Dave Ramsey Says I Can Drive Free Retire Rich

by Mike on April 28, 2010

Anyone who reads this site knows that I am a fan of Dave Ramsey. The Total Money Makeover: A Proven Plan for Financial Fitness was one of those books that gave me a simple, no-kidding plan I could follow to get the finances on track. I have attended a 1-Day Entreleadership class taught by Dave, and have been working with a Financial Peace University representative to bring the 13 week course to my church. There is a lot of financial advice out there, but I have no problem recommending Dave Ramsey. However, I don’t agree 100% with all of his ideas. One such idea is Drive Free – Retire Rich. The basic idea is this:

Instead of upgrading your car and paying the bank month after month for a depreciating asset, keep the car a little while longer and pay yourself by putting the money in a interest growing mutual fund. Then by a used car with cash, rinse and repeat. After a few cycles, you’ll have more money put away for a better car purchase and eventually the mutual fund will generate enough gain such that you can continue to by new cars without monthly payments. Pretty cool right?

I think so, in fact, I can’t wait to be finished paying for my vehiclesoI can implement a modified version of this plan. Why modified? As I stated earlier, some things I don’t agree with 100% and this is one of them. In the video below, you’ll see the numbers soar. The formula is assuming a 12% return. Not only is this very optimistic, it is assuming that will be the rate of return when you are ready to make a withdrawal. What if your “car mutual fund” takes a tumble right before you are about to make a purchase? Do you wait for a rebound? Use your emergency fund?

Once I am done paying for my car (next year), I plan to allocate 70% to a car mutual fund and 30% to a savings account. Why 70/30? I’m planning (and hoping) to get at least another 5 years out of my car. Saving 30% of my current monthly payment for 60 months without including interest would enable me to buy a reliable used car in 5 years. If the mutual fund tanks….I’m not left without funds for a car. If it performs well, then I’m in a much better position. Also, I’m not banking on a 12% return, but if it happens, I’ll be pleasantly surprised.

I believe this modified approach will take out some of the risk.

Although, I’ll still have some driving expenses because this method doesn’t eliminate the need for car insurance and gas. However, I’ve gotten those costs pretty low by carpooling to work and comparing insurance companies on MoneySupermarket.com.

What about you? Do you think it is possible to “DRIVE FREE – RETIRE RICH?”

{ 1 trackback }

uberVU - social comments
April 28, 2010 at 10:51 am

{ 16 comments… read them below or add one }

1 Barb Friedberg May 2, 2010 at 3:39 pm

Hi Kita,
The concept is sound. We’ve paid cash for our cars and kept them forever. But, a stock index fund should only be used for funds needed 5-10 years away. STocks are way to volatile to depend upon for any short term goal. I liked your idea of having some back up cash in case the stock mutual fund has declined substantially when you need the cash to buy the car. Best regards Barb
.-= Barb Friedberg´s last blog ..HERE IS A GUARANTEED WAY FOR YOUR MONEY TO KEEP PACE WITH INFLATION-Part 1 =-.

2 Orville April 30, 2010 at 9:32 am

I think you either do what you are doing, or you keep all the money in a more liquid state with CD or savings and lower your price goal. The actual income and risk tolerance should determine the investment option, as well as the desired price. With a modest vehicle, 4 or 5 years of savings in CD or savings account will still leave a person ahead of the game, they should have enough to buy the vehicle and still have some extra to kickstart the next phase for when the current vehicle is not serviceable.

And don’t forget to put money aside for maintenance on the current vehicle.

3 Torrey April 29, 2010 at 10:17 am

I’ve seen countless examples of people sabotaging their financial future by refusing to free themselves from car payments. The concept is great from Ramsey but as you mentioned, 12% is kidding ourselves. I like your modification

4 Beau April 29, 2010 at 8:59 am

I was the internet manager for The Kia Store Anniston-Oxford and I was giving this advice nearly 5 times a day. I had countless amount of people wanting to trade in their car and stack their existing loan on their new one, putting them 5-10k upside down. While obviously it is the dealerships best interest to sell as my cars as possible, we were not comfortable doing business like that. We would always advise them to pay down their lown first and they get a new car. I would try to explain to them that rolling over loans will always stick with you and be a thorn in your side. I never thought about putting money in a mutual fund, that is a great idea. I will be linking this post at our http://www.mykiastore.com/car-credit-approval-online-form.php.

5 Evolution Of Wealth April 28, 2010 at 4:48 pm

There’s not a financial planner out there that would recommend stock mutual funds for short term (less than 5 years) savings. The reason they won’t is because they can’t due to compliance regulations. I guess it’s a good thing that Dave Ramsey isn’t a financial planner.

I agree that it’s a bad idea to finance a depreciating asset but is it really that much better to pay cash for it?
.-= Evolution Of Wealth´s last blog ..Sunday Link Rodeo 24 =-.

6 Lakita (PFJourney) April 28, 2010 at 5:00 pm

Evolution,

If you don’t finance or pay cash for it….what other alternative is there?
.-= Lakita (PFJourney)´s last blog ..Dave Ramsey Says I Can Drive Free Retire Rich =-.

7 Orville April 30, 2010 at 9:26 am

Good point. A bicycle is not an option for most of us. And public transportation is only available in major metro areas. I think NYC is about the only place I would venture to live without a vehicle.

8 Jamar April 28, 2010 at 3:01 pm

Great article. I think this is a great system to use when considering purchasing a vehicle. It would be good to hear your take on how we could use a similar system like this for other purchases that make sense to do so. The system is good, I think the key is staying committed to it. Delayed gratification is a problem that many Americans have, we want what we want when we want it. Can you resist those day to day urges and desires and sacrifice for the greater goal or for the bigger picture. That’s 1 reason why credit card companies are rich today! Think about it! And oh by the way Honda’s are solid!

9 PF Journey April 29, 2010 at 8:04 am

You bring up some good points!

This system is good for large recurring purchases. Besides a car, I’m not sure how many other assets could use this model. Maybe home repairs to build equity…but I can’t think of much else. Your thoughts?

10 Aaron @ Clarifinancial April 28, 2010 at 9:17 am

It’s all about understanding your own risk and making changes as appropriate. As you mention, there is a lot of risk when it comes to the timing of this plan because “average returns” don’t happen smoothly. Also, just because that is the “stock market average” (as mentioned in the video) doesn’t mean you will be able to net the same thing in a mutual fund for various reasons.

While we’re on the topic of investing, I like to think of cars as value-style investments. If your goal is to loose as little money as possible while you own a vehicle (and in general your car will depreciate), you might try to find under-valued used cars or over-valued new cars. In other words, if a car holds its value well, it is probably a better new buy than a used buy. If its value tanks quickly, it is a much better used buy than a new buy. This has other implications too.

11 PF Journey April 28, 2010 at 9:24 am

Aaron,

That’s a good point about under-valued used cars vs over-valued new cars…I never thought about that. Then again, I never thought of a car as an investment because of the rapid depreciation. I’ve read a book before where the guy actually flipped cars (another topic). My main factor with cars is safety, reliability, and durability….oh, and I want it for a reasonable price πŸ™‚ Honda anyone?

12 Aaron @ Clarifinancial April 28, 2010 at 3:28 pm

I like Hondas, mostly. But I would put them in the over-valued section, meaning I’d rather buy a new Honda than a used one. One of the dangers is that if a brand is over-valued, passing off a bad example is easier for the seller.

Cars are depreciating assets, and your goal should be to either buy one that will depreciate the least or find one that has already depreciated the most. A value investor basically trades on the difference between reality and perception.

Under-valued cars include things like: Subaru (not WRX or STI), Mazda (not Mazda 3), Hyundai, Kia, Pontiac, Cadillac (not CTS or Escalade), Saab, Infiniti (their perception is getting better which is bad news), Land Rover etc. There are some great cars for a wide budget and taste in there.

13 Peter April 28, 2010 at 9:06 am

We used a modified version of this plan as well, saving cash and paying for the car outright. We’re now paying ourselves a car payment again for the future, for when we need another new car. We’re not putting it in a mutual fund, however, because as you say a 12% return is a bit optimistic. Your plan sounds like a decent compromise.
.-= Peter´s last blog ..The Choices We Make Have Consequences. Change Your Life One Decision At A Time =-.

14 PF Journey April 28, 2010 at 9:21 am

Yeah, I already know from decisions I’m making now, that when I move more into investing I’m going to be on the conservative side!

15 BibleDebt April 28, 2010 at 8:48 am

Lakita – I think your modification is a great idea! I am with you, I love Dave, but don’t follow him 100%. There are a few things that change slightly based on how the economy is behaving and what your personal situation is. Good luck achieving your goal of paying your car off!
.-= BibleDebt´s last blog ..Faithfully Rich =-.

16 PF Journey April 28, 2010 at 9:20 am

When the car is paid off, I’m going to do a happy dance! Maybe I’ll record it and put it on YouTube πŸ™‚

Previous post:

Next post: