Thoughts on "Not borrowing", living in America

[Stand_watie]

      My little bro got me to thinking about this proposition a year or eighteen months ago. He has gotten enthusiastic about a money management program espoused by a guy named Dave Ramsey. His money management principles seem very simple, along the lines of

a)Save like crazy

b)Don't borrow

     He has combined these simple principles with a "motivational" seminar series that seems to work for both the salesman and the consumer, ie people are happy to pay him to motivate them, and are sufficiently motivated by him to actually "save like crazy" and "not borrow", and are happy with the financial results they get from this.

      What are our forum members opinions regarding this philosophy? Is there a major flaw in this thinking that I am missing (other than the obvious, that a "poor entrepeneur" might have to take major credit risks to springboard to the position of "filthy rich" entrepeneur)?

      The apparent benefit of this type of thinking was recently brought to my attention when I visited my cousin's new house. It is a 300k house that he bought for 150k (400k house, bought for 200k, if figured at property values and "cost of living" indexes for median American homes). He paid cash for the house, and he has no debt. He has five kids, youngest are in college, older are beginning careers in the business world. Ever since I have known him (I was a teenager and he was a younger middle aged man) he has been variously employed between menial technical jobs and well paid-technical jobs (he is a mechanical wizard). Now, at age (about) 55 to 58 he seems to have the American dream job, he builds custom motorcycles and does well by it (and loves his work). He owns his home (and vehicles, etc.) free and clear, works in his own garage (actually a detached building) at home.

      Ironically, my cousin got into his "no debt" mindset (it seems to me) long before Dave Ramsey was on the air (again "seems to me"), as a reaction to growing up poor with a dad that over-extended himself to credit and put the family into the line of fire of bankruptcy/repossession/etc.

[Monkeyleg]

I'm the last one to ask for financial advice, but the principles your brother and cousin have embraced seem to be solid.

It would be difficult to grow a business to any extent without borrowing. I suppose it's done, but my guess is rarely.

People I know who are successful borrow money when the interest rates are in their favor, i.e. when they can make more in interest with the money they're holding than they'll pay out in interest on the money they're borrowing.

Your cousin sounds much like my next-oldest brother. He has nearly a mil in conservative investment vehicles, he and his wife have pensions, he pays cash for cars, boats and other toys, and his house was paid off years ago.

It's ironic that the motivational speaker is making a killing by charging people to listen to advice on saving money.

[Gowen]

We followed the Dave Ramsey plan before we ever heard of him.  We were in $15k debt after we closed a business we owned.  We had to live on less than we made to survive.  My wife who is the numbers geek, told me if we battened down everything we could pay is off in a year.  I said do it.  We did it and have never gone back.  The only debt we have is a house payment and that will be gone as soon as possible (about 4 years).  What he prescribes, works.  Like he says, "live like no one else, so you can live like no one else."  Think about it, no payments on anything.  You can do whatever you want with YOUR money(yeah, don't talk to me about the IRS).

[Uncle Bubba]

I can ditto what scanr said about Dave's program. It works, as long as you remember the mantra, "Live like no one else so one day you can live like no one else." We're in the beginning stages of the program now. No, it's not fun, in the sense most people have of the word, but it is fun to see where and how much we can save on living expenses while we pay off our debts. We're looking at five years, at present income, to be debt-free. It won't take that long, but that's where the plan is at the moment.

[Uncle Bubba]

It's ironic that the motivational speaker is making a killing by charging people to listen to advice on saving money.

Nothing ironic about it. Dave doesn't make a killing. He makes good money, but not a killing. He gives away a lot of stuff having to do with his program, too. Tickets to his speaking engagements are given away nearly every day on his radio show; packages made up of his books, paperwork to follow the plan, software to do it on your computer, and the like, ditto.

I'd been listening to Dave off and on for a good while and so had my wife. I heard Dave offering a discount on a lot of his stuff last Fall so I ordered his book Total Money Makeover. When I saw the charge was more than I'd heard him say it would be on the air I called his business and asked why. The CSR said my order happened to fall between two sales periods, about a week when the price wasn't discounted. I told her I had just heard Dave touting the sale the week before and it felt as though I'd been rooked, because what's the point of having a week's break in a sale period of two months? In a nutshell, she said, "We don't want you to ever feel like you're being ripped off. That's not what Dave's about. I'll ask the sales weasels [sic] why they did it that way. In the meantime I'll discount your purchase as it should have been done in the first place, and would you like (a choice between two of Dave's software programs that go with his system)." I picked one and a week later got both in the mail with a hand written note that said, "Merry Christmas from the Dave Ramsey Show."

And what's wrong with making a good living by teaching others how to get out of debt by using the method you yourself used to get out of debt, anyway?

[sumpnz]

We've been debt free for about 2 years now after my wife got turned on to Dave Ramsey by a good friend of ours.  It's absolutly saved our bacon while I've been layed off.  Only bills we have to pay are rent and utilities.  No car payments, no credit cards, no student loans, nothing.  

The biggest thing about being debt free, and forcing ourselves to stay that way is that it does compel a greater degree of patience when it comes to getting just about anything.  Another car, buying a house rather than renting, toys of any description, etc. all just take a bit more time to be able to get.  That, I think is the hardest part for a lot of people.  But in the long run we'll be able to afford so much more of all that stuff that it'll be worthwhile.

As far as being an entrepeneur goes, what most people fail to realize is that tons of successful companies start out on a card table in the living room with little more than pocket lint for startup capital.  And by starting small and growing only as profits allow means that when you do finally build it to the point of being a large company you aren't have to take most of your profits to pay the bankers, or, worse yet, venture capital partners.  

Dave went from totally bankrupt (to the point of driving a loaner car that he almost literally had to use a weekwhacker to get to) to be very rich by not borrowing a dime, and growing his buisiness very slowly, and being very careful about what he spent his money on.  For example, when his radio show was first getting started he rented someone else's studio.  Then as money started coming in he set up his own small studio but with second hand equipment he'd bargain hunted for.  Then he got nicer and fancier equipment in larger facilities as profits allowed.  Then he got Fox to pay for his latest studio so he could do his show on FBN from his building in Nashville.  And, oh by the way, he paid cash to buy that $6mil building.

[Stand_watie]

And what's wrong with making a good living by teaching others how to get out of debt by using the method you yourself used to get out of debt, anyway?

      I don't think there's anything wrong with it. I think it's a mutually beneficial model used since mankind first started having community support.  Ie, "I will teach you how to more successfully fish, your payment to me will be a fish". Win/win for both parties...

[Uncle Bubba]

     I don't think there's anything wrong with it. I think it's a mutually beneficial model used since mankind first started having community support.  Ie, "I will teach you how to more successfully fish, your payment to me will be a fish". Win/win for both parties...

My point precisely.

[BryanP]

Before Dave Ramsey began to be known on a national level his radio show was a local thing here in Nashville.  I've been listening to him off and on since about 94.  His ideas do work.  He's a bit radical, but there's no arguing with results.   Me, I'm debt free and plan to stay that way, so I guess you could say I'm a convert, even if I didn't follow his "plan" precisely.

[RevDisk]

Never heard of the guy before, but I agree with him.  Mostly.  There are intelligent uses of credit if you have discipline.

I have a single credit card, which at the moment I have paid $0.02 total in interest YTD.   I occassionally use my credit card to spread something over two pay periods.  Usually insurance, as I like to pay for an entire year. 

Biggest thing is not getting a pile of regular bills.  I got other folks to pay for college, so no student loans.  It's really not that much of a sacrifice to not have a huge TV or cable.  So my monthly bills are rent, electric, gas and car payment.  Car payment I'm saving up to pay off way early.

I automated a fair amount of my savings.  I have a second bank account which I use for long term savings, which I automatically put X dollars into every paycheck.  X dollars also go into my retirement (roughly 13%).  Bills are mostly autopaid.  Wait a day after payday, the rest I can "blow" if I am inclined and everything is already handled.

I'm still fairly young so admitly I don't have tons of assets yet.  But I don't have any significant debts to hold me down.  No huge high definition TV, expensive rims, or whatnot can be half as entertaining as being relatively financially secure.

[K Frame]

Credit is a tool that can be very useful if, like any other tool, it is used properly.

To completely dismiss an entire tool set isn't, in my way of thinking, particularly helpful or useful.

[Perd Hapley]

But it has been very helpful for people without the discipline to use credit wisely.  One would think the next step would be to learn to use credit in cases where it is helpful. 

And why cut up all your credit cards, when you might need them to rent a car or make a reservation? 

[Nick1911]

I'm not so sure about "don't borrow".

I personally think once a sizable down payment has been accrued, buying a home financed on credit makes great sense.

If you have a solid business plan and the drive to execute it, leveraging your idea with someone else's money can greatly speed up building a business.

[Monkeyleg]

I'm not knocking Dave or his program, it's just that there is at least a superficial irony in selling tickets to teach people how to save money.

As far as being an entrepeneur goes, what most people fail to realize is that tons of successful companies start out on a card table in the living room with little more than pocket lint for startup capital.

It depends on the business. Larry Page and Sergey Brin started Google on a shoestring. When I lost my job at a photo studio in 1987, my clients were art directors from the biggest agencies in town. I only borrowed to buy what I absolutely needed, but I couldn't be a photographer without equipment. Even then, I wound up renting tons of equipment until I could afford to buy. Fortunately I'd been buying equipment when I worked for my former employer, so I didn't have to borrow to buy every last bit.

[K Frame]

Lots of businesses have been started on shoestrings with pocket cash.

You think Google is still operating that way, though?

[sumpnz]

Lots of businesses have been started on shoestrings with pocket cash.

You think Google is still operating that way, though?

Dunno 'bout Goggle, but UPS is debt free.  There are a few .com types that are debt free.  Can't remember them off the top of my head, but my wife probably could.  Even her business school profs said that the debt free companies were performing far better than the "leverage yourself to the hilt" types thought was at all possible.

And why cut up all your credit cards, when you might need them to rent a car or make a reservation? 

There's very little, besides going into debt, that can be done with a credit card that you can't do with a debit card.  When it comes to renting cars (or making other reservations) there are a couple places that refues to take debit cards, but they're the most expensive agencies anyway.  Most will take your debit card.  Only thing about doing that is you have to plan ahead a little bit more as they will typically place a large hold on your account.  So if you're on the ragged edge that month with your checking account if can cause problems.

I personally think once a sizable down payment has been accrued, buying a home financed on credit makes great sense.

If you listen to Dave, he does not recommend that everyone wait to pay cash for a house.  He does for his personal business, but he doesn't expect the rest of to do that.  He is still pretty conservative, but he doesn't yell at people that have a minimum 10% down payment, and get a 15 year (or shorter) fixed rate mortgage where the payment is no more than 25% of take home pay.

[Standing Wolf]

Nah, not me. I'm with the Won. Max out them cards, kids. The gummint gonna get here pretty soon & fix things. I been a victim long nuff.

[lupinus]

Dunno 'bout Goggle, but UPS is debt free.  There are a few .com types that are debt free.  Can't remember them off the top of my head, but my wife probably could.  Even her business school profs said that the debt free companies were performing far better than the "leverage yourself to the hilt" types thought was at all possible.

For a brick and mortar example Walgreens was also (until very recently) debt free.  And even now the debt is peanuts for a company of it's size.

[thebaldguy]

We would all be better off if we didn't borrow so much money. That's one of the reasons our economy is in trouble. Banks gave loans/credit cards to people who didn't deserve them, and people over extended themselves on credit and couldn't pay it back.

[AZRedhawk44]

Never heard of the guy, but I adopted his philosophy (about 80% of it at least) last year.

The biggest divergence I'm taking is I'm getting a FHA loan this month, so I'm only putting 3.5% down on a house.  The houses I'm looking at will cost me the same on a mortgage payment as I'm paying in rent right now, so no big deal there. 

Aside from that, I'm paying off the plastic and living entirely off my cash allowance I give myself every pay period.  Last time I used a credit card was simply because the bank had messed up their linkage with Visa on my debit card and I hadn't yet withdrawn my cash allowance to have green in my pocket.  One of the nasty little plastic buggers just got payed off this month, and another one will be done by November or December.  By the time I get my tax refund with my home credit in it, I'll have my plastic paid off and probably my truck as well.

I'm not really cutting corners with living expenses, though.  I still eat decent food, and go out to dinner once a week or so, as well as out to the bar with friends and such.  I could probably save another $100 a week between gas driving all over town and fun expenses, but then I become a single hermit with no social outlet.

My furniture is sorely lacking in "niceness," but it will be very pleasing to me in six months to simply pay cash each month for each room I decide to buy furniture for, rather than financing it today and paying it off over a year or two.  I can easily wait for that.

[Monkeyleg]

My furniture is sorely lacking in "niceness,"...

Our bedroom bureau and vanity were purchased by my parents in 1940, and they look like it. When my wife and I moved in together in 1974, I took them from my parents' basement, and we've used them ever since.

Other furniture we have is from rummage sales or closeout sales. I'm really surprised at how little we've spent over the last thirty years. Even our 30" TV only cost $10.

[Myself]

I agree with the concept of not being in debt.  Perhaps a better theory would be to not borrow for things that will not appreciate in value.  Credit, when used wisely, can make you money.  I get hundreds back each year on the use of credit cards and pay no fee.  I don't buy what I can't pay off the next month.

I don't have car payments and until recently no mortgage.  I also have no job and still have kids in college.  I took out a home equity line of credit when the market started tanking because it made more sense to pay 6-7% interest on the money I was borrowing then to cash in stocks that were down 25-60% to pay bills.  So far this has worked out well.  You must have the discipline to use credit judiciously and wisely.

[MechAg94]

The other side of Dave's teaching is showing people how to budget properly and realistically look at what they take in versus ALL of the money going out.  Putting a name to each dollar is the way he terms it I think. 

Either way, his target audience is typically not people who are already responsibly using credit.  I just take it as more ideas I can use even if I don't use all of them.  For me personally, I finally got into a position the last few years where my truck is paid off and my necessary bills are less than 50% of my income.  I have been surprised how much money have saved in a short time while still buying guns and stuff.  I really need to save more though.  :)

[K Frame]

United Parcel Service is debt free?

I wonder if anyone told them that they're supposed to be debt free?

http://www.cfo.com/article.cfm/10486763?f=related

http://www.shareholder.com/visitors/dynamicdoc/document.cfm?CompanyID=UPS&DocumentID=2475&PIN=&Page=29&Zoom=1x&Section=64660#64660


"Interest expense increased $196 million in 2008, primarily due to a higher average balance of outstanding
debt. In early 2008, we completed the issuance of $4.0 billion in long-term debt, the proceeds of which were used
to reduce our commercial paper balance. Our commercial paper balances had previously increased to fund the
$6.100 billion Central States Pension Fund withdrawal payment in December 2007. The impact of increased debt
balances was partially mitigated, however, by lower average rates incurred on our variable rate debt and interest
rate swap agreements as a result of declines in short-term interest rates in the United States throughout 2008."

[Gowen]

Who's going to stay in  business when the economy is tanking?

http://www.usatoday.com/money/companies/2002-08-21-debt-free_x.htm

Companies with no debt fly high
By Matt Krantz, USA TODAY
Microsoft, Walgreen, Cisco Systems and William Wrigley have something in common that may surprise you. None of them has any debt.

Unlike companies such as WorldCom, US Airways and Vivendi Universal, which have choked on their debt loads, companies that avoided the temptation to borrow during the boom are looking smart. Now that the economy has slowed, they don't have ominous interest payments that've caused their overaggressive rivals to blow up.

"What kills companies is debt," says Peter Andrew, analyst at A.G. Edwards. "Without debt, companies have the financial wherewithal to survive."
     Debt-free companies       
The largest debt-free companies, in terms of revenue:

Microsoft
Walgreen
Cisco Systems
Gateway
CDW Computer Centers
Family Dollar Stores
Ross Stores
Gevity HR
C.H. Robinson Worldwide
Bed Bath & Beyond

Source: USA TODAY research

Several large companies say staying debt free is part of their strategy:

    * Cisco has never borrowed money and doesn't plan to. The networking company uses the cash it generates to fund expansion. Last quarter, the company threw off $1.6 billion in cash from operations.

Not having debt has helped Cisco hold up much better than rivals during the vicious downturn. Cisco earned $772 million during its most recent quarter, while Lucent lost $7.9 billion. Having interest to pay on $3.2 billion in debt hasn't helped Lucent.

    * Walgreen says its drugstores generate enough cash to pay for its expansion. Its philosophy of being debt free is similar to a consumer who pays credit cards off every month, says spokesman Michael Polzin. "We're the pay-as-you-go type," he says. Its shares are just 9% below their 52-week high.

Meanwhile, Rite Aid, its former rival, is struggling with a $3.7 billion debt load. Rite Aid's shares are 76% off their 52-week high.

    * Wrigley doesn't have a policy banning it from borrowing, but the chewing-gum maker says it has never had long-term debt since being founded more than 110 years ago.
    * Ross Stores, a discount apparel retailer, has structured its business so it doesn't have to borrow. Excess cash generated from existing stores allows the company to expand the number of stores by 12% a year, says spokesman Katie Loughnot. And new stores only cost $1.3 million in cash to open, yet generate about $6 million in revenue in their first year. That means they pay for themselves in about two years.

The debt load on companies has been steadily increasing, hitting a record $4.9 trillion in the second quarter of 2002, estimates John Lonski, chief economist at Moody's Investors Service. But companies may be having second thoughts. Debt outstanding among non-financial companies rose just 2.8% in the second quarter, well below the 6.1% growth a year ago and 11.9% in the second quarter of 2000, he says.

But companies that resisted are glad now. "The companies that were a little more conservative with their money are better off," says Tom Galvin, spokesman for debt-free Internet company VeriSign.