Posted: 6/13/2006 1:39:33 PM EDT
|
Many of us have read Dave Ramsey's book, and almost all of us have either heard or taken advantage of zero-interest financing at some point. I currently have about $6,500 on zero-interest credit cards, with the first expiration over a year away. Ramsey says pay them off. I am religious about using such arrangements as intended (i.e. - I pay them off in full one month before the period expires). I'm thinking about what Dave said, though. What do you suggest, and why? I won't even get into the "student loan" I'm still stuck with. 
|
|
Not sure what you're asking. Are you asking whether you should pay off your zero interest credit card debt NOW or wait until one month prior to the end of the zero-interest period and THEN pay them off? I assume you've got a lump of cash sitting just doing nothing .... I say do the latter ... make the zero interest period work for you! Even if you're not overly risk averse, put the money into a short-term CD and let it grow while you're riding out the zero interest period. At the end, you should be ahead a little bit and then you can whomp your credit cards and pay off the balances. If you pay them off now, you forego the return on investment that you could have made with the money. You also forego having the stash of money that you are relying upon because you've handed it over to the bank. If you don't already have an "emergency fund", you could use that cash if your car gets totaled or you suddenly need a new roof on your house. Keep in mind I have not read any of Ramsey's books, but I have read books by Ric Edelman and the guy who wrote Rich Dad, Poor Dad. |
|
There is always the possiblity of what if. I always used it as you are doing to get out of debt. I made balance transfers from a high interest card to a zero interest. Paid it off a month or two before the period ended, then waited at least a month before I used the card again. (Paying off the balance each month this time.) Because sure as death and taxes they tried to charge me interest every time till I pointed out there was no balance to charge it against. If that unforseen problem happens, then you have cash in hand to help. Some places don't take credit cards. How much worse off would you be not having anything when it hits but a credit card? |
That's precisely what I'm thinking. BTW, this was not debt consolidation. These were real purchases I needed (furniture, refrigerator, washer, etc.) and, well...... the ET system (gotta have priorities!). The ex kept everything else. I have enough cash to pay them all off, but I think I'll play hide the payment until it comes due, then write a check. Unless someone can convince me that's not wise.
|
There is value to being debt-free, that is true. Can't fault him there. That said, I am more of the mind that your money strategy should be designed to maximize the effect of your money working FOR you. I don't know if Ramsey goes into this, but in a lot of the books (e.g. The Richest Man in Babylon) the concept of "rather than you working for your money, make your money work for you" is stressed, and I think it's a concept a lot of people tend to give short shrift. You work hard for your money at your job. Most people take that money and after spending on essentials (food) they spend it on stuff that depreciates (e.g. cars). In that way, they lose money, instead of putting their cash to work making money for them. Putting the cash into investments means that your money is going to work every day and making more money for you. I guess in this way your wealth is measured not by what you have in toto, but what income your money/investments bring in for you on a periodic basis. Putting your cash into paying down debt that is already costing you 0% doesn't make you squat.  I understand Ramsey's aversion to debt but there's not much risk at all if you take the cash and put it into a safe investment like a CD or money market fund. So let's say tomorrow your house gets hit by a tornado. Your roof gets ripped off. You need a new roof. What are you going to do? If you paid down your 0% credit card, you're still gonna need to get the cash somehow. Take out an home equity loan? Dunno what rates you could get on that loan. And how long would it take you to get that loan? In this situation, you have to borrow (again) to pay. The only question is, how much will it cost (%?) and how fast can you get the cash? If you put the cash into a money market fund (CDs are not liquid -- downside to that strategy) you could pull out the cash and buy the roof. This strategy means you are in the clear with regard to "how fast can you get the cash" because it's already in your money market account. But what to do when the 0% interest rate runs out and the rate shoots back up to 20%? Well, you could flip it to another 0% interest card. Or if not, I guess Ramsey is right ... you could get left holding the bag on the higher interest. The question is, which is worse? I think the solution is to take your lump of cash and: 1. Get an emergency fund. This will cover unexpected expenses like needing a new roof or a new tranny on your car. If you don't have one now, get one. It is said that 3-6 months of expenses (not salary) is a good rule of thumb. More if you are in a profession that doesn't have a steady paycheck (e.g. you work on commmission), less if you have a more stable check. 2. Take what's left and invest it in a safe investment. If liquidity is key for you, put it in a money market account. You won't make much interest, but that's the risk/reward tradeoff. If you are willing to take more risk, put it in a CD. There are CDs with terms less than a year, so it's possible. Do not put money in equity unless you won't "need" it for 3-5 years. This is the typical window that allows equity investments that have taken a temporary downturn to recover. 3. Pay down that 0% interest card prior to expiration. Does this mean you blow out your emergency fund to do so? No. You have time on your side, so use it to save up more money in the interim so you can keep both your emergency fund AND pay off your credit card debt. I don't profess to know all the answers ... your optimal strategy will depend on how willing you are to take risk, your age, whether you have a wife, kids, girlfriend or whatever. |
| I waited to pay mine off, I had about 20,000 on mine and thought why the hell would I pay it now. I made a little money on it sitting and cooking and got a free AR out of the deal. I waited one 3 months and paid it off once a monthe at a time. The only problem was that when I did pay them off they raised my limit on my card. I didnt want to have that on my credit report so I had to call them and get it back down there. |
Is that realy beneficial though? Interst rates on savings accounts are so low right now (well below inflation) that even keeping the money in a savings account you're technically 'losing money'. For example the best my Credit Unition will do is 2.59% and that is in a preffered Money Market account (with a $10,000 minimum deposit). Standard savings is only 1.51%. Short term CD seems the best option (4.28% for 6mo up to 5.33% for 48+ mo). Savings rate at the local bank is 0.35% (yep just over 1/3 of 1 percent), with CDs running from 3% to 4.3% (60 mo). (and that is inline with the other 'for profit banks'). |
|
I always figured the zero intrest deals are a scam. You just pay the interest in the total cost of the purchase, I assumed. I always wondered if someone walked in to 'Rooms-To-Go' who have the 'no interest until 2009' type deals would get a better up-front price if they offered to pay cash instead  I did do the zero % interest on the Saturn, as they are no haggle prices anyways. |
Oh, of that I have no doubt. Ramsey says as much, as well. I just didn't have the cash back then. One thing I DID do, though, was pay off my truck. Biggest check I've ever written. More than $12K, but it's a shitload of interest I DON'T have to pay over the next 4 years, as well as no monthly payment.  So I'm stuck with this 0% debt, my credit card (~$6K), and that fucking Student loan ($34K). And my mortgage. Needless to say, the CC goes first at the end of the month, anfter which I may very well lock it in the safe I just bought with it.
|
True, but you're losing it at a lower rate. If you just pay it off right now, you don't get the benefit in even a small amount of interest.
If Zaphod has the bank I think he has, the savings account rate is a bit higher at 2.75%. He could always start an account at ING or something like that were the interest rate is a bit higher. He is getting to use their money for free, he should, IMO, take advantage of it, whether he's making money, or losing less money because of inflation. |
What's funny is that you already know the answer. You just said it. As a Christian, we are not supposed to "presume the future". You don't know what will happen. "The debter is slave to the lender..." Sound familiar? How about this one: James 4:13 Go to now, ye that say, To day or to morrow we will go into such a city, and continue there a year, and buy and sell, and get gain: 14 Whereas ye know not what shall be on the morrow. For what is your life? It is even a vapour, that appeareth for a little time, and then vanisheth away. Why are these people condemned? Because they presumed the future. Pay your debts, old buddy. Get debt free. Be a "good steward".  We both know Someone that will be proud of you. |
|
Altenately, you could pay off that debt, something could happen and then you're right back into debt. What's the difference? ETA: Sorry, paying it off doesn't make sense under any scenario. Let's say the worst happens and you die. They'll take the money from your estate anyway. If you are injured and can't work, you can pay off the debt and start a newer simpler life. You will also have the benefit of the interest you earned. If the banking system failed and your money is "lost" who is going to care about your debt anyway. The key is to not touch the money until you have to take it out and pay off the debt. |
|
I think what I'm going to do is a hybrid. I'll set the money aside in a money market account, and when the clock ticks over, send one payment and kill the debt. If I suddenly HAVE to pay it off, I'll have the cash ready, but in the meantime, I'll make at least a little bit. And if I suddenly get the urge to pay it, well, I can do that, too.
|
sounds like a good plan, as long as your money market is making money above fees and inflation...oh and capitol gain taxes. Make sure you account for all of these variables or you may not be making any money at all. |
| Dave is simply anti-debt to the extreme of ignoring possible beneficial situations from 'debt'. Like credit cards for example, the rewards you can get can add up to hundreds per year for stuff you buy anyways. Free money. No interest loans allows you to make money on your own stash and pay them just the minimum. Again, free money. Just depends on whether you have a problem with the mental overbearance of having that debt. I make it a habit however never to get into a purchase that I could not easily pay off should I need to. |
If you're interested, check out ING Direct, Emigrant Direct, or HSBC Online. They are paying up to 4.65% right now I believe. I make a sizeable bit of interest every month. Those other banks are a rip off when it comes to savings rates. GMAC 6 month CDs are at 5.25% APY. |
