Busting Debt Myths With Dave Ramsey Part II

Today we will be taking a look at some more Debt Myths with Dave Ramsey. The myths he discusses in his Total Money Makeover are so common these days that nearly everyone takes them for fact. But, once you think about it, do the math, etc… you will see that they are all foolish! Enjoy!

Myth: Car payments are a way of life. You will always have one.

Truth. The average millionaire stays away from car payments and drives a reliable used car. Hint: that is how they became a millionaire! Taking on a car payment is one of the worst things you can do financially. A car payment is most peoples largest bill each month, besides their mortgage / rent.

Dave explains it like this. The average car payment is $378 over 55 months. Once this car is paid off, most people trade it in for a new car because they “need” it. What a waste of money! If you keep this $378 car payment throughout your normal working life (which is what most people do these days), from age 25 to 65, and invest it in a good growth stock mutual fund at 12% interest, you would have $4,447,084.01 at retirement. As Dave says, “HOPE YOU LIKE THE CAR!”.

So, what should you do? If you put $378 in a cookie jar for just 10 months, you would have almost $4,000 in cash to buy a used car. Sure, you aren’t expected to drive a 4k car the rest of your life. What you do is drive this car and save more money then trade up to an $8,000 car. After only 2.5 years, you will have a 12k PAID FOR car.

Taking on car payments because everyone else does it is not smart. Will your friends laugh at you because you drive a junk car for a bit? Sure. Who cares! If you are that superficial that you care sooo much about what other people think of you, well, your issues are deeper than just finances. You have to make a decision about looking good vs. being good. Looking good is when your broke friends are impressed by what you drive. Being good is having more money than they do.

Myth: Leasing a car is what sophisticated people do. You should lease things that go down in value and take the tax advantage.

Truth. Take a moment and think about it, and you will see that leasing a car is the most expensive way to operate a vehicle. Here is why.

The average interest rate is 14%. If you lease a car with a value of $22,000 for 3 years… and when you turn it in at the end of that lease, the car is worth $10,000. Someone has to cover that loss. You know that the auto giants aren’t going to put together a plan to lose money.

According to Smart Money Magazine, the average new car purchase for cash makes the dealer an $82 profit. When the dealer can get you to finance with them, they make an average of $775 per car. But, if they can get you to lease the car, the dealer can sell it to the bank or finance company for $1,300.

Car dealers make their money in the finance office and the shop, not in the sale of cars.

Myth: You can get a good deal on a new car at 0% interest.

Truth: A new car loses 60% of its value in the first four years. That isn’t 0%!

Dave lays it out on the line, simple and clear. “You can’t afford a new car unless you are a millionaire and can therefore afford to lose thousands of dollars all in the name of the neat, new car smell.” A good used car that is less than three years old is just as reliable as a new car.

A new $28,000 car will lose about $17,000 of value in the first four years that you own it. If you calculate that out, it is nearly $100 per week in lost value. Can you afford to throw away $100 per week? Many people do, and don’t even realize it.

The average millionaire drives a two year old car with no payments - they paid cash. Some people want a new car for a warranty. $17,000 for a four year warranty? You could rebuild the car twice for that price. Insane.

Myth: You should get a credit card to build your credit.

Truth: You won’t use credit with your Total Money Makeover, except maybe for a mortgage… and you don’t need a credit card for that.

This is one of my favorite myths. This myth means you have to get debt so we can get more debt because debt is how we buy stuff. News flash - cash buys stuff better than debt! Before Dave, when I heard about this plan, I thought it was silly and could never work. Ha, talk about me being wrong!

I hear you asking now, how do I get a home mortgage without credit? Simple - find a mortgage company that does manual underwriting, which means they look at your financial past and determine if you are responsible that way, the “old fashioned” way and don’t base it off a silly FICO (aka I LOVE DEBT) score. Through the manual underwriting, you can get a mortgage if: you have paid your landlord early or on time for two years - you have been in the same career field for two years - you have a good down payment - you have no other credit, good or bad - you are not trying to take a loan that is too big. Don’t let anyone tell you to go into debt to get a mortgage. As Dave says, “that is a lie!”.

As for “building credit” for other purposes, leave that to the losers.

Myth: You need a credit card to rent a car, check into a hotel or buy online.

Truth: A debit card will do all of that. The VISA debit card linked to your checking account gives you the ability to do virtually everything the credit card can do. Think the debit card has more risk than the credit card? Wrong! VISA’s regulations require the member’s bank to offer the exact same protections from theft or fraud.

Myth: If you pay off your credit card each month, you get the free use of someone else’s money.

Truth: 60% of people don’t pay off their cards every month. Card companies put out all kinds of bait to get you to use their card: a discount at the register, airline miles, a free hat, etc. Think about it. Why do they try so hard to get you as a member? The answer is, you LOSE and they WIN. You won’t wear the hat, and consumer reports says 75% of the airline miles go unused.

Even if you do pay off your balance each month, you still lose. A study by Dunn and Bradstreet shows that users spend 12-18% more with plastic than cash. It hurts when you spend cash, therefore, you spend less.

So, what do rich people do? THEY DON’T GET RICH WITH FREE HATS, AIRLINE MILES AND THE USE OF SOMEONE ELSE’S MONEY! What do broke people do? They use credit cards. 69% of bankruptcy filers say credit cards were to blame for them filing.