Thoughts on Dave Ramsey

April 25th, 2008 · 6 Comments

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I recently finished Dave Ramsey’s Total Money Makeover, and it is a quick and easy read. I would recommend getting it from your local library - I would not buy it just because there are enough blogs and information on his methods on the web (and you can use the cost of the book as your first snowflake!). I think that Get Rich Slowly has a nice synopsis of the book here if you want to get the basic idea before investing your time reading the whole book.

Is Total Money Makeover going to change our lives? I’m not sure. We have been working hard to pay down debt, and I am confident that we will eventually reach our goal of being debt-free. However, this book made me realize that we need more of a concrete plan. We tend to throw money towards debt in a haphazard manner, but I like the idea of having a psychological boost of seeing something get eliminated. After talking it over with my husband, we’re going to create a modified version of his plan:

1. Get our savings back up to $5,000 - Ramsey suggests a $1000 emergency cushion, but this just doesn’t sit well with us. Maybe it has to do with my lack of dependable income, the recent upheaval we were in as my husband found another job (since his old one will be in China soon), or the fact that our little truck will have to give out someday. We recently used a portion of the emergency fund to cover some unexpected car repairs, and it is sitting at roughly $4400. We will both sleep easier at night when it is back up to $5000.

2. Pay off that *$)!(@ private student loan - it is not our smallest debt, but it is our highest interest debt (currently at 7.5%). I hate it. I don’t care that the interest is deductible. Every time I log into this account, I cringe. At roughly $3500, it needs to go.

After these two goals, we have a couple of others, but we are not sure what order they will go in yet:

3. Max out our Roth IRA contributions - Although Ramsey suggests stopping 401(k) retirement contributions until debt is paid off (in most cases), I just can’t pass up free money. In a recent post, I talked about how we recently decreased our contributions from 20% to 10%. My husband’s company match is 75% on the first 6% - keeping at 10% will help us in attaining our goal of $100,000 in retirement accounts by the end of the year.

4. Pay down our mortgage so that the balance is at 75% of the value of our home - this will allow us to close our escrow account and keep the money in savings. Since we are about $3000 away from reaching this goal, it seems reasonable. Although interest rates in savings accounts isn’t so great right now, the lower mortgage payment would be a nice psychological boost. I know we have enough discipline to put the money aside every month, and I also like the idea of having a little more wiggle room about where our money is going every month.

What do you think of these goals? Are we destined for failure because we are not following the Ramsey plan exactly?

6 responses so far ↓

1 wits3nd (Who am I?) // Apr 27, 2008 at 9:24 am
You may run the risk of taking on too many tasks at once. Get you starter emercency fund in place and then focus on eliminating your debt except for your house. As I understand the Ramsey plan, the idea is to only spend 18-24 months in debt elimination. If it takes longer than that you may have too many car loans or too big a mortgage to get any traction.

Having an intense focus on killing your debt is why it makes sense to temporarily suspend retirement contributions. Once your debt is gone, you’ll have more than enough resources to catch up.

Trying to pay down your student loan (instead of your smallest debt first) and also bringing down your mortgage could splinter your focus.

Good luck with whichever plan you choose. If you find yourself bogging down, try eliminating your smallest debt first.
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2 Tim (Who am I?) // Apr 27, 2008 at 4:59 pm
You said:
“Although interest rates in savings accounts isn’t so great right now, the lower mortgage payment would be a nice psychological boost. ”

Even though the rates are not great, getting something is better than nothing. You can open an account with hsbcdirect.com and get 3.05% instead of the bank holding your money for free.

It also looks like paypal is giving a decent amount on their money market account too.

Tim’s last blog post..You Want A Hot Tub On The Cheap?
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3 moneyloveandchange (Who am I?) // Apr 29, 2008 at 12:53 am
Wits: Thanks for responding! I should have made it more clear that we plan on tackling #1, and then #2. After that, we are unsure whether to proceed with #3 next, or #4. We will do them in some sequential order, however, and not all at once. We are also placing a higher priority on making retirement contributions vs. eliminating low-interest (0-4%) debt. This may change as I look into work-at-home job options.

Tim: I always love getting something! We have an ING account, but will look into other alternatives once we can get rid of that escrow account. We have an IGo savings account, but it was a pain to manage online (it just wasn’t intuitive when attached to two checking accounts), so we’re going to close it.

Paypal is a good option as well - we’ve used that in the past, and will definitely consider it when the time comes.
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4 Joel (Who am I?) // Jun 11, 2008 at 9:13 am
I’m a total Ramsey addict and my wife and I are following his plan to the Tee. But that does not mean that other approaches can’t work. I think there are definite benefits and specific reasons why his plan is laid out like it is, but overall I think actually HAVING A PLAN is by and far the most important lesson.

You are in total control of your finances and you have a well reasoned plan of attack. I think if you stick to it, you will probably win.

I would question the real benefit of the mortgage payoff. Yes, you can keep the money in savings, and earn 3%, which is probably only going to be a couple of hundred dollars a year. For that money, you get the hassle of paying your own taxes and insurance. Additionally, you open yourself up to the temptation of using that money in case of emergency or (even worse) temptation. Like when the truck dies. Just stuff to consider.

As for the student loan: I hate my wife’s as well, but at $40,000 I have little sympathy for $3,500! And if 7.5% is your HIGHEST, then I think you are doing well. Go ahead and pay it off: it will make you feel good and certainly won’t hurt you financially.

Peace,
Joel
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5 moneyloveandchange (Who am I?) // Jun 12, 2008 at 12:01 pm
Joel,

Thanks so much for responding! Just to update, we’re back up to $5000 in savings. Now we’re deciding between Roth IRA payments vs. the student loan.

The mortgage thing is kind of taking the back burner for now.

Have you looked into consolidating your wife’s student loans to lock in the interest rate? We do have other student loans, but this $3500 is a private loan, and we couldn’t consolidate it. Just an idea.

Best of luck with your money makeover!
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6 Joel (Who am I?) // Jun 12, 2008 at 12:51 pm
Yes, they’ve already been consolidated. I think it makes more sense to pay off the debt than invest in the Roth, although I understand the urge since time is your greatest ally (and enemy!) thanks to compound interest.

Our TMMO is really going well, I just wish it could go faster! But then again, I think the time and effort invested is ultimately a large part of the overall process.

Best of luck!
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