Dave Ramsey, debt, credit cards, retirement, etc

[bassman215]

1./3. - So, what you're saying is to keep just $1k as a baby emergency fund? Once your debt is paid off then build the emergency fund to cover 3-6 months of expenses? I have a hard time without having $5k min, but more like $10k as liquid cash. I have about $10k liquid cash sitting in the bank now. Soon to be $7k when I buy my pontoon boat (found a steal I can't pass up and always wanted one).

2. What if your smallest debt is 0% for the lifetime of the balance, assuming you don't default, AND, that you charge a minimum of two things on the card per month? I have two small bills that are always the same for each month on this card. THEN, what if you have two other debts, one credit card and one term loan. Both interests rates AND total amounts are the same. I assume you'd pay off the credit card since it isn't a "term" loan.

4. I am putting 7% into my 401k, my company matches 3.5% and I get a free 3% deposit once a year. What is the max contribution allowed to a 401k per year? I am above the AGI for a Roth IRA so that isn't an option.

5. No kids, no wife, so no college fund till then. Right?

6./7. - Baby Steps LOL

Get rid of that revolving credit, i.e. the credit card, first! IF you were to default they will nail you with fees and likely charge you high interest and possibly back date it. Those guys are vultures and they have very little mercy. Just the nature of the beast. Check out my website www.primerica.com/caseyhildebrandt There is a lot of great information there that lines right up with what DR teaches. I work with families to teach them how to become financially independent. It feels SO good to pay off debt. It takes so much pressure off a family/individual. Usually you don't even realize how much pressure it puts on you until you pay it off and see what it feels like to not have that debt anymore. It's very rewarding. They key is not to get back into debt, which is way too easy to do.

 

[CuzzinOlaf]

Do you really not know what your 401(K) contribution limit is?

Not offhand, isn't it something like $15k? For some reason I was thinking it was a standard figure.

 

[bassman215]

Not offhand, isn't it something like $15k? For some reason I was thinking it was a standard figure.

$15,500 for 2008 and $5000 catch up contrib limit if you're over 50yrs old.

 

[Matt_E]

It adjusts every year, currently it's 15.5k

 

[CuzzinOlaf]

It adjusts every year, currently it's 15.5k

Alrighty, so I was up to date with 2008 figure. Thanks! Last question/statement. In DR's steps, he has paying off debt before building up the emergency fund. I can't say I agree with that and think it should be reversed. Does anyone else agree OR can anyone explain why I should be taking my emergency fund and paying off debt.

 

[bassman215]

Alrighty, so I was up to date with 2008 figure. Thanks! Last question/statement. In DR's steps, he has paying off debt before building up the emergency fund. I can't say I agree with that and think it should be reversed. Does anyone else agree OR can anyone explain why I should be taking my emergency fund and paying off debt.

I think you should do both at the same time. It may mean that you won't put quite as much towards paying off debt as you would like... but if you don't have some type of cash reserve then what happens when the car breaks down, or the water heater goes out? Most people bust out the credit card. Build up at least a small emergency account while paying off your debt. After you pay off the debt, then you can build up to your 3-6 months living expense emergency account.

 

[CuzzinOlaf]

I think you should do both at the same time. It may mean that you won't put quite as much towards paying off debt as you would like... but if you don't have some type of cash reserve then what happens when the car breaks down, or the water heater goes out? Most people bust out the credit card. Build up at least a small emergency account while paying off your debt. After you pay off the debt, then you can build up to your 3-6 months living expense emergency account.

OK, that makes sense, but what if you have the emergency fund built up. Do you dip into it to pay off debt?

 

[Matt_E]

I wouldn't.

 

[Snackem]

Yes and here's why. Dave's theory is that if you are intense that the whole process form building your beginner emergency fund (1k) until you are out of debt will take a couple of years or less. It's about focus and intensity and that if you only worry about one thing at a time you can knock it out in a hurry while if you try and do a bunch of stuff at once you lose focus and spread yourself too thin.

A question that Dave constantly asks is "Would you Borrow money on credit cards/debt to build up your emergency fund?" So if you had a paid for house/car/boat would you take out a loan against it to build up your emergency fund or would you build it up with cash over time.

 

[bassman215]

OK, that makes sense, but what if you have the emergency fund built up. Do you dip into it to pay off debt?

Probably not a good idea. I use some basic money market accounts to setup emergency funds for families. The catch is if you want to write a check on them it has to be $100.00 or more. Keeps a person from nickel and dime-ing it down to nothing. Also, it is not attached to their checking or other savings. Out of sight out of mind kind of thing.

 

[Matt_E]

Yes and here's why. Dave's theory is that if you are intense that the whole process form building your beginner emergency fund (1k) until you are out of debt will take a couple of years or less. It's about focus and intensity and that if you only worry about one thing at a time you can knock it out in a hurry while if you try and do a bunch of stuff at once you lose focus and spread yourself too thin.

A question that Dave constantly asks is "Would you Borrow money on credit cards/debt to build up your emergency fund?" So if you had a paid for house/car/boat would you take out a loan against it to build up your emergency fund or would you build it up with cash over time.

I wouldnt', because if you do have an emergency, you'd dip right back into credit instead of your cash. That would be counter-productive.
You're not using credit to build your emergency fund - it's already there (in this scenario)

If you've already got the emergency cash stashed away, it's not hard to pay off your debt without having to focus on building cash at the same time.
So, focus is there - you're not trying to do two things at the same time.

 

[Snackem]

Yes and here's why. Dave's theory is that if you are intense that the whole process form building your beginner emergency fund (1k) until you are out of debt will take a couple of years or less. It's about focus and intensity and that if you only worry about one thing at a time you can knock it out in a hurry while if you try and do a bunch of stuff at once you lose focus and spread yourself too thin.

A question that Dave constantly asks is "Would you Borrow money on credit cards/debt to build up your emergency fund?" So if you had a paid for house/car/boat would you take out a loan against it to build up your emergency fund or would you build it up with cash over time.

I wouldnt', because if you do have an emergency, you'd dip right back into credit instead of your cash. That would be counter-productive.
You're not using credit to build your emergency fund - it's already there (in this scenario)

If you've already got the emergency cash stashed away, it's not hard to pay off your debt without having to focus on building cash at the same time.
So, focus is there - you're not trying to do two things at the same time.

However if you had the money and paid it down on your debt how much faster would you be out of debt? Dave never talks about getting rid of your entire emergency fund. He says to keep $1,000.00 in the bank for emergencies. Dave also does not want people to become too comfortable while they are in debt. He wants people to be motivated to get on the right track.

Below is an expanded list of the baby steps.

Taken from the FPU Community Forums

0.1: Commit to NO DEBT EVER AGAIN. (mortgage is possible exception)

0.2: Talk with spouse and get him/her on the same page as you concerning finances.

0.3 Do a written budget.

0.4 Temporarily stop all retirement contributions.

0.5 Get current on all the basics (You MUST have Food, Utilities, Shelter, Basic Transportation).

0.6 Amputate "toys" (bikes, boats, ATV's etc) if your snowball will take more than 12 months

0.7 Cut lifestyle (Cut cable, cell phone, landline extras, internet, eating out, etc)

0.7A Get a 2nd job if BEF will take more than 30-90 days.

0.8 Get current on ALL bills.

1.0 Save $1000 In baby EF.

1.1 Shred or cut up ALL CC's. (You have an EF now, no NEED to keep those CC's !!)

1.2 Get Health insurance NOW

1.3 Get Life insurance NOW

1.3A Get Long Term Disability insurance NOW

1.4 Amputate cars that you can't pay off within 24 months. Buy a safe older vehicle: $2-3k range

1.5 Consider raising insurance deductibles to $500 or $1000 and dropping full coverage on paid for used car

1.6 Draw up a will.

2.0 Do debt snowball, paying all your debts from lowest BALANCE to highest.

2.1: DEBT FREE except the mortgage--you can take your first vacation if you can pay cash for it.

3.0 Save 3-6 months EXPENSES in EF.

3.1 Start car replacement fund.

3.2 Save 20% for home purchase OR pay down existing mortgage to the point you can drop PMI.

3.3 Start furniture or other non-essential stuff replacement fund.

3.4 Move up in car if you still feel the need to (must pay cash for it)

4.0 Start contributing 15% of your paycheck to retirement.

5.0 Save for kids college fund.

6.0 Pay off house early.

7.0 Live like no one else since you have lived like no one else. -- Give & Build Wealth.

You can see that shortly after your $1,000 emergency fund you get insurance so that if you have a major emergency you are covered. Smaller emergencies might cause some discomfort but the idea is to sacrifice now and be uncomfortable now to allow yourself to be really comfortable later.

 

[onesojourner]

where is this forum?

 

[SuperJETT]

I think you should do both at the same time. It may mean that you won't put quite as much towards paying off debt as you would like... but if you don't have some type of cash reserve then what happens when the car breaks down, or the water heater goes out? Most people bust out the credit card. Build up at least a small emergency account while paying off your debt. After you pay off the debt, then you can build up to your 3-6 months living expense emergency account.

How much does a water heater cost? $300 plus install? Most car breakdowns are well under $1000 as well.

There are reasons behind his plan, and it works.

$1000 baby emergency fund, then pay off debt (except the house), then build up the 3-6 months' fund.

 

[Matt_E]

However if you had the money and paid it down on your debt how much faster would you be out of debt? Dave never talks about getting rid of your entire emergency fund. He says to keep $1,000.00 in the bank for emergencies. Dave also does not want people to become too comfortable while they are in debt. He wants people to be motivated to get on the right track.

Below is an expanded list of the baby steps.



You can see that shortly after your $1,000 emergency fund you get insurance so that if you have a major emergency you are covered. Smaller emergencies might cause some discomfort but the idea is to sacrifice now and be uncomfortable now to allow yourself to be really comfortable later.

I think it's unlikely that anyone having 6-12 months expenses in cash would really have much CC debt in the first place, no? :biggrin:

Up until the past two years, I have always been a gov't sub-contractor where a job could end at a moments notice.
I simply would not feel comfortable getting rid of a big chunk of emergency cash to pay down debt that can just as well be paid of a little slower for bit more emergency cushion.
What good does it do me to have no debt only to lose my job and stand there with only $1k in cash?
"Emergency" to me doesn't mean water heater or radiator. It means job loss.
$1k isn't gunna cut it.
I would find a 12 month paydown of existing debt a whole lot easier to deal with than only $1k in my pocket if something goes wrong.
Does that make sense?

Either way is a lot better than what many people do (nothing).

EDIT: Note that I am not saying to go beyond building $1k in cash and skipping paying off the debt - not at all.

 

[Snackem]

I might rather just have the 1k and be debt free and here's why:

I can almost always find 'a' job. It might be a crap job mopping floors on a graveyard shift until I found something better but it would be a job. At the same time if I did not have any debt payments I can cut my lifestyle back DRASTICALLY--no cell phones, cable, internet, gas for skis, eating out--and simply pay my utilities, food and rent/mortgage. I may even have to find a second job but I could make it. Under the same circumstances I would not want to have to worry about paying off my truck and CC's

 

[Matt_E]

You can do all that whether you have 1k or 10k in the bank.
Cept 10k gives you more freedom in what job to pick and how long it'll last.
:bigok:
It also gives you the option to draw unemployment instead of finding a crap job (unemployment that you have paid into, of course). That way you got more time available to find a quality job. (And I've done this a couple of times)

I'll take that option, thank you. :bigok:

Again, note that we're discussing a hypothetical situation. Anyone having 6-12 months expenses likely won't have significant CC debt.
For someone starting out on eliminating debt, anyone who doesn't have savings, it's a no-brainer - get a small emergency fund, then pay off your debt.

Oh, and car payments....pfffft, dont' want those.
Never again.

 

[Matt_E]

Something somewhat related.....I am very much looking forward to quit renting and getting back into a mortgage.
I am currently working on building up at least 3 months of expenses (10k). I expect to meet that by next summer.
My lease contract is up Jan 1st 2009.
If I get into a house before Dec 17th 2008, my company will pay for closing cost and some other stuff.
So, I have some motivation to get into a mortgage by year's end.
But.......Do I really want to use my emergency cash for a down payment and be left standing without any cash?

Personally, I am not comfortable with that and would probably prefer renting for another year to avoid that situation.

Opinions?

 

[Snackem]

I would not be comfortable buying a house w/o a nice emergency fund. I'd rather eat my closing costs but have an emergency fund.

 

[onesojourner]

now is a good time to buy. The market is slow and there will be some motivated buyers out there. I think I would do it.