Dave Ramsey-Financial Peace University

[BigLame]

A lot of good discussion here, I appreciate all the feedback! A couple more questions....

For those who recommended mutual funds, can you provide some further info/links on what I should look for with those? I assume I would start one and let it sit for next 30 yrs?

If/when we have kids, how do those 529 savings acts work? That might be next week in class...

I paid for my college thru a small savings acct that vanished quickly and primarily student loans. I've always had a thought that I want my kids to be motivated and learn to pay for college themselves and graduate with a job, then on the backend I would have an account setup to pay off those loans as their reward. I assume the 529 probably wouldn't work that way? Does the student have to be enrolled full time?

These questions here are where a good financial professional would be your best resource. I’d find one that has good reputation from people you know & trust as well as doing your own due diligence. I believe a fair number will do an initial meeting to go over basics as well as disclosing how they would benefit from your business as well as how you’d benefit from their services.

It’s best to know your entire financial picture to know truly what would be your best plans to come up with: how your work related retirement accounts would mix with non-work ones, all of their purposes (children’s education, etc). For instance, use of Roth IRA vs 529 plans & differences in tax implications & so forth (someone brought that up earlier which was a very good point) & on & on. Believe one can withdraw contributions from Roth IRA for college expenses (so long IRA has existed at least 5 or 7 years) without penalty or paying any taxes. 529’s are tax-deferred, so you will pay taxes on the earnings made by the plan when withdrawn & this will likely happen when you & your spouse are in the middle or at beginning of your peak earning years. While you don’t want to raid retirement, if you have other substantial retirement accounts it may not be raiding anything at all. Maybe you would have the wherewithal to use both? Jjudgement calls for sure, but this would be 1 of the many items covered in setting up a plan with a good professional.

 

[Cyched]

I'm surprised we can hear you from how high up your horse is.

I wasn’t born in America to not be able to judge other people’s life choices over the internet.

 

[capitalcityguy]

I'm surprised we can hear you from how high up your horse is.

He/she said “desire to” and he didn’t claim this is the only way to achieve these goals.

So now it is non-PC to have high ideals?

“Lighten up Frances” comes to mind.

 

[twojman]

How many people mean "use a debit card" when they're talking about "using cash" though? You're using a card either way. It's just whether it is directly being debited from your account or whether it is being added to a tally that you pay off once the period closes.

And even though fraud protection for debit cards has improved a credit card is still vastly superior in that department. With a debit card it is your money being held in limbo while things are resolved. They have no incentive to rush things and you can't access it until it is resolved. With a credit card it is the banks money being held in limbo. They have incentive to resolve it quickly and you aren't out anything in the meantime.

Yes, we use a debit card instead of cash. We set our checking account up as a zero based budget each month. The only dollars we keep in our checking account are those that are budgeted for the month. We have a budget we follow to stay on task. We spent too much on groceries/eating out? Can't go to that movie or have to wait until next month to buy those clothes.

In theory I agree 100% with what you are saying. The amount of people in the US that have the self control to use a credit card properly is pretty small though and if you can't see that you don't understand human behavior. I'd say maybe 10%-15% might be able to do it properly based on what I've read with credit card debt, lack of emergency funds in this country and how I've heard people talk.

 

[agrabes]

A common misconception is that credit card companies like you to carry a balance. They actually prefer you to max your card and pay it off immediately. The most profitable thing.

How so? That would be much less profitable than a person who carries a balance and makes interest payments regularly. My understanding of how credit card companies make money is through two ways:

1) Charging small transaction fees to businesses who accept the credit card payments (a few cents per transaction EDIT - actually 2-3% of the transaction, much higher than I originally thought).
2) Interest payments.

They can't make much profit on you unless you pay interest. They actually make nothing at all from you directly unless you do pay interest or an annual fee.

EDIT - I actually took the time to look up an article on this. This is from Motley Fool, a financial website. The largest source of income for credit card companies was interest payments at $63.4B, with transaction fees the second largest at $42.4B. So yes, the credit card companies make the most profit from interest payments by a pretty wide margin.

https://www.fool.com/credit-cards/2017/04/13/this-is-how-credit-card-companies-hauled-in-163-bi.aspx

 

[CyCloned]

First off, you are doing incredible well. The only thing I would suggest is that you pay off all credit cards and then make it a priority to pay them in full every month. Use some of your savings to do this if you have too. If your 40K is not getting any interest you should move it into something that does, but don't get it into anything that has penalties for early withdrawal if this is suppose to be a liquid fund.

 

[ricochet]

Yes, we use a debit card instead of cash. We set our checking account up as a zero based budget each month. The only dollars we keep in our checking account are those that are budgeted for the month. We have a budget we follow to stay on task. We spent too much on groceries/eating out? Can't go to that movie or have to wait until next month to buy those clothes.

Why not do exactly the same thing with a credit card and get the extra fraud protection and possibly rewards of some kind?

 

[iahawks]

but the rewards you can get from using a credit card vs. a debit card or cash also aren't huge.

Not saying you will get rich, but I haven't paid for an airline ticket or hotel room in a few years now and have went on a lot of trips including one to Cancun soon that was completely paid for by CC perks and bonuses. I pay my balance off every month BTW.

 

[iahawks]

Why not do exactly the same thing with a credit card and get the extra fraud protection and possibly rewards of some kind?

Not to mention the usual increased warranties and the fact you don't have to purchase rental car insurance too.

 

[agrabes]

Not saying you will get rich, but I haven't paid for an airline ticket or hotel room in a few years now and have went on a lot of trips including one to Cancun soon that was completely paid for by CC perks and bonuses. I pay my balance off every month BTW.

Not to get personal on this at all, but that's probably a function of how much you are spending. The more you spend, the more rewards you get, but they are still a small fraction of the amount you spent. There's nothing wrong with doing things that way as long as you know what you are doing, which it sounds like you do. But as I said up thread the average Joe doesn't realize that those perks are a lure to get you to spend more than you can afford, or to get you to sign up for a card with an annual fee, etc. The credit card companies do this because it makes them money in the long run.

 

[iahawks]

Not to get personal on this at all, but that's probably a function of how much you are spending. The more you spend, the more rewards you get, but they are still a small fraction of the amount you spent. There's nothing wrong with doing things that way as long as you know what you are doing, which it sounds like you do. But as I said up thread the average Joe doesn't realize that those perks are a lure to get you to spend more than you can afford, or to get you to sign up for a card with an annual fee, etc. The credit card companies do this because it makes them money in the long run.

Never bought something I wasn't going to already. Had to get new appliances two years ago and used credit cards that I paid in full to get the bonuses and points. Would be a fool not to do this I feel if it is something you were going to purchase anyways and have the cash to pay off the cards in full.

 

[HardcoreClone]

Thanks again for the advice and discussion. Will finish going thru the class and evaluate next steps.

 

[BCClone]

How so? That would be much less profitable than a person who carries a balance and makes interest payments regularly. My understanding of how credit card companies make money is through two ways:

1) Charging small transaction fees to businesses who accept the credit card payments (a few cents per transaction EDIT - actually 2-3% of the transaction, much higher than I originally thought).
2) Interest payments.

They can't make much profit on you unless you pay interest. They actually make nothing at all from you directly unless you do pay interest or an annual fee.

EDIT - I actually took the time to look up an article on this. This is from Motley Fool, a financial website. The largest source of income for credit card companies was interest payments at $63.4B, with transaction fees the second largest at $42.4B. So yes, the credit card companies make the most profit from interest payments by a pretty wide margin.

https://www.fool.com/credit-cards/2017/04/13/this-is-how-credit-card-companies-hauled-in-163-bi.aspx

Because people seldom pay off their balances. What are interest rates for credit cards? 19-21% area? That equates to about 1.75%/month. Now if you charge 5k on your credit card and pay it off every month, that's 2-3%/month or 24-36% annual compared to 19-21% on interest. Thing is, majority of people will charge 2k per month on their credit card and pay off 1k until maxed out. Over a few years, they are maxed out, and then just pay the interest and can't charge anything.

 

[Gunnerclone]

Because people seldom pay off their balances. What are interest rates for credit cards? 19-21% area? That equates to about 1.75%/month. Now if you charge 5k on your credit card and pay it off every month, that's 2-3%/month or 24-36% annual compared to 19-21% on interest. Thing is, majority of people will charge 2k per month on their credit card and pay off 1k until maxed out. Over a few years, they are maxed out, and then just pay the interest and can't charge anything.

Only if you have **** credit, aren’t smart at all, or you are talking about a retail card (ie Home Depot, Best Buy, etc). I don’t see any reason for a person with decent credit to have a credit card with an interest rate over 12% right now.

 

[BCClone]

Only if you have **** credit, aren’t smart at all, or you are talking about a retail card (ie Home Depot, Best Buy, etc). I don’t see any reason for a person with decent credit to have a credit card with an interest rate over 12% right now.

No idea, I pay mine off every month and don't look at it.

 

[83Clone]

Just saw the thread and wanted to give my 2 cents since my wife and I (both 57) took FPU a year ago. Sorry if redundant, I didn't read all 8 pages of responses

At a high level, I agree with 95% of what Dave teaches and we did save some money on insurance products by making some changes.

Listen with an open mind-the concepts of living below your means and paying cash are not revolutionary.

I do not agree with any philosophy of stopping your contributions into a company matched retirement account to accelerate paying off debt. He also uses unrealistic models when giving examples of money saved over time-always saying to "put your money in a growth fund that pays 12%"-dude find me that account please.

Take some nuggets away and you will do fine. But don't feel bad if you don't wind up following his model to the letter.

BTW-good for you to be taking such a proactive approach to your financial well being at your age.

 

[agrabes]

Because people seldom pay off their balances. What are interest rates for credit cards? 19-21% area? That equates to about 1.75%/month. Now if you charge 5k on your credit card and pay it off every month, that's 2-3%/month or 24-36% annual compared to 19-21% on interest. Thing is, majority of people will charge 2k per month on their credit card and pay off 1k until maxed out. Over a few years, they are maxed out, and then just pay the interest and can't charge anything.

Ok, so you're just talking about a terminology difference. When I say "carry a balance" I mean carry any balance over from month to month that isn't paid in full and collects interest. I think when you say "carry a balance" you are talking about having a card which you continue to pay interest on, but don't necessarily make any purchases with either because it's maxed out or you just don't use it anymore. Your math still isn't quite correct, but what you are talking about makes sense. Basically, they make money based on your balance at the end of the month, so they make the same whether you continually partially pay down your limit and then spend back up to the limit or if you just let your card sit at max. Here are a few simplified examples for the sake of easy math:

Scenario 1: Pay off CC Each Month, Limit $10K, 10% Interest

Day 1 - Spend $10K, Balance $10k
Day 29 - Payoff $10K, Balance $0
CC Profit: $0*10%=0

Scenario 2: Maxed Out CC
Day 1 - Spend $10K, Balance $10k
Day 30 - Pay Minimum (Interest Only) Balance $10k
CC Profit: $10K*10% = $1K
Day 60 - Pay Minimum (Interest Only) Balance $10k
CC Profit: $10K*10% $1K
Total CC Profit - $2k

Scenario 3: Partial Paydown
Day 1 - Spend $10k, Balance $10k
Day 30 - Pay Interest on $10k + $5K Balance $5K
CC Profit: $1K (Your Spend $6K)
Day 31 - Spend $5K, Balance $10K
Day 60 - Pay Interest on $10k + $5K Balance $5K
CC Profit: $1K (Your Spend $6K)
Total CC Profit - $2K

 

[iahawks]

No idea, I pay mine off every month and don't look at it.

Agreed. I never even look at the interest rate when I sign up. Only look at the signup bonus and points I can accumulate.

 

[BCClone]

Ok, so you're just talking about a terminology difference. When I say "carry a balance" I mean carry any balance over from month to month that isn't paid in full and collects interest. I think when you say "carry a balance" you are talking about having a card which you continue to pay interest on, but don't necessarily make any purchases with either because it's maxed out or you just don't use it anymore. Your math still isn't quite correct, but what you are talking about makes sense. Basically, they make money based on your balance at the end of the month, so they make the same whether you continually partially pay down your limit and then spend back up to the limit or if you just let your card sit at max. Here are a few simplified examples for the sake of easy math:

Scenario 1: Pay off CC Each Month, Limit $10K, 10% Interest

Day 1 - Spend $10K, Balance $10k
Day 29 - Payoff $10K, Balance $0
CC Profit: $0*10%=0

Scenario 2: Maxed Out CC
Day 1 - Spend $10K, Balance $10k
Day 30 - Pay Minimum (Interest Only) Balance $10k
CC Profit: $10K*10% = $1K
Day 60 - Pay Minimum (Interest Only) Balance $10k
CC Profit: $10K*10% $1K
Total CC Profit - $2k

Scenario 3: Partial Paydown
Day 1 - Spend $10k, Balance $10k
Day 30 - Pay Interest on $10k + $5K Balance $5K
CC Profit: $1K (Your Spend $6K)
Day 31 - Spend $5K, Balance $10K
Day 60 - Pay Interest on $10k + $5K Balance $5K
CC Profit: $1K (Your Spend $6K)
Total CC Profit - $2K

Not really interested in getting into an extended discussion on this, but the basic of my statement of CC companies making the most by you maxing it out and paying it off every month is the easist said with: They make 2-3% transaction fees. So in a max out and pay off every month, they make 2-3% every month on their money 24-36% annual interest. If you let any sit, you can't charge the full amount and they get whatever the interest rate is which is typically lower than the transaction fee they charge the vendor on that portion.

This is what would be the most profitable for them (besides the fact that they don't have to worry about charge offs). Transaction fees have increased over the years also. 10 years or so you could get a 1.6% fee when you sold something. Now with 1% cash backs and several cards giving much higher incentives, they just don't eat it, they have jacked up the cost to the vendor and are now pushing 3% pending the card. Some may be more. This is why they won't give you cash when you return something, they would lose 3% just letting you do that.

 

[Judoka]

As BBClone said, credit card companies certainly make a bunch of money from people who pay interest on unpaid balances. But they aren't eating a loss of people who pay it all off each period. It isn't like there is some accountant at American Express who shakes his fist at me when I pay the full amount due every month. Credit card companies make a whole bunch of money off of the fees that merchants pay when you use the card. Which is why they incentivize you to use it as often as possible. That example 2% card - the company makes more than 2% off of those fees so even though they are giving you a percentage back they are still making a profit on every transaction. And when they offer sign on bonuses, or extra high cash back from certain types of purchases they goal is to get you to get used to pulling that card out when making a purchase.