My wife and I have over $100,000 of debt between the both of us. That balance consists almost entirely of student loans because we had the audacity to get college degrees in the United States without having rich parents.
A bit scary to live with, right? After moving my wife’s payments from the “extended” plan to the “standard” plan, our monthly student loan expense, at a minimum, is $1200. It is a massive burden on our finances and gives us much less flexibility to switch careers or invest in ourselves. At my current, reasonably-respectable salary of about $45/hour, I have to work almost 27 hours a week just to cover our loans.
For a while, my wife and I were following the advice of Dave Ramsey, the smiling man in the picture below. He’s a financial advice guru 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 because of the “debt snowball” strategy he touts.
Ramsey hates debt, passionately. His business is built on a one-size-fits-all, seven-step financial solution to building wealth, with the aforementioned debt snowball encapsulated in step 2:
Save $1000 as a mini emergency fund
Pay off all of your non-house debt
Save a bigger emergency fund (6 months of expenses)
Begin investing 15% of your household income for retirement
Save for your kid’s college fund
Pay off your home early
Build wealth and give
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 will notice that this approach of paying off all of your debts before saving or investing anything is leaving a lot of money on the table for someone like me. That is several years of debt payments with absolutely no savings. I could probably get a down payment together for a rental property, invest in the S&P 500, get into some REIT’s, buy some shares of healthy dividend-paying blue chip stocks, or 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.
Remember when people used actual calculators?
In fairness, Dave himself has added a few grains of salt to his advice through his platform. 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 primary problem is their income, not debt. You have no leverage if your income is next to nothing, and make no mistake, $10/hour is next to nothing in 2020.
Fortunately, my household is sitting at about $100,000/year in income 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, and financial goals.
I observed this flexibility in action when we got married in 2019. Having some money set aside was essential. And the thing is, it makes more mathematical sense for us to build some passive income streams now, when we are 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 support the platform).
Hey, I have to eat too. Takes a lot of Washingtons.
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 are younger than Dave’s average reader seems to be, meaning we can leverage time better than many others, 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 just got married, just got a house, and don’t have kids. We only recently built a respectable income.
Your money grows when you invest it. Look at the metaphor! Look at it!
I would also argue that Dave’s solution is designed to be stupid-proof because he’s speaking to everyone. If you have ever worked in a restaurant or a retail environment, you know there are a lot of dumb people around, and Dave has to cover their needs, too.
So, there are a few things he says that I do not 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 so you only spend money you already 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 do not blow money constantly. Be smart to begin with and you won’t have a problem! For reference, I tend to use credit cards with consistent cash back rates and no annual fees, then pay them off with every paycheck. For me, that means a free meal with my wife 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 would argue that $1000 is not enough to cover most rainy days. Car repairs reliably cost more than $1000, as do almost anything to do with your house. Besides, if you save, you can build up a stream of passive income faster and worry less about how much your job pays. Dave admits that there are times to halt the debt snowball, but I am not sure we would agree on how often that should be.
Mostly, I notice that Dave’s advice tends to assume you need a financial advisor to build passive income which is patently false. I would rather devote my money to investments that pay me than save a few hundred bucks by paying a student loan down faster. It may take time, but I would rather double my monthly income than be completely debt-free.
All in all, Dave’s advice is not a bad starting point. It’s actually pretty good. But bear in mind 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 55.
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