Forgive Us Our Debts

I've gotten more personal email about my article on Dave Ramsey than any other piece I've written for the magazine, and several of you have asked me to blog about it here.  I chose to write about him for a few reasons.  First, I find him totally fascinating.  Second, I got to go to Detroit.  And third, we're in the middle of a vast national conversation about debt, and Dave Ramsey represents one of the most extreme views on the subject.

For those of you who don't know of Dave Ramsey (though I'm fairly sure a number of my readers are followers), he's an evangelical personal finance guru who has a syndicated radio show and a television program on Fox Business.  Ramsey's program has a few basic pillars:

  • Cut up all your credit cards and promise never to use them again
  • Do not borrow money for any purpose whatsoever, with two exceptions:
    • You may take out a 15-year fixed rate mortgage where the payment is no more than 25% of your take home pay
    • You may take out a bridge loan to cover the underwater portion of a car, boat, or other asset loan, if you are selling the asset in order to get out from under the payment
  • Sit down at the beginning of every month and do a written budget in which you allocate every dollar you expect to earn
  • Take cash out of the bank and use it to pay for your non-automatic purchases:  eating out, groceries, gas, parking, clothing, etc.
  • Pay off all of your debt as quickly as possible
  • Give ten percent of your income to charity
  • Save fifteen percent of your income
  • Don't declare bankruptcy unless they bailiffs are actually on their way to your house to evict you, seize your furniture, and put your family on the street

There are various wrinkles for people with irregular income and so forth; there is investment advice, some of it good and some of it not--but that's the core of it.  And Peter and I tried the program in preparation for writing the article.

What did we think?  Well, that's in the article.  But the upshot is, we're sticking with the program, though the part where we pay off all our outstanding debt is on hold while we save for our wedding.  I'd never done a detailed budget before, much less written it down, and forced myself to stick to it by doling out all the payments in cash.

It sounds unbearably tedious.  But it's actually incredibly freeing.  I have never before felt like I had total control over my money.  And given all the economic gyrations, it would be awfully nice to know that I was on the road to a paid off house, and could cut my expenses to the bare bones if needed.

But it's odd.  And it's really hard to do in a society where lots of people are willing to take on lots of debt, because their debt-laden lifestyle sets the standards for yours.  It's hard enough when everyone has nicer stuff.  But as I note in the article, in the case of housing, it actually makes it hard for people to, say, secure a home in a decent school district, if other people with similar incomes are willing to leverage themselves to the hilt in order to bid on that home.

Presented by

Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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