Wednesday, January 07, 2009

Dave Ramsey makes me mad

Not because he's wrong.

But because people are paying him bazillions of dollars and all he's doing is doling out common sense. Even he says so.


You want to be out of debt?

Quit spending so much money. And pay off your debt - piece by piece until you're done. There's no magical elf trick to it. It's not easy, or we wouldn't be in the situation we're in now economically.

I don't agree with everything he says, but I do know that everything he says's just not my preferred order of business.

His steps, my comments:

1. $1,000 to start an Emergency Fund. Part of me thinks this is a decent idea. At the same time, $1000 towards a high interest credit card will save you more money, and if you have an emergency you can use your credit card, in that case, you will have saved however many months of interest since you gathered the $1000.

2. Pay off all debt using the Debt Snowball. Debt snowball means to make your payments as normal, pick one thing to put extra money towards, when that's paid off you put that payment towards your next debt that you want paid off. His suggestion is to line them up according to balance, because paying off a small balance feels more rewarding that paying a chunk of a big balance. This one I agree with, except, in some cases you may want to address the higher interest rates first.

During this step, if you can't pay cash for it, and it isn't an emergency, you don't buy it. Period.

Dave also advocates living as if in poverty while doing this (rice and beans, beans and rice). It takes a special person to live like that for any length of time, if you set yourself up doing something you can't sustain, you will fail. I suggest breaking out your excel skills (or calculator skills) and creating a budget where you write down every income and every bill you have. Over estimate your bills, underestimate your income, as you spend anything not included add lines to make it essentially your check register. Adjust amounts as they are received or spent. My file right now will tell me if I spend $50 today, whether it will have ill effects as far ahead as the end of 2012. So if you line up your budget, you can figure out when things will be paid off and you can decide for yourself if it's worth cutting back on extravagances so as to pay debt off sooner.

3. 3 to 6 months of expenses in savings. Having been laid off in the past, I now know how important this fund is. But I do agree it should come after debt is paid off.

4. Invest 15% of household income into Roth IRAs and pre-tax retirement. For this one I disagree with the placement. I think it should be #1. Even if it's not 15%, you should be putting some money away for retirement. At a minimum, if your company matches your contributions, you should put enough to maximize the free money they are giving you. That's a possible 100% return on your investment depending on your company's policy, you cannot get better than that. The sooner you start putting this money away, the less you have to put in. It's called compound interest, people.

5. College funding for children. Yes. Your kid might not be the next super sports star with all the scholarships. And although we all know he's a super genius, that doesn't guarantee him any scholarships. At least allow for a state school. At the moment there are programs in place where if a kid gets student loans, then graduates in 4 years with a B average, they forgive a certain amount of the loan. This isn't something you can count on being around later, but if it is, and you've saved this money, have the kid get the loans, if the portion is forgiven, you then pay off the balance and you should come out ahead of the game.

6. Pay off home early. This one is debatable. One one hand, you can write off the interest on the mortgage loan, which means you will probably be able to write off other stuff, since then you'll be itemizing. But the mathematics are that if you pay $4000 in interest in a year you will get a whopping $1000 back in your taxes (that's a 25% tax bracket, and your mileage may vary.) So you just spent $3000 to save $1000. So, yeah - pay off the house.

7. Build wealth and give! Once you are totally debt free, you will have more money to do things like give back to organizations that have helped you and your children through the years.

So my steps look like this:

1. Invest 10-15% of household income into Roth IRAs and pre-tax retirement, at a minimum maximize any matching that your company does.

2. Pay off all debt using the Debt Snowball, small balances and high interest rates first. Also call all debtors and see if you qualify for lower interest rates.

3. 3 to 6 months of expenses in savings

4. College funding for children.

5. Pay off home early.

6. Build wealth and give!

Oh and if I were to recommend a book, one whose advice I tend more closely to that Dave Ramsey, it would be Smart Women Finish Rich by David Bach. He has other books, like one for couples, and not having read it, I'm still sure it has nearly the same information, but is more geared towards couples.


The Modernish Father said...

After watching my wife's retirement portfolio lose an ungodly amount over the past year, I'm investing everything we've got in canned hams and handguns.

bernthis said...

I agree with the credit card thing. HOwever, I would only suggest using the card if you can pay it off every month and still get points. For every 10 grand I get a hundred dollars cash. So if I'm buying it anyway, with money that I have, why not get something out of it. But that is only if you have the discipline to pay off the card each month.

thanks for the tips

nonsoccermom said...

My husband is quite correct, my retirement funds are in bad shape. I haven't even looked at the balance in months, truth be told, because I think it would make me cry.

Kristine said...

I no longer look at my retirement balances either. But last time I did, I conforted myself by saying that since my company put in half the money, that we hadn't even dipped below what I put in and that made me feel slightly better.

The thing to remember is that it's in there for the long haul and the economy works in a cycle, it will go back up, just give it time.

Also, I agree, that if a credit card can be used in situations where you pay if off every month, that's fine. Meaning, you have the cash, but you put it on the card anyway, so when the bill comes in you pay it and it's "like" paying cash.