Dave Ramsey it or keep low interest debt

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
User avatar
Meaty
Posts: 597
Joined: Mon Jul 22, 2013 7:35 pm
Location: Texas

Dave Ramsey it or keep low interest debt

Post by Meaty » Fri May 18, 2018 4:12 pm

I have 3 debts as follows

20k car loan - 0%
38k car loan - 1.9%
226k mortgage - 3.625%

Annual income 255k
Fully funded emergency fund (6 months)

Right now I save 86k annually. Should I continue saving as is (via 401k, Roth, taxable) or save less to knock out these very low interest loans? I know the wiki advises keeping all until normal payoff but Ramsey keeps stating millionaires are made following his methods

Thanks in advance
"Discipline equals Freedom" - Jocko Willink

retiredjg
Posts: 33203
Joined: Thu Jan 10, 2008 12:56 pm

Re: Dave Ramsey it or keep low interest debt

Post by retiredjg » Fri May 18, 2018 4:23 pm

I don't think your debt is the kind that "needs" to be paid ahead of schedule. It also does not appear that debt is a problem for you - by that I mean some people have problems managing money and living within their means and are always just getting by by taking on debt they can't afford. That does not seem to be an issue for you.

I don't think it will make one bit of difference if you pay the debt off early or not. If you would get emotional satisfaction by doing that, go ahead and do it. That's worth something.

User avatar
Pajamas
Posts: 6015
Joined: Sun Jun 03, 2012 6:32 pm

Re: Dave Ramsey it or keep low interest debt

Post by Pajamas » Fri May 18, 2018 4:26 pm

No one can say with certainty which will actually be better for you financially.

Which do you think and feel will put you ahead financially, investing or paying off the loans?

If you are truly on the fence and can't decide despite all that you know about this decision from being active on Bogleheads for five years, flip a coin. :beer

User avatar
Meaty
Posts: 597
Joined: Mon Jul 22, 2013 7:35 pm
Location: Texas

Re: Dave Ramsey it or keep low interest debt

Post by Meaty » Fri May 18, 2018 4:33 pm

Thank you both. I realize it’s a heart vs brain issue. My brain says keep it as I’ll likely earn more in my accounts but heart would prefer to payoff
"Discipline equals Freedom" - Jocko Willink

anonsdca
Posts: 186
Joined: Mon Jun 01, 2015 11:47 pm

Re: Dave Ramsey it or keep low interest debt

Post by anonsdca » Fri May 18, 2018 4:33 pm

Meaty wrote:
Fri May 18, 2018 4:12 pm
I have 3 debts as follows

20k car loan - 0%
38k car loan - 1.9%
226k mortgage - 3.625%

Annual income 255k
Fully funded emergency fund (6 months)

Right now I save 86k annually. Should I continue saving as is (via 401k, Roth, taxable) or save less to knock out these very low interest loans? I know the wiki advises keeping all until normal payoff but Ramsey keeps stating millionaires are made following his methods

Thanks in advance
I think "Dave's way" ---at least about debt-- is about both good sense and mental. The mental part is driving (Gazelle like) to be debt free. You either buy into that or just do what you think is best. If you don't buy into Dave's way, that is OK, but you will likely payoff your cars and at some point down the line get more debt to buy new cars. Dave's way, just payoff that debt and never go into debt again. I think with your salary and reading here you will be fine, but just wanted to point out the mental and philosophical point of Dave (as I see it) when it comes to debt.

teddytimtam
Posts: 73
Joined: Mon Jan 01, 2018 9:35 pm

Re: Dave Ramsey it or keep low interest debt

Post by teddytimtam » Fri May 18, 2018 4:40 pm

I would pay off both car loans today. Like Ramsey says, the borrower is slave to the lender.

It's more of an emotional feeling that you don't owe any money to anyone or bank (besides mortgage). Many people that are math "geniuses" do not ever account for this and always think about rate of returns vs low interest debt.

Look at it this way... if you had both car loans paid for ($58k), would you go BORROW $58k just to invest it? Even worse, would you go borrow $58k just to finance another vehicle?

User avatar
Pajamas
Posts: 6015
Joined: Sun Jun 03, 2012 6:32 pm

Re: Dave Ramsey it or keep low interest debt

Post by Pajamas » Fri May 18, 2018 4:45 pm

Meaty wrote:
Fri May 18, 2018 4:33 pm
Thank you both. I realize it’s a heart vs brain issue. My brain says keep it as I’ll likely earn more in my accounts but heart would prefer to payoff
Well, you can always decide to pay off the loans later but you can't un-pay them off once you have paid them off.
teddytimtam wrote:
Fri May 18, 2018 4:40 pm
Look at it this way... if you had both car loans paid for ($58k), would you go BORROW $58k just to invest it? Even worse, would you go borrow $58k just to finance another vehicle?
Personally, I would borrow $20k at 0% interest to invest. I would borrow more than that if it were offered. (I do use a small amount of margin already.) It would be difficult not to come out ahead on that, even without taking on much risk.

nolesrule
Posts: 644
Joined: Thu Feb 26, 2015 10:59 am

Re: Dave Ramsey it or keep low interest debt

Post by nolesrule » Fri May 18, 2018 4:48 pm

teddytimtam wrote:
Fri May 18, 2018 4:40 pm


Look at it this way... if you had both car loans paid for ($58k), would you go BORROW $58k just to invest it? Even worse, would you go borrow $58k just to finance another vehicle?
The question isn't about financing another vehicle, but paying off a loan vs. investing.

I'm not the OP, but at 1.24% weighted APR between the 2 loans, I earn 30% more in my savings account. So yeah, I'd borrow $58k at 1.24%.

retiredjg
Posts: 33203
Joined: Thu Jan 10, 2008 12:56 pm

Re: Dave Ramsey it or keep low interest debt

Post by retiredjg » Fri May 18, 2018 4:51 pm

Meaty wrote:
Fri May 18, 2018 4:33 pm
.... but heart would prefer to payoff
That's the answer then.

User avatar
Pajamas
Posts: 6015
Joined: Sun Jun 03, 2012 6:32 pm

Re: Dave Ramsey it or keep low interest debt

Post by Pajamas » Fri May 18, 2018 5:06 pm

retiredjg wrote:
Fri May 18, 2018 4:51 pm
Meaty wrote:
Fri May 18, 2018 4:33 pm
.... but heart would prefer to payoff
That's the answer then.
Why should he decide by emotion instead of reason?

User avatar
Clever_Username
Posts: 1040
Joined: Sun Jul 15, 2012 12:24 am
Location: Southern California

Re: Dave Ramsey it or keep low interest debt

Post by Clever_Username » Fri May 18, 2018 5:09 pm

Meaty wrote:
Fri May 18, 2018 4:12 pm
Ramsey keeps stating millionaires are made following his methods
Millionaires are also made by playing the lottery. Yes, Ramsey is a sounder financial plan than the lottery, but just because millionaires are made following his methods doesn't make his methods optimal.

If I had your debt load, I'd keep them. I'd also be willing to borrow with my car as collateral at the rate of your auto loan in order to invest; I'd similarly be willing to pull equity out of my house at the rate of your home loan in order to invest. But that's me.

For you, it should come down to whether you'd like to eliminate the debt -- one less thing to worry about, one less bill to pay, that sort of thing. Mathematically, you're probably better off investing instead of paying down the debt aggressively. I would be especially worried about prepaying the mortgage, as it's a super low rate, probably deductible, and paying it down would make your effective networth that much less diversified.
"What was true then is true now. Have a plan. Stick to it." -- XXXX, _Layer Cake_

Spirit Rider
Posts: 8338
Joined: Fri Mar 02, 2007 2:39 pm

Re: Dave Ramsey it or keep low interest debt

Post by Spirit Rider » Fri May 18, 2018 5:15 pm

Meaty wrote:
Fri May 18, 2018 4:12 pm
20k car loan - 0%
38k car loan - 1.9%
226k mortgage - 3.625%

Annual income 255k, Fully funded emergency fund (6 months)

Right now I save 86k annually. Should I continue saving as is (via 401k, Roth, taxable) or save less to knock out these very low interest loans? I know the wiki advises keeping all until normal payoff but Ramsey keeps stating millionaires are made following his methods
You need to understand DR's target audience and the fact that he is an absolutest with no capacity for rational discourse. It is his way or the highway. The fundamental fact is that debt is a financial tool like many other tools. DR, Mr. Money Mustache and some Bogleheads use pure emotion instead analyzing the right tool for the right job.

I prefer to look at such things analytically with an eye on behavioral issues. There is a view that you should never finance a depreciating asset. I do not hold that view if the interest rate is very low. However, there is a behavorial caution that very low interest rates causes people to spend more on vehicles than they otherwise would if they were paying cash. I am sympathetic to that and view your $58K of vehicle debt as excessive.

Even though I paid off my mortgage early, it was at 5.24%. At 3.625 I am ambivalent about paying it down. With the Fed projecting two more rate increases this year and 2-3 next year, it is starting to look better and better as an inflation hedge.

Personally, I would take the following middle ground:
  • Continue to pay off the 0% car loan on schedule.
  • Make double payments on the 1.9% car loan to reduce that debt quicker. Make a pledge to never having more vehicle debt than 20% of your income no matter what the interest rate.
  • Consider a payment schedule to knock off your mortgage 5, 10 or 15 years sooner (depending on the term of course).
  • None of these steps should be taken if it results in less tax advantaged plan contributions.

thangngo
Posts: 1128
Joined: Sun Feb 26, 2017 2:08 pm

Re: Dave Ramsey it or keep low interest debt

Post by thangngo » Fri May 18, 2018 5:17 pm

Meaty wrote:
Fri May 18, 2018 4:12 pm
I have 3 debts as follows

20k car loan - 0%
38k car loan - 1.9%
226k mortgage - 3.625%

Annual income 255k
Fully funded emergency fund (6 months)

Right now I save 86k annually. Should I continue saving as is (via 401k, Roth, taxable) or save less to knock out these very low interest loans? I know the wiki advises keeping all until normal payoff but Ramsey keeps stating millionaires are made following his methods

Thanks in advance
Just remember, when [stuff --admin LadyGeek] hits the fan, the person who has high leverage (more debt) stands to lose the most.

20k car loan at 0%: keep it.
38k car loan at 1.9%: keep it. you'll get risk-free interest income around that rate soon enough.
226k mortgage - 3.625%: come up with a plan to accelerate principal payment.

Also, what matters more is that try not to add more to your debt. As long as you continue to save 86k or more annually, you'll do fine.

retiredjg
Posts: 33203
Joined: Thu Jan 10, 2008 12:56 pm

Re: Dave Ramsey it or keep low interest debt

Post by retiredjg » Fri May 18, 2018 5:18 pm

Pajamas wrote:
Fri May 18, 2018 5:06 pm
retiredjg wrote:
Fri May 18, 2018 4:51 pm
Meaty wrote:
Fri May 18, 2018 4:33 pm
.... but heart would prefer to payoff
That's the answer then.
Why should he decide by emotion instead of reason?
Because financially it will not matter, but emotionally it apparently does matter. Why keep an emotional burden when there no quality of life benefit to be gained on the other end?

User avatar
Pajamas
Posts: 6015
Joined: Sun Jun 03, 2012 6:32 pm

Re: Dave Ramsey it or keep low interest debt

Post by Pajamas » Fri May 18, 2018 5:20 pm

retiredjg wrote:
Fri May 18, 2018 5:18 pm
Because financially it will not matter, but emotionally it apparently does matter. Why keep an emotional burden when there no quality of life benefit to be gained on the other end?
If it didn't matter financially, then why would he even be struggling with making a decision?

Meaty, does it matter to you financially? If not, then the decision is obvious.

BradJ
Posts: 201
Joined: Sun Jan 21, 2018 6:06 pm

Re: Dave Ramsey it or keep low interest debt

Post by BradJ » Fri May 18, 2018 5:22 pm

When in doubt, aim for the middle- pay one car loan (the more expensive) and call it a day.

Now, if it were up to me, I would pay off the cars. I’ve been debt free for about 3 years now and I find it liberating.

User avatar
whodidntante
Posts: 3712
Joined: Thu Jan 21, 2016 11:11 pm

Re: Dave Ramsey it or keep low interest debt

Post by whodidntante » Fri May 18, 2018 5:26 pm

I would keep the low interest debt, and lose the Dave Ramsey.

User avatar
Meaty
Posts: 597
Joined: Mon Jul 22, 2013 7:35 pm
Location: Texas

Re: Dave Ramsey it or keep low interest debt

Post by Meaty » Fri May 18, 2018 5:36 pm

Thanks for all the great responses. I knew I could count on this community to help me think through this from all angles. I think I’ll keep and payoff as scheduled; especially given my online banking account pays more than the weighted APR of the cars

I’ll also ensure I never borrow money again. That should satisfy both my intellectual and emotional sides

Thanks again
"Discipline equals Freedom" - Jocko Willink

retiredjg
Posts: 33203
Joined: Thu Jan 10, 2008 12:56 pm

Re: Dave Ramsey it or keep low interest debt

Post by retiredjg » Fri May 18, 2018 5:51 pm

Sounds like a win - win.

Grt2bOutdoors
Posts: 18833
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Dave Ramsey it or keep low interest debt

Post by Grt2bOutdoors » Fri May 18, 2018 5:53 pm

Millionaires are made by paying off debt? Yes and no. Look at the audience he is targeting, folks who don’t have a budget or discipline, when money touches their hands it goes through them like a sieve. Yes, those folks ought to pay off their debts, otherwise they won’t be able to save a dime since they are always paying the piper. You don’t have that problem- you are already saving $86k each year. Ironic isn’t it? Look at your interest rates, compare that to the 12% he claims he’s earning on his investments- with a net spread like that what do you think Dave would do in your shoes? Pass up a 9% return after costs? Keep investing - you will come out ahead.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

retiredjg
Posts: 33203
Joined: Thu Jan 10, 2008 12:56 pm

Re: Dave Ramsey it or keep low interest debt

Post by retiredjg » Fri May 18, 2018 5:54 pm

Pajamas wrote:
Fri May 18, 2018 5:20 pm
If it didn't matter financially, then why would he even be struggling with making a decision?
I think people sometimes don't know what they think until they ask others for an opinion and then realize "I knew what I thought all along, but did not know it!"

Olemiss540
Posts: 514
Joined: Fri Aug 18, 2017 8:46 pm

Re: Dave Ramsey it or keep low interest debt

Post by Olemiss540 » Fri May 18, 2018 6:09 pm

nolesrule wrote:
Fri May 18, 2018 4:48 pm
teddytimtam wrote:
Fri May 18, 2018 4:40 pm


Look at it this way... if you had both car loans paid for ($58k), would you go BORROW $58k just to invest it? Even worse, would you go borrow $58k just to finance another vehicle?
The question isn't about financing another vehicle, but paying off a loan vs. investing.

I'm not the OP, but at 1.24% weighted APR between the 2 loans, I earn 30% more in my savings account. So yeah, I'd borrow $58k at 1.24%.
Weighted APR? If I had 5K in credit card debt and a 40k 0% car loan would I keep the credit card debt because my weighted APR is low? Did you just make up a financial calculation to prove a point?

OP,

You decision seems reasonable, and it seems you will be FI regardless of what you decide with these loans. I would pay them off, but DR turned me into a bit of a cashflow nut.
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.

bltn
Posts: 144
Joined: Mon Feb 20, 2017 9:32 pm

Re: Dave Ramsey it or keep low interest debt

Post by bltn » Fri May 18, 2018 6:51 pm

I would make the emotional and mental leap to pay off the cars now. And make a promose to my self to pay cash for cars in the future. You re on the right track thinking to never make a car loan in the future, but until you cement that feeling with an action, it may not last.
As for 0% and 1% car loans, how are those obtained?
By Paying more than cash buyers for your car. And paying more than buyers with a routine interest rate.
The tiny bit of money you ll make by safely investing the payoff money over the next couple of years is a small sacrifice for changing your behavior right now.
While I don t agree with some of Dave Ramsey s recommendations, I do believe an early commitment to avoiding consumer debt will increase your chances of becoming wealthy.

teddytimtam
Posts: 73
Joined: Mon Jan 01, 2018 9:35 pm

Re: Dave Ramsey it or keep low interest debt

Post by teddytimtam » Fri May 18, 2018 7:18 pm

nolesrule wrote:
Fri May 18, 2018 4:48 pm
teddytimtam wrote:
Fri May 18, 2018 4:40 pm


Look at it this way... if you had both car loans paid for ($58k), would you go BORROW $58k just to invest it? Even worse, would you go borrow $58k just to finance another vehicle?
The question isn't about financing another vehicle, but paying off a loan vs. investing.

I'm not the OP, but at 1.24% weighted APR between the 2 loans, I earn 30% more in my savings account. So yeah, I'd borrow $58k at 1.24%.

Why would you borrow $58k at 1.24% to invest in a 2% savings or money market? Or even invest it in index funds, say Total Market. Why not saving up the money you earn and use that as investments? Because at the end of the day, it's all yours and not the banks.

There is a reason why banks have nicer furniture than we do in our homes.

nolesrule
Posts: 644
Joined: Thu Feb 26, 2015 10:59 am

Re: Dave Ramsey it or keep low interest debt

Post by nolesrule » Fri May 18, 2018 7:55 pm

Olemiss540 wrote:
Fri May 18, 2018 6:09 pm
nolesrule wrote:
Fri May 18, 2018 4:48 pm
teddytimtam wrote:
Fri May 18, 2018 4:40 pm


Look at it this way... if you had both car loans paid for ($58k), would you go BORROW $58k just to invest it? Even worse, would you go borrow $58k just to finance another vehicle?
The question isn't about financing another vehicle, but paying off a loan vs. investing.

I'm not the OP, but at 1.24% weighted APR between the 2 loans, I earn 30% more in my savings account. So yeah, I'd borrow $58k at 1.24%.
Weighted APR? If I had 5K in credit card debt and a 40k 0% car loan would I keep the credit card debt because my weighted APR is low? Did you just make up a financial calculation to prove a point?

OP,

You decision seems reasonable, and it seems you will be FI regardless of what you decide with these loans. I would pay them off, but DR turned me into a bit of a cashflow nut.
Only because even the 1.9% rate is relatively low itself. I was responding to someone specifically talking about the 2 car loans. If the spread on the interest rates was higher, I'd consider them separately.

Besides, it's a loan, you're still going to be making payments that will end eventually. Credit card minimum payments are different in regards to making the minimum payment and eventual payoff.

User avatar
stemikger
Posts: 4844
Joined: Thu Apr 08, 2010 5:02 am

Re: Dave Ramsey it or keep low interest debt

Post by stemikger » Fri May 18, 2018 8:00 pm

Meaty wrote:
Fri May 18, 2018 4:12 pm
I have 3 debts as follows

20k car loan - 0%
38k car loan - 1.9%
226k mortgage - 3.625%

Annual income 255k
Fully funded emergency fund (6 months)

Right now I save 86k annually. Should I continue saving as is (via 401k, Roth, taxable) or save less to knock out these very low interest loans? I know the wiki advises keeping all until normal payoff but Ramsey keeps stating millionaires are made following his methods

Thanks in advance
I think you should David Bach it. In the book The Automatic Millionaire, David Bach has you grow yourself out of debt and saving for your retirement at the same time. It doesn't have to me an All or Nothing approach like Dave Ramsey suggests. IMHO The Automatic Millionaire is so much better than The Total Money Makeover. Also, David Bach invests like a Boglehead, Dave Ramsey does not.
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!

User avatar
Meaty
Posts: 597
Joined: Mon Jul 22, 2013 7:35 pm
Location: Texas

Re: Dave Ramsey it or keep low interest debt

Post by Meaty » Fri May 18, 2018 8:03 pm

stemikger wrote:
Fri May 18, 2018 8:00 pm
Meaty wrote:
Fri May 18, 2018 4:12 pm
I have 3 debts as follows

20k car loan - 0%
38k car loan - 1.9%
226k mortgage - 3.625%

Annual income 255k
Fully funded emergency fund (6 months)

Right now I save 86k annually. Should I continue saving as is (via 401k, Roth, taxable) or save less to knock out these very low interest loans? I know the wiki advises keeping all until normal payoff but Ramsey keeps stating millionaires are made following his methods

Thanks in advance
I think you should David Bach it. In the book The Automatic Millionaire, David Bach has you grow yourself out of debt and saving for your retirement at the same time. It doesn't have to me an All or Nothing approach like Dave Ramsey suggests. IMHO The Automatic Millionaire is so much better than The Total Money Makeover. Also, David Bach invests like a Boglehead, Dave Ramsey does not.
Thanks. I haven’t heard of him so I’ll check it out
"Discipline equals Freedom" - Jocko Willink

pennylane
Posts: 74
Joined: Thu Apr 12, 2018 10:22 am

Re: Dave Ramsey it or keep low interest debt

Post by pennylane » Fri May 18, 2018 8:06 pm

Do people actually take DR seriously? 🙄

nolesrule
Posts: 644
Joined: Thu Feb 26, 2015 10:59 am

Re: Dave Ramsey it or keep low interest debt

Post by nolesrule » Fri May 18, 2018 8:09 pm

teddytimtam wrote:
Fri May 18, 2018 7:18 pm
nolesrule wrote:
Fri May 18, 2018 4:48 pm
teddytimtam wrote:
Fri May 18, 2018 4:40 pm


Look at it this way... if you had both car loans paid for ($58k), would you go BORROW $58k just to invest it? Even worse, would you go borrow $58k just to finance another vehicle?
The question isn't about financing another vehicle, but paying off a loan vs. investing.

I'm not the OP, but at 1.24% weighted APR between the 2 loans, I earn 30% more in my savings account. So yeah, I'd borrow $58k at 1.24%.

Why would you borrow $58k at 1.24% to invest in a 2% savings or money market? Or even invest it in index funds, say Total Market. Why not saving up the money you earn and use that as investments? Because at the end of the day, it's all yours and not the banks.

There is a reason why banks have nicer furniture than we do in our homes.
I'm not so sure about banks having nicer furniture, but ok.

I don't care who holds a lien on something (they don't own it, they just have claim in the event of non-payment) temporarily if I can earn more holding onto my cash longer. I was comparing the interest rates to the bank account solely as a reason not to accelerate the paydown. You have 4 things you can do with money:

1) spend it
2) pay down debt
3) save it
4) invest it

#3 actually has a better return than #2 with the same risk in this scenario. The reason being is the lien isn't removed until payoff is complete, so you are at risk of repossession until that point. If you put the money in the bank at a higher interest rate, you get a better return while not locking the money into the loan paydown. But you still have the money to pay it down or off... in the bank, earning more interest than what you'd save in interest incurred paying down the loan.

That said, at the interest rates we're talking about, I'd still choose to invest over paying down or simply saving it. I do it with my 3.125% mortgage.

anonsdca
Posts: 186
Joined: Mon Jun 01, 2015 11:47 pm

Re: Dave Ramsey it or keep low interest debt

Post by anonsdca » Fri May 18, 2018 8:12 pm

pennylane wrote:
Fri May 18, 2018 8:06 pm
Do people actually take DR seriously? 🙄
Uh, yeah...

Live below your means
Get out of debt
Max retirement accounts
Save for kids college
Give

Probably most of the people here do that. That is his main push.

pennylane
Posts: 74
Joined: Thu Apr 12, 2018 10:22 am

Re: Dave Ramsey it or keep low interest debt

Post by pennylane » Fri May 18, 2018 8:15 pm

anonsdca wrote:
Fri May 18, 2018 8:12 pm
pennylane wrote:
Fri May 18, 2018 8:06 pm
Do people actually take DR seriously? 🙄
Uh, yeah...

Live below your means
Get out of debt
Max retirement accounts
Save for kids college
Give

Probably most of the people here do that. That is his main push.
DR comes off very arrogant, very annoying to listen to.

retiredjg
Posts: 33203
Joined: Thu Jan 10, 2008 12:56 pm

Re: Dave Ramsey it or keep low interest debt

Post by retiredjg » Fri May 18, 2018 8:15 pm

pennylane wrote:
Fri May 18, 2018 8:06 pm
Do people actually take DR seriously? 🙄
I think many people here think DR is great for helping people get out of monstrous debt. Maybe one of the best.

But I think most would not have great things to say for DR's investment advice.

PharmerBrown
Posts: 55
Joined: Sat Mar 08, 2014 7:50 pm
Location: Pennsylvania

Re: Dave Ramsey it or keep low interest debt

Post by PharmerBrown » Fri May 18, 2018 8:21 pm

thangngo wrote:
Fri May 18, 2018 5:17 pm
Meaty wrote:
Fri May 18, 2018 4:12 pm
I have 3 debts as follows

20k car loan - 0%
38k car loan - 1.9%
226k mortgage - 3.625%

Annual income 255k
Fully funded emergency fund (6 months)

Right now I save 86k annually. Should I continue saving as is (via 401k, Roth, taxable) or save less to knock out these very low interest loans? I know the wiki advises keeping all until normal payoff but Ramsey keeps stating millionaires are made following his methods

Thanks in advance
Just remember, when [stuff --admin LadyGeek] hits the fan, the person who has high leverage (more debt) stands to lose the most.

20k car loan at 0%: keep it.
38k car loan at 1.9%: keep it. you'll get risk-free interest income around that rate soon enough.
226k mortgage - 3.625%: come up with a plan to accelerate principal payment.

Also, what matters more is that try not to add more to your debt. As long as you continue to save 86k or more annually, you'll do fine.
Actually, I'd much rather have the liquidity and the loans in that situation.

GodelianKnot
Posts: 65
Joined: Tue Mar 11, 2014 11:32 am

Re: Dave Ramsey it or keep low interest debt

Post by GodelianKnot » Fri May 18, 2018 8:23 pm

teddytimtam wrote:
Fri May 18, 2018 7:18 pm
Why would you borrow $58k at 1.24% to invest in a 2% savings or money market? Or even invest it in index funds, say Total Market. Why not saving up the money you earn and use that as investments? Because at the end of the day, it's all yours and not the banks.

There is a reason why banks have nicer furniture than we do in our homes.
Why wouldn't you borrow money at a lower rate than you can re-invest it (net of taxes)? This is exactly how banks make a lot of money. It's free money.

Grt2bOutdoors
Posts: 18833
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Dave Ramsey it or keep low interest debt

Post by Grt2bOutdoors » Fri May 18, 2018 8:28 pm

teddytimtam wrote:
Fri May 18, 2018 7:18 pm
nolesrule wrote:
Fri May 18, 2018 4:48 pm
teddytimtam wrote:
Fri May 18, 2018 4:40 pm


Look at it this way... if you had both car loans paid for ($58k), would you go BORROW $58k just to invest it? Even worse, would you go borrow $58k just to finance another vehicle?
The question isn't about financing another vehicle, but paying off a loan vs. investing.

I'm not the OP, but at 1.24% weighted APR between the 2 loans, I earn 30% more in my savings account. So yeah, I'd borrow $58k at 1.24%.

Why would you borrow $58k at 1.24% to invest in a 2% savings or money market? Or even invest it in index funds, say Total Market. Why not saving up the money you earn and use that as investments? Because at the end of the day, it's all yours and not the banks.

There is a reason why banks have nicer furniture than we do in our homes.
Banks have nicer furniture because they take risks and in return for that are generally compensated for it. It does help when ones cost of funding is much less than the rate charged to customers and you have large volume of clients. The power of operating leverage is huge.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Grt2bOutdoors
Posts: 18833
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Dave Ramsey it or keep low interest debt

Post by Grt2bOutdoors » Fri May 18, 2018 8:35 pm

pennylane wrote:
Fri May 18, 2018 8:06 pm
Do people actually take DR seriously? 🙄
Yes, listen to his show, his opening line: “where cash is king, debt is dumb, the paid off home mortgage has taken the place of the BMW as the status symbol of choice”. He has a segment on show where individuals proclaim they’ve paid off X amount of debt in Y number of months on a salary of Z. After some talking back and forth Q & A style, he’ll say “well done”, then give them an opportunity to do a debt-free scream, the guests will scream out “We are Debt Free!!”. Think about it, most folks who are broke want to be free of the bondage, here’s a guy who has people screaming on his show that they’ve gotten rid of the debt burden by following his formula. His Financial Peace University classes are popular as are his books and seminars.
Last edited by Grt2bOutdoors on Fri May 18, 2018 8:39 pm, edited 1 time in total.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

ThePrince
Posts: 312
Joined: Sun Aug 20, 2017 9:15 pm
Location: U.S.A.

Re: Dave Ramsey it or keep low interest debt

Post by ThePrince » Fri May 18, 2018 8:37 pm

Meaty wrote:
Fri May 18, 2018 4:12 pm
I have 3 debts as follows

20k car loan - 0%
38k car loan - 1.9%
226k mortgage - 3.625%

Annual income 255k
Fully funded emergency fund (6 months)

Right now I save 86k annually. Should I continue saving as is (via 401k, Roth, taxable) or save less to knock out these very low interest loans? I know the wiki advises keeping all until normal payoff but Ramsey keeps stating millionaires are made following his methods

Thanks in advance
It’s not a pet or a trinket that sits on the mantle. Pay the debt off.

Grt2bOutdoors
Posts: 18833
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Dave Ramsey it or keep low interest debt

Post by Grt2bOutdoors » Fri May 18, 2018 8:37 pm

retiredjg wrote:
Fri May 18, 2018 8:15 pm
pennylane wrote:
Fri May 18, 2018 8:06 pm
Do people actually take DR seriously? 🙄
I think many people here think DR is great for helping people get out of monstrous debt. Maybe one of the best.

But I think most would not have great things to say for DR's investment advice.
What you mean you haven’t spoken to a SmartVestor pro who has the “heart of a teacher”? :wink:
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

TX_Drew
Posts: 33
Joined: Wed May 16, 2018 11:37 am

Re: Dave Ramsey it or keep low interest debt

Post by TX_Drew » Fri May 18, 2018 8:38 pm

I would pay off the car loans. In my opinion, it’s not APR vs. potential gains. To me it’s how you view spending. Anyone can finance cars for zero percent. But would you spend the same amount if you wrote a 58k check vs. paying monthly? Most people spend more immediately if they finance vs. cutting the check; that’s why auto loans are what they are. There is less pain involved in the purchase.

You enjoy investing, clearly. Would you spend the 58k if it took from your investing? The difference in percentages really doesn’t matter, but the difference in spending will matter.

ThePrince
Posts: 312
Joined: Sun Aug 20, 2017 9:15 pm
Location: U.S.A.

Re: Dave Ramsey it or keep low interest debt

Post by ThePrince » Fri May 18, 2018 8:53 pm

pennylane wrote:
Fri May 18, 2018 8:06 pm
Do people actually take DR seriously? 🙄
Many here, including myself, take Dave Ramsey seriously. Your question, not so much.

venkman
Posts: 629
Joined: Tue Mar 14, 2017 10:33 pm

Re: Dave Ramsey it or keep low interest debt

Post by venkman » Fri May 18, 2018 9:01 pm

Meaty wrote:
Fri May 18, 2018 4:12 pm
I know the wiki advises keeping all until normal payoff but Ramsey keeps stating millionaires are made following his methods.
Yeah, but he never mentions that the millionaires are him and the advisors who send him kickbacks for his endorsement. :happy

User avatar
randomizer
Posts: 1326
Joined: Sun Jul 06, 2014 3:46 pm

Re: Dave Ramsey it or keep low interest debt

Post by randomizer » Fri May 18, 2018 9:07 pm

Meaty wrote:
Fri May 18, 2018 4:12 pm
Right now I save 86k annually. Should I continue saving as is (via 401k, Roth, taxable) or save less to knock out these very low interest loans?
I wouldn't race to kill off the car loans. I wouldn't even race to kill off the mortgage to be honest, although there's not enough info in your post to be sure (term left on the loan, equity so far, what % of your net worth you have in the house, is the loan fixed or variable etc).
75:25 — HODL the course!

Nate79
Posts: 3012
Joined: Thu Aug 11, 2016 6:24 pm
Location: Portland, OR

Re: Dave Ramsey it or keep low interest debt

Post by Nate79 » Fri May 18, 2018 11:35 pm

Why do you have the debt? It's so small compared to your income it has very little impact on your life or return as long as you have the income. I would pay off the consumer debt. Having no consumer debt is risk reduction for when bad things happen. It is also behavioral to help prevent lifestyle creep.

Jags4186
Posts: 2255
Joined: Wed Jun 18, 2014 7:12 pm

Re: Dave Ramsey it or keep low interest debt

Post by Jags4186 » Fri May 18, 2018 11:47 pm

As others have posted borrowing money for things like cars puts you in the payment trap. What’s another $50/mo..? However if you decide your budget, stick to your budget and then get offered 0% then you should consider taking it. After all a 5 year 0% loan can be off set with a 5 year 3.2% CD. In your situation I’d probably kill the 1.9% loan but hang onto the 0%.

Stormbringer
Posts: 545
Joined: Sun Jun 14, 2015 7:07 am

Re: Dave Ramsey it or keep low interest debt

Post by Stormbringer » Sat May 19, 2018 6:15 am

Meaty wrote:
Fri May 18, 2018 4:12 pm
20k car loan - 0%
38k car loan - 1.9%
226k mortgage - 3.625%

Annual income 255k
Fully funded emergency fund (6 months)
Well, those care loans are at negative real interest rates, so mathematically speaking I wouldn't be in a hurry to pay them off. If you had the cash to pay them off, you could put it in a 3-year CD and get 2.9%.

My main concern going forward is the car debt treadmill. By the time you pay off that $58K you will be looking to borrow another $50-60K+ to buy new ones and that can become a perpetual cycle. Future iterations are likely to be at higher interest rates. I'd recommend that you drive those cars a few years after they've been paid off, and during that time save up the cash to buy the next ones. You may be surprised how paying cash changes your decision-making process vs. buying something with borrowed money.
"Compound interest is the most powerful force in the universe." - Albert Einstein

mortfree
Posts: 1127
Joined: Mon Sep 12, 2016 7:06 pm

Re: Dave Ramsey it or keep low interest debt

Post by mortfree » Sat May 19, 2018 6:30 am

Meaty wrote:
Fri May 18, 2018 5:36 pm
Thanks for all the great responses. I knew I could count on this community to help me think through this from all angles. I think I’ll keep and payoff as scheduled; especially given my online banking account pays more than the weighted APR of the cars

I’ll also ensure I never borrow money again. That should satisfy both my intellectual and emotional sides

Thanks again
With your income and savings i would probably keep both car loans too.

However maybe you just want to start paying 1000 per month on the 20k car loan.

That would feel productive and not too drastic as paying one or both car loans off in one fell swoop.

My 1 cent value of thoughts.

petulant
Posts: 305
Joined: Thu Sep 22, 2016 1:09 pm

Re: Dave Ramsey it or keep low interest debt

Post by petulant » Sat May 19, 2018 7:12 am

Here's a middle ground that hasn't been considered: take the savings each month that you would be putting in taxable, and put that on the principal on the car loans instead. You'll pay off the debts faster and you won't compromise much of the saving, especially the tax-advantaged saving, and you won't have any capital gains.

User avatar
3CT_Paddler
Posts: 3221
Joined: Wed Feb 04, 2009 5:28 pm
Location: Marietta, GA

Re: Dave Ramsey it or keep low interest debt

Post by 3CT_Paddler » Sat May 19, 2018 7:26 am

Meaty wrote:
Fri May 18, 2018 4:12 pm
I have 3 debts as follows

20k car loan - 0%
38k car loan - 1.9%
226k mortgage - 3.625%

Annual income 255k
Fully funded emergency fund (6 months)

Right now I save 86k annually. Should I continue saving as is (via 401k, Roth, taxable) or save less to knock out these very low interest loans? I know the wiki advises keeping all until normal payoff but Ramsey keeps stating millionaires are made following his methods

Thanks in advance
Change the terms and see what your answer is...

I have $58k in credit card debt with an effective rate of 1%. What should I do?

I would pay it off, and in the future I would pay cash for cars. What happens if you lose your job?

beth65
Posts: 64
Joined: Mon May 08, 2017 1:51 pm

Re: Dave Ramsey it or keep low interest debt

Post by beth65 » Sat May 19, 2018 7:44 am

Debt can absolutely be used strategically, and shouldn’t always be looked at as a burden if it’s low-interest debt, managed responsibly and IF the money not used to pay off the debt is used for investment or other ways to minimize higher interest debt or to grow emergency funds. Read the book http://www.thevalueofdebt.com

Companies leverage debt in many ways, so we don’t have to view it as an absolute evil. I would rather have low interest debt that I COULD pay off, with payments on auto payment, and have more money in my pocket than to pay off all debts but have almost nothing left. Compound interest is important, and the later you start investing, even if you put more towards investing, the less you will net than if you have invested all along.

indexonlyplease
Posts: 1141
Joined: Thu Apr 30, 2015 12:30 pm
Location: Pembroke Pines, FL

Re: Dave Ramsey it or keep low interest debt

Post by indexonlyplease » Sat May 19, 2018 7:53 am

Hard to believe any Boglehead would keep any of nterest payments when they don’t have too. We talk about low index ers then say it’s ok to pay interest.

You should payoff car as fast as possible. Then payoff the house with at least 15 yr. mortgage.

With your salary I don’t understand why someone would have a car loan. Paying cash is the goal unless your cars are to expensive.

I also believe you can do this while maxing out your investment

Post Reply