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Old 03-26-2010, 10:02 AM   #21
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Good luck to you, 2Cor521.

When we started we felt like $1000 in BS1 was uncomfortably low. Our house is 50+ years old and has the original furnace, our cars are over 5 years old and a few other things made us feel like $1000 EF could be gone in a flash so our BS1 was more like $3500. We had enough income to just re-focus debt repayment on one at a time rather than trying to make substantial payments on everything at once. Between shifting focus and cutting lifestyle we were able to make pretty big debt payments each month. That's the part I really enjoyed, sending extra principal payments in and seeing balances fall.

When you make a budget and then find you can't quite stick to it, realize that this is all a learning process. On the radio Dave always says that it takes 3 or 4 months before you get the hang of it. It's hard to predict what's coming up in a month. If you make the changes to your spending and put all extra money on the debt repayment you WILL see progress.
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Old 03-26-2010, 04:31 PM   #22
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Originally Posted by Urchina View Post
Yes, so long as at least $1000 of that money is not yet spoken for (ie, it's not designated for property taxes or a vacation, etc.). This emergency fund is untouchable except for a real emergency.
Correct. This money is not spoken for.

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Originally Posted by DJRR View Post
Yes, assuming you are current on all obligations you can start.

BS1 - Set aside $1,000 in a checking/saving accounts for emergencies.

BS2 ... < snip > ...
Yes, I am current on all my obligations.

It looks like BS2 is where I will start to diverge from Dave's plan.

I'm going to go read what he says on his site and then post back.

2Cor521
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Old 03-26-2010, 04:52 PM   #23
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OK, according to here:

Real Debt Help - Get out of debt with Dave Ramsey's Total Money Makeover Plan

I should list my debts smallest to largest excluding the house:

$7.67 Ex-wife "tab"
$449.81 PenFed VISA
$729.00 FSA account
$13,265.62 Student loan

Here come some questions. How would Dave answer?

1. The first one is money I owe my ex-wife. Basically we are obligated to pay for certain kid expenses (medical copays, etc.) in a certain percentage. Since our divorce we have been able to run a "tab" which we clear to zero by writing a check from one of us to the other when it gets too big. There are on average about 5 items like this a month. The total of all items since 9/21/09 has been $3,287.73. My ex-wife has not asked for the $7.67. Also, in about a week one of us would owe the other money again. Would Dave tell me to write her a check?

2. On the credit card, the above number represents what I owe as of this moment. I have this set up to automatically pay-in-full monthly, so this is just what has accumulated since my last payment. I'm assuming Dave would say to go off the current amount (for the purposes of listing the debts in priority order...I know he'd say don't use credit cards in the first place.)

3. The FSA "debt" is because I am setting aside money in my paycheck for my son's braces, and I already paid the orthodontist and got reimbursed from my employer. I don't think I should really include this because (a) if my job ends I don't owe the money and (b) There's no way to pay it back faster; it's deducted from my weekly paycheck. It's also a 0% loan. What would Dave say?

4. The student loan is a 3.5% fixed rate loan. The payment is $79.24 monthly and will increase to $123.84 in July 2012. If I pay according to schedule, it would be paid off in 2022.

5. I do have a mortgage as well, but I'll leave that out of the picture for now.

I'll resist the temptation for now to discuss my progress on the steps after this one, since I believe he advocates going in order.

So what would Dave say my next step forward should be?

2Cor521
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Old 03-26-2010, 06:57 PM   #24
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I think he'd say to put $7.67 cash in an envelope and give it to the ex next time you see her. Or just keep running a tab like you are doing. That's not really debt, it's a current expense. You're not really making payments on it.

He'd slap your hand for using PenFed, but we here know it's just your current months charges, not yet billed, right? Not a debt for the snowball in BS2.

Omit the FSA for the orthodontia. It's pre-tax and you don't even see it in your take home pay.

So the $13,265 student loan is your only debt in BS2. Do you have a plan to pay more than the $79.24 this month or next month? And do you know if you can make additional payments online? Or do you have to mail them a separate check?
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Old 03-26-2010, 06:58 PM   #25
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OK. Here is what I believe he would say:

1. Dave does not believe in owing or lending money to family/friends because it introduces a creditor relationship and "the borrower is slave to the lender". Write the check and keep this current.

2. Cut up your credit card. Make the decision to never use credit again. Use your 1,651.11 to immediately pay this off.

3. This is not a debt. It is cash flow from your paycheck. You are committed to it and there is no obligation if you are laid off. It will automatically be paid from your check.

4. Send in the remaining $1,201.30 after paying off your credit card as a prepayment on your student loan. That will leave a balance of ~ $12,000. Do everything possible to pay this off in no later than 2 years. Preferably one year. Find an extra $1,000 per month and be done with debt forever. You have changed your family tree.

Continue on with the rest of the plan so that you can "live like no one else."

That is Dave's plan. It is not about optimizing float, using other peoples money, borrowing money at cheap rates to arbitrage investments, etc. He recommends an intense focus to wipe out what he considers a spiritual and physical bondage. YMMV, but it does work if applied as testified to and documented by the thousands of people who call in having paid off many thousands of debt.
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Old 03-26-2010, 10:27 PM   #26
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1. Not a debt it's $10 do whatever feels good
2. Dave would say payoff and close acct. I still have mine but pay online whenever the urge strikes (weekly?) feel I'm using almost like a debit card.
3. Not a debt.
4. "Kick Sallie Mae out of the house" pay this thing off in the next 12 months extra jobs, garage sales, don't cash out any ira's/401's but do stop contributing until this is paid off.
Not always sound math but there really is a power to focus......
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Old 03-26-2010, 11:57 PM   #27
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I'm with Darryl on this one. But of course Dave would say it more vehemently and give you less leeway.
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Old 03-28-2010, 06:46 PM   #28
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This thread has given me a lot to chew on over the past several days.

Fundamentally, my dad advocates a sort of interest rate arbitrage, where if you have a debt at a low fixed interest rate with manageable payments (for example, my student loan), you should pay the minimums, stretch it out as long as possible, and invest the difference in the stock market. Over time, one would expect to come out ahead in this strategy assuming the market averages better than your cost of debt over the long haul.

I can see a lot of truth in my dad's position, and I believe I am able to put that strategy into place over a long period of years. I think my dad's approach would result in greater wealth over the long haul if followed consistently.

As a result of applying that strategy to the greatest degree to which I am able, I have recently been somewhat liquidity constrained -- I've got plenty in savings, plenty in income, but as soon as money rolls into my accounts, I ship it back out to my 401(k), my kids' college, or my taxable savings account. And that has been stressing me out a little.

While I don't think Dave's approach is the greatest wealth-building approach, what I do see is that it can bring a lot more, for lack of a better term, peace. The arbitrage approach is more complicated because you have more accounts, more payments, and there's always that potential lurking in the background of not being able to make the payment (although my payments are very reasonable and I've never missed a payment on anything in over 20 years).

Dave's thing is "Financial Peace University", my dad's would be "Financial Wealth University", and to a certain degree I think the two are incompatible in the journey suggested (I think one would end up largely in a similar spot at the end).

It is a big step for me to stop following my father's advice on something like this.

...

As far as baby step 2 goes, here's an update:

1. I didn't make it very clear that she and I don't borrow or lend to each other. What happens is that, for example, she'll take our son to the doctor's office, and there's a $5 copay. Because it's a medical expense, we have to split it. Instead of having her pay $2 to the doctor and me pay $3 to the doctor, she'll pay the $5 to the doctor to save them the complication. Similarly, I'll pay for something else that she'll owe me for. We keep track of this and every six months or so we'll clear it to $0 by having one of us write a check to the other.

So I updated the tab, and as of this coming Friday she'll owe me $25.33, so I'm going to let it slide.

2. I decided to pay down the credit card by $300. Between that and my monthly rebate from PenFed, I now owe only $141.43. I discovered one can pay online at PenFed now, which is really nice; I didn't know you could do that. I've also decided that I'll only use the PenFed card at the pump and use my debit cards for everything else. I know, not quite the Ramsey plan, but closer.

3. Taking the advice of everyone here and ignoring this one.

4. Student loan. I forgot to include some information on this one originally. I took it out for my Master's degree a few years ago because the rate on my mortgage was 7% and the student loan was at 3.5%. I then paid down my mortgage by a roughly equal amount. So I think I decided a while ago that because of that history, I could consider my student loan to be a part of my mortgage. What do you think?

Finally, I have decided that I am going to go out of order and build up my emergency fund further because that is what is bothering me the most. After that I have my goals lined up in an order I like and will focus on them in turn.

Comments welcome.

2Cor521
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Old 03-28-2010, 10:17 PM   #29
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2Cor, you clearly understand the difference between your plan and Dave's plan. You are a very detailed and disciplined person and will do just fine on your plan.
If you knock out the loan your cash flow will be better and your walk more peaceful. Not easy to prove on a spreadsheet but I believe my productivity and income increased after the payments went away. YMMV
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Old 03-29-2010, 01:08 AM   #30
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4. Student loan. I forgot to include some information on this one originally. I took it out for my Master's degree a few years ago because the rate on my mortgage was 7% and the student loan was at 3.5%. I then paid down my mortgage by a roughly equal amount. So I think I decided a while ago that because of that history, I could consider my student loan to be a part of my mortgage. What do you think?2Cor521
So, what did you use to pay for your master's with? (I read the above as: you took out $X at a student loan rate, then paid off $X of your mortgage, leaving $0 for school). I'm having a hard time getting my brain around this one. Or are you saying that instead of paying off your student loan with extra money you had each month, you made the payments to your mortgage instead, because it had a higher interest rate (and your dad thinks it makes more sense to pay off debt this way?)

Maybe another way to think about this is: what if, instead of "school," you wrote in "boat?" As in, "I took out a 3.5% loan to buy a boat, then paid down my mortgage by the same amount." Would you still consider that loan on the boat as part of your mortgage?

I wouldn't. Your student loan is not your mortgage. It is a separate debt. This is what Dave would say, I think.

Side note: Why not refinance that mortgage? It's at 7%, but the going rate now is around 5%. Refi, and your payments will drop because of lower principal and lower interest rates. Then you can use the additional cash flow to pay off your student loan, or to build up your emergency fund quicker.

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Finally, I have decided that I am going to go out of order and build up my emergency fund further because that is what is bothering me the most. After that I have my goals lined up in an order I like and will focus on them in turn.

Comments welcome.

2Cor521
I think this is a fine plan as long as you put a cap on it. You need to be definite as to what's "enough" when it comes to an emergency fund. It's too easy to feel that $1000 isn't enough, $2000 isn't enough, $10,000 isn't enough. I'd say that you need to choose something that can be easily attained, and then really put your oomph behind the debt snowball. Remember that once you've gotten rid of that debt, there are two benefits: First, you'll have more cash flow to build up an emergency fund or invest, and two, your fixed expenses will be lower, so you'll need less cash to meet your budget, giving you an even bigger cushion.

Good luck!
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Old 03-29-2010, 08:42 AM   #31
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1. Dave does not believe in owing or lending money to family/friends because it introduces a creditor relationship and "the borrower is slave to the lender".
My father in law remarried (unknown to him) a lifelong con artist who got him to accept power of attorney on an account where she embezzled tens of thousands of dollars without his knowledge. If we followed this advice religiously he wouldn't have had the means to pay the restitution which he needed for deal to keep him out of jail as an (unwitting) accessory after she was busted.

Unfortunately we obtained her background check *after* all the damage was done. She's had several aliases and been in and out of jail for the last 40 years. She also racked up nearly $40,000 in credit card debt that he has to pay back. We've told him not to even think about paying us back one dime until those jackals are paid off.
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Old 03-29-2010, 09:41 AM   #32
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I think you are doing pretty well and for the Penfed, if you continue to use it like a debit card at the gas pump by going online and paying it every week then that is a good use of it.

For the student loan, remember that it is with you forever and cannot be discharged in bankruptcy. That would bother me even though it is only 3.5% and I would want to get rid of it.
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Old 03-29-2010, 01:23 PM   #33
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@Urchina,

I took out a student loan and paid for my school with that. I separately received a gift from my parents to pay for school, and used that to pay down my mortgage. Net/net I shifted about $15K from being at 7% to being at 3.5%.

I've subsequently gotten rid of that mortgage and now have about 13 years left on a 15 year fixed at 4.625%.

I have a target of 5 months of emergency fund. At the moment I am at 4.26 months (the Alliant CU account mentioned earlier is not my only source of emergency funds). When I am done with that I will move on to my next goal.

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Old 03-30-2010, 09:29 AM   #34
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I took out a student loan and paid for my school with that. I separately received a gift from my parents to pay for school, and used that to pay down my mortgage. Net/net I shifted about $15K from being at 7% to being at 3.5%.

I've subsequently gotten rid of that mortgage and now have about 13 years left on a 15 year fixed at 4.625%.

I have a target of 5 months of emergency fund. At the moment I am at 4.26 months (the Alliant CU account mentioned earlier is not my only source of emergency funds). When I am done with that I will move on to my next goal.

2Cor521
Dave Ramsey has let you to a good place, and you don't seem to need his advice anymore. Keep doing what you're doing...

As you segue into investment strategies, visit the Boglehead forums.
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Old 03-30-2010, 09:42 AM   #35
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As you segue into investment strategies, visit the Boglehead forums.
Agreed. Dave can help you get out of debt, but look elsewhere for investment advice.
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