Money Management

Following Ramsey’s advice could hurt your retirement prospects. 

Dave Ramsey is a finance expert offering advice on many issues, including where you should put your retirement money.

Ramsey gave some good suggestions about what kinds of brokerage accounts you should be putting your money into. But, when it comes to suggesting assets to invest in, he’s given some very bad advice that you likely should not follow.

Specifically, Ramsey recommended mutual funds over exchange-traded funds for most retirement investors. And he gave some explanations for this recommendation, most of which highlight just how incorrect he is. Here are two reasons Ramsey is dead wrong.

1. Ramsey says actively managed mutual funds are worth paying more for

When comparing mutual funds and exchange-traded funds, Ramsey acknowledged that mutual funds can have higher fees than ETFs. But, he suggests, that could be a good thing if you’re paying for a fund manager to personally select assets.

“ETFs are managed passively (the fund just follows the market index) while mutual funds are managed actively by investment professionals,” Ramsey explained. “The goal of having someone actively managing your mutual fund is to benefit from their expertise and beat average market returns. That makes mutual funds a little more expensive to own than ETFs, but the idea is you’ll benefit from stronger returns.”

There are some big problems with this advice, though.

Most importantly, actively managed investments very rarely, if ever, outperform market indexes over the long term — especially after factoring in the fees that fund managers charge. In the rare cases where active investing does net higher returns, it’s usually in situations where wealthy investors are purchasing assets regular people can’t access.

Why would you ever want to take a chance on paying more for a fund manager to pick your stocks when the odds are very good that you’d do better with a cheaper passively managed ETF?

2. Ramsey says index mutual funds can be a better buy than ETFs

Ramsey suggested that if you do want to engage in passive investing, you’re better off doing it with an index mutual fund than with an ETF that tracks a market or financial index.

His reasoning: Mutual funds are meant to be invested in over the long term, while ETFs trade daily. He goes on to argue that mutual funds allow you to avoid brokerage fees often charged by ETFs.

There’s problems with this advice, too, though. ETFs can also be held for as long as you’d like, even though they do trade like stocks. So there’s no reason long-term investors can’t opt for an ETF. And many brokerage firms offer more options for commission-free ETFs than mutual funds. So, you could have a broader choice of fee-free investments if you opted for ETFs instead.

For these key reasons, Ramsey’s advice isn’t the best on this issue. If you want to build a retirement nest egg that provides the security you deserve and you don’t want to pick individual stocks, an ETF could be a way better bet than most mutual funds would be.

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Anyone hoping for more stimulus money should pay attention to what happened in Congress yesterday. 

On Tuesday Jan. 3, 2023, a new Congress was sworn in. Both newly elected Congress members and incumbents took their oaths of office, with Republicans taking control of the House of Representatives while the Democrats retained control of the Senate.

With the new Congress now in place, the big question on many people’s minds is whether stimulus checks are on the table in this upcoming legislative session. If you’re hoping for more money in your bank account from the federal government, it’s worth considering the implications of yesterday’s important day.

Are stimulus checks on the table in the 118th Congress?

Stimulus checks originally enjoyed bipartisan support. Both Democrats and Republicans voted together to provide the initial direct payments during the heart of the pandemic.

But, as time went on, this consensus eroded. And when President Biden signed the American Rescue Plan Act into law shortly after taking office, the legislation had been passed with the support of Democrats alone.

At the time, Democrats were in control of the White House, but they also had a small majority in the House of Representatives and the U.S. Senate.

With the Democrats losing this unified control of Congress after Republicans took the majority in the House when new members were sworn in on Jan. 3, the chances of a stimulus check dimmed.

It is very unlikely that the Republican majority in the House of Representatives would provide the votes needed for a fourth stimulus check — or even allow a bill authorizing one to come up for a vote.

All hope isn’t lost though

While another direct payment that’s broadly available to most Americans is unlikely, there’s still a chance the federal government could step up and offer some new financial support. This most likely would come in the form of an expanded Child Tax Credit for parents.

The most recent COVID-19 legislation provided payments up to $3,600 per child under age 6 to eligible parents, and payments up to $3,000 per child aged 6 to 17 for eligible families as well. Republicans were not on board with this specifically, although this Child Tax Credit was a key Democratic priority.

Some Republicans have indicated they believe the current Child Tax Credit system should be modified, though, and that parents should receive more direct aid.

Since this may be one of few areas where there is an overlap of goals on the left and right, there remains a chance that parents at least will see some extra help from Uncle Sam now that the 118th Congress has kicked off.

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It really depends on the cost involved, and on other factors. 

When my husband and I bought our Prius back in 2007, we were among the first of our friends to have a hybrid vehicle. And since gas prices were up at the time, we enjoyed lower credit card bills by virtue of not having to fill up our car as often.

In 2020, our Prius started giving us trouble and we learned we’d need to replace the battery. Only since this is a hybrid car, not a regular one, a replacement battery doesn’t just cost a few hundred dollars. Rather, we were looking at a $1,500 outlay.

We weren’t sure if spending the money on an older car was the right move. But then we did the math and figured that if we were to lease a replacement car, we’d be looking at around $400 to $500 a month.

All told, we determined that if we spent the $1,500 and got at least four more months out of our Prius, which was likely, we’d break even. And if we got more than four more months out of the car, we’d come out ahead by making the repair.

Fast forward two years, and the Prius is still hanging on. Granted, we don’t expect it to stick around all that much longer, and at this point, I don’t know that I’d be willing to sink $1,500 into it. But clearly, fixing it up two years ago was the right call.

If you have an older car that needs work, you may be wondering if it pays to pump money into it or just get yourself a replacement car. The answer? It depends on the cost of the work and the extent to which it’s likely to extend your car’s lifespan.

A tough call

Right now, car prices are way up across the board. Even if you’re willing to skip the fancy features and stick to a basic car, you’re still looking at spending more money than usual. And if you need to finance a vehicle purchase, you might get stuck with a higher interest rate on your auto loan, since borrowing rates are up across the board too.

That’s why it could pay to fix up an old car and get a little more use out of it — but only to a point. Basically, you’ll need to do what I did a couple of years ago and calculate your break-even point.

So, let’s say you’re looking at a $1,000 repair for a 15-year-old car, but your mechanic thinks that by spending that money, you’ll get a minimum of six more months out of your vehicle, and possibly more. That’s a repair that could make financial sense, because these days, even a very inexpensive monthly lease or car payment is going to cost you $350 or $400. And you may be looking at a lot more.

On the other hand, let’s say you’re looking at a $3,500 repair that might buy you six more months with your vehicle. Suddenly, the numbers seem to favor going out and getting a new car.

A newer car could save you in other ways

When you have an aging car, you never know when you might spend money to address an issue only to encounter another issue a few months later. So if you’re looking at a costlier repair and not too much upside (meaning, the repair is only likely to extend your car’s lifespan by a few months, not a few years), then you may just want to get yourself a new vehicle that’s unlikely to need repairs in the near term.

While cars today are generally expensive, if you shop around and do some research, you may be able to find one that’s reasonably affordable. And if you have a great credit score, you might eke out some savings on an auto loan despite rates generally being higher.

One thing you don’t want to do, however, is let your emotional attachment to a car lead you to make a poor financial decision. You might hate the idea of giving up the car you love, but if you’re looking at a $5,000 repair to maybe get another year out of it, it’s just not worth it. And in that situation, it’s important to rely on numbers more so than feelings.

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You might have to fight for it, but it’s worth the fight. 

If you owe money to creditors, you’re definitely in good company. According to research from The Ascent, Americans’ average debt by household was $96,371 in 2021. Despite what some financial gurus will tell you, being in debt isn’t necessarily a bad thing, especially if you’ve taken it on to buy a house or invest in yourself via education. Owing money on credit cards and auto or personal loans, on the other hand, is a less-than-optimal situation.

The silver lining with paying back a fixed-term loan (as opposed to a credit card) is that your payments and interest are set ahead of time, and if you take out a loan with, say, a 48-month payoff period, you know you’ll have it paid off if you make all 48 of those monthly payments.

You might find yourself in the fortunate position of having the resources to pay off an auto or personal loan faster. But is that something you’re able to do? Yes, you absolutely are. Financial guru Tori Dunlap (also known as The Financial Feminist) recently offered tips and advice about paying off a loan ahead of schedule on her podcast, and it pays to learn from her experience. Be warned — lenders don’t always make it easy to end your relationship with them early.

How can you pay off a loan faster?

The trick to paying off a loan faster is to make extra payments to your principal balance (meaning the money you borrowed initially, rather than the interest being charged on it). But as Tori Dunlap noted, it isn’t always a snap to do so. Lenders want to keep you in debt (and paying them interest) as long as possible, so they’ll make you jump through hoops to pay extra and finish with that debt payoff sooner.

Dunlap recounted a story about trying to pay extra on a car loan. She added an extra $50 on a monthly payment, only to find that instead of being applied to her principal, it was just applied to the overall balance, reducing the next month’s payment by $50. This wasn’t going to save her any money on interest. Dunlap had to call and speak to someone in customer service to learn that she needed to send a check to a P.O. Box in Iowa to have extra money applied to her principal balance.

The lesson here is to be persistent. If you are in a position to pay down your loans ahead of schedule, you’ll likely need to agitate to get the information necessary to do so. And it’s absolutely worth it to do so, as paying a loan balance off faster in this way will save you money on interest.

A caveat

If you have a low-interest loan (like you were lucky enough to snag a mortgage loan or refinance an existing one during the days of 3% interest back in early 2022), you may not want to pay it off early. The money you’d send to settle that debt early could instead be invested in a brokerage account, or even kept in a high-yield savings account, some of which are now paying more than 3% interest on money kept in them. This will give you a better return on your money than paying off low-interest debt.

That said, having debt hanging over your head can impact your mental health. So if you know it will give you greater peace of mind to pay off even low-interest debt sooner than anticipated, I say go for it. Your mental health is priceless.

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Despite what we see on home improvement television, undertaking large renovations is not always the wisest course of action. 

Are you spending a lot of time recently dreaming about how you might improve your home? We’ve all been there and experienced the home renovation itch. There’s nothing wrong with making changes to your dwelling that will make your life happier and more comfortable, but there is such a thing as the “wrong time” to undertake any major changes. If any of the following scenarios apply to you, consider keeping the changes (for now) to a minimum.

1. You have existing high-interest debt

If you’re thinking about renovating your home but still have outstanding high-interest debt, it’s definitely not the right time to get that new bathroom or kitchen installed. Carrying high-interest debt is a drain on your finances and makes it tough to save for the future.

Let’s say you owe $10,000 on a credit card with an APR of 17%. Paying that debt off before you do anything else is like investing 17% in yourself. Once the debt is paid in full, you’ll have those funds available to make actual investments for your future.

2. Your emergency account is lacking

Given the percentage of Americans who don’t have enough cash on hand to cover an emergency, it is vital to ensure that you have a healthy emergency fund before spending anything on home renovations.

The rule of thumb has long been that you should have enough put away to cover three to six months’ worth of bills, but as the COVID-19 pandemic has shown, emergencies can last even longer. This emergency savings calculator can help you come up with an amount you’re comfortable with.

3. You expect a healthy return on your investment

The value of your home is likely to increase over time, but that may not be due to expensive home improvements. According to Fixr.com, expensive projects don’t always equal a higher return on investment (ROI). For example, a mid-range major kitchen remodel has a ROI value of 53%. That means if you spend $80,000 to upgrade your kitchen, you can expect to recoup approximately $42,000 when you sell. Adding a mid-range bathroom has an ROI of 52%.

In other words, if you’re justifying your remodeling efforts by saying you’ll earn the money back when you sell, that’s probably not true. On the other hand, if you’re strictly making changes for your own enjoyment, that’s an entirely different story.

4. You don’t plan to stay long

Unless you’re confident that you’ll live in a home long enough to enjoy the upgrades, you may want to keep the money in your bank account or search for investments that will put the funds to better use.

5. Renovations will overvalue your home

One of the easiest ways to get stuck in a house when it’s time to sell is to make it the most valuable home in your neighborhood. Let’s say homes in your area are selling for an average of $300,000, but your home is valued at $450,000. It’s going to be tough to find someone willing to take out a mortgage on the most overvalued home in the neighborhood — especially if they can go down the street and buy a basic model at a cheaper price.

If you’re itching to put your stamp on a house to make it feel like your own, consider less expensive changes that you can pay for as you go. For example, changing out light fixtures, painting rooms, hanging personal art, and giving the cabinets a facelift by adding new hardware all add customized touches that will be uniquely you.

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