There's a saying usually applied to diet and exercise that also seems relevant here - that the best diet/exercise program by far is the one you will actually do.
I think this is off base, on much deeper grounds than optimizing a few points of interest rate. Namely, it assumes stability and minimal growth prospects, both for your personal income and the world as a whole.
In reality, people make much more money later in their life and later in their career than earlier in their career, and in many cases the growth rate involved is higher than even pretty bad loan terms. And in today's world, it looks like a singularity or radical economic transformation is particularly imminent. If you "invest 15% of your household income in retirement", this is probably equally as valuable as setting that money on fire.
I think this is off base
Sorry, is "this" here me or Ramsey?
If you "invest 15% of your household income in retirement", this is probably equally as valuable as setting that money on fire.
There are still a bunch of good reasons to put money in retirement accounts: Retirement Accounts and Short Timelines, Personal AI Planning.
If the advice spreads using social channels (is popular in certain communities), a possible fix is to have some official experts, and add a rule like "if you want to do something differently, you need to check it with the expert first". Ideally, the expert would verify your financial knowledge, and then approve of e.g. paying off the 10% debt first; maybe conditional on you providing evidence that you are actually paying off that debt.
The core issue of our time is that different rules work better for different people, and the mechanisms for communicating, let alone accommodating, this are broken or outright forbidden.
The disciplined young welder from Arkansas who watches Ramsey doesn't need Ramsey to tell him not to spend all of his money on a Disneyland vacation with his five children from three fathers. He doesn't especially want to go there, and he doesn't even have five children of questionable parentage to bring with him. If anything, he could stand to lighten up, put his salary into the Dow, and refinance his debt at a lower rate. It's a simple process that'd leave him massively better off, and he'd learn it readily if someone taught it to him.
But, are there no people out there who need to hear that bringing their five fatherless children to Disneyland with $5k in credit card debt is a bad idea? There are countless such people. So we can't say that Ramsey's advice is useless. There are millions of people who would be better off if they took it. Our young welder sees them, assumes that they could be him but for the grace of God, and attributes his having averted that fate to his regular viewing of Ramsey. He cannot imagine how different they are from him.
The crux of it is that the people who watch Ramsey are the people to whom responsibility and honor come naturally, and who would never even consider spending $200k in scammed VA benefits on fudge rounds and a subsequent quadruple bypass. The people who are spending $200k in scammed VA benefits on fudge rounds and a subsequent quadruple bypass would never even consider watching Ramsey.
It really is awful advice for a disciplined and informed person who's thoughtful with their money
does this person find themselves with expensive debt?
This post was prompted in part by conversations with a financially responsible person whose only debt was a 30y fixed mortgage below 4%. They are very religious, and their community is really bought into Ramsey, so they're working hard to pay their mortgage down as quickly as possible.
They're pretty informed: they agreed with me that the math of paying it off quickly didn't really make financial sense for them in particular, but they insisted that it was really socially valuable for their whole community to be following the Ramsey approach. I don't fully disagree with them!
1Pay off the debt with the highest interest rate first seems like simple advice that most people should be able to follow. People are too eager to believe claims about how dumb most people are. Rules about "the total value of all vehicles" seem pointless and distracting.
Pay off the debt with the highest interest rate first seems like simple advice that most people should be able to follow.
Agreed. But the argument for paying off smaller debts first isn't that comparing interest rates is confusing, it's that the experience of retiring debts is motivating and you want to get some wins sooner.
Rules about "the total value of all vehicles" seem pointless and distracting.
I think you might not be aware of how much Americans tend to put into cars and other vehicles. People commonly get themselves into situations where their car payments are on the same scale is rent.
I think you might not be aware of how much Americans tend to put into cars and other vehicles. People commonly get themselves into situations where their car payments are on the same scale is rent.
Particularly in rural area, pickup trucks and boats (eg. bass fishing boats) are a major form of intrasexual competition and showing off. (Look up the high end, or even just the average sales price, of a Ford F150 pickup truck.)
Agreed. But the argument for paying off smaller debts first, isn't that comparing interest rates is confusing, it's that the experience of retiring debts is motivating and you want to get some wins sooner.
If you are aware of how much paying off part of a debt reduces the interest you pay every year, paying off part of a high-interest debt should be more motivating then paying off part of a low-interest debt.
I'm sure there are free spreadsheet templates where you can put in all of your debts to see the total interest you pay and how much paying off a certain part reduces it. I think most people are capable of finding such a template, and if they aren't, they're still capable of using one, so it would be more helpful to point them to one then to tell them to pay off smaller debts first.
People are often pretty short-sighted, spending money today that they'll want tomorrow. Debt makes it possible to prioritize your current self even more highly: you can spend money you haven't even earned yet. This is a trap many people fall into, and one different communities have built social defenses against.
One of the more surprisingly successful approaches is the Financial Peace (Ramsey) system, popular in evangelical Christian communities. It has a series of rules, most prominently the seven baby steps:
There are many more specific rules, however, such as:
I have had several conversations over the years with Christian friends and acquaintances who are big fans of these methods, and each time I'm thinking both:
This seems like a set of rules that, overall, is likely to help the median American improve their financial situation. The advice is straightforward and accounts for how people actually behave. Bright line rules reduce decision fatigue, limit rationalization, and generally make it harder to fool yourself. A community that strictly follows this approach likely ends up much stronger financially than average.
The rules are full of bad advice.
Some specific bad advice on which the Ramsey approach is uncompromising:
If you have $10k of debt at 2% interest and $11k of debt at 10% interest, you should pay down the $10k first.
If you have any non-mortgage debt you should not contribute to retirement, even if this means passing up on a generous employer match.
If you have debt at very low interest (ex: a mortgage from 2021 at 3%) you should pay it off as fast as you can afford to, even though extremely safe investments (money market funds, treasury bills) pay higher rates (~4%).
I want to write about how terrible this is, but I can't. It really is awful advice for a disciplined and informed person who's thoughtful with their money, but that's not his audience. And it's not most people.
Still, the choice isn't between the Ramsey approach and nothing. There are other advisers out there who combine consideration of human irrationalities and failings with a better ratio of good to bad financial planning advice. The next time I'm in one of these conversations I'm going to try to hook them on Mr. Money Mustache or at least the Money Guys.
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