Wednesday, 6 August 2008

My Thoughts on Dave Ramsey

I've been reading about Dave Ramsey, who is a financial guru. His financial advice is apparently based on the Bible and has a strong dislike for debt.

Many say that by borrowing money to invest, one can make more money because investing more money earns more than investing little money, and the only way to get more money if you don't have that money is to borrow it. Dave claims that although this is true, the added risk or leveraging to invest makes debt investing worthless. He even quotes the book of Proverbs in the Bible that claims that "the borrower is slave to the lender."

Ultimately I think risk versus return is a matter of personal preference. Each of us have different risk tolerance. Since using debt to invest is a way to increasing both potential return and risk then whether it is good for you depends on you and how much you can stomach risk. If you are a fearful, risk-averse individual who is worried about losing money and would rather settle with little money instead, debt is not for you.

Dave is against credit cards because he claims that it gives people the impression that they have infinite money. I think credit cards can indeed do that. However, credit cards have many benefits. For example, you need a credit card to buy many things over the Internet. Buying stuff online saves petrol. (Using Paypal, you can choose to debit your bank account rather than use credit card.) The credit card I use, the Coles Group Source Mastercard, has a 2-month interest free period. This means you can leave money in investments for those two periods to accumulate interest. Because I spend so little, doing this doesn't earn me much money. The main reason why I use credit card is because I don't have much money in my bank account. If I used debit card all the time, as Dave recommends, then I may spend more money than I have and be charged an overdraft fee. Dave claims that I shouldn't spend money I don't have, but what if I have no money and I need to buy necessities like petrol or food? Dave claims that you should have savings in your bank account. The problem with this is that money in currency form in your bank account does not earn interest, so money in cash form is wasted. Dave claims that personal finance is 80% behavioral and that the problem with credit cards is that users think they have infinite cash. This may be true, but having heaps of cash in your bank account also gives you the impression that you have lots of money. Many people use savings accounts from their bank accounts to save up money for a deposit on a house, and what I often see is people hesitant to buy a house because of all the risks attached to it. They then have heaps of money in their bank account, and the temptation to just withdraw cash from an ATM or spend using debt card is huge.

Apart from my credit card, I am quite anti-debt. Dave recommends that you should attack your home loan as fast as possible. I would even go so far as to say that you don't need a home. If my parents kick me out of their house then I am prepared to live in a van. What you need is a roof over your head. A van provides that. Hopefully I will never be that desperate!

Dave talks often about teaching children good financial habits. I happen to believe that by having children you are putting yourself into debt. Why is this? First we must define debt. Debt is the obligation to pay or do something. By having a child, you automatically create an obligation to pay for the child's food, clothes, and so forth. You are obliged to do this by law. Thus having a child is no different to taking out a home loan. This therefore means that because each of us has to provide for himself then all of us have a debt. Because I need to eat, pay for rent/board, etc, then it follow that I have personal necessity debt. However, this debt can be eliminated. If I save enough money and invest it all, the returns on this investment could pay for necessities and then I would truly be debt free. There is the problem is inflation, that is a change in prices of necessities, however this can be fixed with hedging.

No comments: