Dave Ramsey has built an empire with his strong stance on getting out of debt as fast as you possibly can. While I strongly agree that debt can choke away people’s financial dreams, Dave began his spirited attack on debt in 1992, when the average 30-year fixed rate mortgage had 9% interest attached to it. Dave’s financially wise ways were born from his own financial struggles in 1987 and 1988 when the average 30-year fixed rate mortgage had 11% interest. Today, the average fixed rate 30-year mortgage is less than 3%.
Just to provide some context, if borrowing $100,000 for a home and paying it back over 30 years at 11%, the total payback to the bank equals $342,835. At 3% interest, the payback over 30 years equals $151,776. Another way of stating the obvious is that at 3% interest, the house cost $191,000 less than at 11% interest. I’m not trying to bash Dave Ramsey. Far from it, Dave is among my financial heroes and has tremendously helped several people I know personally. His “get out of debt fast” approach is a godsend for certain people in certain situations. However, not all debt is the same. High interest credit card debt is a bad financial decision 100% of the time, sometimes necessary in desperate situations, but never good. A low interest fixed rate mortgage could be the sharpest and most useful tool in your toolbox though.
The problem with debt is some people are good money managers and others are not. For those good money managers, a proper and prudent use of debt can accelerate your financial goals. For folks that have challenges with good money decisions, a daily dose of Dave on the radio is probably good medicine.
When it comes to interest rates, these are historic times and historically low rates. Depending on your place/stage in life and how good you are with money, utilizing debt with historically low interest is a planning opportunity that should be taken into consideration when evaluating your financial goals and priorities.
This week’s Weekly Market Review begins with a summary of all the additional debt American’s have taken on in the last year. Warning - it is a staggering amount. How much of this debt was good money managers recognizing the interest rates as an opportunity and how much is debt attached to poor money management decisions? We may never know that answer, but there is no doubt that these historically low rates have people lined up to borrow.
As always, we hope you find the Weekly Market Review both informative and interesting. Have a great week!
Trevor N. Coe, CFP®