patience to explain it right now. Perhaps in a future entry. My advice there would be "don't be tempted by people who claim to have a system for beating the market; their only system involves parting your money from you." If you are in a position to care about this sort of thing, read anything Warren Buffett ever wrote, especially if it's free.

Baby Step 5: Save for Your Children’s College Fund

I'm just going to go out on a limb here and say it: if you're in debt, having kids is one of the worst things you can do financially. Time was, children were assets; they could work the farm at an early age and step in if you're incapacitated. Now, last I heard, less than 2% of the population are farmers, and for the rest of us, children are a financial drain and a liability -- and yet we continue to labor under the emotional baggage of our agricultural ancestors.

I know this opinion is going to get me pinioned; it has in the past. I recognize that there are emotional reasons to have kids, and it's problematic to say "if you're poor, don't breed." (I'm not saying that.) But at the very least, I'd suggest not thinking in terms of "I have to pay for my kids' college tuition." That shit's expensive, and not always worth the investment, not anymore.

Then they’ll be more caring care-takers of you in old age, not self-entitled narcissists skiing in the Italian Alps...

Again, there are plenty of reasons, both good and bad, to have kids; "I need someone to take care of me in my old age" ranks up there with some of the worst, most selfish, reasons I've ever encountered. "I'm going to create a life so they can ignore everything else and spoon-feed me and change my Depends." I said a while back that raising a child costs several hundred thousand dollars; if you have the discipline to save that kind of money, you can afford a caregiver when you're old, and meanwhile that money has been earning interest.

Baby Step 6: Pay off Your Home Early

Not much I can add to Kleiner's criticism here, except this: If you have a mortgage at, say, 5% fixed, and you can expect an average annual return from investments of 8% (which, over the 30 year time span of a typical mortgage, you probably can), it makes sense to keep the mortgage.

However, this decision also has an emotional component. I paid off my mortgage (4.5% if I recall correctly) early for several reasons (I almost never do anything for just one reason; this is something that I think is important to understand about me), one of them being that it kept getting sold off and ended up with a bank I hated with the all-consuming fiery passion of a thousand supernovas. Fuck you, PNC Bank, with a rusty chainsaw.

Oh, and the "tax benefits" of having a mortgage ain't what they used to be. Standard deduction has increased, and fewer homeowners itemize these days.

Baby Step 7: Build Wealth and Give

Giving is good; one doesn't have to be religious to see that. Once you reach a certain point in net worth (what the point is depends on your expenses), as long as you don't do something stupid, you can't help but make more money. The trick is making sure you don't do something stupid.

Here's the problem I see: all of these ideas can be found as free resources on the internet or in cheap personal finance books (even cheaper if you use the library). There is absolutely no reason to pay someone to tell you how to save and invest, not when you're already, presumably, drowning in debt. (Exception: if you have the urge to invest in particular companies, you'll probably have to pay, but you have to decide if the returns are worth the extra expense. For all but the richest investors, the answer is usually "no," hence the index fund advice above.) All you're doing is enriching Dave Ramsey at the expense of your own financial situation. I think the real "Baby Step 7" should read: "Market your own debt-reduction and wealth-building plan, give it a spin that targets a particular demographic, and suck money from the rubes." But that would be too honest.

I'm not saying it's fraudulent in any way, not like that "prosperity gospel" nonsense that preys on peoples' fears without giving anything tangible in return. Overall, it's pretty good advice. And obviously, I'm not going to fork over the money to take any advanced courses, so I don't know what's in them, so I'm not commenting beyond the "baby steps" here.

Bottom line: you can do it on your own. As Ramsey himself points out at the above link, "Personal finance is 20% head knowledge and 80% behavior." If you're not ready to walk the walk, no amount of information or advice will help. Again, it's a lot like losing weight; just knowing that you should be eating less calories doesn't make you a dieter.

Is Ramsey taking advantage of people? Yes, to some extent, I think so. But no more than, say, Bezos is by providing a product or service that's in demand. Still, you can probably do just fine by using free resources. As I said, the important thing is not to wait until you know what the very best plan is; the important thing is to have a plan and stick to it as best you can.

Maybe I should try to make money by selling financial advice to other cynical procrastinators like me. Nah... I'd never get around to publishing; and besides, it'll never work.