Finance Gets Personal

I started listening to the Dave Ramsey Show podcast in July, and have continued to listen to it every day on my way to work. That’s a real compliment to the show, considering I’m a non-church-going liberal and he’s, well…not.

I’ve been working on paying off my debt ever since I began acquiring it in college, but once I’d get one thing paid off, there was another reason I “needed” to borrow money. But listening to Dave Ramsey every day is like AA for overspenders.

Here are Dave Ramsey’s steps to financial freedom, which he refers to as the “Baby Steps:”

1. Build an emergency fund of $1,000.
2. Pay off all your debt except your mortgage, from smallest to largest (regardless of the interest rate). This is called the “debt snowball.” You pay minimums on all your debts except the smallest one, and you attack it. Then, when that one is paid off, take all that money plus the minimum you were already paying and apply to to the second smallest debt. Etc. If you have a second mortgage, you are supposed to include it in this step if it is 50% or less than your total annual income.
3. Build your emergency savings up to 3-6 months of living expenses
4. Invest 15% into retirement, not including any employer matching. You should not be contributing ANYTHING to retirement (even if your employer offers a match) until you reach this step.
5. Save for your children’s college.
6. Pay off your home early. (Steps 5 and 6 can be done at the same time)
7. Invest in mutual funds and real estate, and donate lots of money to charity.

So, I am following this basic plan, but here’s where I’m doing things differently:

• We are contributing 5% of my husband’s income into his employer’s 401k because they give a 5% match. I get about 10% from my employer with no contributions on my part, but I’m putting $50 a month into a ROTH IRA. Dave’s basis for saying you shouldn’t contribute to retirement until you reach baby step 4 is that steps 1-3 shouldn’t take that long if you’re really being hardcore, and the 15% should more than make up for it. However, steps 1-3 will probably take us about 2 1/2 years, and I am not going to give up any free money.

• We started our debt snowball with our car loans, which did not have the smallest balances, but did have the highest interest rate. We’ve paid off about $16,000 in car debt since July. As soon as the remaining $3,000 is paid off, we’ll move to the $3,400 credit card, which has an interest rate of 2.99% fixed. I know it doesn’t make much sense mathematically to pay this off, but I’ve been carrying around this balance for 7 years and am sick of it! Plus it will give us the momentum we need to keep with this once we start paying extra on our $35,000 second mortgage.

• Dave says to tithe 10% of your income to your local church throughout this whole process. Well, we don’t go to church, so we don’t do that. I’d like to give 10% to our favorite charities, but I think it makes more sense to make this commitment after we’re out of debt. So for now, we just give $50 here and $25 there.

Tags: Dave Ramsey, Debt Snowball, Debt-Reduction, Personal Progress