*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.

 

[Cfabar1]

But here's a breakdown of my debt (highest to lowest with what I currently owe):
- School loan: $19,574 with a $148 monthly payment at 4.25% APR;
- Car payment: $15,693 with a $505 monthly payment at 23.8% APR;
- Bank loan: $3,432 with a $235 monthly payment at 11.5% APR;
(from when my wife was involved in a hit and run when the other driver was at fault but took off)
- CC1: $439 with a $40 monthly payment at 28.2% APR and a $100/year fee;
- CC2: $297 with a $30 monthly payment at 29.7% APR and no annual fee;

Grand Total
Minus School Loan: $19.861
Minus School and Car: $4,168

My feeling is this is actually very doable.... And, I would point out that we all have choices that lead us to making decisions that we make or come to regret with money. I like DR, but sometimes his method can feel, to me, a bit judgmental. Here are some things I would think about if I were you.

Find a way to pay off the credit card with $300 on it by the end of the week. Sell some things if you need to, pick up some extra shifts driving uber. Just get it done. You will feel amazing, and it is going to make you annoyed that you still have another credit card, but it will be done.

Then, see if you can get that other credit card paid off by October. Make it a Halloween present to yourself! To have these credit cards done....

The car payment scares me... That is a LOT of debt at a very high interest rate. Can you get a loan from your bank that would cut the interest in half? (You have a small-ish loan with them at 11.5% APR for example).

I know that DR doesn't like balance transfers and money moves like this because he feels like "you think you've done something, but you haven't". But my view is that you are spending so much money in interest on that car loan... I have a car loan personally at a very low interest rate, and it still infuriates me how much I spend on interest. Interest on purchases makes other people money and serves no benefit to you.

Thanks. Yes, vacations are out. And the only times we'll be eating out going forward is when it's mandatory meetings for work. That happens 3 times per week. But 3 is better than the 14+ it used to be 10 years ago.

I don't know your entire circumstances, your income and other needs. I am not worried about you taking the vacation personally. What does worry me is that some of these debts you need to find a way to get rid of right away.... Could you make paying off the CCs and knowing you'll have the money to go to WDW without adding debt a "reward" to yourself?

I don’t know much about the DR method except what I hear from my son and DIL. He needs a new car, he is driving the one he got at 16, he is now 28. But he can’t buy one because DR says you have to pay cash. Any insight on this would be helpful.

Dave Ramsey advocates no debt for cars because cars are a terrible investment. In our friend above's case, it is likely they are paying more in interest each month than they are paying for the car. So, you have a depreciating asset, that ends up costing you even more than the purchase price due to interest.

Dave also recommends not buying a new car until you have a net worth of 1 million dollars. That is advice I personally have not followed.

one thing I do like that Dave recommends is that all things with a motor in your family should add up to no more than half your income (ex. 70k income, your car should cost no more than 35k). It is a very helpful rule to consider.


Dave Ramsey has mostly solid financial advice, and advice that is easy to follow and easy to remember. I don't follow all of it, and probably don't follow enough of it... I actually prefer the advice these guys advocate: https://moneyguy.com/guide/foo/ but it is much more complicated and nuanced than what Dave provides. These guys recommend 8% of your gross income is the max you pay on a car loan with a 3 year repayment window. Getting tougher to do in today's market, but probably not bad advice either.