On Wednesday I wrote that I’m reading Dave Ramsey’s Total Money Makeover (again), and using it as a basis for my own financial strategy. Early on in the book, Dave makes it clear that his plan works in every situation, regardless of how special you may think your situation may be. I get what he’s saying. And yet, I’m not going to follow his plan exactly.
The House: First off, I’m delaying really starting the plan because I’m trying to sell my house. I’m setting money aside for repairs, and am going to continue setting aside money until the house is sold. Selling a house means I’ll need to consider Realtor’s commissions, closing costs (in my area the seller almost always pays the closing costs), and unknown other incidentals that may come up along the way. I’m not sure that Dave would 100% disagree with this decision; he does recommend selling everything you can to start with. Once the house is gone, I should be able to cut my expenses considerably. And, it will give me some flexibility, should a better job offer come along, etc.
The Car: Dave Ramsey is famous for advising people to “Sell the car!” He believes in buying inexpensive, used cars with cash. When I sold the Nissan and bought the Honda, I was trying to follow the plan. But then I ended up selling the Honda and getting a loan for a brand new 2014 Ford Escape. I know, I know. But honestly, I don’t regret it. Following my plan, the car will be paid off in 31 more months, maximum. I plan to keep the car for at least 10 years, but probably closer to 15. And that car has been a life saver this winter. The Nissan nor the Honda would have fared well, with the temps staying below freezing, and 50+ inches of snow so far this winter. It may not have been the most financially savvy decision, but I don’t regret the car.
Dave breaks his plan down into “baby steps” that should be followed in order.
Baby step #1: Build a $1,000 emergency fund. Except in very special circumstances you should have no more, no less. This is a temporary fund, as later in the program you build a 3-6 month fund. I’ve already built my emergency fund, which currently has $3,000 in it. Dave would tell me to keep $1,000 in the bank, and put the other $2,000 towards paying off my debt. Right now, I’m just not comfortable doing that. I’m gearing up to sell a house, and move. Who knows what kinds of expenses I’ll face over the next year? Maybe once the house is sold, and I feel more comfortable with my living situation, I’ll be more willing to cut back the temporary emergency fund. But for now, I’m keeping the $3,000.
Baby step #2: Pay off all debt, excluding the mortgage. That’s my plan, once I have everything figured out with the house. Technically I could pay off my student loan today (~$6,800), if I cut my emergency fund back to the $1,000 and threw everything else I had in the bank at my debt. This would shave a year off the 31 months I estimate it will take to pay off all of my debts. Trust me, it’s tempting. That being said, I think getting out from under the house will put me in a much better position overall.
Stop 401k contributions until Baby step #4: In Dave’s plan, retirement contributions don’t start until step #4. He says not to take anything out if you already have a retirement account, but to stop contributing any more. Even if that means losing matching funds from your company.
That’s a tough one. On the one hand, I get what he’s saying; if you’re sticking to the plan, you’ll be back to saving for retirement in no time! And then you’ll be really able to ramp up your savings! At my company they contribute 6% to my plan, whether or not I contribute anything. And it’s 100% vested. So I wouldn’t be losing any “free” money by halting my contributions. That would be ~$54 each week I could be putting towards debt. Honestly? I’m wavering on this one. But I kinda agree with other experts here; with compounding interest, it’s really hard to catch back up on those missing funds.
Conclusion: If I followed Dave’s plan, including the emergency fund, debt repayment, and retirement savings, I could be done with my debt (except the mortgage) in 17 months, as opposed to the 31 months I’m calculating now. I have to admit, it’s really tempting to switch gears. But then, I’d still have the house 17 months from now. The house that is currently sitting empty. It would still need repairs, plus probably additional repairs. Nothing is certain right now, but I think getting out from under the house will free up more of my income, plus give me more flexibility to be able to take advantage of more opportunities.
I don’t know what the future holds. Maybe I’ll actually make some money off of selling the house, and end up being out of debt much sooner than I expected. Maybe I won’t. Maybe I’d follow Dave’s plan exactly, and be out of debt much sooner, and be able to sell the house then. Maybe major damage would occur to the house in that year and a half, or I’d have to pass up a great job opportunity in another area, and I’d come out behind. There’s no way of knowing for sure which route would turn out the best. The most I can do is decide on a plan, throw everything I’ve got into it, and hope for the best.
Hard work and careful choices will get me there, no matter what path I choose.
– Cindy W.