Debt Myths

Matt and I are currently taking the Dave Ramsey class, Financial Peace University at church. We go once a week for 2 hours (13 weeks). The first part of the class is a video of Dave Ramsey "lecturing", but it is pretty entertaining, and the rest of the class is breakout groups with discussion. This week's lesson was called "Dumping Debt". The thing you have to know about Ramsey's philosophy is that any debt is bad. If you don't have cash to pay for it (except maybe a mortgage), then you can't afford it. So, this week the whole lesson was taking a myth about debt and "popping" it (he popped balloons for each one). So many of the myths are how American's live and many of us fall for them. I thought I'd share some of them...

Myth: Car payments are a way of life, and you'll always have one.

Truth: Staying away from car payments by driving reliable used cars is what the typical millionaire does. That his how they became millionaires.

Myth: By cosigning a loan, I am helping out a friend of relative.

Truth: The bank requires a cosigner because the person isn't likely to repay. So, be ready to pay the loan and have your credit damaged because you are on the loan.

Myth: Playing the lottery and other forms of gambling will make me rich.

Truth: The lottery is a tax on the poor and on people who can't do math.

Myth: Leasing your car is what sophisticated financial people do. You should always lease things that go down in value. There are tax advantages.

Truth: Consumer Reports, Smart Money magazine, and a good calculator will tell you that the car lease is the most expensive way to finance and operate a car.

Myth: You can get a good deal on a new car.

Truth: A new car loses 70% of its value in the first four years. This is the largest purchase most consumers make that goes down in value.

Myth: I'll take out a 30-year mortgage and pay extra, I promise!

Truth: Life happens! Something else will always seem more important, so almost no one pays extra every month. Never take more than a 15-year fixed-rate loan.

Myth: It is wise to take out an adjustable rate mortgage (or a balloon) if "I know I'll be moving."

Truth: You will be moving when they forclose.

Myth: "I pay mine off every month with no annual fee. I get brownie points, air miles, and a free hat."

Truth: A recent Dun and Bradstreet study found that when you use plastic instead of cash, you spend 12-18% more because spending cash hurts. So what if you get 1% back and a free hat?

Myth: The home equity loan is good for consolidation and is a substitute for an emergency fund.

Truth: You don't go into debt for emergencies.

Myth: Debt consolidation saves interest, and you get just one smaller payment.

Truth: Debt consolidation is a con.

Truth: Debt consolidation typically saves little or no interest because you will throw your low interest loans into the deal.

Truth: Smaller payments equal more time in debt.

Myth: You need a credit card to rent a car or to make purchases online.

Truth: A debit card will do all of that, except for a few major companies. Check in advance.