Financial Knowledge All Adults Should Know?

[kyphysics]

But how do those generate compound interest?

Not really compound interest, but just a place to get a higher return than a savings account. I was just saying that it's a better place perhaps to invest one's money these days (low cost index funds that is).

 

[DrClaude]

I suggest those interested in these matters listen to the podcast The Phil Ferguson Show. It is 1/3 skeptical (i.e., evidence based) investing and 2/3 atheism, but you can skip that latter part if you are not into it.

 

[Bandersnatch]

Even more surprising, or shocking

The only thing I find shocking about it, is people trying to repaint their spendthrift and living beyond their means as 'financial illiteracy', to gain sympathy.

Reminds me of that recent thread about 'struggling' silicon valley employees.

 

[TeethWhitener]

I'm constantly amazed at the number of people who don't take advantage of employer matching for retirement funds. I want to shake them and say, "They're actually offering you free money! Why wouldn't you take it?"

 

[Vanadium 50]

I'm constantly amazed at the number of people who don't take advantage of employer matching for retirement funds.

I am amazed at that, amazed that people don't put enough in it, and amazed at how many put their 401K's into cash or similar.

 

[jtbell]

1. Always pay off your credit cards in full each month, so as to avoid interest charges.

2. Don't use credit cards that have an annual fee, unless you're sure the benefits in rewards points, airline miles, etc. are enough to cover the fee.

3. Marry someone who earns (or can earn) a decent salary, and is at least as thrifty as you are.

4. Don't use a financial advisor who charges an annual fee that is a percentage of "assets under management" (AUM). You will probably pay not only a fee of about 1% of AUM, but also high "hidden" fees ("expense ratio" = ER) of the mutual funds that he puts you into, which can easily be 1%-1.5%. You pay these fees regardless of whether your investments go up or down! Consider that in a good year, your investments might earn 7%-10% before subtracting the fees.

 

[MarneMath]

I think everyone here has given pretty solid advice. As a person who is a director for a bugle bracket, I tend to recommend that people do not buy individual stocks. Most people lack the ability to find good valuations and properly balance risk and reward. Also most people lack sufficient capital to do so even if they were aware of valuations and risk.

 

[kyphysics]

Something I learned from Dave Ramsey (who I agree with much of the time, but not all):

People spend less money when they pay with cash versus paying with a credit card. It's about 18% less if I recall. There are multiple studies on this and some of the early reasons why big corporations implemented credit card payment options in their business locations (e.g., McDonald's).

There's something about a greater emotional attachment to physical cash vs. a plastic credit card that gets the buyer to appreciate the value of money more.

I've heard people say the same thing about casino chips. If you were asked to plop down $300 of cold hard cash on a roulette spin, you'd much less likely do so than if you had to just toss in these round chips with a casino logo on them. The human brain seems to detach the value of work more from replacements of using cash.

Ramsey recommends always paying with cash. You're much less likely to splurge on wasteful or questionable stuff. And that savings adds up over time!

 

[NTL2009]

Something I learned from Dave Ramsey (who I agree with much of the time, but not all):

People spend less money when they pay with cash versus paying with a credit card. ...

Ramsey recommends always paying with cash. You're much less likely to splurge on wasteful or questionable stuff. And that savings adds up over time!

I will suggest an alternate approach. Better to learn to control your spending, and use a credit card with rewards and pay it off each month. Those rewards definitely add up over time! Think of a credit card as a tool, tools can be used for good or bad. We don't stop using hammers because they can be misused.

Forget about the studies that show that the average person spends more on credit, strive to be better than average. The average person doesn't know much about physics either, do we use that as a reason to avoid physics? The average person doesn't save for a rainy day, and on and on. You can do better.

 

[kyphysics]

I will suggest an alternate approach.

I agree that a very strong-willed and disciplined person can probably still avoid unnecessary spending using a credit card.

Ramsey's caution with credit card cash back rewards is that they're usually so minimal as to be not worth the counter-balancing negative effect of potentially spending more than you wanted. E.g., He says you'd have to buy $100,000 worth of stuff to get just $1,000 with 1% cash back rewards (which puts it into perspective) and that along the way you have to not have the overspending counter-veiling force affect you.

Psychologically, those rewards may justify spending that might otherwise not be done if you didn't have a credit card on you. Some people might be thinking, "Great! I can get cash rewards back, so buying x/y/z isn't such a bad deal..."

Not saying that the very strong-willed person wouldn't be able to overcome that, but that's a lot of mental willpower (and maybe time spent second guessing your purchases), lol. My parents could probably do it. They're super disciplined. I guess maybe know yourself? If you're not super disciplined, then maybe it is smart to just carry debit card and/or cash.

Debits cards, which he recommends, have you spend what you immediately have. You don't run the risk of racking up a balance that incurs interest on the credit card.

Also, if you're at risk of being an over-spender with a CC, then that could be savings not put into investments or any kind of interest bearing account. Instead, you might be buying up unnecessary, frivolous stuff with depreciating value. Overspending could cost you significant long-term wealth. Whereas, just spending on what you need and splurging every now and then (he doesn't say never treat yourself to nice things, but just don't be one of those who lives their dreams now on a credit card and doesn't put away for savings, gets into debt, buys wasteful stuff frequently, and so forth only to have to "pay" later) gives you more savings that can be invested. You can accrue interest on savings/investments and have appreciating value to those assets, whereas you pay interest on your debts or just have lost opportunity cost from frivolous spending.

Knowing my own personality, I have to say that I'm probably better off going with debit card and cash only. Certainly lots of psychology involved. But you are right that that doesn't have to apply to everyone. I just know for me that it's probably wise.

 

[strangerep]

But how do those generate compound interest?

Shares pay dividends which the fund can reinvest by buying more shares/bonds. Bonds pay interest which... the fund can reinvest by buying more shares/bonds.

Btw, one doesn't need oodles of money to start investing in low cost, tax effective, diversified index funds. But pay off your home mortgage first if you have one.

Side question for others: in the US, is capital gains realized on sale of your primary residence tax free like it is here in Oz?

 

[Borg]

Side question for others: in the US, is capital gains realized on sale of your primary residence tax free like it is here in Oz?

Capital gains are tax free for the first $250,000 or $500,000 if you're married with dual ownership. There are deductions that you can also take for improvements that have been made to the home during that time.

 

[NTL2009]

I agree that a very strong-willed and disciplined person can probably still avoid unnecessary spending using a credit card.

Ramsey's caution with credit card cash back rewards is that they're usually so minimal as to be not worth the counter-balancing negative effect of potentially spending more than you wanted. ...

Psychologically, those rewards may justify spending that might otherwise not be done if you didn't have a credit card on you. Some people might be thinking, "Great! I can get cash rewards back, so buying x/y/z isn't such a bad deal..."

Not saying that the very strong-willed person wouldn't be able to overcome that, ...

Debits cards, which he recommends, have you spend what you immediately have. You don't run the risk of racking up a balance that incurs interest on the credit card.

Also, if you're at risk of being an over-spender with a CC, then that could be savings not put into investments or any kind of interest bearing account. Instead, you might be buying up unnecessary, frivolous stuff with depreciating value. ...

Knowing my own personality, I have to say that I'm probably better off going with debit card and cash only. Certainly lots of psychology involved. But you are right that that doesn't have to apply to everyone. I just know for me that it's probably wise.

I will disagree on several fronts.

First, I do not feel that this requires a "very strong will". What it requires, is the mind set that will guide you to long term success, and that is understanding the value of money (to spend as well as save), delayed gratification, and that money is 'fungible'. When you develop that mind set, it comes naturally. Without that mind set, I suspect you will be doomed to fail anyhow. Since we are on a physics forum, I'll make an analogy and say it's a bit like trying to tackle advanced physics if you have not yet grasped Newton's laws of motion.

To succeed in this, you have to develop the mind set to spend carefully based on true 'needs', and the 'wants' that are truly important to you, and present a good value. If you spend based on the availability of money instead, I think you will always struggle with dipping into savings, and in making value-based decisions.

I will counter this idea of cash versus a credit card with this scenario - if I went to the ATM and got out $200 cash for the week (or whatever), do I walk into a store and say "I have $200 cash, so I can spend it all!". Probably not, so it isn't spending due to availability, so why would I spend more with a credit card available, if I realize it is ALL my money?!

I've had a rewards card for decades that pays 2% on all purchases, one good for 3% at Amazon, and recently one (Costco) that pays 4% on gas and 3% at restaurants. I've been able to pay college tuition on the 2% card with no fees for 6 years (2 kids went to that college) before they charged a fee. Yes, THAT added up! The delay between the charge and the due date also means I have more money working for me, all the time, and gives me time to optimize where I draw the money for large purchases. The past two years I put a new HVAC system and replacement windows in the house - all on CC and each was > $10,000. Passing up over $400 cash back makes no financial sense to me. I purchase based on value, not because something will get me 2% back. With that mindset, how could you ever pass up a 20% off sale? No, you must grasp if that purchase has value after all discounts are applied. That is a universal constant.

Now, if you do feel that a CC is going to cause you to overspend, then sure, maybe it is best for you to pay cash or with debit, for now. But as I have laid out, the real goal should be to develop this fundamental relationship between you and your money, so you stop thinking this way. It will help you all around.

 

[kyphysics]

I will disagree on several fronts.
I will counter this idea of cash versus a credit card with this scenario - if I went to the ATM and got out $200 cash for the week (or whatever), do I walk into a store and say "I have $200 cash, so I can spend it all!". Probably not, so it isn't spending due to availability, so why would I spend more with a credit card available, if I realize it is ALL my money?!

I've had a rewards card for decades that pays 2% on all purchases, one good for 3% at Amazon, and recently one (Costco) that pays 4% on gas and 3% at restaurants. I've been able to pay college tuition on the 2% card with no fees for 6 years (2 kids went to that college) before they charged a fee. Yes, THAT added up! The delay between the charge and the due date also means I have more money working for me, all the time, and gives me time to optimize where I draw the money for large purchases. The past two years I put a new HVAC system and replacement windows in the house - all on CC and each was > $10,000. Passing up over $400 cash back makes no financial sense to me. I purchase based on value, not because something will get me 2% back. With that mindset, how could you ever pass up a 20% off sale? No, you must grasp if that purchase has value after all discounts are applied. That is a universal constant.

This could be a pretty cool discussion, NTL2009!

I thought maybe before replying that I'd link a few Ramsey short clips from his talk show that give his thoughts on credit cards for some background perspective and as a reference for anyone interested in learning more about him. He's got lots of content on YouTube.





So, I think logically and obviously - Ramsey would have to agree too - that a person making constant good financial decisions would not be harmed by having a credit card and could have something to gain. (I have that Costco card too!)

It's just that psychologically having that card makes you more prone to money value detachment. And that can be tricky even for the very wise and disciplined. Ramsey gives some figures and interesting trends with how CCs are increasing sales/spending. People spend 12-18% more when they use plastic over cash. Credits cards get people to spend the most. Debit cards second. Cash last. He talks about how vending machines saw a 178% increase in sales after installing CC readers. There's just something about the ease and money value detachment that makes it easier to spend away and not even realize it. The pain centers of the brain aren't activated (or not as much) when you spend x dollars on plastic vs. cold hard cash. I know for me that's true. It's absolutely the case that when I walk into Walmart with a credit card that I feel less inhibited than if I had cash. I have to make a mental adjustment (to acknowledge that $-value detachment) to get myself to avoid frivolous spending. And I'm not talking about a lot here, since I'm broke anyways ($1,000/month in part-time work, as I'm completing my degrees). It's like I'll spend just a teeny weeny more here and there. A bag of gummy bears and Ben & Jerry's one day. Some potato chips and soda another day. Maybe $6-7 at Taco Bell another time if I'm hungry and want the convenience of something quick. Those little amounts add up over time.

Ramsey's a millionaire, who teaches personal finance, and even he says he falls victim to the money value detachment problem.

It's weird. It's as if when I have cash I know exactly what I have and how much it's immediately hurting me. When I have a CC, it "feels" like I have much more money than I actually do and there's not this sense of immediate pain from buying something. It's like: "Oh, I bought this, but the bill comes later." With cash, you give up the dough right away.

Also, you might get lured into buying a more expensive necessity than you need. E.g., food. Everyone needs it to survive. You might think: "Great, I can take care of a necessity by eating a meal at Panera Bread. Can't argue against that, since it's a need." Whereas, you may have overspent a few dollars as a result of that detachment - even on a necessity.

I know you're probably thinking it's still all about personal discipline and the proper mindset of spending wise. I think Ramsey would agree and so would I. That's 100% logically true that if you're just careful and wise that a CC won't hurt you and may help. But it's a big fight. That's really his point. Psychology is wired against us. It's why casinos have chips. People spend more using them. And the same goes with plastic. Ramsey is saying why play with snakes (his words) when you don't have to? Is the 1%..2%...etc. upside really worth it (as people typically spend 12-18% more with CCs)?

He argues, heck, if you need to spend $100,000 to make $1,000 in cash back and through it all avoid overspending (let alone incurring an interesting-bearing balance), then there are ways you could make $1,000 in your sleep/a lot more easily (maybe mow 2-3 lawns every weekend and make $400/month - my parents pay $40 a pop for lawn mowing professionals).

 

[NTL2009]

This could be a pretty cool discussion, NTL2009! ...

To be honest, I'm not sure I agree with that either! You seem to have just repeated your previous comments - should I repeat mine? It looks to be getting circular?

OK, I'll try again, but will try to be brief (and will probably fail)...
Not interested in watching more of Dave Ramsey, I've caught his show in the car a few times, so I 'get it'. He hates credit card, he hates all debt (rather than teaching people to use these tools to their advantage). As I said before, a couple different ways, maybe some people are at a stage that they need that, but they would be better served learning how to use those tools to their advantage.

emphasis mine:

It's just that psychologically having that card makes you more prone to money value detachment.

And as I said before, stop thinking in terms of what the average person does - take the "you" out of that, and substitute "the average person in this study - who is not me". Do you need more examples than I already gave? The average person does not get a STEM degree, should we advise people on this forum to not get a STEM degree, because of what averages say? This kind of thinking gets you in the "keeping up with the Joneses" mentality, and then you are spending on all sorts of depreciating assets that may not be bringing you long term value. Get over that thinking. Get over what the masses do. You can do better for yourself, and it's not hard. Isn't that what we are trying to achieve, something better than average? Then stop thinking 'average'.

-- more from you about 'studies' that I don't care about, and you shouldn't either...

It's absolutely the case that when I walk into Walmart with a credit card that I feel less inhibited than if I had cash. I have to make a mental adjustment (to acknowledge that $-value detachment) to get myself to avoid frivolous spending.

So stop that! It's easy - here is my thought process, it is so basic, it doesn't involve discipline, you just do it: Evaluate whether a purchase makes sense for you (short/long term, and fits your budget). Period. If it does, then you buy/invest in that purchase, if it doesn't, you don't! Regardless of payment method. The second decision is how to pay for it. And you pay by the method that helps you achieve your long term goals the best. Often, a 2%-4% rewards card is the best choice. If they offer a cash discount, that may be the best choice. If they offer low rate financing, that may be the best choice. Forget one-size-fits-all. use your head!

Ramsey's a millionaire, who teaches personal finance, and even he says he falls victim to the money value detachment problem.

Perhaps, but I'm willing to bet this is part of his "shtick" to appeal to his audience. "Hey, I'm just like you, don't feel bad, my advice will help you" (and keep me on the radio and selling books, etc).

-- more from you about 'studies' that I don't care about, and you shouldn't either...

He argues, heck, if you need to spend $100,000 to make $1,000 in cash back and through it all avoid overspending (let alone incurring an interesting-bearing balance), then there are ways you could make $1,000 in your sleep/a lot more easily (maybe mow 2-3 lawns every weekend and make $400/month - my parents pay $40 a pop for lawn mowing professionals).

No, this is rationalization and twisted. Making 2% or more rewards on my card takes less than zero effort (the float/grace-period makes it easier to arrange payment), there is nothing I can do to make money that easy, especially cutting lawns. And if I don't use that rewards card, I'm effectively throwing that money away. That makes no sense. And I have never paid credit card interest, because I made that budget/value decision upfront.

Hey, do what you want. But I guess I need to repeat it - learning to use these tools to advantage will be better for you than ignoring them because some other people misuse them.< Insert another analogy here - I'm sure you can think of plenty on your own.>

One more Dave Ramsey story, from a show I heard in the car. He is so anti-debt of all kinds, in this show a family made what were clearly a string of bad financial and life-style decisions in the process of getting away from all debt. It was a single-minded approach, eliminate debt at all 'costs' (financial and personal). Yet, it was high fives all around, and some kind of "cult-like" cheer for being 'debt free'. This family would have been far better off to take a more balanced approach to all this, and eliminate bad debt over time, choosing the best times for each transaction. Instead, they had 'fire sales' (in a rush to sell to pay off debt) and moved multiple times (pulling kids in/out of schools), and other things that really hurt them. But hey, they are 'debt free'.

BTW, I'm retired, yet have a mortgage (many people will say that's 'bad'). The mortgage is a very low rate, and it helps keep my money working for me. That mortgage is a tool, if it wasn't working for me, I'd dump it. Easy.

 

[NTL2009]

...
I thought maybe before replying that I'd link a few Ramsey short clips from his talk show that give his thoughts on credit cards for some background perspective and as a reference for anyone interested in learning more about him. He's got lots of content on YouTube.
... .

Just so you don't feel I was cutting you short with my earlier comment that I don't need to watch any more Dave Ramsey, that I already know his views, I will add that I just did go back and watch the two clips you provided.

My impression of Dave Ramsey is worse now that I watched those clips. Very circular, and very poor arguments, and some downright lies (misrepresentations?).

I don't disagree with everything he says, I've heard a few good comments from him on other subjects, but these two clips are just not helpful to people, lots of bad information, twisted to match his personal (or profitable) views.

I have to run, but if you are interested, and I find the time, I can point out just how disingenuous many of his comments are.

 

[kyphysics]

Just so you don't feel I was cutting you short with my earlier comment that I don't need to watch any more Dave Ramsey, that I already know his views, I will add that I just did go back and watch the two clips you provided.

My impression of Dave Ramsey is worse now that I watched those clips. Very circular, and very poor arguments, and some downright lies (misrepresentations?).

I don't disagree with everything he says, I've heard a few good comments from him on other subjects, but these two clips are just not helpful to people, lots of bad information, twisted to match his personal (or profitable) views.

I have to run, but if you are interested, and I find the time, I can point out just how disingenuous many of his comments are.

In case I was misunderstood at all earlier, I don't agree with all of Ramsey's basic financial principles. But what I find very helpful about him are his insights into doing simple things that can lead to greater savings and long-term financial success. Most people would probably call it common sense, but I think in a culture obsessed with outward appearances and saturated with all sorts of clever advertising and financial "scams" to get us to spend more, that common sense can be lost in the everyday wilderness of consumer life.

Ramsey also uses some of the best research in economics and related fields for certain topics that I agree with him on. Having said that, I disagree, too, on a variety of things he says.

1.) I think he's too extreme on debt. He thinks you should pay for a house, car, school education (or work while you're attending), etc. in cash.
2.) He's too ideological in his personal finance conservatism and does seem to try to fit (as you maybe alluded to?) certain facts about the world into his system.
3.) He thinks personal responsibility will be enough to lead a person to financial success. Okay, success here is too vaguely defined, but essentially I think he discounts inequality in the U.S. and doesn't adequately account for and legitimately blame the government and corporations/the rich for "rigging" our economic system. That doesn't mean you can't improve your financial lot in life using his principles, but I think that mobility is greatly reduced from when he was growing up. The U.S. government is bought by the billionaire class and large corporations since campaign finance law changed to allow "legal bribery." ...I could go on an epic rant, but wont.

I'll say this. Ramsey is just wrong on certain topics, but on the ones he is right about, he is absolutely a joy to listen to. Even on the topics that I think he's wrong on, I appreciate his perspective, because I find it often has some kernel of wisdom that can be gleaned. One thing I could never ever call Ramsey is disingenuous or insincere. I believe he is one of the most sincere people around, but just ignorant of some aspects of historical economic history in the U.S. and overly ideological on some personal finance topics (i.e., debt). There are lots of people that I could consider insincere and maybe complete liars/frauds, who are paid by industry to say what they say. Ramsey is not one of them. I believe he's genuine through and through, if not always right.

I have to run too. But I enjoy talking about these topics and shall catch back up shortly. Thanks!

edited to add:


In this short clip, Dan Ariely, who's a well-known expert and Professor of Behavioral Economics at Duke University, confirms a lot of Ramsey's views on money value detachment. Some of the examples he gives are genius! Great viewing, imo.

 

[NTL2009]

In case I was misunderstood at all earlier, I don't agree with all of Ramsey's basic financial principles. But what I find very helpful about him are his insights into doing simple things that can lead to greater savings and long-term financial success. ...

In this short clip, Dan Ariely, who's a well-known expert and Professor of Behavioral Economics at Duke University, confirms a lot of Ramsey's views on money value detachment. Some of the examples he gives are genius! Great viewing, imo.

OK, I think I have some time before I run off again. I think you continue to miss my message - was I unclear? I don't (and you don't) need any additional videos and articles about how some/many/most/average people make bad financial decisions. I'm not arguing that with you or anyone else.

What I am saying, and have said, is if you want to be well above average on personal finance (or any other endeavor), stop worrying about what the masses do. Concentrate on what it takes for you to be better. I don't think Serena Williams would learn anything from my serve!

You need to grasp that this is your money that you earned, and no one will care more about the safety/security/growth of your money than you. It is your responsibility. Once you have that in your head, no credit card company, no 'sexy' commercial, no "keeping up with the Joneses", no flashing "40% OFF!" sale, no "limited time offer- act now!" - nothing will "make" you spend one penny more than you would have otherwise. Seriously, you need to get over this!

I was going to use a Dave Ramsey radio ad as an example of where I do agree with him on some things, then realized, even that positive message is shrouded in a "head in the sand" mentality that just isn't the best route to success. In the ad, he says something to the effect of if the CNN news headlines are affecting your investment decisions, "Turn off the news!". OK, but it would be far better to learn that ALL outside influences are pretty meaningless to the long term investor. Since I know DR gets religious on occasion, I'll relate that to the "give a man a fish or teach a man to fish" parable. Learn the lesson, don't just follow a specific bit of advice (like "don't use credit cards").

OK, here's where I have a serious problem with the video clips of DR you posted. I learned long ago, if someone has a strong case to make, they don't use weak arguments, or cherry pick or distort - the facts ca speak for themselves. But DR has mnay of these issues in tose clips - a few I recall:

A) He keeps talking about $1,000 rewards on $100,000. That's 1%. I don't know anyone who is a savvy CC user that has a 1% card. I said, my cards are 2%, 3%, and 4%. If he has a strong case, why distort by a factor of >2 ("co-incidently, the distortion is in his 'favor'?)

B) Straw Man arguments - after acknowledging that these two callers are sophisticated enough to avoid the pitfalls of over-spending or paying interest, he actually continues to use that argument against them (something about why are you playing with snakes?)!

C) ALL that effort, to get (the deceptive ) 1% rewards? That's a lie - It isn't a lot of work, it's negative work compared to cash/checks/debit. OK, maybe if you use airline/hotel/travel credits, etc it is work - but I don't, I use cash reward cards. I like cash - it is fungible.

D) Only downside-no upside? That's a lie, the rewards are an upside, the float is an upside, the flexibility of the delayed payment is an upside (I can give a real world example later). And if you have the right mindset, there is no downside. It's simple not true.

E) And the silliest one - "I know lots of millionaires, and not one said the way they got rich is through these rewards". Gimme a break, don't insult my intelligence. I'm well off, and I assure there no one single thing that "made me rich". I could make a long list, but to be concise, it is a mindset. Optimize what you can, when you can. And I would never scoff at saving 2%-4% on my routine purchases - that's a factor (among many others) to becoming "rich". I'll turn it around - if you are going to bypass a 2% - 4% sale on most of what you purchase, you are likely to to struggle to become wealthy.

That's all I have time for but that;s enough. He is so disingenuous, i I just can't listen to any more. Learn to learn, not repeat catch phrases from people like DR.

 

[kyphysics]

To be honest, I'm not sure I agree with that either! You seem to have just repeated your previous comments - should I repeat mine? It looks to be getting circular?

I hadn't read this post the first time around, NTL2009. Wow!

I think maybe relaxing a bit and just focusing on the issues would be best (and not personalizing anything, as I sensed). I could be wrong, but you seem to have some anger in your tone and an "aggressive" way of speaking. That's how the tone sounded to me on a subjective level. So, I just want to say up front that I'm interested in peaceful dialogue and hope to keep things friendly - even if there is intellectual disagreement.

Alright, with that being said, I shall respond:

And as I said before, stop thinking in terms of what the average person does - take the "you" out of that, and substitute "the average person in this study - who is not me".

I understand the underlying logic, NTL2009, and l think we're probably actually in agreement already with each other on many things.

Nevertheless, I think you can take away the useful insights that Ramsey offers, while acknowledging his flaws. For me, the most useful thing was seeing how susceptible human beings are to overspending when they have plastic and other "detached" forms of payment.


I promise this will be the last Ramsey clip I post, by the way. Don't want you to get too steamed up over there - LOL. I just think it has a pretty ingenious description of how the psychology of paying with cash gives humans a sense of a proper value exchange taking place. He talks about his daughter (Rachel Cruze, who is also a personal finance media personality) mentioning to him that as kids we develop a sense of a fair value exchange from trading things (e.g., trading marbles, trading baseball cards, trading toys, etc. with our friends). You get that sense because you have to give something to another person in order to get something back. Even if bartering is replaced with paper and coin monies in modern society, there's still a sense of that transaction preserved, as you need to physically give away money in order to receive shoes, food, or whatever you want in return. But when you pay with plastic, you give your plastic card to the cashier and then you physically get that card back and then whatever item you just purchased. Psychologically, it may leave you with the impression that you got a good deal or that nothing/not as much was "lost" in that transaction. Dan Ariely, the behavioral economist from Duke University, who talks about this in the clip I linked to earlier, offers a lot of other psychological insights into how non-cash transactions get us to loosen up our spending. But, returning to Ramsey's clip for a moment, he mentions a famous MIT FMRI study that showed that people buying things with cash had their pain sensors activated in their brain, whereas those paying with cash lacked those sensors firing. I thought that was pretty neat.

As I said earlier, psychology and biology are wired against us in the fight to spend properly using a CC (e.g., Ramsey mentions people spending 78% more on fast food after credit cards were allowed as a form of payment there). It's not an impossible fight to win - just hard, as we can easily be deceived by ourselves!

Add to that the genius marketing of corporations and credit card companies to get you to spend more and it'll be a constant uphill fight. Take a look at this short 3 minute, 42 seconds clip of how credit card companies "tricked" consumers into using credit cards in Thailand, despite a strong aversion to them:


It's not impossible to win - just a hassle and Dave asks whether it's worth it for 1, 2, or 3% cash back, given:

a.) easier ways of earning that money (e.g., mowing lawns)
b.) the potential to overspend (often on frivolous purchases, which are depreciating assets vs. saving that money and putting it into investments that turn into appreciating assets), in which psychology and biology are wired against us

That's really all Dave is saying. And I found it a very helpful insight. I personally try to pay in cash as much as possible. I also agree with you that distinguishing your necessities from your wants is a good practice that will help a person spend properly. I've begun doing that recently in a spreadsheet for all of my purchases (planned or already bought). I also agree that Dave is too extreme in saying that we should avoid credit cards at all costs, but I'm glad that he's done a good job in laying out all the potential pitfalls we have to consider.

-- more from you about 'studies' that I don't care about, and you shouldn't either...
So stop that!

This is what I meant when I said you were possibly personalizing things and using an overly aggressive in tone, NTL2009. I assume that everyone is a capable thinker and can decide for themselves whether to accept an argument position or not and don't wish to personalize things or become "hostile" to push a point I want to make.

It's easy - here is my thought process...

I think we're probably in agreement about the process (it's absolutely logical to do what you proposed), but just maybe not on the level of difficulty involved.

Ramsey says personal finance is 20% head knowledge and 80% behavior. It's really the discipline oftentimes that people struggle with and not the knowledge of how best to manage one's finances. Most people probably know that upsizing to a large drink when you don't need those extra 10 (or whatever it is) oz. is a bad buy even if it's only .25 more (or whatever it is). We probably know that we don't need a ton of stuff and that we'd be more financially secure and prosperous in the long-term if we saved on those purchases and invested that money. The difficulty comes from the marketing involved to get us to spend more, the money value detachment problem of credit cards, and our own impulse control. Feynman said the easiest person to fool is yourself in science. The same may be true, too, when it comes to personal finance and people rationalizing poor spending decisions or not even consciously realizing they're being influenced by the money value detachment problem.

You can think of Dave's CC philosophy as "training wheels" to learning to spend wisely. When a person feels comfortable discarding those training wheels is up to them. Some might need them longer than others; I'm currently using them that way. Similarly, you can think of his more conservative CC advice as a safety mechanism too. If you're not sure how good your decision making is, then use the cash over a card just to be safe.

(I'll re: more later.)

 

[kyphysics]

One more Dave Ramsey story, from a show I heard in the car. He is so anti-debt of all kinds, in this show a family made what were clearly a string of bad financial and life-style decisions in the process of getting away from all debt. It was a single-minded approach, eliminate debt at all 'costs' (financial and personal). Yet, it was high fives all around, and some kind of "cult-like" cheer for being 'debt free'. This family would have been far better off to take a more balanced approach to all this, and eliminate bad debt over time, choosing the best times for each transaction. Instead, they had 'fire sales' (in a rush to sell to pay off debt) and moved multiple times (pulling kids in/out of schools), and other things that really hurt them. But hey, they are 'debt free'.

I totally agree.

His get out of debt at all costs is not good advice for a lot of folks. For example, let's say you get into Harvard medical school, but can't go on a full scholarship or don't have $200,000 (or whatever it costs) lying around to use for your expenses. Is it a bad investment to go into temporary student loan debt to attend Harvard med?

Of course not, if you've shown yourself to be competent in pre-med courses and have a strong interest in medicine. It's an investment that will pay off later. Similarly, his approach would completely void all of Keynesian economics, which is based off of debt spending. I'm sad to hear that he may have hurt some family's finances with his approach. I don't know enough about that story to comment, though.

I have disagreed with him during his call-in advice segments. But, at the same time, I've 1,000% agreed with him other times and thought he was giving great advice. It's really his super hardcore ideological financial conservatism that is not open to debt as a SOMETIMES good/okay idea that can tick me off at times.

*Maybe now I'm starting to see why you're "angry" before.*

His wealth building strategies are good, though, imho. I like that he teaches people the power of compound interest and to save and invest early in life.

You could be a millionaire by just saving $300 and month and investing that for 20 years and letting compound interest grow it. You could stop at 20 years and never put a cent more into the investment account and just let it grow on its own. 20 years later, you'd be a millionaire. Yes, that's approximately a 40 year process, but it's also very do-able for many people if they just put away $300/month (and it helps to not overspend with a CC, so you have more savings you can invest).

Long story short: Dave has great insights into many things, while simultaneously being unreasonable and flawed in other areas. A well educated and independent, rational thinking person (not someone who follows others blindly) should be able to pick out which areas are worth applying and which are not in Dave's advice and philosophy.

I hear you, though, that sometimes his own ignorance or flawed thinking can harm a listener and that does make me upset and sad. I guess I was mainly thinking about my own self at the beginning of this discussion and what I can glean from him that is useful.

 

[NTL2009]

I totally agree.

His get out of debt at all costs is not good advice for a lot of folks. ...

I'll try to get to your previous post later, but for now (and somewhat out-of-order) - OK, good to see that you see that. But that helps capsulize my issue with Dave Ramsey. Actually, you stated it well later...

Long story short: Dave has great insights into many things, while simultaneously being unreasonable and flawed in other areas. A well educated and independent, rational thinking person (not someone who follows others blindly) should be able to pick out which areas are worth applying and which are not in Dave's advice and philosophy. ...

But Dave Ramsey appeals to beginners who do not have the background to pick out good from bad advice. And he comes across with such confidence in all these areas, and appears as a 'guru/white-knight/savior' to follow (I say 'white knight' as he describes the CC companies as 'snakes'). So people do get sucked into some questionable things, where they would be better served with education, and learning independent thought.

Now, people can certainly have different philosophies on personal investing, there is some subjectivity involved, but I think we can agree that objectively, as in your examples, it isn't helpful to treat all debt as bad debt. So allow me to make an imperfect analogy to illustrate:

Let's say you were a beginner at math. Your parents hire a teacher for you that is well respected, and appears confident in all he/she does. But 1/4 of what they teach is wrong. You, as a beginner, don't know how to separate the good from the bad. The teacher is equally confident in all of it. You are not getting a good math education, and your parents should be angry, but they don't know any better either.

I hear you, though, that sometimes his own ignorance or flawed thinking can harm a listener and that does make me upset and sad. ...
... It's really his super hardcore ideological financial conservatism that is not open to debt as a SOMETIMES good/okay idea that can tick me off at times.

*Maybe now I'm starting to see why you're "angry" before.*

Hah hah - just to clarify, in my other posts, I used a lot of emphasis, as you seemed to just not be getting/responding to my points. It wasn't anger. Though I was a little 'angry' at DR when he was congratulating that family on these bad decisions, all in the name of "getting out of debt for getting out of debt's sake". I'm pretty well situated financially, but I have empathy for those starting out and/or struggling. I could make a financial error of a size that would be very hard on someone in that position, and I'll kick myself, and learn from it, and consider that I need to do better on average, but it won't affect my life style one bit, I've got some buffer there for mistakes. But this family didn't. Selling off stuff in what amounted to a 'fire sale', just to get out of debt, hurt them. And it hurt me to listen to everyone applauding this, rather than using it as a teaching moment on making good decisions about debt. But these people don't know that, and follow the leader.

I just wish DR was more balanced. Sure, some people need some "Emergency Room" treatment. But then they need education to think for themselves. If you really can't handle credit cards, then tear them up (for now). But there should be the message that long term, you will do better to learn how to use tools to your advantage, and instead of a CC 'costing' you in extra spending and fees, your CC can provide you with a 2-3-4% discount on most of what you buy. What's the old expression? "Most people work for their money, smart people have their money working for them"? My credit cards work for me, and they can work for anyone who develops a healthy, rational understanding of their relationship with (emphasis!) their money.

I'll edit/add this: I can't get inside DR's mind, but he seems like a smart and sophisticated guy. I suspect that he knows this as well, but has carved out an audience that appeals to this simple black or white approach to debt. If that's the case, then in a way, he is taking advantage of them for his benefit (radio show & books and I suppose speaking engagements). I can't respect that. He could work the 'education' into his show, but I think he feels that would lose the audience. I think he could do both.

 

[Vanadium 50]

I think the in general the model of "one investment guru who can explain it all" is not a good one: if for no other reason is that they don't address the most important question: goals. Why are you investing anyway?

In addition, many of them seem to shoehorn everything into a single idea.

 

[kyphysics]

With apologies to NTL2009, I couldn't resist posting this Ramsey segment from 7.17.17 -



Really relates to a lot of our earlier conversation and is interesting in and of itself.

 

[NTL2009]

With apologies to NTL2009, I couldn't resist posting this Ramsey segment from 7.17.17 -

...

Really relates to a lot of our earlier conversation and is interesting in and of itself.

Ho-hum. I found it only mildly interesting, and probably not for the same reasons as you. I was clicking/skipping a few seconds at a time through much of it, I hate videos like this instead of a text format that allows you to scan and re-read so much easier. Anyway...

Where I do 'connect' - I don't like to see any company or organization get too big and gain too much power/leverage. I do think the CC companies may be in this area - I like competition to level the playing field, and Visa, MC, AMEX seems like too much of an oligopoly to me.

But then DR goes into treating everybody like they are stupid again, and I find it insulting and not helpful. Gee, a successful business owner can't decide for themselves if the deal the CC company is offering them is good or not? Not a good deal for the business, just say "NO". But DR treats them like they are stupid, and have to be told by this 'guru' that it is a bad deal for them (his biased opinion).

I'm fine with a business taking only CC if they so choose. Fine with me. I hate carrying cash. I have to maintain an 'inventory' of it, anticipate my spending, stop at a bank or ATM to replenish, walk around with pockets full of paper and metal, eventually take that metal to a change machine ('conveniently located in a store - is this a 'trick' to get you to spend money in the store? Of course it is! Does that make cash 'evil'?) or spend time rolling it into paper tubes (banks are often requiring this now). And that cash inventory isn't earning anything for me. And no, I'm not just missing out on the current low/zero bank rates, having a larger cash buffer means I have less in my long term portfolio, and that is earning long term rates for me (probably ~ 3-4% real). No thanks! And if a truly good deal for me appears, and my paper money 'inventory' is low, I might miss that good deal. But I can always make the good decision to pull out my card, grab that deal while it's hot, and probably get a 2% reward on top of it. Win-Win-Win.

I'm also OK with a business taking only cash. Their decision, and I can decide to do business with them or not (that competition thing again). And I may not, I find cash inconvenient, and detrimental to my personal financial health, compared to the convenience, ready access, float, and rewards I get with a CC.

The more you post, the more I dislike Dave Ramsey. Please stop! :)

Seriously, instead of posting more repetitive DR videos, counter the arguments I've presented. That might be in interesting.

 

[NTL2009]

A little follow up:

@kyphysics - Can you point out the BIG logical fallacy from Dave Ramsey in that video? It jumped out at me, even as I 'skimmed' it. I'd be interested to see if you are approaching this with a touch of critical thinking.

And again, if a point is so strong, why use false logic to try to make it? Let it stand on it's own strong feet.

 

[Vanadium 50]

With apologies to NTL2009, I couldn't resist posting this Ramsey segment

The nation that controls magnesium controls the universe!

Since you're repeating yourself, I will too - I think the model of "one investment guru who can explain it all" is not a good one.

 

[russ_watters]

A little follow up:

@kyphysics - Can you point out the BIG logical fallacy from Dave Ramsey in that video? It jumped out at me, even as I 'skimmed' it.

I skim-watched this too, after not having looked at the others, and frankly it struck me as Rush Limbaugh-ish/conspiracy theoryish and really devoid of much value or relevance to this thread. Are they all that bad? In either case, i noticed half a dozen flaws, but I think I know which you were referring to...

 

[NTL2009]

I skim-watched this too, after not having looked at the others, and frankly it struck me as Rush Limbaugh-ish/conspiracy theoryish and really devoid of much value or relevance to this thread. Are they all that bad? In either case, i noticed half a dozen flaws, but I think I know which you were referring to...

Not sure of any comparison to Rush - while he can be off-base on many things, at least it seems like it presented as his opinion, he's not actually giving advice (not saying others won't follow his lead as if it was advice, but it is different, I think, from Ramsey who is explicitly giving advice). I may be wrong on that, but whatever.

But yes, I think the other videos are that bad (or worse). I'd say it is relevant to this thread (as a bad example!), to maybe help teach people to think for themselves (the basics really are very simple), and not follow 'gurus'. A few oft-repeated phrases on a personal finance forum that I follow is:

" The hardest thing to understand about personal finance is how simple it is."
" By the time you have learned enough about personal finance to be able to evaluate a financial advisor, you know enough to just do it yourself."
" No one cares about your money more than you."

Exceptions for specific, out-of-the ordinary and complex situations, but those can normally be handled by paying by the hour or by the task for specific advice from a fiduciary. You're not likely to get good value from someone charging 1% or so of AUM (Assets Under Management), ongoing.

 

[DS2C]

The 3 month rule!
Always have an emergency fund that will pay for bills, groceries, and gas for at least 3 months. In case you ever get laid off or any other reason, you can support yourself and not get into a financial hole while you recover.

 

[kyphysics]

Mark Cuban on credit cards:

I skim-watched this too, after not having looked at the others, and frankly it struck me as Rush Limbaugh-ish/conspiracy theoryish and really devoid of much value or relevance to this thread. Are they all that bad? In either case, i noticed half a dozen flaws, but I think I know which you were referring to...

Wait, you're telling me his "redneck emergency fund" wasn't an Earth-shattering revelation to you?

This one isn't a good indication of Ramsey's diverse content (many people have benefited from his advice on very practical matters - from condo and car buying all the way to 401Ks and the ethics of various businesses, etc. - and also on saving and avoiding credit cards as discussed earlier), but it's pretty bad here. lol. Don't blame you if this was your first Ramsey vid.

I agree he can sound Rush Limbaugh-ish in his rhetoric and delivery, but he's genuine - even if genuinely WRONG at times - whereas Rush Limbaugh seems more of a shill to me who doesn't really believe all that he says at times and does it just for the money. I could be wrong about Rush, but those are just my impressions.

Anyhow, Ramsey is wrong on a lot of stuff, but right about a lot too, imho. And I think it's fine and responsible to criticize him in areas where he's wrong. He's relevant to our culture I suppose, because he has America's #1 radio show (at least, I think it's #1)?