Paying Off Debt Will Cost You Your Future
The Investing Tutor
21

I am no Dave Ramsey disciple but I have read into his philosophy among others. One thing he always does is provide numbers and specifics. I get this article is meant to be a succinct article to draw people towards your coaching. But I feel your point would be better with more concrete numbers. Without them, many important questions are left unanswered.

For example:

Do they both have equal school debt at equivalent interest rates? Average Rate for student debt with a professional degree is $120,000.

If so then what is the interest savings that Cynthia experiences compared to Kate? According to my calculations based on the previous debt Cynthia would pay around $20,000 in interest verse Kate at $40,000.

Do we assume they have equal costs of living? Rent, utilities, food, travel, etc… Average cost of living for a single person in the US is $2,371/mo with about $560 of that accounting for housing.

Is Kate investing pretax or post tax? How much is she saving for her home during this time and doesn’t she need to also have furniture and appliances for her new home? Does she save for that or finance? If so then what is the interest cost to that?

If you take a post tax value of $60,000 take home pay then they are bringing home 4,615/mo which equals a 461 monthly investment (10%). If she pays off her loan on a 10 year plan she is paying 1332.25/mo and after cost of living is left with $450 of discretionary funds to save for her new house

Cynthia pays 2319.94/mo to pay off her debt in 5 years and that leaves her with -$84 a month which would be accounted for by the Ramsey method of a tight budget.

Also, Dave Ramsey recommends a 15 year fixed mortgage with a 20% minimum down payment with a payment no more than a quarter of your monthly take home pay so Cynthia wouldn’t be in a 30 year if she were following Dave.

Assuming Kate and Cynthia both want to purchase a 200,000 home with 4% closing costs, Cynthia would need to save the student loan payment she was making for an additional 19 months to get cover the costs (44,000). To save for furniture and appliances Cynthia would be able to save $15,000 in 12 months after accounting for the 1,100 increase to her cost of living from mortgage payment, home insurance and taxes. After this time she would save for 3–6 months of living expenses so 10,000 which would take 9 months.

After 8 years Cynthia would have $165,000 in home debt with $35,000 in equity. She would have no other debt, $10,000 in savings for emergency and assuming no change in income would have $1,200 to invest monthly for the next 27 years and at a 7% annual return she would have $1,106,558 (compounded annually). More than double the amount you quoted for her. And you can add the $20,000 in saved interest to her total. If we add in the additional $1405 after her home is paid off in year 16 her total would be $1,756,739 with savings a paid for home and no debt.

Kate would need to save for 8 years in order to save $44,000 for her home. The issue for Kate is that once she purchases her home, she will not have enough to income to cover her student loan unless she stops investing for the remaining 2 years of her loan payments and even then she will need to sacrifice to cover the additional $100 deficit. The $461 she has been investing has grown to $58,556 in those first 8 years at 7%. She has no left over discretionary funds for saving so she must wait 2 years to purchase her house and save for her furniture and appliances or she must finance which adds a payment she cannot afford. Perhaps she could take out a 30 year mortgage which would save her $400/mo on payment but would cost her an extra $70,000 in interest over the life of the loan. She could put down less money for her house but would have a difficult time getting approved with her debt to income ratio.

Lets say that Kate waits until year 10 to buy her house and she is done paying student loans. She saved an additional $10,800 while waiting to buy her house to cover her furniture and appliances and then uses her extra 1100 from student loans to get the rest in 3 months. At this time she begins investing the 1100/mo for the final 25 years of your timeline and here are her final stats.

At 8 years Kate has no house, $19,206.49 left in student loans, no savings and investments worth $58,556.

At 10 years Kate has a house debt of $180,000 with $20,000 in equity. She has investments worth $78,855 at 7% average return (compounded annually). She has no other debt and no savings. She has 1,200/mo in discretionary funds to invest from their forward which after 25 years would be worth 1,367,630 and subtract her 20,000 in interest losses.

Adding in her 1405 house payment to investing after paying off her house in year 25 Kate hits 1,607,958 with no savings, no debt, and an extra 20,000 paid in interest on student loans.

Final Score after 35 years-

Cynthia: $1,756,739 investments; 10,000 savings, 20,000 Stud loan interest

Kate: $1,607,958 investments; 0 savings, 40,000 Stud loan interest

The final numbers you post from an investing standpoint are staggering enough to generate interest. But your lack of specifics are concerning enough that I question where you numbers come from and after doing basic research and running the numbers myself, I can’t help but disagree with your assessment. If you are willing to post your numbers and methodology I would like to see them so I can add to my current limited knowledge of personal finance. As it stands, you are trashing one philosophy to build your own without much substance to back it up.

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