09/15/2021
I am reading a book right now by Dave Ramsey and his daughter, Rachel, Smart Money Smart Kids, and I think there is some valuable information parents can use to teach their kids the importance of budgeting, managing money and saving, but there are also some things I disagree with and want to share my thoughts on the matter.
First, Dave Ramsey is opposed to the teaching that you need to have a good credit score, because he believes it encourages having debt and debt is intrinsically bad. I don’t disagree that we should teach our kids (and ourselves) to live within our means, not spend more than we have, and avoid credit card debt, but I disagree that you don’t need to have a good credit score. Even if you live completely debt free you still need to have a good credit score to set up electricity to your home or rent a cable box. Having a good credit score does not mean having to be in debt. Teaching kids how to use credit wisely and responsibly is important too. The best way to build credit is to get a credit card and use it sparingly for something you know you would buy anyway and need, such as gas or groceries. If you have a $500 limit on a credit card and just charge a $50 tank of gas once or twice a month and pay the bill in full when it comes, you will establish a good credit score by making your payment on time and using less than 25% of the limit on the card. The purpose of credit is for lenders, landlords, utility companies, etc. to determine if you are a good credit risk, which means whether you will pay them on time or not. If you have no credit history there is no way to gauge whether you are a good credit risk or not. To have a good score does not mean having to have multiple accounts or different types of accounts. I have seen young people with 800 credit scores who have one small credit card.
Secondly, Dave firmly believes in living debt free and not owing anyone anything. I think this is a great goal for later in life – to have everything paid off in your retirement years and be able to live on your retirement income, 401k, etc. I think it’s also important to not get in to credit card debt, because it’s an endless hole of high interest and is difficult to get out of. Our society likes to live on debt, to pretend we’re wealthier than we are, but we should teach our kids to work hard, save up for big expenses, have a savings account for emergencies, and not spend more than we make. However, the idea of saving up for a car or house can seem unrealistic. I’ll start with the car. Yes, you might be able to save up a few thousand as a teenager to buy a clunker that will get you to and from work, but the repair bills will need to be budgeted for and it may not last terrible long. When you have a job and are able to budget for a small car loan, the goal should be to get a reliable car, that you know you can afford to pay for. My favorites are Honda and Toyota, because most of them will run until you take them out to pasture. If you get that first car and pay it off in 5 years, over the next 5 years while you don’t have a car payment, take what you were paying for the car loan and put it in a savings account. After 5 years you will have enough money to pay cash for your next car. You will save all of the money you would have spent in interest. Keep putting money away, as if you had a car payment so the next time you need to buy a car you’ll have even more money and could afford a more expensive vehicle.
Next, I’ll address the idea of not having a mortgage. It is unrealistic for most of us to save up the hundreds of thousands of dollars necessary to pay cash for a house. While you’re saving that money you are presumably paying rent, or in other words, you’re paying someone else’s mortgage. While you’re paying rent you aren’t building wealth, you’re throwing that money away. On the other hand, if you borrowed money from the bank to buy a home you will still be paying a monthly bill, not now you are paying it toward owning your house and building equity, rather than throwing it away in rent. If you consider the appreciation of real estate, if you bought a house for $250,000 and after five years it’s worth $300,000 you made $50,000 that you wouldn’t have made if you were renting. Of course the goal should be to pay off that mortgage so at some point you can be without a mortgage payment, so if you can pay extra toward the mortgage payment and pay it back faster, that’s great.
Overall, the teachings of Dave Ramsey can be helpful in tackling debt, avoiding financial pitfalls and encouraging saving for the future, but sometimes taking on debt, especially in the form of a mortgage, can be a good thing for your future. Just be realistic in what you can afford in a house payment so you are still able to live debt free in other areas of life and save for other expenses.
