Why Dave Ramsey’s “Drive Free” Theory May Be Flawed OR Why ‘Get Rich Slowly’ May Never Get To “Drive Free”

by golbguru on January 8, 2007

I am being a devil’s advocate here, and just nitpicking on JD of Get Rich Slowly’s endorsement of a Dave Ramsey concept of “Drive Free, Retire Rich“. I will always have the utmost respect for JD and his Get Rich Slowly blog, so please view this post purely in terms of numbers…there is nothing personal against anyone here.

I am not convinced by Ramsey’s “Drive Free” theory. I am sure there are others who are not convinced. If you know something more about this, kindly leave a comment so that we all understand this better.

Ramsey say’s this as a part of his arguments:

You want a brand new sports car that would normally cost you $475 a month. The car you are driving now is worth $1,500.

If you take that $475 and pay yourself instead of paying the dealer, you’ll have $4750 in just ten months. Add that to the $1,500 you can get for your current car, and you can pay cash for a used $6250 car. That’s a major upgrade in car in just 10 months-without owing the bank a dime!

But let’s keep going. If you kept saving at that rate, you’d have another $4750 in another ten months. Chances are, less than a year later, you could sell your $6250 car for about what you paid for it. This means that you can step up again-with-cash-into an excellent $11,000 used car just twenty months from today! Not Bad!

Yeah..not bad…but not feasible either ! Especially, this part: “Chances are, less than a year later, you could sell your $6250 car for about what you paid for it.” Details are given later in this post.

Using this Ramsey theory as the base, JD says:

Here’s where it gets interesting. If I kept making $250 payments to myself, I’d have another $3,000 saved at the end of the second year. Let’s say the $6,700 car lost another $1,000 in value and was now worth $5,700. I could trade it in and use my saved money to upgrade to an $8,700 used car.

…I can continue this cycle until I reach the level of car with which I’m comfortable. After that, the amount I need to save each year would decline sharply….

Taking some of JD’s numbers, let’s run a few calculations for a used Honda Civic and see where JD may land. I am using Honda Civic as an example car, because it’s one of the top “least-depreciating” vehicles. Most other vehicles may give worse results. Given below are two tables. The first table lists prices of used Honda Civics sorted year-wise. The second table gives the difference between the prices of Civics in consecutive years. All values are taken from Edmunds.com.

Table 1. Year-wise Prices of Used Honda Civic (LX)

Car Price Table 1

The above table is indicative of the “market depreciation” of the car. This has nothing to do with how much (or how little) you have driven the car. For example, suppose you buy a 2002 Civic for $10,375…and in the next instant try to trade it in for a better car, you will get only $8123 for this trade in. This means you will lose $2252 on this transaction even without putting any additional miles on the car.

Table 2. Price Difference Between Two Consecutive Years

Car Price Table 2

This table is indicative of the “mechanical depreciation” of the car, that is depreciation due to usage and wear and tear. It assumes a 12,000 miles per year average usage. It is clear from the table that on an average, Honda Civics would lose about $1353 per every year that you use it.

The total depreciation that JD would face if buys a Honda Civic and tries to sell it the next year would be around $3500 and not $1000 as he estimates in his calculations. I am doing these calculations using “trade-in” values, because JD mentions that he would trade it in for a better car. A hypothetical case of JD buying a seven year old 2000 Honda Civic is tabulated below. The table is pretty self-explanatory so I won’t put any efforts on that part.

Get Rich Slowly Calculations

It is obvious that JD will not be able to buy a similar quality car after the end of one year. To buy a similar quality car (a seven year old car), JD would require to increase his monthly contribution and that would make this a loss making cycle. And btw, all this is with pretty conservative numbers.

What about Ramsey’s numbers?

I ran the same deal for Ramsey’s $475 a month that he uses in his presentation, and the details are tabulated below:

Ramsey Calculations

…but there must be a catch. :) Here, the catch is in the monthly payments itself. If you are ready to save $475 a month for a year and upgrade, then pay another $475 a month and upgrade….you might as well pay that amount a month and get a brand new Honda Civic and just be done with it (no need to drive a junk for 4 years and turn yourself into a annual car salesman trying to buy and sell cars every year). Take good care of the car and it will serve you almost flawlessly for at least 10 years and make the investment worth it.

Overall, I am not convinced about this “Drive Free” theory. But that’s just my opinion. I would be very glad to see someone come up with numbers to support this stuff …or I am going to stay unconvinced.

Other considerations

I have not even considered the cost of repair headaches for used cars….which can sometimes run into thousands. Repairs are required for new cars also, but for used cars they run into a lot more sometimes because you don’t have any idea about how the previous owner used the car.

You can try selling to and buying from private-party (individuals). However, even if you run the numbers for a private-party deal rather than a trade-in, things don’t really add up very well. Also, the moment you start buying/selling cars from individuals, you run the risk of buying a lemon. Not to mention the amount of time you spend in trying to locate a prospective buyer for your old car and a prospective seller for your newer car.

Dave Ramsey mentions in his presentation that average Americans pay 9.6% APR on car loans. I am not sure if that is true…but if it is true..then average Americans are not really getting themselves good deals on car loans. Just a few weeks ago I was involved in a car loan deal for a guy who had a credit score around 670-ish and was approved a loan at 5.99% APR.

I have some more issues, but this post has gotten darn long…so everything else will have to wait :)

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{ 167 comments… read them below or add one }

1 J.D. 01.08.07 at 2:18 pm

Great post. I hadn’t actually run any numbers yet, just roughed it.

In reality, I’m torn. I’m one of those who buys a new car. I like to own my car from start-to-finish. I really do run them until they won’t go any more. But I hate to spend a lot on a car, so I end up buying crap vehicles. This isn’t good, either. I’m toying with the idea of buying a 2-3 year old car now, and then running it into the ground. We’ll see.

The point is moot since my Focus is only seven years old and still runs (mostly) fine. I hate the thing, but won’t consider getting a different car until it dies, which probably won’t be for a l-o-n-g time.

2 Lazy Man and Money 01.08.07 at 3:41 pm

I was sceptical of this from the beginning, but was too lazy run the math. You can’t just make money come from nowhere to make owning a car happen for free. You have to work really hard to sell your current car for more than it’s worth or buy the new one for less than it’s worth. Or else you can save the $475 as Ramsey suggests, but at that point you are aren’t driving for free, you are using that $475 to drive.

3 dimes 01.08.07 at 3:55 pm

I think the whole thing is too danged much hassle. I hate buying and selling cars so I hang onto mine as long as possible. We paid mine off last January and have saved $400 per month on not having a car loan (or in Ramsey-speak, $4800 interest) and I suppose my vehicle would fetch about $8K at trade-in. Given that I bought it at about $13K two years ago, I suppose it would be an equitable trade for the same car two years younger. Why bother? This one runs fine, may as well just keep socking away the $400 so that we can get the next car without having to finance much if anything.

4 Rich Slick 01.08.07 at 5:05 pm

Thank you for disproving this myth. I was going to challenge this but I’m tiring of responding to these “Wild E Coyote” schemes.

You remember Wild E. Coyote from Saturday morning cartoons don’t you?

Poor Wild E Coyote would spend thousands of dollars ordering elaborate kits, equipment and spent hours scheming, diagramming, and setting up stuff to catch the Road Runner so that he could eat him.

You have to wonder why the Coyote just didn’t stop at KFC and buy himself a whole chicken rather than torturing himself all those years with disappointment. Lol! Perhaps he should have ordered a road runner through ACME Co.

If you want a new car, earn yourself 30k trading or doing something beneficial to the economy and skip the schemes.

5 Emma 01.08.07 at 7:33 pm

Actually, I buy the theory. Mainly because I don’t have a car payment and have that extra $450 a month to stash for either a car or whatever the heck I want I guess. Of course, I am a Dave Ramsey fan and have been on his program for just over a year.

One of the key things most people don’t get about Dave is that he’s not just about the numbers. He’s about changing behavior toward borowing money.

Your numbers look great and almost convincing. The thing you missed is that Dave’s numbers aren’t based on trade-in values. They are based on Kelly Blue Book, individual sale. Rarely can you get the full value of a car from a dealer. They want to get it cheap so they can make a profit. The concept relies on the fact that you must SELL your car first.

Either way you look at it, Dave’s main push is to get people to save for a car as opposed to borrowing and owing more on the car than it’s worth. When was the last time you actually saved money to buy something?

“Take good care of the car and it will serve you almost flawlessly for at least 10 years and make the investment worth it.”
Any finance person will tell you that cars are not investments. Investments go up in value, not down like a rock.

6 Golbguru 01.08.07 at 9:09 pm

Emma: I am glad you spoke for Dave here. I have absolutely no issues with the fact that Dave Ramsey is about chaning behavior towards borrowing money. :) I think he is impressive on that part.

My issues are only with this particular theory. I do acknowledge the fact that you can deal with private-parties in the “Other Considerations” section. But the hassles are just too much, when you consider that you will have to do this dealing every year. Also if I were to sell the car, I would want to sell it above the KBB value; if you were to buy the car from me, you will want it below KBB value…the deal can go either ways here. Also, when you are trying to sell a 7~8 year old car…the burden is more on the seller than the buyer to make sure that things work perfectly fine with the car, which means more money to make it “sale-able”.

I am all for saving money before buying things, but I still don’t agree with this concept.

About investment, cars are investments…they are just poor monetary investments. Every machine ever made is a poor investment if you just look at the monetary value. The worth of a machine investment is determined by how you use it. Worth not just in terms of money, but also in terms of time and efforts. At least in my opinion.

I thank you Emma for debating the issue…that always sort of refines thinking on either side. Sorry about the awfully long reply. :)

7 jersey jen 01.08.07 at 9:41 pm

thanks for the info. when i first saw the heading, the thought of depreciation entered my mind. as i continue to read the article, your math obviously backup the thought. great post!

8 ispf 01.09.07 at 6:04 am

Great post! The better half and I were discussing this over the weekend and realised that the math doesnt pan out. Thanks for working out the detailed numbers, golbguru.

Another thing that bothers me about this is the use of the phrase “drive free”. If you are still making the monthly payments for the next 4 or 5 years (albeit to yourself), it is not “drive free”! Yes you are saving on the interest, but with some ‘creative financing’ you can keep the interest really low. Rather than worry every year about ‘creating marketing’ to make sure I get back what I paid for the car, I would prefer to spend time once at the beginning getting a low interest loan, juggle some 0%BT etc to ensure I pay next to nothing in interest. But thats just me. I am a PF blogger, what can I say :)

9 moneymonk 01.09.07 at 9:07 am

Bravo for the breakdown!

“If you are ready to save $475 a month for a year and upgrade, then pay another $475 a month and upgrade….you might as well pay that amount a month and get a brand new Honda Civic and just be done with it ”

I agree with you 100%.

Cars are not like houses, no matter if you buy a new or used car they are not equip to last for a lifetime.

Im not a HUGE fan of DR although I agree with some of his advice.

10 Frugal Frugalson 01.10.07 at 7:25 am

Being a “numbers” person, this is yet another case where I don’t agree with Mr. Ramsey. You are certainly not “driving free” if you are saving money to pay cash for a car. And in my experience selling two gently used Hondas myself, you are dreaming if you expect to get Kelly Blue Book value for the private sale of your car.

I HATE buying and selling cars, so my strategy is to buy new and keep driving the thing until it is unsafe/unreliable or family circumstances change (we sold each of our last two cars when a new baby was born). I also try to minimize costs by doing as much maintenance myself as possible.

Right now, I drive an 8 year old car that is paid for and my wife drives a 3 year old car financed at 3.74%. I could have paid cash for the newer car, but instead chose to park my money in I-Bonds, T-Bills, and CD’s that have yielded more than 3.74%.

11 Aravind 01.10.07 at 9:33 am

Wonderful post!

Also if you put a monetary value to the non-tangible pleasure you derive from using a new car, the engine smoothness, the better pick up, the better ride comfort, and yeah the pleasure of showing off a new car to the neighbour… that would further dent the ‘drive free’ theory.

Of course, this could vary from person to person

12 Mona@TimeToBudget 01.11.07 at 11:14 pm

I agree with Emma!
I think it’s great that you did your math but I really the point of Dave Ramsey’s message is to stay out of debt. Borrowing money is bad math which ever way you look at it.
It’s a mindset not a mathematical equation. It may be that the figures Dave Ramsey quoted don’t jive, I will give you that (not that I completely agree just don’t have the time to research it) but the decission to stay out of debt is a much better choice then getting a new car that you may or may not be able to pay off.
How many times have people defaulted on their loans? Too many. So taking Dave Ramsey’s advice of buying a car with cash is much wiser than borrowing money if you really think about it. My advice to anyone and everyone is -Don’t Borrow Money! and buy that “junk car” if you have to.

13 LivingAlmostLarge 01.15.07 at 1:38 pm

I hate DH’s 7 year old focus, it sucks. Anwyay though I guess we’ll be driving that car forever, of course it won’t last as long as my 99 corolla. So we both bought new cars. But I don’t like DR’s math, because you are constantly saving a lot of money a month to keep upgrading cars. I’m more a buy and keep it forever car person. Of course I can say that because I still have the one and only car I’ve ever owned. Maybe I’d be different if my parents had bought me a used car and turned me on used cars. But they didn’t. Thus, without much car experience, I only know that I like having a new car that I know I have taken care of and maintained. It’s also had less trouble because of my care.

14 Trent 01.17.07 at 7:45 am

Ignore all of this silliness. Buy a late-model used car (something that just came off of a lease) and drive it into oblivion (say, 8 years). When it’s paid off (after, say, 4 years), keep making that payment into a savings account. Then when you go to the dealership, you can trade in your used up car for at least a little bit and, if things have gone well, pay cash for another car. Keep saving those payments each month. Then, eight years later, go get another car, trade in your used up one, and you can either get something very nice or else you can lay off the monthly savings for a while. What’s the benefit? Instead of paying interest to the car dealer, the bank where you save the money is paying interest to you. In other words, instead of losing 7% a year to the car loan, you can gain 5% a year in the savings account.

15 Jay S 01.17.07 at 9:26 am

Buying a car really isn’t a huge hassle. I have bought a sold a car about every 6 months in the last 15 years. I have only traded in a car once. I have Never lost more than 1000 a year to depreciation. Most of the time I have at least sold the car for what I paid for it, and on a few occasions have made a $1000 profit (on a $1000 and $5000 car respectively).

Just go buy a clean used car from a private individual. You are at no more risk of buying a lemon than from a dealer (unless you are going really old, which dealers don’t sell). You will buy for cheaper than a dealer (then spend $200 getting it detailed, which is all the dealer does anyway), as they don’t make their profit, and in many states you don’t have to pay sales tax on private party transactions. Private party deals are less stress anyway - not as much haggling, a normal person to deal with.

When you sell - just sell the car for a reasonable price and it will sell quickly.

16 Erik 01.17.07 at 8:58 pm

If numbers are all that you care about when it comes to personal finance, then you have to factor risk into the equation. Risk has a quantitative value. Any of you that have taken a business finance class know that the beta coefficient is typically used in equations to factor in risk. I don’t know how to factor it into your numbers to “debunk” the drive free theory, but my point is that it is hardly ever considered by pure numbers conscious financial thinkers. My problem with many personal financial theories is that no one thinks about the risk that it puts into a family’s life when they take on $30,000 in car debt. The household becomes more volatile. I’d much rather have a $5000 paid for car than a $400 payment if I were to lose my job tomorrow. Because we all know that the shiny new car is upside down on the loan for at least the first two years depending on how much your down payment is.

Maybe someone needs to run the numbers on how much interest you’ll pay in a lifetime for owning new cars with 5 - 7 year loans. Why are so many of you obsessed with helping the CEO of Bank of America pay for his new yacht?

17 JD 01.18.07 at 6:26 am

Ok, I have something of a unique car situation I wanted to share and comment on:

My company provides me with a car allowance, which is essentially non taxed dollars in my pocket. This intended to cover gas, maintenance, and mileage.

I put about 30k on my vehicle every year.

I MUST have 4 wheel drive.

The truck must be light enough to not get stuck in the mud and durable enough to go hundreds of highway miles and 10s of offroad miles in the same day.

The only vehicle I could find that met these requirements to MY satisfaction was the Tacoma. I researched them for a couple weeks and a Tacoma with 30k miles was about $1500 less than a brand spankin new one….
so I bought the brand spankin new one.

In addition, I will be able to deduct the depreciation on my taxes this year.

So… I have a pretty big payment for the next couple years, but the following will be a result:

1) don’t have the transaction costs of buying another vehicle every year (TT&L)

2) If the truck has been torn up off road I want to be sure I’m the one that did it and not the previous owner :)
3) tax-free dollars pay the note.

4) depreciation is tax deductible, which should add about $1500 to my refund every year (depending on all other tax figures.. this is a very rough estimate)

18 golbguru 01.18.07 at 7:59 am

Thanks for the thoughtful comments guys. Here are some attempted answers.

Jay: If you are making profit selling used cars, I have to say you are a very smart man. But let’s consider this, if the guy who buys from you is equally smart, he will sell it after one year for the same price (if not for profit). That would mean that after two years the car still retains it’s original value :). Obviously, you could stretch that for a few years and we will run into some ridiculous proportions very quickly. The fact is that the car has lost value over the time you used it and if you are not paying the price, some one else down the line will certainly pay for it. The point being that, this might work for you, but it’s not how it will work for the rest of us. Personally, I have found private party dealings more time consuming and less easy than you potray them :)
Erik: You got a valid point too. But don’t you think the beta factor applies to “each” car buying and selling transaction you will do when you go the Ramsey way? Also the risk factor is pretty big when you are buying a fairly used car from a dealer or an individual (in terms of monetary value and also the mechanical quality of the car). Also, like others have mentioned you got to take into TT&L for each transaction. Of course you are paying the bank some interest (thanks for mentioning that…I do need to calculate it to put things into perspective), but you are getting a brand new car in return. :)
JD (the latest one): Thanks for the practical insight :). When you say “If the truck has been torn up off road I want to be sure I’m the one that did it and not the previous owner”, I hear you :). I have had so much car trouble with used cars that I am going to think really hard the next time I buy one.

Also, if we may refocus on the point in contention…there is no such thing as “free” driving. Someone has to pay somewhere :)

19 Jay S 01.18.07 at 8:38 am

The secret to retaining value is hitting cars that have all the depreciation out of them. For example I bought a 15 yr old honda accord for $1000. I fixed the tire, cleaned it and sold it for $2k. I wouldn’t be surprised it if sold for close to that a year, 2 years or 3 years later.

The other car I sold for a profit i actually bought from a dealer! It was a 8 yr old plymouth acclaim (an underrated car). I bought it for $4800 and sold it for $5700 a year later. It helped that I bought it during the winter (when everyone was buying 4×4s, and it was a little old fogey) and it had low miles and it was really clean. I still sold it below bluebook cause i had to move.

I don’t think PP are that much more time consuming, unless you don’t really care what you drive and just go to the dealer and say - what do you have for $6k.

I have also found that ebaymotors is a great way to buy a used car. Check the feedback and make a phone call to actually talk to the person and then bid away. Especially if you are looking for a particular make and model that may not be in high supply in your area.

20 Jan 02.07.07 at 11:25 am

Thanks for the numbers. I’m one of those who bought new for cash back in 1982 and still am happily driving that 24-year-old Toyota Supra to this day! She’s near body perfect except for a nonworking sunroof, still flies down the highway and just needs me to watch the oil. Think of all the savings here!

21 Matt 03.01.07 at 9:41 am

Just a couple things…not that anyone here probably cares.

The biggest chunk of depreciation occurs in the first year of ownership, so I’m not sure why anyone would want to take on that financial butt kicking. I found a local guy who goes to the big car auctions. He gets cars coming off lease, 1-2 years old, with less than 25,000 miles on them, and with a factory warranty still on it…for all practical purposes they are “like new”. The last one I helped someone else get from him was a 2005 Pacifica with 24,000 miles. It’s retail value was somewhere between $18k-$20k and we got it from him for $14,500. You just need to know where to find the good deals. At a dealership you end up paying retail….and who wants that?

Dave’s example is a little extreme yes (with getting another car every 12-24 months), but I think it was done that way to prove the point. You COULD upgrade cars every 1 to 2 years, if you wanted to deal with the hassle, and still come out ahead. But a wiser choice would be to find that really great 1-2 year old car, and drive it for 7 or 8 years.

If you are(and always will be) a new car buyer, and your payments are $300/month for example. If you were to pay cash and drive the same car for 8 years, that’s a total of $28,800 not counting any interest. Do you need a $30,000 car? Probably not, so go get another $15k-20k car and save the rest for the next one. You could lower your payments to yourself too if you wanted.

Stop using the “what about car repairs” excuse too…it’s a straw man argument. Under Dave’s plan you would already have 3-6 months of expenses in an emergency fund anyway. Car repairs? It’s a minor annoyance…just pay it. If the repairs are close to or over the value of the car, it ain’t worth repairing…go get yourself a new(used) one with the cash you’ve saved.

Same with depreciation. By the end of 8 years I just don’t think it’s going to be enough to matter.

Don’t be lazy and go to a dealer. They’ll just rip you off on the trade-in. Private sale is where you’ll get the most for your old vehicle.

I guess that’s enough from me… :)

But what’s with the payday loan advertisements at the bottom of your blog. Is that actually encouraged here? No wonder you all are gung ho on the new cars. :)


22 Golbguru 03.01.07 at 10:06 am

The whole point was to show that Dave’s example is a bit extreme. My attitude towards addressing the concept is clear in

“Overall, I am not convinced about this “Drive Free” theory. But that’s just my opinion. I would be very glad to see someone come up with numbers to support this stuff …or I am going to stay unconvinced.”

And probably you may have realized that it’s not “free” after reading some of the comments above. But, your point of view is appreciated and disagreements are welcome on this blog in the spirit that they help in refining thoughts.

I don’t see how my thoughts on Ramsey’s theory has anything to do with advertising. My thoughts against payday loans are clearly expressed in posts like this and this. I believe my readers know enough about it through those articles to understand the difference between “encouraging” and “advertising”. Having said that, you still have the right to disagree, but I would appreciate if you email me your concerns about it. That way the discussion in the comments will be relevant to the post.

23 4rest 03.02.07 at 3:29 pm

It’s good to crunch numbers. It’s very important. Because once you crunch the numbers you can use the emotion and mental motivation that Dave Ramsey gives you in his plan to beat the numbers. Check out my story to understand what I mean.


24 ryan 03.07.07 at 12:40 pm

I have to put in my two cents. . .

Dave doesn’t advocate selling your car every 10 months and moving up in “car”. It’s getting you from a $1500 beater into a $11,000 vehicle, that is probably worth $12-13 (my opinion, if I have cash I can negotiate a better price with a seller) in twenty months rather than saddle yourself with a 72 month note.

The remaining 62 months, he assumes you drive the same vehicle until the wheels fall off (the aforementioned behavior modification - you won’t be buying this years BMW) and invest in a nice mutual fund that runs approx. 12% a year (think S&P 500 Index fund).

I noticed you left off the rest of the story. . . which is that 62 months later you’d have over $30,000 in your car fund account, and you could pay cash for another vehicle for approximately $13k or so. Then leaving it alone, and not adding one additional dime, and letting it appreciate, you would be able to pretty much replace your vehicle every few years.

The awesome part is if you continued to invest that $475 forever (let’s say you’re 25, so until age 65 - 40 years) at 12% it would be worth $5 million dollars.

Then you can go buy whatever you want.

It’s a lifestyle choice.

25 ryan 03.08.07 at 10:05 am

Earlier I typed within 62 months. That’s a typo: it shoule read 52 months.

26 golbguru 03.08.07 at 10:09 am

Hmm…that’s ok ryan. I understood what you are saying and I am thinking about a good reply to your comment. For now, your theory sounds like David Bach’s theory. :) But I will have more to say on it soon. Thanks for the input.

27 Eric 03.08.07 at 2:04 pm

What the drive free “Program” consist of is
Save $475 a month in a good mutual fund earmarked as car fund for 52 months. at the average rate of growth of 12% annually that should be about $32K. Then Buy a car for $12K. With compound interest if you never put another dime in to the Mutual Fund you should be able to buy a 14-18k car every 5 to 6 years. If you decided to keep paying into that fund $475 a month for the next 40 years you should have approx $5Million saved. This is all based on a growth of 12% in long term and compounding interest.

28 Eric 03.08.07 at 7:35 pm

OOOPS! When I wrote the above post I did not see Ryan’s Post and posted the exact same thing.

29 golbguru 03.08.07 at 9:30 pm

Ryan and Eric: I quoted Ramsey in the post. He specifically talks about changing cars in 10 months. My issue (and all the math) is with concerned with these specific words. I will paste his words here again:

If you take that $475 and pay yourself instead of paying the dealer, you’ll have $4750 in just ten months. Add that to the $1,500 you can get for your current car, and you can pay cash for a used $6250 car. That’s a major upgrade in car in just 10 months-without owing the bank a dime!

Another, simple question. Forget about money for the car, have you tried investing in the stock market (S&P 500, or any other ETF or index fund) and received a 12% rate of return consistently?

Plus there is a risk factor which is two-folds the normal risk factor. 1st risk factor is in assuming that your old car will work 5 years without major repairs (remember you don’t know how it has been used before you bought it) and the second risk is whether your invested money will continue to earn the promised return. You will probably realize that neither of them carry any kind of guarantee.

There should also be some thought to efficient leveraging of debt. I can easily extend Ramsey’s arguement and tell you that if you keep putting $800 a month for the next 30 years you will save so much that you can buy a house just from the interest earned on those savings. What’s wrong with the argument? Would you try doing that?

Believe me I am not trying to claim that a new car is *cheap* (I drive a used car because I can’t afford a new one), at times it does makes sense to buy *only certain* used cars…but you can’t keep buying and selling like he suggested and make money from doing it, it doesn’t make sense that way. What I am trying to point out is that the picture is not as *rosy* as Ramsey makes people believe. May be his intention was something more noble over the long term, but that is not very clear from his talk.

I could go on and on and on…but I need to stop here.

Thanks for putting some life into this topic again :) I had almost forgotten about this post. Feel free to speak your mind. :)

30 Claudia 03.11.07 at 12:29 am

One more example. Two colleagues of mine bought the same model car last year. One paid $44,000 for a 2006, while the other colleague paid $23,000 for a 2005 lease-return.

Both vehicles are identical, except one had 7,000 km (4,300 miles) on the odometer!

31 Claudia 03.11.07 at 12:37 am

You can save a LOT of money by only buying secondhand cars through private sales. And paying cash, because it’s never a good idea to get into debt over something that depreciates!

The key is to research the car to make sure it’s a not a lemon (Phil Edmonston’s Lemon-Aid Used Car Guide, published annually, is a terrific resource), have the car thoroughly inspected by a certified mechanic, and run a check for liens, accidents and registrations.

In my case — and all these numbers are in Canadian dollars — I bought a 2004 Toyota Echo hatchback for a grand total of $8,934. My expenses were as follows:

$100 for the mechanical inspection
$60 for the lien/accidents/registration check
$8200 for the car
$574 PST (provincial tax)

If I’d bought the car from a dealer, there likely would’ve been a minimum two to three thousand dollar mark-up, plus I’d have to pay $533 GST (goods and services tax).

To put this into perspective, the fellow I bought it from still hadn’t finished paying the car off when he sold it to me. He had been paying $415 a month for almost three years — a total of $13,791 — and the balance owing on the loan was $6,129!

In stark contrast, I paid for the car in cash (well, actually two bank drafts — one to the creditor for $6,129 and $2,071 to the seller).

As long as I take the car in for regular maintenance, there is absolutely no reason — touch wood, I don’t get into an accident — I should be able to drive my “new” little car for at least a decade. Probably longer, since my last Toyota lasted well over 16 years.

Furthermore, my insurance rates are significantly lower than if I’d bought a new vehicle.

32 golbguru 03.11.07 at 3:06 am

Claudia: I won’t debate your point. :) Used cars are no doubt cheaper than new cars. But used cars are not *free* as the theory suggests. You have to pay for it, in some way or other. Also, you can’t keep buying and selling them..that’s not reasonable. As for buying it for cash or bank loan, it is a matter of individual perception. If I get a car loan for 5% APR and if investing in stock market is getting me 8% APR, I would go for the car loan and invest available cash in the market.

Rest of my comment is just about my thoughts on your comment and not related to Dave Ramsey or his theory…

You know, every machine ever made depreciates (except when it becomes antique). The real worth of the machine is in how well you use it. And in addition to the utility, I would include peace of mind, warranty, and reliability as factors in calculating a machine’s worth.

About this thing: “One paid $44,000 for a 2006, while the other colleague paid $23,000 for a 2005 lease-return.” That much depreciation just sounds like an extremely bad car. I would *never* recommend buying a car that depreciates to almost half the value after 4,300 miles on it…not new, not second hand, not third hand…never buy such a car. Not all cars depreciate like this…this is just an extreme example.

Also, from personal experience (I bought a used Nissan from a private party…and I am still driving it), I have decided that I will never buy a car from a private party again…I won’t mind paying the extra premium for getting a certified used car from a dealer with a considerable warranty on it (If I don’t buy it new). I won’t get into a debate about why *sometimes* a new car might turn out to be better for some people…there are a variety of reasons why this might be the case. :)

33 Claudia 03.11.07 at 1:47 pm

The car that depreciated by almost half was an American SUV, but I forget which make and model. American cars tend to depreciate far more rapidly than their Japanese counterparts, because the latter tend to be far better-built.

I’m sorry you had such a bad experience with private car sales, because I personally find the slight inconvenience of having a mechanical inspection done and ordering a lien search (I got mine through carproof.com) is worth it — in my case, I saved more than $3000!

I didn’t feel the need for a warranty, because I had the car thoroughly checked before purchasing, and also because that particular make and model is known for its reliability. My last car was a 1992 Toyota Tercel; in the last couple of years, I did start having to pay about $800 in repairs annually but that was after the car was over a decade old, so that was be expected and was still very reasonable. (My main reason for buying a newer Toyota was because I wanted an air-conditioned hatchback, as opposed to a sedan where I could only cool off by rolling the windows down!)

In terms of loaning vs paying cash, I agree that it’s a real matter of preference. Yes, you’re right: Potentially, you could invest that money for a higher rate of return. But a lot of people aren’t that disciplined ;-)

As for Dave Ramsey’s point, well. I paid $8200 for my car and the equivalent make and model (with similar mileage, bells and whistles) sells at most dealerships from anywhere from $11,000 to $15,000 — so I could probably trade my car into a dealership for more than I paid and iteratively keep doing that (buying privately, trading in through a dealership) until I had a free car.

But the PITA factor would be ridiculous. I find making big ticket purchases like that stressful, and much prefer to only go through the ordeal every decade or so!

34 Claudia 03.11.07 at 1:54 pm

Correction: The iterative process would be buying privately, trading in for a new car, driving that for a few years, selling it privately, buying a newer car privately, trading that in for a new car, and, and, and. The process only works if you only go to the dealership when trading in a privately-bought car at a profit to buy a new car that you sell privately (thus not getting dinged as badly on depreciation).

But, yeah. What a hassle. Some people might find it fun to drive a different car every few years and might even enjoy all the negotiations involved with the constant buying and selling, but I’m not one of them!

35 JJB79792 03.23.07 at 4:52 am

My take on all this is Golburu is a car salesman or banker who deals in car loans and just wants to feel ok with what he does. If you read his second to last paragraph he talks about getting someone a loan.

Dave Ramsey is great. I love his teachings. Dave doesn’t advocate buying a car every 10 months. You are taking a quick little example of his and trying to say Dave expects you to buy a car every 10 months. Also trading a car in is foolish.

Selling a car as a private party might take some work, but I will be happy to do a little work and get 2-3k more out of my used car than a dealer would give me.

Good luck at the car lot or bank golburu.

36 golbguru 03.23.07 at 7:02 am

JJB79792: lol ! :) that’s funny. I am a graduate student who is not even allowed to work more than 20 hrs a week.

The post is my *quick little example* response to Dave’s *quick little example* about free driving…a bit of questioning never hurts.

And if that can be misconstrued as me being a *car salesman* …then I can safely misconstrue certain people as “Dave Ramsey salesmen” :) …but I won’t do that.

37 jake 03.23.07 at 11:09 pm

What everybody is missing here, is, “the Borrower is Slave to the Lender”

38 jake 03.23.07 at 11:28 pm

For me not to have a car payment to any lender, I am driving FREE!! You can take the time to work the numbers all you want, but if you have payments you are “Slave to the Lender”!!

39 JJB79792 03.28.07 at 7:29 am

Nice Post Jake I agree

Why were you involved in a carloan?

your quick little example goes on for a few pages and involves spreadsheets. Not exactly a quick little example. Plus it is built a few faulty premisses.

1. Dave doesn’t expect you to buy a car every 10 months
2. Dave doesn’t recommend you trade your car in to a dealer

golbguru I like dave ramsey he has great advice. In a way I guess I am a salesman for Dave because I do think people should read his material & listen to his radio show. It doesn’t profit me if you do, but it would profit you.

You talked about being involved in a car loan, and your posts seem to be slanted in favor of just let the dealer handle it all.

If you are not a salesman / loan guy you sure seem to like car lots / loans.

40 JJB79792 03.28.07 at 12:20 pm

I forgot to say golburu after first line of previous post

41 iowatt 03.30.07 at 6:16 am

I think Emma is the only one getting the point here. It’s not about the math, it’s about saving. God forbid you have to drive around in a piece of crap losing points with the opposite sex because of it. The ONLY reason anyone needs a brand new car is for the image. The image of success that the driver (notice I didn’t say owner!) wants everyone to see. I personally think that the people driving the crappiest cars on the road are sometimes the richest. When disaster strikes, it’s the smart ones that aren’t going to go into debt to get themselves out of it. Just think for a moment what it would be like not to have any debt payments? hhhmmmm, bliss, right? it’s attainable. I do appreciate the respectful manner in which the writer of this post presented their opinion, bravo!!

42 Rev8k 04.17.07 at 12:59 pm

I need to chime in here.

What about the amount of mileage you
put on a car. I commute almost 500 miles
a week. That’s just over 25,000 miles a
year. I was in the process of replacing
my current car with a newer one. I was
faced with a decision to buy new or
slightly used and take out a car loan or
buy a 5 - 10 year old car with cash.
Now, in my situation, any car is going
to depreciate even more because of the
amount of miles that is put on the car.
I’ve decided to purchase a 8 year old
Toyota Camry with cash with under 78,000 miles. My reason? Well, it’s because the
majority of the depreciation has already
happened. I knew I was going to loose
money with a car. Especially one that
is driven with so many miles. The idea
is to loose as little money as possible.

Here’s a buying and selling comparison for a 4 year span for my situation.

(1)Brand New 2007 Camry (0 miles) $24,000
2007 Camry (4) years later (100k) $11,300
Money lost: $12,700

(2)Used 2005 Camry (30,000 miles) $16,500
2005 Camry (4) years later (130k) $8,300
Money lost: $8,300

(3)Used 1999 Camry (75,000 miles) $7,000
1999 Camry (4) years later (175k) $2,500
Money lost: $4,500

So, I think the #3 option was the best
for my situation. I know they are just
estimates but I think I’m pretty close.
Yes, the 1999 Camry may have more repairs
but I’m not paying any interest with option 3.

My 2 cents.

43 AZDebtFree 04.28.07 at 9:31 pm

This topic generates almost as much debate as money itself. We obviously have very emotional attachment to our cars in this, and other countries. Bottom line is, anyone who has managed to build wealth will tell you, minimize liabilities and maximize assets. Your income and investments are assets — it’s money coming in. Your car is a liability — it’s money going out. Why would you trade income for a liability? If you want to understand how to save and manage money, spend a little less time at car dealerships and a lot more time finding people who’re self-made millionaires — And they love to tell you how they did it.

This isn’t rocket science, and nitpicking about interest rates about that great car loan you got being lower than your mutual fund is leaving you dead in the water - You’re paying money every month for the privilege of driving a car that’s worth a little less every morning that you drive it to work.

44 Rev8k 05.04.07 at 1:04 pm

But most of us still need (not just want) cars. In my case, I commute 45 miles to work. I work in Chicago but I choose to live an hours drive away from downtown because housing is less expensive. And using public transportation does not make sense for me because it would take me two hours to get to work. So, I choose to buy a relatively low mileage eight year old car. It made sense for me because I don’t get hit as hard with depreciation. Yes, cars are a big liability but most of us still need it.

45 Corndogdriver 05.18.07 at 9:58 pm

1. After 5 years of regular listening, I have never heard Dave Ramsey offer-up anything called “Drive Free” as a theory. I don’t know if you rolled him in with some other guy or what. He suggests paying yourself the payment and using compound interest to your advantage instead of your detriment throughout your life.

2. Dave Ramsey will verbally flick you on your ear if you even suggest you are thinking about trading in a car instead of cleaning it up and retailing it to a private buyer.

3. The 10 month example is purely to show Twenty Somethings how fast things actually can move in your favor if you do smart stuff. The point is you can get yourself into a reliable little paid-for get-around car very quickly (10 months of bumming rides with friends or family). That car will serve you well for a couple of years, then you can move up into buying a $13k car for $10k range for a few years and literally your 3rd car is pretty dang nice.

4. Note that at any time in this process you can…..STOP. Got job problems? Need to help out a family member? Decide to go back to college? Want to go on a mission trip? Guess what? You have ….MONEY!! All you do is rename it and decide to drive what you’ve got for a little longer. Compare that paradigm to that of having to schlep off to a job you hate to make the money to write the check for a freakin Mustang that was oh-so-cool when you bought it but now just bores the snot out of you, and it’s worth way less than you owe on it.

5. Selling and buying cars from private parties is way easier than people are led to believe. Hmmm.. wonder who led them to believe otherwise? Think it might have been… hang on… thinking…thinking… car dealers? Banks? ‘It’s too much hassle’ is a nice rationalization and it might even sound sophisticated if you say it dismissively enough. But it’s still financially stupid.

6. As was mentioned before, you simply can’t keep paying way too much for stuff and expect to come out ahead. It’s simply not possible for you to beat me if you’re buying new Ridgelines for $35,000 plus tax plus financing charges while I’m buying a 5,600 mile Ridgeline for $29,000 plus (way less).

You can’t drive free unless you’re the absolute buying and selling master. Ramsey never said you could. But most Americans operate their vehicles under a series of disasterous delusions - like; “I can’t drive a used car cuz they’re unreliable”; another is “I’ll always have a car payment, so I may as well drive whatever I want”; yet another is “I traded-in my truck to get something that gets better gas mileage”.

Pay yourself the car payment. Money flows in. Money flows out. In is better.

46 golbguru 05.18.07 at 10:51 pm

Corndogdriver: I hear you. I remember when I heard the “Drive free” presentation on Ramsey’s website - and honestly you say it better than him.

I have linked to a presentation on Dave Ramsey’s website that runs with the title “Drive Free, Retire Rich” - that’s what I call his “Drive Free” theory. My main objective was just to show that there is no such thing as “drive free” - the way Ramsey explains in the presentation. He tried it to sell it in a *rosy* way and I didn’t like it.

Although, I still do not agree with some of the points - through personal experience. For example “Selling and buying cars from private parties is way easier than people are led to believe.” - I am still a student and drive an used car that I bought a few years ago. Everyone around me buys used cars and I know how difficult that gets when the deal doesn’t go your way - which happens often. Where do you place the accountability when things go wrong a few months after you buy it? Perhaps I am more critical of the problems because I have faced them myself. So that’s where I am coming from. Of course, depending on personal experiences things can be skewed - and I accept that.

Anyways, on a lighter side here is an argument on this issue that you raised “It’s simply not possible for you to beat me if you’re buying new Ridgelines for $35,000 plus tax plus financing charges while I’m buying a 5,600 mile Ridgeline for $29,000 plus (way less).” ….I think I can beat that with brand new Honda Civic anyday. :) and I will be driving it 15 years from now while you would have changed 3 cars without getting to use a *new* car. Of course, I can save a few thousand bucks by buying a used Honda Civic - but that’s with the full acknowledgment that I am still not driving *free* and with the acknowledgment that I don’t have the same reliability as a new car would have. Again, take this as a light-hearted argument - I am not backing up numbers here. :)

Forget about the example I ran in the post specifically for Ramsey’s theory - here is what I think of the whole issue. I am not trying to generalize that all used car deals are stupid - it’s just that whether you buy used or new, there are tangible and intangible costs associated with both - just let it be known that there is no *free* driving.

I appreciate your thoughtful comment.

47 Corndogdriver 05.19.07 at 10:53 am

If you buy a new Civic and drive it for 15 years, 2/3 of that span of time will be spent driving a 5 year old or older Civic. Why not just buy a five year old Civic? Why would you pay an extra $10,000 every time? See? I’m gonna win.

48 gazelleintense.com 06.21.07 at 6:11 am

it’s pretty simple, and math isn’t my strongest area…

car payments are why so many Americans are b.r.o.k.e.

Avoid car payments and financing, save and pay cash for used cars….

I admit I had to watch the video a few times until it sank in. :)

49 Lifeguard1999 07.05.07 at 8:35 am

Personally, I did buy a new car 3 years ago (Honda Civic). I bought it based on Total Cost of Ownership (it was the cheapest listed), the fact that it gets good gas mileage (38 MPG listed, but I get 39+ MPG), and it meets my needs (carpool to work). I paid just above dealer cost (using the fax-attack method) financed it for 3 yrs at 3.8% interest. When I am done paying for it in Sept., its payment will be saved so that I can pay cash to replace my wife’s van.

Dave Ramsey’s whole day is spent dealing with people who give no thought to finances, get new car fever, buy more than they can afford, and then wonder why they are in debt. (Hence the Proverbs 22:7 reference: The rich rules over the poor, and the borrower becomes the lender’s slave. NASB) That is why he is in favor of paying cash and cutting up the credit cards. The Drive Free video is just an extension of that. It is trying to get people to realize that financing (or leasing) a brand new car is a great way to get yourself into debt. Why not just live below your means for a few years (drive a junker), save the money, and then buy a car. Hence his catch-phrase: Live like no one else (now) so that you can Live like no one else (later).

You will notice that with my choices, I choose the pay $475/mo for a Honda Civic (actually $503/mo), and did not follow Dave’s Drive-Free plan. Three years later the Honda is about paid off, and I will drive it for another 7 years or more. But I am following the “live below your means” advice. I did not get that advice from Dave, but from my Dad.

50 Kenny 07.12.07 at 6:29 am

But dude, you’re still paying your bank account $475 a month to save up for your next car. That’s not “driving free” at all!

51 Angel Castaneda 07.12.07 at 7:26 am


But dude! Those $475 are yours! Then you can go ahead and buy whatever you want, without having to borrow!

Plus, if you don’t have to borrow money for that second car, you’d have money laying around, that would normally be used for a car payment, that you can save, invest, or put aside for car repairs (which, I agree, would be more likely to happen if you’re driving an older car).

52 The Happy Rock 07.12.07 at 7:30 am

Lifegaurd and Trent make good points.

The whole idea of drive free is geared toward people who usually buy new cars with credit when they can’t afford them. Drive free tries to show them that they can have what they want, just through a different route. The goal is to get them going down a new/better route. Drive free attempts to change behavior. Most people will drive a decent paid for $6000 car realize that they probably don’t need to step up that much more, when the see the benefits and cash flow that come from having a paid for car. I know that totally worked for me, before I read Dave. I bought on credit a 94 sentra when I wanted a 99 celica. Once the sentra was paid off in 1.5 years, I realized I would rather have the 300 a month cash flow rather then step up to the car I ‘really wanted’. I am still driving the sentra, and have had 5 years of an extra $300 dollars a month and minimal repairs.

As a side note too, you do get interest from the money you ‘pay yourself’

53 SavingDiva 07.12.07 at 11:22 am

I wasn’t actually familiar with Dave Ramsey’s Drive Free theory until I read your article. I do have to agree with you (and you do a fantastic job of proving your point) and note there are several flaws in Dave Ramsey’s theory. I’m really just too lazy to constantly buy a new car (or a new to me car). I’ve had the same car for about 4 years (it’s 7 years old) and I plan to have it for at least another 4. It’s not the coolest, it’s been rear-ended a few times, and it’s not as nice as my friend’s cars…but it’s mine. Plus, it gets pretty decent gas mileage.

54 Jim Lippard 07.12.07 at 3:28 pm

Some people enjoy buying and selling cars–I’m not one of them, but I have an uncle who is. He buys and sells used vehicles from and to other private individuals on pretty much an annual basis, and more often than not sells vehicles for more than he paid for them–much like Claudia and Jay S. report. He’s also able to do most of his own repairs.

55 del 07.12.07 at 6:41 pm


If this is only about behavior, then why does so much of the video focus on….ehm…..the numbers?

Dave is a numbers guy. You could have all the behavior change in the world and if the numbers don’t add up, in Dave’s favor, Dave ain’t interested.

That’s why Dave is writing books and we’re buying books. It’s about the numbers.

Now I’m not saying that Dave has a bad program and much of what Dave teaches shouldn’t be followed. But there are times when the facts aren’t always in alignment with the teaching.

Dave’s a real estate man. The technic he uses is an old real estate (sales) technic called puffery. There’s enough of the facts remaining to not be able to be accused of not telling the truth.

I love a lot about Dave. But like this video, sometimes you need to look a a little deeper than just the skin of the message.

For most people, when the numbers don’t add up similarly to the example Dave uses, but look more like the example in the original post, a persons behavior is not going to change in the manner Dave is “teaching”.

As a matter of fact, most would give up and revert to old habits.

56 Mortgage Guide 08.02.07 at 4:29 pm

What everyone is missing here in this argument is the opportunity cost that paying for a car in cash is costing the consumer who doesn’t finance. In economics class I was taught that you can never buy a used car at the correct price in the first place. Either the car will be worth more than the average asking price or the car will be a lemon and it will be worth less than the going price for the make and model. Either way you’re always getting screwed regardless of whether you finance it or not.

57 thatguy 08.17.07 at 5:22 am

Many here whine about the hassle of selling a car to a private party and having to buy a car every year. This is the attitude difference between the rich and the poor. The rich understand the value of the hassle, the poor just want it easy and will pay a dealer a few $1000 by selling their car at retail. So even if you loose some value and the numbers don’t come out and Dave is half wrong after 20 years you’d still have about $225,000 instead of $470,000. If you look at it that way the hassle starts to seem worth it.

Poor is a state of mind.

58 passingthru 09.12.07 at 4:25 am

“I would prefer to spend time once at the beginning getting a low interest loan, juggle some 0%BT etc to ensure I pay next to nothing in interest”

Great reading. I probably wouldn’t suggest this, as #1 it could potentially hurt your credit moving balances around, #2. If you totaled that vehicle and had it on a credit card, chances are you’d be paying on a vehicle you no longer have.

59 John Moore 09.25.07 at 10:56 am

Mostly I buy Junkers for less than $2000 and drive them till they die. I’m good enough at taking care of most mechanical problems that that expense is minimized and I usually get at least a year out of each vehicle. So take my latest vehicle a pickup for which I paid $1500 cash. If it lasts me a year that’s $125 per month and during that time I’ve had transportation to work.

It’s not free but it’s pretty close.

60 Brandon Helms 10.02.07 at 10:56 am

The other itme to thnk about is when financing a vehicle you are requried by the lender to carry full coverage on the vehicle. I preffer to carry comprehensive with collision insurance which is signicatly cheaper saving me almost 1,000 dollars per year in insurance costs.

61 Sam K. 10.09.07 at 10:59 am

I can provide hard numbers that it works.

During school and a few years after I drove a total beater and took lots of public transit. I scrimped and saved and after the numerous repairs to the beater I managed to save $8K.

With that I bought a 2001 Cavalier in 2005.

So for two years now I’ve been saving $300/mo. I now have $7,200 in a bank account. I use this account for any freak repairs needed but general maintenance and oil changes comes out of my regular spending money.

I estimate that since I’ve been taking good care of the car, it will last me at least 2 more years, so (not including interest), I’ll have $14,400.

Now say I want another car in two years from now. Let’s be totally conservative and say I can only get $1000 for my old Cavalier.

That means I’ll have $15,400 cash for my next car. Actually I’ll have more since I’m earning 4% interest on the account, and my car will sell for more than $1k. So I’ll be able to get a one or two year old car that has low KMS and is better quality than a Cavalier for my next car purchase. Sounds like an upgrade to me and I didn’t have to pay a dime on any debt. Plus a paid off car gives your more flexibility. I can sell it in a crunch. No debt = flexibility.

There’s hard numbers for you.

62 GJONES 12.03.07 at 10:21 pm

What is funny is that when the dust settles…. He that is resposible will have no financial worries. After living humbly and driving less than new vehicles his family is insured financial freedom. He that worried about everybody else and did fancy math problems to justify why he borrowed his way through life and pimped himself out to every bank in town won’t have a pot to piss in, but he will be carried by the people who saved their whole life. That sucks. Thats life.

63 Yoyo 12.20.07 at 10:11 am

How did you completely miss the fact that you don’t have to keep buying cars every year?

Basically this plan builds up a $20,000 mutual fund account. Every 6 years you buy a car with ONLY the interest on ONLY that money. You can buy a car every 6 years for ETERNITY with ONLY compound interest/investment earnings. That’s as close to free cars as you can get.

64 lisa 12.30.07 at 5:37 am

Hi! We have a 1994 Oldsmobile Cutlass Supreme 4 door. It is a good running car.We get 30 miles to the gallon and this is a car with a little over 251,000 miles on it.I don’t realy think the difference of 9 miles to the gallon is worth the car payments every month or the big price.lisa

65 sunshineluv7 03.11.08 at 12:01 pm


Okay, I have a question for you all out there. I am in the process of getting out of a lease, or turning it in for some overage charges at the end of the lease.

Now, basically, right now all of my extra cash is going to pay of CCs from the debt snowball plan.

So I only have my “emergency” fund (I picked $700 instead of $1000 because at my age, and my income, it takes a bit to get to a grand) while I’m paying off my credit cards. The thing is, the lease is up before my credit cards are paid off.

So, I’m not gonna have any money to “pay cash” for a car with. And if I buy a car for $700, you can bet there’s gonna be some pretty expensive problems pretty quickly down the line.

So, do I finance? What if I finance and get like, a decent car for 5K? (I could pay that off in three years.) But then there’s surprise mainetenance costs…

Or do I just go the other way, consider a car as a utility, and just always have a car payment of some sort (with leasing, or buying, and financing). Because, I’m sure it’s great if you can get into this plan if you aren’t already attacking debt, or you can save a few grand to buy a “junker” that will last a few years. But what if you’re going to be carless before that point?

Best advice?

66 Matt 03.17.08 at 4:11 am

Maybe we’re missing the point of the free part - it’s not FREE as in you will never spend money again on a car - but DEBT FREE - free from the burden of having to make that monthly payment to your lender.

67 Rev8k 03.18.08 at 11:09 am

About 6 years ago my wife purchased a car for getting around (for her job) at the time. We didn’t want to spend much on this car. We ended up buying a 1995 Geo Prism (same as a Toyota Corolla) for $600. All it needed was a $100 alternator. So, the total initial cost was about $700. It had 190,000 miles on it. We were only going to keep it for a year. However, we ended up keeping it for 5 years and put another 60,000 miles on it before finally getting rid of it about a year ago. The car only needed a clutch, tires, shocks, and basic maintenance during those 5 years. I realize we were fortunate, but it is possible to get a reliable car for under a grand. You just have to look for models that are reliable. Also, don’t be afraid to look at high-mileage cars as long as they were taken care of.

68 fielding j. hurst 04.13.08 at 5:41 pm

i think you are over thinking this issue. The gist is NO PAYMENTS. DON’T BUY UNLESS YOU CAN PAY FOR IT.


69 Sam 04.17.08 at 10:05 am

I’m a big Dave fan, but I also think that trading up cars every year is silly. Just pay cash for decent used car, then drive it for as long as you can while saving up for your ideal car. Don’t trade up constantly, just be patient.

The problem with your argument regarding- you might as well use that monthly money and buy a new car right away, is the same argument that people everywhere tell themselves, but you’re missing something important. Hold debt involves risk. What if you buy that new car and lose your job shortly after? Or have medical bills? Or another emergency? Suddenly you’ll be wishing you had the cash, but you’ll be upside down on the car.

Debt has risk- people always leave that out of their calculations.

70 Ethel 04.25.08 at 3:16 pm

I think Dave has some neat stuff going for him. And I think the comment that buying cars is a hassle is spot-on. And probably intentional.

Let’s say I’m a super-Dave fan (I actually just think he’s a good place to start, for beginners). I decide to buy a junk car. I get to the point where he suggests trading up, but just don’t get around to it. I keep putting my $475 in the bank until the car breaks down, possibly years later if I got a great deal but probably at least months later (if it hasn’t broken down yet).

At this point, I finally get the better car - but if I slipped on buying more than four months, I either don’t spend all of the money, or get a better car, because I’ve been saving longer. I drive this newer car until I “should” trade it, but get busy. I keep cashing the $475. I also start to realize . . . A $6,000 car is actually pretty okay. The delayed purchase of that $11,000 car gave me time to consider what a car is really worth to me, especially when combined with the rest of Dave’s advice. I may realize that I can drive my $6K car for five to seven years (this is how long the $3K car my parents bought me in ‘00 lasted) and feel good abut it.

This “get rich quick” scheme is more about hooking people into healthy spending habits, I think, than about attracting an audience. Although it probably does get Dave an audience, too.

At the same time, I bet we could make $1K off of this minivan we bought for $1.5K and paid 1K to repair - because the owner didn’t want to take the trouble. It’s actually in great condition after tuning and a few parts. So Dave isn’t entirely insane, you can sell a car for what you paid or more - but you have to be smart.

I also think Dave targets newbies to finance who don’t always make good choices and want to change - not super-smart, super-serious investors. He’s the stepping stone to becoming a smart investor if you’re at the opposite end (or at least, he was for me). But once you get a feel for the water, there are better advisors to follow. I think. I’m still figuring out where to go next.

71 Ethel 04.25.08 at 3:20 pm

The “free” part is in six years - as I think he points out quite clearly when I’ve heard him explain it. From the interest off of investing the payments you would have made on a car loan. Basically, the money comes from not paying interest on a loan (question: do you spend the interest money on more repairs, though?) and from getting interest instead. Which does add up eventually - the real question, I would think, is whether this plan works as quickly as Dave suggests it does.

Maybe I’ll do the math someday.

72 MJ 05.11.08 at 7:14 pm

I didn’t read all the replies to know if somebody has already said this but you have to understand dave ramsey. He’s an entrepreneur and when he says sell your car, well by god, you get out there, do the leg work and sell it for as much as you can get for it. Then, go and find a steal of a deal on a newer car so that in another year you will be able to sell that car for what you bought it for or just a little less. It could work for a person with the right mindset and obviously it’s not for everyone. But, remember, there is always somebody out there desperate to sell their car and those are the ones you look for when purchasing your next vehicle. Low ball is the name of the game. This is not some get rich quick scheme. It would take time and effort. Some people don’t mind the time required, some do. It will never work buying a car from a dealer and then in a year turning around and trading it in on another car from a dealer. You have to buy private

73 Kristen 05.27.08 at 6:08 am

I am sitting here looking at the numbers and then thinking to myself, “how could not paying interest on a car not benefit someone?” You are saying rather than save for a car to just go get a loan on a new car that will depreciate far more quickly than a used car that you paid for in cash?

74 Eric 06.30.08 at 2:01 pm

I did not read every single post in detail, but I got the general idea of the arguement against the “Drive Free Theory”. A big part of Dave Ramsey’s theorys are behavorial. Sure, his plan isn’t perfect..you may not be able to sell a car for what its worth in 10 months, he doesn’t take into account county/state sales taxes on new car purchase and I think you would be hard pressed to get a consistent 12% return. However, it comes down to a behavior change. Too often in this country we buy things without having the money to pay for them. The world tells you that car payments are “normal”. They do not have to be though. It really comes to down to delayed gratification. If you just sacrifice for 5 years or so and drive cheaper, used cars when you are young, you could drive cars for “free” the rest of your life while contributing that old car payment into a retirement account that could be worth millions. One more quick point…the author of this site uses a brand new Honda Civic as an example of the math behind Dave’s theory. Sure, you could buy a brand economy car and drive it for 10+ years, I don’t have a problem with that. However, I would like to enjoy life and have a nicer car. I recently bought a well cared for Lexus that was a one owner with all maintenance and service done at the dealer. The car has 100k for miles, but for those who don’t know, Lexus makes some of the most reliable cars on the road today. I paid $7,500 for this car and borrowed just a small amount that will be paid off in just 1 year. After that, I can expect to drive a nice, luxury car without any more maintenance and upkeep costs than the Honda Civic used in the example. I am very confident that the Lexus will go to 200k for miles without any major problems. That would equate to nearly 10 years of driving for me. When the car is paid off next year, I will continue to pay myself the payment which will grow to over $30,000 over 9 years (not including any compound interest). I will then start the process over and buy another well taken care of Lexus for $10,000 or so and still have $20,000 in cash earning interest that can buy me free cars the rest of my life. Which would you rather drive day to day…a Honda Civic or a Lexus? I choose to be smart financially and still enjoy life and the fun of driving a nice, luxury car.

75 Jim 09.11.08 at 3:36 pm

Sorry. That was an accident. I am disabled. My wife makes just above minimum wage. With have two children. We can’t realistically do this. Yet our church has told us if we don’t take the course they will no longer help us if we need it. I’m thinking about becoming Catholic because they get it. At Catholic Charities I took one 3 hr budgeting course and got help.

76 live1phish 09.14.08 at 6:02 pm

Dont buy your vehicles from dealers EVER. do your research and buy when you find a great deal. I’ve made money. patience

77 Jow Black 12.05.08 at 6:07 pm

Ramsey is a Jesus guy. There is nothing wrong with that in and of itself. However in the same breath he talks about saving money, he tells his disciples (listners? readers?) to give 10% (of pre-tax earnings) to the church. TEN PERCENT. Ouch. For that much, I could be a Catholic!

That is a lot of dough to give to a church, IMHO. And some of these churches…..remember Jim and Tammy Faye? I don’t mind giivng money to a church that helps the homeless or runs a soup kitchen. But not to a church that buys lear jets for the Pastor and a boob job for his wife. Like anything else, with churches, you have to shop carefully and read the fine print.

So his writings have another angle, I think. Churches love his seminars, as if you can get parishioners out of a monthly car payment, well that’s more money they can tithe to the church! Praise Jesus!

His message boils down to “less for yourself, more for the church.”

That being said, he probably helps some people get out of perpetual debt. But most of his advice is common sense and can be obtained elsewhere at no cost.

My take on all these financial Gurus is this: If you want to read their advice, check their books out of the local libary - it’s free. You can’t spend your way to wealth, just as you can’t eat your way to slimness. So spending money on books or seminars when you are in financial straits is the wrong way to go about it.

78 Michael 12.11.08 at 7:42 am

The writer of this blog got totally owned. You cannot tell me by retirement age you will have more money by making car payments vs doing Dave’s plan. If you think so, you are …mentally challenged.

Of course you won’t be able to sell the “beaters” for EXACTLY what you paid for them. It’s not about perfect math, if it were why the hell would anybody pay interest on something that is worth less every second of the day?

Interesting how you point out the flaw in math with the used cars but totally ignore how much a new car is when you buy it, when your done paying for it and how much it’s worth when your done with it. You are almost always going to be in the red.

Dave’s plan works, for everybody. It won’t work if you care about what other people think about you.

79 Eric 12.15.08 at 8:24 am

I couldn’t agree more with the previous post. The blog writer does not fully understand the power of having excess cash flow. Instead of continually sending car payments to the bank each month for the rest of your life, you can use your excess cash flow to make more money while preparing yourself and family for a prosperous future. All it takes is discipline and few years sacrifice of not driving a nice car.

80 Eric 01.05.09 at 6:53 am

I had to comment again on the author’s theory. In June 2008 I purchased a 1999 Lexus ES300 via a private party sale. The car was a one owner with just 105k for miles and all service was done at the dealership with records proving it. Since the car was nearly 10 years old, it already took the bulk of its depreciation hit. The car was nearly $40k brand new and I paid just $7,500 to purchase it. I took out a short term car loan and just paid it off a few days ago. The car is running great and currently has 112k for miles. Since it is now paid for, I will no car payments for the immediate future while driving a very nice luxury car. I drive about 10k miles per year and based on my car’s condition and reliability record (it is an Edmunds.com used car best bet) I am confident I can drive it for at least 5 more years without any major problems. Taking my old car payment of $300/month and saving it on my own for 5 years (60 months) would give me $18,000 (not including any compounding interest). Let’s say I can get $2,000 for my car after those 5 years, I would then have $20,000 of which I could use to pay cash for a different car. I could easily get a very good car for as little as $10,000, which would leave me with $10,000 left over. Yes, I would me technically “making car payments to myself” during those 5 years, but I’d much rather do that than have to send a payment to the bank. Plus, if I ever lost my job or anything, I would have cash I could draw on. Regardless of what you think of the “drive free method” the key thing is that buying a new car is not smart because of the depreciation hit and the fact that you will be making payments for 3-5 years. Be smart and buy a resonably priced used car for cash or pay it off in less than 12 months and enjoy not having a car payments. It feels so much better to make that payment to yourself than to the bank:-)

81 michael 02.02.09 at 10:03 pm

the only problem with your method is, you say go ahead and pay the monthly car payment instead of driving a junker for 4 years. thing is what happens when you lose your job and cant afford the car payment. eventually you get so far behind and your car gets repo’d. if your paying $475 or whatever to your own piggy bank and you lose your job, guess what, you can afford to skip out on paying yourself that for a few months until you can get another job. it will take a little longer to get another car because you stopped paying yourself for a few months, but its better then losing a car, screwing up your credit and getting yourself into a huge mess.

82 Eric 02.06.09 at 1:53 pm

Michael (the previous post) has it right. What he is referring to is risk. There is risk in owing money to a bank on a car. However, most people do not properly take that into account before they buy. They focus only on the monthly payment. Just like Michael said, if you lost your job with a car payment and were unable to keep up with payments, you would get your car repo’d. However, if you owned a paid for junker for a few years and had saved up the money that would have gone to your car payment and then suddenly lost your job, you would get to keep your car plus you would have cash to tap into until you found another job. Risk matters and the author of the original blog fails to consider that in his argument.

83 Chuck Williams 02.23.09 at 1:26 pm

Dave says:

Debt is Dumb. Cash is King.

Only idiots pay retail, which is why your math has no bearing. If you look in your newspaper, there is going to be a price range on a 2006 Accord. Some will be due to features, color, damage, etc. Other variance will be due to the fact that, sometimes people just need to sell their car. If you’re the guy with the wallet full of cash ready to make a purchase, you’ve got the power. Guy wants 13k for his car, well I’ve got $12.5k in crisp $100 bills, what do you say?

84 Dan 03.05.09 at 6:14 am

I believe Dave’s whole point in all of this is to give an example of how you can have a nice car within a 5 to 7 year period and never borrow a penny from anyone.

If you buy a car and have a loan for 5-7 years, you have paid a lot more money over that time period than you would have by using Dave’s method. From interest and the car dropping it’s value. Plus using Dave’s method would allow you to decide what you wanted to do with your money. You are not stuck for 5 years paying on a loan. How depressing is that???

We as a country need to understand that the barrower truly is slave to the lender and that trumps any calculations you can do with the numbers. How can you feel free if you owe someone something?

85 Mark 03.05.09 at 7:15 pm

This is funny. If people put the effort they put into making excuses and actually executing a financial plan like Ramsey’s they would see that it is not perfect but it works. I didnt know about his theory but had been applying a similar financial method my father started me on.

I went from an old $1500 buick Skylark to an nicer Audi a4 within a year, to a 2001 Audi A6 in just two years. PAID IN FULL.

The Audi A6 was good to me for 4 years, I had around $15,030.54 saved according to my bank. And i only had it sitting in an online savings account with HSBC that is currently earning just 2.26%

So do the math. in 6 Years, I had a nice car i found a good deal on eBay and i had 15K in the bank. Right about now, you would be had been paying off your loan and i had 15K in the bank.

Year 7, i drove the audi to the ground and ended up donating it and had a good tax write off from it. Payed $9K for a 2000 Jaguar S-type and been driving for about a year.

I still have $21,200 in the bank, now im not going to get rich from it but i can certainly tell you that im saving money and driving decent cars at the same time and at this rate by the time i retire, i should have good chunk of change in the bank. i do have to spend some money repairing them every once in a while but i can assure you, it feels so good to pay cash to fix them instead of using a credit card and to know there is lots more cash left where that came from.

That is just my 2 cents.

86 Mark 03.05.09 at 7:25 pm

Oh yeah i forgot to add, that the car i recently purchased, i should be able to drive for another 3 more years. By then I should have saved another $15-16, Worst case scenario $12K on top of the $21K i have today.

Even if worse comes to worse, I should have $33-35K, Im not even including interests to that. Even if I DO NOT TRADE MY CURRENT CAR. I will buy me another 10K decent car and have 25K still earning me interest in the bank and a very good TAX WRITE OFF from my donation.

People get caught up in the TRADE IN and DEPRECIATION EXCUSE but its nothing more than an excuse. I plan on donating every car i buy from here on out til i retire and I can assure you, i still will accomplish a better financial plan than all of these people here making excuses to not get started into some kind of financial plan and alternative lifestyle than the good ol’ CREDIT way of life.

87 Eric 03.11.09 at 4:29 am


Thanks for your comments. I am currently doing something similar to your plan with my 1999 Lexus. I really like your idea of donating the car as well.

You hit the nail on the head regarding repairs. Paying cash for the occaisonal repair is a lot easier than being stuck with a monthly payment for 5 years. The whole “repairs excuse” is something I hear a lot about it and its really lame. You pay a lot more making a fixed monthly payment for 4-5 years with the average car loan than paying cash for the occaisonal repair. I would strongly argue that car loans are one of the biggest reasons why people do not become wealthy because they continually look at car payments as a “way of life”. It does not have to be like that and if you look at things from common sense standpoint and just sacrifice for a couple years, you can be much better off.

88 Delmer 03.30.09 at 11:43 am

Ramsey approach is indeed feasible. The diffeence in depreciation is essentially the car dealers profit when you get to models that have so much of their depreciation taken out already. So skip the dealer. Buy your car direct from craiglsit etc. People complain that they don;t know what they are getting. You don;t at a dealer anyways. Give yourselkf the deler’s profit and you have the money to replace the engine or transmission anyways. You ahve to jsut think outside the box roll up your sleeves and use some common sense and you are able to amke the math work out even better than he says.

89 Eric 04.02.09 at 10:58 am

Great post Delmer. Craigslist is a gold mine in terms of used cars. Spend some time searching and you can find a good deal on a private party sale. In many cases, these people have detailed service records that show the work done on the car. Case in point on my 1999 Lexus ES300. I bought it locally via craigslist from a man who had bought the car brand new. He had all service records from the local dealer and I got the car for $2,000 less than it would have cost me retail at a dealer. You really don’t get any peace of mind buying from a dealer, unless they give you some sort of warranty and even if that is the case, there are usually several strings attached.

90 ragamami 11.13.09 at 12:44 am

I just came across this post because i was so sold on the Dave Ramsey idea and i wanted to hear the other side. Strangely enough this post plus comments has convinced me that its a solid idea at the core. I dont believe you have to follow it to the letter, i.e sell your car every ten months (though its just once in the plan!) but the spirit of the idea is that you will benefit more from treating yourself as the bank and keeping your interest.

I think the ten month thing is because people are impatient to get the car and so will take the loan so they can have the car ‘now’! but ten months doesn’t seem such a long time and id be willing to wait if in 2o months i had the car i wanted and paid cash for it. Also id still be driving so im not too put out by the inconvenience of not having a car.

The drive free part comes after you have bought the 11000.00 car if you listen carefully. he says pretend you still have a loan and pay into your car account for the next 52 months. With a good interest rate, it is unlikely you will need to add any more to that account and you can still dip into it to buy your new(ish) car every time your current one ‘

This post on the other hand has convinced me of some other things. People like dealers coz they take the hassle away from the haggling and the making sure its a good deal. So you pay extra for convenience. Thats fair enough if you are willing to pay but I would be willing to put in some weeks work into finding a good deal every 6 or so years and save the money. To each his own.

New cars are shiny and they are yours. I get the attraction and its really appealing. For many people the prestige of a new car is inherent in the decision of buying a car. What Dave seems to be saying is if you can give up that prestige for just a while then get your car in 2o months, you will be better off financially than if you took a loan.

For those to whom a car is just wheels to take you around, i like the idea of driving your car into the ground then going to your fund to get a new(ish) and continue on your way, debt free.

Thanks all, for helping me see this more clearly…

91 Derek 02.06.10 at 7:18 pm

I don’t agree with trading up per say. I drive reliable junk and want to know why its reliable. Because I FIX IT ALL MYSELF. My current car was purchased for $1800 in 2003 with 98k on it and now has 215k on it and is going to be retired soon. Maintenance during this time period has cost me about $2000 in that time period. Tell me I didn’t get my moneys worth? I will not be trading up either, im still doing the thing only taking over the wife’s car. I like Dave’s program and ideas but I don’t do everything by his plan because I trust my own judgement and intelligence.

92 Rev. Spike 02.13.10 at 7:05 am

Ramsey has a gift/liability of cutting through the bull. I think his point is that people want something that they do not need. “Sorry kids, I can’t hang out today, I have to go work my second job to pay for my 45k SUV when I could have kept driving my Taurus since we only have a household of three anyway…” I am sure that his math is not meant to be absolute either. All sorts of other terrible things can happen too, like losing jobs, rolling your car, etc. All told however, his logic is, well logical.

People have a ridiculous sense of entitlement. Sometimes you just have to wait.

93 gagirl 02.22.10 at 9:06 am

Anyone notice a common thread here? The new car buyers will read good, sound advice from Dave and still find a way to justify their purchase! Why bother reading this if you’re only going to complain about used cars??? Just keep buying new, stay in your current position and be happy about it. These are the same folks who buy lattes on a daily basis and then wonder where their money is. Bottom line is, once you drive your new car off the lot, guess what? It’s used. No one will know what year your car is unless you tell them and no one cares anyway.

94 Josh 03.16.10 at 8:19 am

Emma is right, one must use Kelly blue book and use private party on both the buy and sell. The Dave Ramsey concept does work, it is proven to work, but one thing that he doesn’t consider is the taxes on buying all these cars. State sales taxes must be added to the price and you don’t get that back when you sell. instead you keep paying more sales taxes. In Indiana, I pay 7% sales tax, so the theory doesn’t work well for me. if I upgrade every year, I would be paying 7% to taxes each year! I might as well be paying interest, right?

95 Ronald Spencer 07.02.10 at 8:03 am

You know, the neigh sayers will always say neigh. There are several, MAJOR flaws with your analysis of this method.

Lets start with what is right. Cars depreciate. -this is right.

- the average car looses 70% of its value in the first 4 years of ownership. (this is regardless of brand). Now some brands may depreciate a little slower and some a little faster, but nearly all are around this mark
- Honda is a solid car. as a whole, very dependable. Having said this, no car is without its flaws.

Now, lets discuss what is wrong with the article:

The numbers used are skewed. Using Kbb trade-in value is only good if you are going to take the car to a dealership and let them take advantage of you. Most dealerships underbid trade-ins as part of a whole machine to make the dealership money. A used car buyer (for a dealership) will buy cars 2-2500 (or maybe more) “back of book” or below book value. Sure, this is at auction, where the savvy dealship folks (car buyers) go. In the dealership, that number could be even greater. Why? Most people only want to know how much down and how much a month. Having said this, the KBB trade in values are not the best representation of a vehicles actual value.

Now, if you watch a true depreciation graph for a vehicle, it will drop quickly in the first couple years, then begin to level off. (not go down consistently, year after year).

Moving on. Given the numbers I provided above, which can be verified (for any who are more than passively curious about this whole idea), the example Ramsey provides is valid. If you have $1500 car it is not still dropping “Like a Rock”. It has experienced the greatest part of its depreciation. in 10 months if you take the 475 and pay your self, you will hae 4750. That is elementary math (no smoke and mirrors here): 10 * 475= 4750. If you add 1500 for your car to the 4750, you do, actually get 6250. you buy a 6250 car. In my market, that is an 2001 Audi A6, or an 06 VW Jetta, or maybe even a 2000 toyota avalon. Ten more months (paying yourself 475 a month) is another 6250. Your avalon is not going down by much (it is already 10 years old). You sell it for 5700 and use the proceeds plus the 6250 (6250 + 5700 = 11950). You could easily find an 11000 car (in my area that is any one of a number of late model used cars).

This is just the basics, without any interest. If you can find contentment in a 2009 cobalt or 2000 sc430, you then move to the next phase of this. This is where you make those same payments into a good growth-stock mutual fund. now, interest becomes your friend. Banks figured this out long ago. The interest you are not making on your money, currently, is paying for all those branches and downtown hi-rises.

If you know about compound interest, then you know the Rule of 72. The rule of 72 says take the interest rate you are receiving on your money and devide 72 by it, that is how long (with compound interest) it will take for your money to double. if you earn 2%, you will double your money every 36 years (72/2=36). If you earn 6 %, you will double every 12 years, and 12% will get you every 6 years.

Another agrument in this article is repairs an maintenance. True, those are not part of this equation, but do exist. That is what sinking funds are fore. If you are not paying out a bunch of money to banks and other lending institutions (for stuff you cannot afford), you will be able to pay yourself. put $50/a month into a bank account that you use just for car repairs. In 12 months, that is $600.

One concession I will give you is that the drive free theory has some assumptions to it. One of these assumption is that you are taking care of all of your other responsibilities. This is where the Baby Steps come in. Baby Step 1 is 1,000 in a bank account for emergencys (not pizza or disneyland). If you have 1,000 in the bank, when the car needs tires, you won’t go to Visa or American Excess to have them bail you out (for lack of planning). Baby Step 2 is the Debt Snow ball. The debt snowball says order your debts from highest to lowest balance. (Before any financial guru’s chime in, at this point, interest rate does not matter unless the debts have similar balanaces. (Let’s face it, if we could do math, would we really borrow money anyway?). Having put them in order, pay the minimum on every thing but the littlest one. This one you attack with a vengence. Any extra money you can scrap together, any overtime you can work, anything you can sell, goes to the little guy (until he is paid off). Just like dieting, we are looking for the psychological benefits of the quick win. Once the littlest on is done, you attack the next one, and repeat the process until you have paid off everything but the house (Step 6). Step 3 is to revisit this baby emergency fund and extend it to 3 - 6 months of expenses (note: these expenses will now be much lower without all of that other debt). Step 4 is 15% of your income in mutual funds (retirement). Step 5 is saving for your kids college (despite what our government is trying to claim, college is not an entitlement, and a successful kid may not have the desire to support parents through their retirement. Besides, a J O B can get a kid through college -without debt). Step 6 is to pay off the house. If you get here, you join a very small group of people (approximately 2%, who have a paid off mortgage). Step 7: Build wealth, give a bunch of it away and have a lot of fun!!!!

Dave Ramsey is attempting to draw people back to common sense. He is no guru, just a common sense guy that was tired of being broke. The principles that he teaches are not his (he will be the first to admit that). The path he lays out, which has a proven track record, is not easy and not quick. It is directly contrary to our fast food and microwaves society… It is crock pot finance.

My wife and I are currently on baby step 2. It is difficult, no doubt, but definitely rewarding. We have more room in our budget (the dreaded B word) now because we don’t have car payments any more. I would be happy to discuss this with anyone who is curious. My email is ronald _ spencer AT hotmail dot com.

96 Credit Girl 07.06.10 at 12:33 pm

Interesting advice. I liked the video.
For all you Dave Ramsey junkies, this article details some more of Dave Ramsey’s sage advice.

97 Eric 07.15.10 at 9:43 am


Great post. I don’t have much to add as you detailed it out nicely.

I’d like to share my story. My wife and I are on baby step 2. She is in school and has a little bit of student loan debt that will be paid off within 6 months of her graduating next year. We have 2 paid for cars, a 1999 Toyota Solara with 125k for miles and a 1999 Lexus ES300 with 130k for miles. Both are very reliable and need little maintenance. I am very confident we will get at least another 3 years out of each car and the extra money we save with no car payments has allowed my wife to go back to school and helped us paid down other debt. Regarding maintenance on our cars, let’s say we spent as much as $1,000/year in maintenance (which we don’t) that would be $83/month as a car payment. That is so much better than paying $400/month to the bank in a car payment, plus we have enough extra cash to save and allow my wife to invest in her education. Lastly, when the cars do need repairs, we have enough in our emergency fund to cover it. This is all on one middle class income as my wife is a full-time student. We also have a mortgage payment like most people, but hope to get rid of that soon as well.

This is not bragging–I’m merely showing others that Dave’s principles actually work. You just have to quit making excuses and finding ways to rationalize buying a new car over a 60-72 month amortization. It is crazy because there is such a better way. Yes, having a brand new, shiny car is nice, but it won’t give you the same happiness as having a solid, paid for car and extra money each month. I guaranty it. Just try it folks, you won’t regret it :-)

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Did anyone watch the video? Did anyone think more long term?

It’s all a money game. You have to play the interest in your favor. Like he says here:


The interest is key. Being agressive is key. The more you cut your budget down, live on less than you make, and continue to stay away from debt, you will win every time.

Yes, I do believe nothing is really free. But this is darn close, when you think about the fact that, after years of HARD WORK (which America has seemed to forgotten the definition of), you will eventually be able to work the system and not let the system work you.

Faith and Perseverance.

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Hi, all:

I came across this blog because I purchased the a car I have been drooling for for quite some time, a 2005 convertible BMW M3 in pristine condition with only 30K miles. The car was $30K and I put $8 down. I purchased a 100K mile extended warranty that is transferable to the next owner if I sell the car. My payment? $526.00 per month for 65 months with a lousy 12.55% interest rate. If I sell the car now, I can get between $30,000 and $32,00.00 simply because of the warranty and the condition of the car.

Now for some background; the last car I owned was a 2005 Honda S2000 that I purchased brand new with 7 miles on the clock. I paid it off one year earlier than the planned 6 years. I then found myself car payment free for one year. That didn’t last, and I went out and purchased my M3, which is the 10th car that I have owned since age 19–I am now 31, single with no kids. I would like to say that during the year of being car payment free, I did the wrong thing and spent the money I used to pay monthly to party, purchase expensive things like iphones and smartphones every 3 months, a Macbook Pro, and a $1,500.00 Bianchi bike that I rode 4 times and is now collecting dust–I will be selling it.

Back to my M. I love this thing and I do not want to get rid of it, but the truth is, I should. That doesn’t mean that I don’t day dream with the fact that I can keep my car. Overall, I can afford the payments ($526), but after rent, insurance ($114), a credit card ($776 with minimum payments of $18) and my only debt besides my M, gas ($400), food ($300), car repair budget ($50-$100), and entertainment ($400), I am left with close to nothing (less then $100per month) for savings. Something positive to note, I have completed baby step one and I will be attacking my CC with the vengeance now.

I am in the process of changing careers and becoming a State Trooper. Not only will my salary increase, I will also have plenty of overtime opportunities and a take-home cruiser with insurance and gas paid for. Also, there are several Troopers who live rent-free because the apartments they live in want to increase the presence of police. There are Troopers who aren’t as lucky to score a rent-free deals, but can score a 50% off deal, which is great. I plan to take up one of these deals when I become a Trooper and use the rent money to apply towards my savings and maybe keep my M. Sure, I may not be that lucky, and score any of the rental deals, so there is always that to think about.

In addition to loving my M, I am eager to have my own house, but I do not have the funds for a down payment and I have no clue what barrack I will be assigned to. I will have to most likely commit to a probation period of 1 - 2 years before I can transfer to another barrack. Once I an sure where I want to stay, I will buy a house.

I feel that no one close to me really has the financial mentality like everyone on this blog, which is why I am venting and asking for some advise. Should I just sell my beloved M?



100 Ronald Spencer 09.04.12 at 2:15 pm

Hi Henry,

First, let me thank you for your desire to serve your community (by becoming a trooper) is admirable. I would also like to say that, ultimately, you need to do what is right for your situation. If you don’t have an accountability partner (someone you can bounce ideas/etcetera off of, someone who is not afraid to hurt your feelings for your own good) I would recommend getting one.

Second, regarding your question, it sounds like you have a pretty good head on your shoulders (31, no kids, only debts being a car and a couple cards). Having said this, you did as a question, so I shall do my best to answer. Not knowing your income, I will have to make a few assumptions. I will start by assuming that you are not currently making an excessive amount of money. I feel safe assuming this because you said a job in public service (State Trooper), would result in a pay increase. I will, however, leave the term excessive as a vague definition of the mount of money you are bringing in, given that you did not state it (in as many words) in your post.

Whew. Sell the car. Why? It is more car than you should have at this point in life. I know what you admitted a “love” of the car, but it is just an automobile. If you sold the car, you could wipe out the other debt you had in 1-2 months. Further, with a cruiser to handle your commute, you could get something simple, for now, to address off-work transportation needs.

If I infer, based on your stated expenses, that your outgo (expenditures) not including rent (which you don’t state) is approximately $2000, 25% of this is car payment. Just because your budget will sustain it, does not mean you can afford it. Another test, if you choose to overlook this, is the does the car equal more than 50% of your annual salary (take home)? DR would say that the value of all of such items (to include toys like boats and jetskis) should not be greater than 50%. Their maintenance and upkeep (and other unseen costs) could break the bank.

Finally, if you did sell your car and pay off the only other debts you had, the combined total of payments (not to mention the money you could save on gas an insurance) would be an extra $544/month. You could make great strides toward the rest of the baby steps with this (at your current income). Then, if your desire is to have that M, save up and pay cash. $544/a month (disregarding the excess that will be found in the gas and insurance categories) adds up to a 30k M in just over 55 months. And then, you will have a PAID FOR, M. It will truly be yours.

I am walking this path as well (mentioned in my previous post). My wife and I are on Baby Step 3 (having paid all of our debts, using the debt snowball). It has been a long process, but is gaining traction now that we are no longer giving our money to others (for the servicing of debt).


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I understand the concern that depreciation inflates overall cost to drive BUT the principle of being debt free and saving in my experiences bypasses the spreadsheet in unquantifiable ways. We started with a 10 year old van that was a miracle of a deal to find driven by a grandmother with only 55k miles! That was our first foray abd we were forced by circumstances of 2009. Then we found we like this and began to save for my husband’s car and four years later he is frequently asked if he would consider selling it. From initial purchase to today we have only lost 1500 in depreciation which is a conservative estimate because we won’t know until it actually sells but we did awesome on the buy. I am soon to upgrade again to my 3rd van with cash into an even nicer van! I can contrast this new way of driving to our previous behavior of leasing/borrowing since we both were 16! The end of 2009 we were facing repos on both our vehicles because when tide went out in economy we discovered that zero percent loan that made us feel like rock stars really wasn’t zero! if we sold our vehicle it wasn’t anywhere near our initial new purchase price. And the lease remainder we tagged onto my car into a used car with at time was a reasonable payment came to call too. I soon learned that depreciation of my vehicle plus rolled over lease debt …well we were trapped and too broke that we couldn’t make it right. We were forced into cash buying position and 4 1/2 years later the behaviors that changed for us are 1.) Much wiser and patient buyers because we are empowered by time on our side….there is no lease coming to end or threat of losing that “limited time only APR” in fact I can take all the time I want for best buy 2.) We take much better care of our cars because we own them not rent them. I don’t let my kids junk out my van keep regular maintenance schedules because an ounce of prevention helps me as an owner and later as reseller 3.) I remember the palpable fear and distress as creditors called and dread of knowing soon a repo truck would arrive for all my neighbors to see (He nicely gave a courtesy call and we met him in a parking lot) That will never happen to us again ever! Because to GMAC who we tax payers bailed out didn’t care that we had been doubling payments prior to our self employed business being affected by economic crash dominoes because clients didn’t pay us…we asked if our extra payments could buy us time during this struggle their reply was “no”. It was a 42k Avalanche at zero percent interest and we were only 15 payments from paying it off but all the previous 33 months didn’t count for anything they came and took it away and marred our credit…with a balance more than we owed because we have to pay divergence between FMV and what they did it for at auction aging with reo and legal fees! What is really insane is we tried everything including selling it we even had a buyer but he was only going to buy for 2k less than note owed to GMAC. We called with this great need but they wouldn’t release title and let us pay off the remainder we were too broke to sell it…so it is on our credit report as a repo and instead they paid a repo man and attorneys for legal work which easily could have cost them more than the 2k debt gap between us and a buyer….no they got a bailout rewarding them to discharge debts. And the previous 33 on time payments wiped off our credit report and nothing to show for those efforts….nothing to show for years in system! We will never ever be in that noose again! My dad was right whoever makes the gold makes the rules and they made the rules disregarding honest hard-working people. If business slows or tide goes out again we own everything we have now with cash in bank. The behavior change in applying “cash or pass” changes everything! 4.) Another byproduct is it gives you contentment! You no longer are dissatisfied by your “old” car as you think you know for same monthly payment I could have newer and better ….I have never been as content as I was in my $6600 10 year old van….it was then after having to move out of state for work then returning to my home town of Big D the land of Mercedes and BMW and beyond did I realize I changed and felt contentment! While sitting at a red light next to some shiny Benz I proudly gripped my steering wheel knowing I own this it doesn’t own me financially nor am I attached to what it may say about my identity or success…the security of cash in the bank if economy ever takes a downturn again and making progress to debt free was more empowering something no souped engine can recreate! No matter what car you drive there is and always will be something newer and shinier but the cash we save over long term 15 25 35 years will never go out of style or look less shiny! 5.) I lift weights and am back to my highschool jeans at 34 and 2 kids later and 47lbs later….financial fitness is parallel to physical fitness. If you read Dave Ramsey they are 6 steps. If you can’t save for a car how do you have same endurance and discipline needed to delay gratification and pay off your home or save for retirement? Because the excuse for but going to the gun is “I don’t have time” the debt free excuse is “I don’t make enough money”.When I reflect on when I first reentered the gym I couldn’t do but 3 pushups now I can easily do 30…the achievements and freedom as we became for financially fit I do believe influenced our physical fitness for me the emotional stress was less debt ess literary a weight lifted from us! Another unquantifiable data point is our faith and seeking God as our source in our business and in all our purchases. To date He has always provided the best deal at buy or sell. We paid a huge stupid tax thousands of dollars wasted to leases and car loans if worst case scenario is I pay a 2500 depreciation I still come out ahead and in control! Oh and my 6600 van I traded into a dealer 2 1/2 years later with 105k miles and he gave me 8k on trade! The can I bought for cash was 2200 under retail…we prayed for weeks for a car prior to purchasing that first car and we weren’t even in the van market but beggars can’t be choose! We didn’t have one car after the repos….God provided in so many ways. After purchasing that first van about 2 weeks later we finally received call for work but it was 1800 miles away…that van was perfect for packing all we needed to get started and for sleeping in as we had such a limited budget knowing we had to stretch dollars until we first were paid in net 45. No worries my kids weren’t with us because I knew we could sacrifice meals and things but no way would I be able to do that to my children they stayed with my parents for two weeks while we settled. I called the bank on our home mortgage for any kind of forbearance because we were taking our last dollars to our name which was the next mortgage payment to fund us to take this job….two weeks later I received a letter from our lienholder giving us 6 months forebearance of course the interest tacked to back of note! A month later we realized we may have to stay here longer than expected let’s list our home to sell and see what happens. This was Feb 2010 winter and peak of housing mortgage crisis…we received five offers the day sign went in the yard accepting a cash offer that was over our asking price on condition we move everything out in 2 weeks! I had to also include my childhood piano in the deal…that was only the first 3 months of going all in for cash only whereas before we were partially committed to this theory! I have so many other blessings to list and I attribute it to faith in God and not in my FICO, government handout or any bank! The freedom of being in the driver’s seat of your life is Better than any new car! 6.) In my calculations I have discovered that buying a car 4 to 5 years is sweet spot for hedging depreciation and after 6 it is pretty much stable in almost every brand some are better than others but overall this can be a rule of thumb to at least narrow the field. I don’t plan on ever buying a car brand new off a lot no matter how much cash saved or earnrd bc those first 2 to 3 years is stupid and one spray of new car smell is only 4 bucks! I don’t see any need to ever buy over 25/27k and when I do I will drive for 5 years not 2.5 as we worked out way up out of beaters… In fact my goal is not a mercedes but my goal is to be able to afford to sell to someone else committed to cash at wholesale cost and for it to be as clean and well cared for as our first van we fondly named Christmas Van for it’s color and timing and gift of freedom to us. We shared one car for 6 months while saving for my husband’s car while we both worked to get our heads above water. I cried as we were 1800 miles from home and all I ever knew as I dropped my baby off at daycare something I never ever wanted to do and went to frontlines to help our family survive. The next greatest gift is now as of May I am home with my kids no debt….it’s because of discipline and sacrifice and faith in God who multiplies the little we have when we live in complete obedience to Him! I still work in our business on back end but I no longer am under contract with a client working 6 days a week 50 hours a week and juggling demands of home and motherhood and missing those early moments because the best thing to do for our family was for me to work…debt took that from us not depreciation! We were.building our muscles on this step giving us strength and endurance to tackle next goals which years ago seemed impossible, improbable pie in sky but we now are progressing and see them attainable! All those sacrifices we made on front end that I cried and it was hard I sacrificed many things but they are my most treasured memories because of the pain from which it was born it makes the sweet moments in between that much sweeter….it’s a principle you apply to your life it can’t be calculated in a spreadsheet…I make the spreadsheets as I analyze abd research the best car purchase as I hone in specific targets for year make model mileage and trim based upon total cost of ownership with repairs based upon data….everytime my buy and sell my forecasted numbers were always slightly off and it ends up in our favor …three cars later we have had zero depreciation I know it’s God part as we commit to our part ) Jefferson was right when he disagreed with Hamilton on debt…if all operated on cash a house would be less expensive, cars would be less expensive since when are new Tahoes tipping over 55/60k? Healthcare yes I said it if people were paying cash directly would be less and people would be holding all these corporate empires that sell us goods and services accountable with our cash that we pay directly. We would do a lot more active research and less passive buying infkuenced by heavily marketing schemes. But when you only see a monthly payment you just don’t care as much you are too busy because it’s only 400 dollars not 54000….neither my husband and I are economists or.college grads (not till I was 33 and again paid cash) when you have cash everyone negotiates from my doctor to my college…I no longer act like the ugly girl glad that the cute guy asked me to prom just to use me which is how it now seems to be as I remember those anxious minutes as they run your credit report hoping the bank asks you to dance! Here is my challenge just do it for two years…worst case nothing changes too you behavior or other areas of your life behaviour you can always go back the dance to lease or borrow :) I highly recommend ditching the dance like the ending of a great 80s movie and drive freely :)

103 Ronald Spencer 11.15.13 at 8:06 am


Wow! That was a REALLY long post, but I read every word, and was excited to hear the passion in your voice. Congratulations on the turn-around. Here’s hoping and praying that others are inspired to do the same!!!

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What is most noticeable about this rare genetic disorder is the excessive discolouration of the skin which
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164 Aaron 01.06.15 at 7:06 am

I’m not sure if anyone addressed the issue(comments were so long I’m assuming so but I’m still going to address it). You’re numbers are flawed. They are trade-in. That is not a factor so instead of focusing on them you should have actually put trade-in values in your “other considerations” section and focused on the true issues. Vehicles are not an investment unless you specifically use it to make far more money than what it’s worth, like a dump truck, box-truck, etc. On average people are paying $475 a month on a vehicle that drops in value rapidly. I think the key here is to get good deals on vehicles. I am following Dave’s plan. I am getting out of all debt and have started to be a deal finder.
Sure, if you pay $2,000 for a car that is worth $2,000 it will be worth less in 10 months. However, if you pay $2,000 for a car that is worth $3,000 you could end up selling it for more. I have had patience with my purchases. I bought a Honda CRV for $5,500. I fixed a sensor that caused the check engine light to turn on ($29). I ended up saving for 18 months because I knew I could sell it for more after a longer amount of time. It sold for $6,200. I then bought a truck for $8k and it was actually worth $12k after I put only $500 bucks into it. I sold it Immediately and I now drive a $10k car and the rest went to student loan debt. I have stopped doing the plan to focus on my debt snowball. Which is rolling at an incredible pace. I still have a few years before I’ll be debt free (not including home) because of the large amount of student loans and pauses for babies.
All in all, I must say that Dave Ramsey’s plan is flawless. The only flaw to be found is in his 12% mutual fund by certain people. Because they take it literally. As in 12% per year, every year. Rather than average. Obviously, a few years since 2008, people weren’t getting 12%. But the last 3 years in this bull market economy, there are numerous mutual funds that have averaged 30% (I saw a mutual fund at 42% last year-2013). So that makes up for many of the bad years. Which goes on to help the 12% lifetime average for many long time mutual funds. Food for thought. Obviously, I’m not trying to change your mind, just letting you know that you’re perspective is angled.

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