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Bad advice from Dave Ramsey

Close Encounters of the Cheap Kind has a new home at www.CheapEncounters.com!

I spent a good part of this afternoon on the road, so I did something I don’t do very often. I listened to talk radio, specifically the Dave Ramsey radio program. Now, I am not extremely anti-Ramsey like some bloggers. I think Ramsey gives relatively good advice, provided that you understand that the intended audience is (or at least should be) the relatively uninformed that have already gotten themselves into financial trouble. In my view, his advice isn’t to send you to the top of the highest financial mountain, but should get you at least to sea level.

A prime example of this is his system of paying of debt. The basic concept is that you making a listing from lowest to highest of all of your debts and then work at paying them off, starting with the smallest debt and working upwards. If you know anything about accounting or finance this makes you cringe, as the system does not take into account the interest rate charged on these debts. In a financially prudent process, you would pay off the highest interest rate debts first since those are the ones that are incurring the most interest, ignoring the amount of the balance. Why would you pay off $1000 in debt over five accounts at 0% interest when you are incurring interest at 20% on a single account with a balance of $1000? But for the intended audience that has already proven they have trouble handling their finances, the system works because of the psychological effects of seeing more bills completely eliminated help the person keep with the program, although in the end you pay more interest than if you had paid the highest rate debts first and stuck with it.

Anyway, the bad advice from today was a question from a caller about a collection notice received on an old debt. The caller indicated he had received a letter for an old debt that was written off by the credit card company eight years ago, and asked if there was anything to worry about. The debt had been on his credit report and had recently fallen off because of age. Ramsey’s response was that this was a debt that needed to be dealt with immediately and encouraged the caller to contact the collection agency to settle at about 10% of the value of the debt.

BAD ADVICE! At this point, the debt is essentially uncollectable because of the age of the account. That’s why it fell off the credit report. Although it might sound counterintuative, if the debtor makes any payment of the debt it could cost him nearly, as the new activity will essentially make the account active again allowing the creditor to put it back on the debtor’s credit report. Even if he pays the account in full, it will still be listed on the credit report indicating the account was turned over to collection but later paid. If the debtor does nothing, it would probably never appear on the credit report again.

I am all for personal responsibility and paying one’s debts, however the potential negative effect on the person’s credit make pursuing a settlement a bad idea.

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May 16, 2007 Posted by | Education, Tips | 1 Comment

Happy 2nd anniversary to Five Cent Nickel!

Close Encounters of the Cheap Kind has a new home at www.CheapEncounters.com!

One of my favorite personal finance blogs is celebrating its second anniversary today. Two years ago today FiveCentNickel.com had its first blog posting. Since then he has posted 985 articles and received 5,574 reader comments. Quite the accomplishment, indeed.

FCN was actually the very first personal finance blog I read, and remains one of my favorites. I even subscribe to the RSS feed so I can make sure to keep up with his blog. His blog is one of the best I have found in that it is both informative and entertaining to read. Classic FCN posts include “Life’s too short to drink cheap beer” and “Dave Ramsey is Bad at Math”. While I don’t drink at all, these posts make you laugh but also think.

To celebrate the big 2, FCN is doing a big giveaway. Just by posting here you can enter to win one of five primo prizes, including an iPod Nano. If you have a blog of your own, you can review his site for an additional three chances to win. Learn more about FiveCentNickel by checking out his welcome page, and then be sure to explore around on his site for a while.

May 1, 2007 Posted by | Education, Links | 2 Comments

Online Personal Finance Tutorials from the LDS (Mormon) Church

Close Encounters of the Cheap Kind has a new home at www.CheapEncounters.com!

It isn’t my intention to make my religion part of my personal finance blog, but I am a member of the Church of Jesus Christ of Latter-day Saints, more popularly known as the Mormon Church. One of the topics that has been mentioned on several occasions by the leaders of our church is prudent resource management, including prudent management of financial resources (money). Understandable considering that the rate of bankruptcy filings in Utah (home of a large percentage of the membership of the LDS Church) is one of the highest in the country. The Church has published various guides and pamphlets on the topic, and has even started a website dedicated to resource management called ProvidentLiving.org.

One of the newest resources on this website is an online tutorial discussing the basics of personal finance. The tutorial does have an LDS flavor to it (as would be expected), discussing concepts like tithing and including quotes from various LDS Church leaders. However, the tutorial has a lot of great information for members and non-members alike. The tutorial can be found online at:

http://www.providentliving.org/channel/0,11677,1709-1,00.html

April 2, 2007 Posted by | Basics, Debt, Education, Religion, Savings | Leave a comment