So I am probably about 2/3 of the way through Dave Ramsey's The Total Money Makeover, (thanks to my friends Ashley and Heather sending me a copy). The good news is I have already achieved baby step 1, which is to have a $1,000 emergency fund. For someone like me, who obsesses about money and cares very little about material things, this was not difficult to do. I think having an emergency fund is very important, and I do agree with Dave that you should get one started even if you have debt, something I disagreed with probably six months ago until I read an article he wrote in Readers Digest. Emergencies can and do come up, so get to it if you are not doing it now.
Alas, step 2, snowball all your debt but your mortgage as fast as you can, is where I start to run into trouble (yes, I did not get very far before hitting a roadblock). I have accumulated more than an emergency fund, but according to Dave, I should use some of my extra money to pay off my non-mortgage debt. The thought of taking money out of savings to pay off one of my car loans is a little unsettling, especially the larger one which is a no-interest loan. However, assuming we get a tax refund this year as we have in the past, I think I am willing to pay off most, maybe all, of the smaller used car loan. But paying off my new car loan will be more difficult not only because it is larger than the interest one, but also because it will involve a shift in my thinking. I thought I was doing the right thing taking out a 0 percent interest new car loan (at least until Ash told me otherwise at lunch the week before). Dave says something like you might as well take $100 and throw it out the window every week because of all the money you lose with a new car's depreciation. I should have done what I did last time: buy used. I guess even though my last car loan had something like 9 percent interest (ah, the Clintonian times of prosperity), it was better to do that, buy used, rather than buy new at 0 percent. Who knew?
Regardless, since I cannot bring myself to use my savings to pay off my no-interest car loan (though maybe I am not really supposed to use savings to do that; I should probably go back and reread that chapter), I don't think I can move to step 3, which is accumulate savings equal to three to six months of expenses AFTER you have paid off all your debt. Crap. Even if I did not have the car loan, the other thing going against us is we are saving money for a house. But Dave says you should ideally pay cash for a house or take out a 15-year loan, neither of which we can come remotely close to doing. According to Dave, we should not be considering getting another house. Dave, you are killing me!
I have not read too much about the other steps since it will be awhile before I get there (paying off the mortgage, putting something like 15 percent in retirement, saving for your kids' college, giving to others), so stay tuned.
So how will I change/what have I learned?
1. I might just wait another year to put our house back on the market so we can save more money. I mentioned this to Brian, and he did not take that well, wanting to get to where we are going to be for hopefully at least the next 15 to 20 years. He would probably be behind this if not for our kid. We signed J up for kindergarten this fall at her same school (more expensive than the Catholic school, so Dave might be against that). But what if we put our house on the market say next February, and then come August our house is not sold. Do we take the house off the market because at that point we will have signed her up for Catholic school for first grade? Do we leave the house on the market and then possibly go through a move in the middle of the year? No use losing sleep over this now (although I probably will), but it is still something to consider.
2. I will use my credit card less. Sorry, Dave, at least for now I won't stop using it for gas and groceries when we get 1 to 3 percent off all our purchases; we have to buy those things anyway, and we pay the card off every month. Really. We even did this back when the company I work for made us take a pay cut for about a year and Bri was not making any money for most of those 12 months. If we lose a job, we have savings to fall back on for a little while, so I am not worried that I would end up taking six months to pay off groceries. But Dave is right that you are far more tempted to spend money when you have a credit card than when you carry just cash. I don't spend recklessly, but if I would stop using my credit card for everything, I could probably save more money than I realize. I should look into that.
3. Dave is not a fan of the lottery, but what smart person is really. I am not banking on the Powerball as my retirement as apparently a ridiculously high number of people are. But as I said in another post, what is $1 per week. And I am just that superstitious that if I dropped out, I am sure the group would win the next week. I cannot take the chance.
4. I should have a will. I knew this already, but Dave hit my fear right on the head: Don't wait to have a will because you are afraid you will die. You are going to die anyway, so you might as well be prepared (or something like that).
5. I should stop patting myself on the back for my money management skills. Before I read Dave's book, I thought Brian and I were doing just fine financially. And compared to many others, we are. But once I read the stories of others getting out of huge debt and now having no debt, including a mortgage, it made me realize we can and should do more.
I vow for my next post not to be about money, and since we won't be getting our government checks for a few months, I won't have to think about that for awhile. Will I listen to Dave or will I buy the flat screen TV? Stay tuned for these and other exciting answers.
Now, off to eat, one of my favorite things. Hopefully my cranky kid is now less cranky.
Alas, step 2, snowball all your debt but your mortgage as fast as you can, is where I start to run into trouble (yes, I did not get very far before hitting a roadblock). I have accumulated more than an emergency fund, but according to Dave, I should use some of my extra money to pay off my non-mortgage debt. The thought of taking money out of savings to pay off one of my car loans is a little unsettling, especially the larger one which is a no-interest loan. However, assuming we get a tax refund this year as we have in the past, I think I am willing to pay off most, maybe all, of the smaller used car loan. But paying off my new car loan will be more difficult not only because it is larger than the interest one, but also because it will involve a shift in my thinking. I thought I was doing the right thing taking out a 0 percent interest new car loan (at least until Ash told me otherwise at lunch the week before). Dave says something like you might as well take $100 and throw it out the window every week because of all the money you lose with a new car's depreciation. I should have done what I did last time: buy used. I guess even though my last car loan had something like 9 percent interest (ah, the Clintonian times of prosperity), it was better to do that, buy used, rather than buy new at 0 percent. Who knew?
Regardless, since I cannot bring myself to use my savings to pay off my no-interest car loan (though maybe I am not really supposed to use savings to do that; I should probably go back and reread that chapter), I don't think I can move to step 3, which is accumulate savings equal to three to six months of expenses AFTER you have paid off all your debt. Crap. Even if I did not have the car loan, the other thing going against us is we are saving money for a house. But Dave says you should ideally pay cash for a house or take out a 15-year loan, neither of which we can come remotely close to doing. According to Dave, we should not be considering getting another house. Dave, you are killing me!
I have not read too much about the other steps since it will be awhile before I get there (paying off the mortgage, putting something like 15 percent in retirement, saving for your kids' college, giving to others), so stay tuned.
So how will I change/what have I learned?
1. I might just wait another year to put our house back on the market so we can save more money. I mentioned this to Brian, and he did not take that well, wanting to get to where we are going to be for hopefully at least the next 15 to 20 years. He would probably be behind this if not for our kid. We signed J up for kindergarten this fall at her same school (more expensive than the Catholic school, so Dave might be against that). But what if we put our house on the market say next February, and then come August our house is not sold. Do we take the house off the market because at that point we will have signed her up for Catholic school for first grade? Do we leave the house on the market and then possibly go through a move in the middle of the year? No use losing sleep over this now (although I probably will), but it is still something to consider.
2. I will use my credit card less. Sorry, Dave, at least for now I won't stop using it for gas and groceries when we get 1 to 3 percent off all our purchases; we have to buy those things anyway, and we pay the card off every month. Really. We even did this back when the company I work for made us take a pay cut for about a year and Bri was not making any money for most of those 12 months. If we lose a job, we have savings to fall back on for a little while, so I am not worried that I would end up taking six months to pay off groceries. But Dave is right that you are far more tempted to spend money when you have a credit card than when you carry just cash. I don't spend recklessly, but if I would stop using my credit card for everything, I could probably save more money than I realize. I should look into that.
3. Dave is not a fan of the lottery, but what smart person is really. I am not banking on the Powerball as my retirement as apparently a ridiculously high number of people are. But as I said in another post, what is $1 per week. And I am just that superstitious that if I dropped out, I am sure the group would win the next week. I cannot take the chance.
4. I should have a will. I knew this already, but Dave hit my fear right on the head: Don't wait to have a will because you are afraid you will die. You are going to die anyway, so you might as well be prepared (or something like that).
5. I should stop patting myself on the back for my money management skills. Before I read Dave's book, I thought Brian and I were doing just fine financially. And compared to many others, we are. But once I read the stories of others getting out of huge debt and now having no debt, including a mortgage, it made me realize we can and should do more.
I vow for my next post not to be about money, and since we won't be getting our government checks for a few months, I won't have to think about that for awhile. Will I listen to Dave or will I buy the flat screen TV? Stay tuned for these and other exciting answers.
Now, off to eat, one of my favorite things. Hopefully my cranky kid is now less cranky.
Comments
Couple of things to consider, if your car was paid for, no balance, would you take a loan out on it, and put that $ into savings? Probably not right? Your scenario is the exact same thing.
On the new car, your friend is right, and I see it now, as I'm looking for used cars myself, the value is losing way more than 0%. I believe it is 40% over a 4 year period, if your mutual fund was doing that, you'd go crazy, well, a car is an asset as well.
I would listen to Dave's show some, see how well the cc companies treat people. They are snakes, and they bite. Good luck on your method, just trying to help. You have to really dive in, and not just put your feet in the shallow end for this stuff to work.
I used to be disciple of Suze Orman, who is quite different from Dave. I can finally appreciate a lot of what Dave says. But I still don't think I can bring myself to pay off a 0 percent interest loan when I am earning interest on that money in my savings accounts/CDs. But that I am going to try to pay more money on the car each month is step in the right direction.
if Dave R comes 'round or does a telecast, go/listen. he'll make you realize the ridiculousness of much of our culture. even listening to his show will make you more aware of it. plus, you'll hear how he lambasts the people who whine and make excuses and it'll make you want to be the opposite of those people.
and for cryin' out loud, cut up those credit cards!!! you don't need 'em! wanna get crazy? try the cash envelope method for a month. it'll show you just how many stupid extraneous little expenses creep into your life without your realizing.
okay, enough from me. sorry for the soapbox rant. : )
1999 - First heard Dave on the radio, and thought he was a whackjob because he told someone they should use their own money to start a business.
Later in 1999 - Told by a co-worker that I should listen to Dave because it would change my life. That may not seem important, but it always stuck in my head. She didn't ride me about it and she wasn't nosey about it, but I remember being struck by how sincerely she believed it could help me. I listened to the radio show occasionally over the next 2-3 years...enough to get the big ideas, and to begin to be convinced that at some point, I'd need to do this whole debt free plan.
January 2002 - After wracking up about $6-7k in credit card debt from a bad breakup with no financial padding to absorb some of the hit, I started listening to Dave more because I knew something had to change.
February 2002 - I didn't have a car after the breakup, so after a few months of relying solely on buses, I purchased a new car with financing (a fairly cheap new car, financed at 2.9% over 5 years). I remember thinking I probably shouldn't do it (or more specifically, Dave would tell me not to), but I also remember thinking that it was all I really knew to do at the time, and that I would drive the car until it died anyway. I still don't regret that decision because I was doing all I knew to do at the time...it just serves as evidence that I wasn't completely on the baby step plan yet.
March 2002 - After many months of unsuccessful attempts to pay down the credit card debt, I cut up my three credit cards. I know now that my lack of success came from the fact that I wasn't doing a budget every month.
Summer 2002 - I probably started doing rough budget plans each month around this time. It was nothing too hardcore, but I was beginning to have to think about money differently, because I was no longer using credit cards to pick up my slack.
Fall 2003 - Started graduate school. Took out federal student loans to help make that possible, but by then, all my credit cards were finally paid off and gone. Around this time, I also started being more deliberate with my budget, and trying to really make it work.
Winter 2003-2004 - Switched to the envelope system, which really transformed my ability to stick to the budget. I love the envelope system.
Spring 2005 - Finished graduate school. Still owed about 1/3 of original amount on the car, and now had a huge hunk of student loans. Yikes!
November 2005–November 2006
Paid off about 20% of total debt my first year of really making it a goal.
November 2006
Heather and I finally eased into combining finances, and we were finally on a mission together to get rid of debt. The snowball really began rolling, and we paid off our last loan 9 months later, in August 2007. (So we paid 20% the first year, and the remaining 80% the second year! That was one year faster than my most optimistic projections.)
The big lesson from all this is that you can play around with these ideas for a very long time. But if you ever get to that point where you buckle down, and the way you think about personal finance really shifts, you can make headway that you never thought was possible. I agree with comments above about what will probably help you the most, in the long run...I think you'd feel great paying off that car, and I think you'd build your savings up FAST because you obviously love having money in the bank. But you'll do it if/when you're ready.
I chuckled to myself when I read how uncomfortable you'd be without all your savings in place, because I could hear Dave saying, "Good! I want you to be uncomfortable! That will make you get out of debt even faster." But I appreciate how open-minded you are in reading the book, opening yourself up to discussion from your Baby Stepping friends, and thinking critically about ideas you've held in place for a long time. Maybe the new ideas will only have a small impact on how you think about and handle money, and that's fine. Or maybe it will end up being bigger, who knows! Either way, I'm glad you're thinking about it.
:)
Thanks for the comments. I know it can be done, so it is great to hear your stories. I guess I am just not ready to do the complete makeover, but hopefully someday. And even if I do just a few things Dave suggest for the next year or so (or longer), better than nothing.