A week ago I wrote Dave Ramsey Scares me, for the fact that he forecasts the US stock market to grow at 12% as far as the eye can see and I think his disciples are ill-served by such prognostications. Over the past week, I thought some more on this. This is the same guy that talks about being debt free, paying the mortgage off as though it were a deal with devil. But wait a second, Dave, if I can borrow at 5% but get a 12% return on my money, why not just let that mortgage be, and start investing sooner? Let’s see what would happen if we did that.

I tried to keep the numbers simple here. A 5% mortgage even though rates are actually lower right now. A $250,000 starting balance. Simple means I ignore the mortgage tax deduction, I don’t need it to prove the point. If we do the math, we find the difference in payments between the 15 year and the 30 year terms to be just under $635. If you go with the 30 year mortgage, you’ll still have a balance after 15 years of $169,709.77. This is simply the nature of mortgages, the balance is not linear, it can’t be. The interesting thing is that if you invest that $635 and get an annual return of 5%, after 15 years you’d have exactly $169,709.77, the exact amount remaining on the mortgage. Dave however, believes 12% is the norm, so let’s skip right to that line on the chart. At 12%, you have over $317,000 in your account. This isn’t just more than the remaining mortgage balance, it’s so much greater that if you withdraw just the amount due on the mortgage, it’s still growing faster than the withdrawals. Of course, 12% per year is 1% per month, and 1% of this balance is $3,170 against a payment due of $1342.05. (Note – I also showed the account balance if the market only does 6,8, or 10% vs Dave’s 12. Still, some impressive numbers.)

I know there’s a reason Dave doesn’t recommend this approach, I just don’t know what it is. I continued to do the math, no more money out of your checking account to pay this mortgage, it all comes from the saving that $634. After another 15 years, you’d have just over $1.2 million sacked away. I’d really like to know the flip side of this, how one can reconcile a 12%/yr forecast and the maniacal payback of this low interest debt.

I think you have to consider Dave Ramsey’s intended audience. If you listen to the show, a good half of the people that call in know nothing more about money than the fact that it’s something they get every payday. I think that the no-debt mindset is important for these people to develop because a lot of that mindset is what’s required to invest, such as disciplining one’s self to invest money at all as opposed to spending it on consumer products, to be disciplined enough to ride out the bad times in their investing strategies, and simply living within their means enough to have money left over to invest.

I agree though, it’s almost counter-intuitive to keep paying off some of that debt when you could get the kind of returns Dave talks about.