Frugal Babe

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Dave Ramsey Wisdom?

March 9, 2007 By Frugal Babe

While we were in AZ with my in laws, we listened to Dave Ramsey almost every day when we were in the car.   I’m an athiest, so Dave Ramsey’s Christian money management advice  has never been top of my list, but most of his money advice seems to be good common sense.   However, I was suprised by the advice he gave one caller.   The man was about to get married, but didn’t say (and wasn’t asked) how old he was.    He said that he owned a house valued at $500,000 – and that he owed $105,000 on the mortgage.   He also said that he had an IRA and 401k, aswell as $55,000 in stocks outside of retirement plans.   His question to Dave was whether he should sell his stocks and use the money to pay down his mortgage.  

Dave pointed out that if he only owed $50,000 on his house, he wouldn’t take an extra $55,000 loan on the house and invest the money in the stock market.   So his advice was that the caller should sell his stocks and put the $55k towards his mortgage.   This seemed a bit odd, especially since he didn’t ask how old the caller was, or what his interest rate is on his mortgage.   Since the guy is obviously doing ok financially, he doesn’t seem to be in a spot where he needs to sell off his stocks (historically the highest return investment you can have) to pay down a mortgage.   Since interest rates have been low for several years now, chances are good that the guy’s interest rate was 6% or lower – someone with that much home equity, aswell as stocks and retirement plans, probably has a  high enough credit score to have refinanced in the last few years.

I thought Dave missed the mark on this one.   If the caller were to leave his $55k in the stock market long term, he would have a good chance of making a 9% or 10% return on the money.   But if he uses it to pay down a mortgage, his effective return is only the interest rate on the mortgage, which is likely quite a bit lower than 9%.  

 

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