*The Dave Ramsey 'Baby Steps' Thread*

[Willow Ufgood]

DR is not entirely for us as well. I think some of his methods have merit while others can be short-sighted. with the example of a needed car purchase-we were in this situation just about 1 year ago this next month. I'm a big believer in having a healthy 'emegency fund' (6 months or better of monthly expenses). now, we could have paid cash outright for the new car we were looking at but to do so would have taken our emergency fund well below a single month's expenses. this makes me nervous. I also have our emergency fund in an interest earning account that's making 5.5%. since it was the end of the model year dealers were offering finance deals in the 3% and lower range (and with added price reduction incentives for financing). for us it was a no-brainer, we were not going to pay cash and (1) pay more for the vehicle, and (2) lose out on earning interest. yes (DR gasps) we have a car loan-and despite paying interest on it we are netting over 2 1/2% on that money sitting in the bank. it's going to be paid off VERY quickly (i'm making triple payments if not more each month) but I don't have to worry that if some other large system or appliance or expense comes up i'm sitting with next to nothing in my emergency fund and forced to use a credit card or some obscene in-store financing.

This works for you because you have that 6 month EF making more interest than you're paying on the car loan. In Dave's world, having a 6 month EF only happens after you have paid off all debts but your mortgage. The PP's son is trying to follow DR's baby steps. In Dave's world, you don't buy new cars that depreciate as soon as you drive it off the lot. You buy beaters and drive them into the ground until you are debt free. And even then, he would advocate that you purchase a good used vehicle.

There's a lot of things that DR recommends that go contrary to what a debt reductuon consultant would advise. The first is paying just the minimum on all debts until a $1K EF is established. I went back thru posts in other threads by @WDW_fan_in_TX after responding here. I get the impression that while he has made progress by paying off one CC, life keeps smacking him in the face. Having a $1K EF would have helped but then paying off that CC would not have happened. And that's the problem for a lot of people. You can't get past BS#1 if you are constantly having to dip into it.

The next piece of DR advise that goes against conventional logic is BS#2. The snowball method has you paying off your debts from smallest to largest regardless of the interest that is accruing. He maintains that by reducing debts from smallest to largest, you are more motivated as opposed to slugging it out to pay off a larger debt with a higher interest rate and not seeing much progress. This step also takes the longest because it involves paying off all debt with the exception of your house before moving on to BS#3. Meanwhile, life keeps happening and you dip into the emergency fund, which puts you back at BS#1 until the EF has been brought back to $1K. It's a never ending cycle for some people because $1K doesn't go very far for true emergencies and you're back to using the CCs or taking out personal loans to cover the emergency.

I saw that @WDW_fan_in_TX is struggling to establish a budget that works for him and his wife. It's understandable because we have all seen the cost of necessities rise faster than our paychecks. What worked last year isn't working this year. In fact, what worked last month isn't working this month. That's why I suggested using cash for everything possible. The envelope method might be worthwhile for him but I read that instead of just using plain white envelopes, his wife ordered a fancier binder version from Amazon. And it doesn't appear that they are using it.

DR also says no to vacations when you're paying down debt. I don't agree to saying absolutely none but spending money that I didn't have in order to go to WDW would just not happen even if I were not following DR. I pointed out what that vacation is costing @WDW_fan_in_TX because it's money that could pay off another CC or go into an EF . I do believe that time off from work is important for mental health. But it doesn't have to cost the price of a WDW trip.

 

[ThereYouSeeHer]

What worked last year isn't working this year. In fact, what worked last month isn't working this month.

Yeah, this is key. You have to constantly keep tweaking the budget as new information becomes available. We use spreadsheets and keep a column for the current month's budget, as well as columns for the previous 5 months. Every month, the oldest column gets deleted and a new column gets added. Within this rolling 6-month snapshot, we allow one outlier in each line item. Once we go over budget in a certain area for two months, we have to decrease the budget somewhere else and use it to cover the new upward trend. If we are consistently coming under budget somewhere, then we reduce that budgeted amount and add the surplus somewhere else. The overall budget has to stay balanced, so that we don't spend more than we make.

That's why I suggested using cash for everything possible.

Yes, cash in an envelope makes it easy to see when you've run out! For our weekly cash, we also like to think of it in daily terms. If we have $280 a week to spend on all takeout, grocery, household items, and entertainment, that's $40 a day. So, sometimes we stick to a daily limit, instead of a weekly one. Because what usually happens is people will spend the entire week's allotment on a large grocery trip on Sunday. "It's ok, we'll just stay home the rest of the week and eat what we bought." But life happens, it doesn't work out the way you planned, and now any other purchases you make are putting you further behind.

 

[barkley]

In Dave's world, you don't buy new cars that depreciate as soon as you drive it off the lot. You buy beaters and drive them into the ground until you are debt free. And even then, he would advocate that you purchase a good used vehicle.

whenever I hear Dave or one of his people advocating 'buy a cheap beater for a few thousand' I have to wonder where these opportunities exist b/c they sure don't in our region. we were originally considering buying used but what was available was in no way cheap and frequently (per our friend/mechanic's review) approaching the need for costly repairs or maintainance (as he said 'when you buy used you buy someone else's existing or known to be impending problems'). another consideration when buying an 'old beater' is the cost for insurance-the car we replaced (had it not died entirely) would have fallen into this category and we were quite happy to see our insurance rates decrease with the new vehicle (replacement parts are much easier to come by and in 19 years vehicle safety standards have improved such that a new vehicle can be less expensive to insure).

You have to constantly keep tweaking the budget as new information becomes available

absolutely. I keep records on some non monthly expenses to discover pricing trends and avail our household of lower costs. one that comes to mind is propane which is what powers our whole house generator, fireplace, cooktop and oven. I have records that show how much we've paid per gallon in different months of the year. doing that i've figured out which months prices seem to dip so I can do large fills twice per year saving a good chunk of change (esp. with a thousand gallon tank).

 

[Willow Ufgood]

Because what usually happens is people will spend the entire week's allotment on a large grocery trip on Sunday. "It's ok, we'll just stay home the rest of the week and eat what we bought." But life happens, it doesn't work out the way you planned, and now any other purchases you make are putting you further behind.

This is what kept me on track when I first started adulting on my own. It took a while to make sure my 4 walls were taken care of before I knew what could be used for discretionary spending.

Just a little background on my journey. I was 17 when I began college. Too young to sign for loans and my parents wouldn't cosign. I had a 1 year scholarship from my high school, a 4 year renewable scholarship and small loan from my college and a federal student loan. When classmates were joining sororities and going to frat parties, I was working a job for 20 hours a week, sometimes more, in order to cover tuition. When I was a junior, I was offered a position as an RA which would have covered room and board. I declined it because it required me to be available to the classmates on my floor 24/7 and working nights was a better fit for me. So they offered me a position as a TA instead. The pay went directly to my tuition.

When I graduated, it took a few months to find a job. There's a short grace period between when you graduate and when you have to start paying back loans and I took full advantage. In retrospect I should have begun paying them down right away. It would have saved me the interest. I kept my 20 hour/week job while I looked for something in my field and I picked up weekends working in housekeeping at a hospital. There were mornings when I would wake up and have to check the radio to see what day it was so that I knew which job to report to! I was making more money than I ever had in my life and got stupid with it.

I ran up debt. I paid bills late or not at all. I had a prepaid phone that I didn't always have money to top off. Like I said, I was stupid with my money. I quit my part time job after getting a real job in an entry level research lab but I kept the weekend job. With more income came more spending. I had been living a spartan life for over 5 years and I felt that I deserved it. I was a pretty dumb kid on my own at 22.

Imagine my surprise when I received a check from my part time job a few months after I had quit. They had a pension plan and I was vested in it. The check wasn't big but all I could think of was what I could buy with that found money. I mentioned this to an older coworker and they talked me put of spending the money and taking the tax hit. I rolled it over into an IRA. This is the same coworker who mentored me when I started, convincing me to start contributing up to the company match into their 401k even though the match would not begin until I was there a year. They showed me how I would get accustomed to having that money in my paycheck and would really miss it a year later if I delayed until the match kicked in. They were so right on both counts. So instead of getting a car with that money, I got a bus pass.

That coworker stepped up and helped me make a budget that included a pathway to paying off my debts. I'll be forever grateful for the guidance I got from them. It makes me want to pay it forward.