Dave Ramsey question

[zoebartlett]

I'm hoping to get some help with a question regarding Dave Ramsey. I've looked elsewhere but I can't find the answer, so I thought I'd try here.

Let's say you have your emergency savings fund in place. You have no consumer debt except for school loans. You're renting so you don't have a mortgage, but you'd like to start saving for a house. You also want to save for one new car, maybe two, since they're both old. They're in good shape but you want be prepared for when the time comes. All this time you've been putting money into a retirement account because it makes sense, although yes, this goes against Ramsey's plan. How do you tackle these things and in what order do you take care of them?

 

[daintyG]

I'm hoping to get some help with a question regarding Dave Ramsey. I've looked elsewhere but I can't find the answer, so I thought I'd try here.

Let's say you have your emergency savings fund in place. You have no consumer debt except for school loans. You're renting so you don't have a mortgage, but you'd like to start saving for a house. You also want to save for one new car, maybe two, since they're both old. They're in good shape but you want be prepared for when the time comes. All this time you've been putting money into a retirement account because it makes sense, although yes, this goes against Ramsey's plan. How do you tackle these things and in what order do you take care of them?

Hi! Ramsey has a list of 7 baby steps (https://www.daveramsey.com/baby-steps). According to that, step one is to save $1k in an emergency fund. Step two is to pay off all debt. His attitude seems to be that you will really be able to save a lot more once you've paid off the debt because you've now freed up that money. And also, the interest rate on your loans is likely higher than the interest rate you'd earn by putting the same cash into a savings or money market account. Step three is to save up 3-6 months of expenses "just in case". I *think* that after step three is where he suggests purchasing cars, homes, etc. Ramsey will suggest you keeping your old vehicle until you save enough to pay cash for your next vehicle. Step four is to invest 15% of household income into retirement.

I understand if you feel like paying off the debt first keeps you from being able to do the things you think you should be doing (saving for a car, house, retirement), but that is also his point--that debt holds you back. He advocates paying off debt with focus and intensity, and buckling down so you can get it over with. I haven't followed his baby steps exactly as prescribed, so I hope you don't think I'm judging. I'm just trying to convey what I think I've heard from attending the Financial Peace University and listening to him on the radio. Best of luck to you, Zoe!

 

[zoebartlett]

Oh and thanks for the advice! I love Ramsey but other than rarely catching his podcasts online, I can't find him anywhere on the radio. I will hate to give up our savings to pay school loans way down, but I kind of figured that's what the recommendation would be. I'm not sure I can do that, given what we've gone through at times.

So let's say that part's taken out of the equation. Then would come cars (well, one, most likely, even though two would be great) and then a house? Aye aye aye...it will take forever...

I really appreciate the help! I know other PSers follow Ramsey, and I always find these conversations interesting.

 

[zoebartlett]

Oh, and I forgot to ask, what was FPU like?

 

[daintyG]

Oh and thanks for the advice! I love Ramsey but other than rarely catching his podcasts online, I can't find him anywhere on the radio. I will hate to give up our savings to pay school loans way down, but I kind of figured that's what the recommendation would be. I'm not sure I can do that, given what we've gone through at times.

So let's say that part's taken out of the equation. Then would come cars (well, one, most likely, even though two would be great) and then a house? Aye aye aye...it will take forever...

I really appreciate the help! I know other PSers follow Ramsey, and I always find these conversations interesting.

I know the feeling. I've been married five years, and I took FPU several months before I married or was engaged. Anyway, since I've been married I've been stuck between steps one and two the whole time. My husband had student loans from undergrad. The loans were deferred while we both went to grad school. We did not take out more loans, and so we struggled to pay for tuition and rent. It's been two years now since we began paying on his student loans, and we are down to one more loan. I get my "extra" paycheck this month (it is not bonus since it is included in my salary) and I'm going to finish off those student loans this month! After that we have to pay off a small home improvement loan and two cars in order to be debt free. My husband feels like it will take too long before we can do this, and that we should build up our savings some now.

Anyway, if you are skipping step two, then step three--the savings for 3-6 months expenses--is next. Then house or cars, I think. I don't know if one comes before the other, but it seems like he suggests you have a certain down payment before purchasing. Maybe 20%. (Here's another place where I really didn't follow the steps correctly. Long story.)

I listen to him on a local radio station on my commute home from work. Here is a link to search for a station near you with his show. https://www.daveramsey.com/show/stations/

I liked FPU, although when I took it I wasn't married yet. However, I learned a lot about money management and I felt very equipped by having attended FPU. I only somewhat apply the principals, mostly because my husband isn't totally on board with strict adherence to the baby steps.

 

[House Cat]

From what I understand, student loans should be paid off with "gazelle intensity" with the money that you were using from the snowball debt payoff. Every bit of extra money you have should be going toward your debt until it is paid off. His recommendation is that you drive clunkers and that you don't even consider buying a house until your debt is gone. Once the debt is paid off, save for a down payment of 20%.

 

[NewEnglandLady]

Zoe, pay off the debt and then keep that gazelle-like intensity toward saving once the debt is gone. Remember that cars are depreciating assets and you only need something to get you from point A to B. You don't have to get anything nice. Pay cash for a Corolla with 100K+ miles on it and that will likely last you years. We're on step 6 with money set aside for another vehicle (if needed) and we still drive our 2000 Hyundai Elantra with 249K miles on it and love it.

It does feel daunting at times, but once the snowball starts you really feel the momentum. Lots of luck!

 

[zoebartlett]

We did steps 1, 2 (except my student loans), 3, and we're doing step 4 now. Step 5 doesn't apply since we don't have kids. I know the right thing to do is to get rid of our last debt and then go back to steps 3 and 4, but it's hard to do when life gets in the way and things like layoffs happen.

NEL, both of our cars were brand new when we bought them 11 years ago, and we're prepared to drive them into the ground if needed. My husband's Prius has almost 200k miles on it and my Corolla has about 150k. I'm hung up on wanting a new car eventually, rather than getting a used one with high miles. I like being the original owner. I figure it may be worth it since I don't need anything fancy and I'll hang onto it for many years. Our goal is to save as much cash as possible for a down payment when the time comes.

Thanks for your thoughts, House Cat. I hope to own a house someday. I have to admit though, it's kind of nice not having such a large debt hanging over our heads though.