As Dave Ramsey was losing a 4 million dollar real estate portfolio in the mid '80s, he was sued repeatedly, foreclosed on repeatedly, nearly-repo'd, broke, scared, and about to lose his marriage. At the bottom of this 3-year fight, lay bankruptcy with a toddler and another on the way. Looking for "God and Grandma's ways of handling money", he consulted the Bible and found over 800 pieces of Scripture devoted to money. None of them had anything good to say about debt. He consulted guys with "gray hair and no hair" to find out how older, wiser wealthy people handled money. Very few of them had anything good to say about debt and many scolded him for trying to get rich too quickly. As he began to dig out, he started helping others in his church and his community who were struggling "invisibly" - looking good on the outside, but broke, desperate, and struggling in reality. This counseling ministry turned into a radio show done without compensation on a recently-bankrupt local station and from there grew to a nationally-syndicated radio show on 350+ stations. The painful lessons he learned are contained in his first NY Times Bestseller "Financial Peace".

The principles he teaches are very simple, but very difficult. Dave realized people need a very methodical way to approach this subject, especially when they are really swamped and overwhelmed. How do you eat an elephant? One bite at a time…

Baby Step 1 – Put $1,000 in the bank as fast as you can. Cash. This is your Baby Emergency Fund. It catches life’s little curve balls so they don’t keep causing more debt.
Baby Step 2 – Get out of debt using the Debt Snowball. Quit borrowing money, period. Cut up the cards, get on a budget. Stay current with all creditors. Rank the debts from smallest to largest payoff and attack the little one with rabid intensity. When it’s gone, take it’s payment plus any other money you can squeeze out of the budget and attack the next biggest one. Get MAD. Sell a bunch of stuff. Have a garage sale. Take a second job. Every time you pay one off you have more money to attack the next one, until you get to the last one which is likely to be a big car or student loan debt.
Baby Step 3 – Finish the emergency fund. When you are out of debt except for the mortgage, go back and fully fund the emergency fund you started in Step 1. That equals 3-6 months of your household expenses. For emergency use only.
Baby Step 4 – Invest 15% of your gross income into retirement. You stopped doing this in Step 1, now it’s time to start for real, with a solid foundation under you. Invest in your company’s 401k or 403b plan up to the matching percentage; then take the rest and go fund Roth IRAs, then go back to the 401 until you get to 15%.
Baby Step 5 – College saving for the kids. Use Educational Savings Accounts and carefully-selected 529 plans. Don’t get this out of order. You need to take care of your own retirement before you pay for college.
Baby Step 6 – Pay off the house. Every thing is on autopilot. Retirement, college – all handled. Now find extra money in the budget and start rapidly paying off your mortgage. Rapidly.
Baby Step 7 – Build wealth like crazy and give a bunch of it away. What could you do and who could you help if you had absolutely no debt? Any thing and any body you want. This is what it’s all about. The most fun you’ll ever have with money – giving it away.

good post master fish

j

i know you always said that you should only finance a house. question for you: would i be guilty as charged for borrowing money a few years ago for a student loan for flying school to be a pilot? $60000.

j

j,

It's not a matter of being "guilty" of anything. No matter where you find yourself, you have to start there. The beauty of the Baby Steps is that is allows you to do just that. 60k in student loans is pretty steep (and totally unnecessary, by the way), but you're there now. Just start walking through the steps. Do you have any money? If so, $1,000 goes into your Baby Emergency Fund. The rest goes against your smallest debt. As far down the list as you can go on whatever money you have. Then it becomes a cash-flow and budgeting exercise as you pay off the rest of it until you're out of debt except for the mortgage.

No need to feel bad, we all have that "V-8 Moment" where we slap ourselves in the forehead in realization that you really don't want to live like everyone else.

Good luck in your flying career - we're all going to need it.

i like this advice

dorkfish, i have absolutely no debt except the student loan. my credit cards are all paid off and i put them away. still open just dont use them. no car or house note at all. i save about $1000 a month as my wife is a teacher.

thanks

j

dorkfish, i have absolutely no debt except the student loan. my credit cards are all paid off and i put them away. still open just dont use them. no car or house note at all. i save about $1000 a month as my wife is a teacher.

thanks

j

That's awesome, Dood! Very nice job. What would be "normal" in this case would be to keep saving money and keep the student loan around like it's a pet. Kill it. Attack it like it just bit your kid.

Let me flip the equation over for you and see if you come to a slightly different conclusion:

If you didn't have that money in savings - let's say it's $10,000 just for an example - and your student loan balance was $50,000 instead of $60,000. Would you go out and borrow another $10,000 on your student loan in order to put it into savings? That's exactly the same choice you're making right now. Most people intuitively know it's a bad idea to borrow money to invest or save. But at the same time those same people will hesitate to take money OUT of savings in order to pay off debt, which is mathematically the same thing. In my flipped-over example, your heart immediately recognizes the risk you'd be taking, and you'd likely not even consider that move.

Now the exception is if you've been putting that $1,000 a month into a tax-advantaged retirement plan like a 401k or 403b where there'd be significant (around 40%) taxes and penalties for withdrawing it. If that's the case, the better plan is to leave that money alone, but stop contributing until you've paid off the student loan as quickly as humanly possible. But if it's not in retirement savings, you know what to do - stroke a BIG check and be FREE.

Are you working as a pylut now?

yes i am working as a pilot now. so, i have the money in a cd that yields a little under 7% a year. every month i go and make my deposit so that it keeps growing. tried the stock options level two through etrade and that was a joke. good thing i only used $1000 to try and make more mulla. would you advise me to rather pay the $1000 extra towards the loan? or keep putting it in the cd? i love seeing the money grow and am a little hesitant to use it on the loan.

thanks in advance

j

Hmmm... I think you may need to read the fine print on this 7% CD. Bankrate.com lists the highest-yielding CDs in the nation as topping out around 3.8%/year, with even the 5 year CDs topping out right around 4.5% Don't mean to sound skeptical, but you wouldn't be the first guy to not be getting what he thought he was getting.

All that aside, yes I would definitely cash that money out of the CD, along with any other money I had laying around outside of retirement accounts, and pay down that loan as far as I could. Again the choice you're making - without actually making it - is to borrow on a student loan in order to invest in CDs. That's the mathematical fact of what your current plan.

As far a signing up on eTrade to trade stock options, that's just totally unnecessary. Rich people, contrary to how they're portrayed on TV and in movies, have very simple investment plans. This image we have of them furiously watching stock tickers, executing hyper-sophisticated trading strategies, calling their brokers every 20 minutes is simply wrong. Once you get out of debt everything except for the mortgage in Baby Step 2, and have saved 3-6 months worth of household expenses in Baby Step 3, you're ready to start investing for retirement. The vehicle of choice is mutual funds, particularly "growth stock" mutual funds. You put 15% of your household income into retirement in the following order: first in 410k or 403b plans up to the matching percentage. If the company matches the first 4% of your contributions, you put 4% in there to get the full match. Then you move over to Roth IRAs - one for you one for your wife - again in growth stock mutual funds. If there's still money left over to get to 15% of your income, go back to the 410k/403b and put the rest in there and you're done - Automatic Millionaire.

I'll start a thread on mutual funds - what they are and how they relate to the different account types I mentioned. It's a barrel of fish hooks since the gummint is involved, but understand it is well worth it.

well the only debt i have right now is my bike loan...i still owe like 5000 on it...i have 13000 in the bank...so i could theoretically pay it off right now..but i would rather let the money earn interest for me in my savings account..rather than pay the loan off..because everyone knows the first payments on a loan is the interest you are paying in order to borrow the money...

so what do you think...pay it off and not be in debt..or be in debt and let the money earn interest in my savings account?

well the only debt i have right now is my bike loan...i still owe like 5000 on it...i have 13000 in the bank...so i could theoretically pay it off right now..but i would rather let the money earn interest for me in my savings account..rather than pay the loan off..because everyone knows the first payments on a loan is the interest you are paying in order to borrow the money...

so what do you think...pay it off and not be in debt..or be in debt and let the money earn interest in my savings account?

I'll beat him to the punch... Most likely your bike loan has a higer APR than the bank account... If that is the case you are losing money trying to make a cup of coffee in interest...

This is a very generalized system you speak of here, I'm sure it works, but there are better ways to go about it if you are financially minded...

Instead of tackling the smaller debts first then larger ones, look at the cost of carrying that debt, pay off higher APR loans first, on top of that, focus on non tax deductible debt first...

After any loans/credit cards are paid off, Then you need to evaluate, can you earn more by investing money rather than paying off tax deductible debt?? Most people cant do that...so its better to get the guaranteed return on your money by not having to pay for the debt in interest.

figure it like this, the best guaranteed return you can get on your money in a savings or cd is around 3-4%(after taxes on that interest income it is 2.5-3%), if your home loan is at 6%, you are getting a guaranteed higher return than a savings or cd. (yes, this is very broad, the actual return on that would vary depending on your tax situation among other things..

In short, tackle higher interest rate debt first, not just smaller debt...

dorkfish, i know this is kinda random. gas prices are through the roof, the economy is down, and the dollar is very weak. my job is up and down as the airline industry is terrible right now due to the high price of gas. are we going into a recession? how long do you think the economy is going to continue this way? and whats your take on the gas price?

thanks

j

One of the most outstanding principles of the Dave Plan is that you're recession proof. When you don't have debt, there is no fear of losing stuff in an economic down-turn. I have no idea if we are in or are headed for a recession. The most recent economic statistics have shown an undeniable slow-down, but not a technical recession which is defined as 2 consecutive quarters of negative economic growth. We haven't yet had the first of those two, but that doesn't mean it's not on the way. As far as fuel prices and their effect on the airline industry, you're right we're bleedin' and there's no conceivable end to it in sight unless $115 oil is a speculative bubble, which some at the Wall Street Journal think is the case. With regard to the falling dollar, the Fed Chairman is taking care of the banks at the expense of everyone else by de-valuing the dollar. Corn and other feed grains are being diverted into ethanol production which drives up the price of all the stuff we buy at the grocery store. It's all pretty stupid, but that aspect is out of my control. What we do have control over is how much we're obligated to send out the door every month in payments for stuff we bought back when we thought we were Ten Foot Tall and Bulletproof. This is the risk aspect of debt that shows up immediately when things go a little bit south.

The volatility of the airline career positively begs for us to stay out of debt. Just ask the guys at Independence, ATA, Champion, Skybus, and soon to be Frontier. Job gone, payments still here.

With regard to the falling dollar, the Fed Chairman is taking care of the banks at the expense of everyone else by de-valuing the dollar.

Umm, actually when the Fed Lowers the Fed reserve rate it is stimulating the economy...Everyone knows the US is one of the largest exporters of goods in the world, by devaluing the dollar we are stimulating all the american businesses that do export, think about it like this, a few months ago, the EUR/USD was trading at 1 Eur = 1.40 USD, now it is at 1.55 USD (along the same lines, what used to cost 1 Euro, now costs them less than 1 Euro for the same good in USD), this means that our goods are becoming cheaper to everyone whose base currency is the Euro...this will help stimulate the economy...

This all is needed in our case because there are a lot of financially STUPID people out there that bit off more than they could chew with loans.

The part that hurts everyone else in the US is inflation (not the Fed Rate)...usually inflation decreases or is slowed when the fed rate is cut, but in this case it is lagging behind their actions.

Beleive me, the Fed is acting in the best interests of the people and our economy in mind, by decreasing the Fed rate, it is making it easier for large financial institutions to loan money(hopefully now to people who know what they are doing, so this turmoil does not happen again, but it will, there are too many stupid people in the world to prevent things like this from occuring), this in turn will help out the people.

I didn't mean to start a debate about Fed policy, and since I'm clearly outgunned in that arena, I'll shut up about it.

Sorry fish if that came out the wrong way, i really wasnt trying to argue...guess its kind of more fun to talk about work in a motorcycle forum than actually work, huh??? :)

Happy Riding

No, no I didn't take it that way at all. It was a good post. I need to mind my snack-hole when I'm irritated with the Fed for bailing out idiotic banks and their idiotic customers in the name of "stability". I quickly exceed my actual expertise in that area.

Best to you.

I thought it might be useful to revisit this thread "after the fact", so to speak. It's been a little bit dead on this forum for a while, so maybe someone will find something here he can use.

So.... if you had done what I suggested in this topic in early 2008, what would your life have been like through this downturn?

1. By the market meltdown in fall of '08, you would have been sitting on $1,000 starter emergency fund;
2. You would have made huge progress toward getting out of debt, maybe paying off everything but the house if you really went at it.
3. If so, you'd have made significant progress by the end of the market meltdown in March '09 toward having 6-months worth of living expenses in the bank, and you'dve been ready to face the uncertainty of the job market.
4. If you got layed-off, down-sized, right-sized, or otherwise let go, you'd be in a position to methodically find your next job while living modestly on your emergency fund.
5. Because you don't have any payments except your house payment, no one is showing up to repo your car, bike, furniture, or to shut off the power, cable, or gas. You're not in a death spiral of losing necessities just because you lost your job. You're hunkered down and weathering the storm. Your wife is not scared, you're not panicked, your kids are safe.
6. If you stayed employed (and despite this being a really bad streak of unemployment most people did), you're now investing 15% of your gross into your retirement plans at bargain-basement prices. Many people don't know that the market has climbed over 80% since it's bottom in March '09.
7. Throughout this whole mess - which may not be over by the way - you've been "above the fray" as it were. Peaceful. Calm. In control, versus madly casting about looking for someone to blame or the next re-fi scheme, or the next handout from Uncle Sam to try and save yourself from your self-inflicted wounds.

Handling money for your family's benefit first - always - is what rich people do. Their money handling habits are what made them rich in the first place. It's a myth that they do all sorts of sophisticated schemes, that they inherited their money, that they "got lucky", that they made ginormous incomes, or that they've stepped on necks to get where they are. They have a plan. They faithfully execute the plan. The plan is simple: do smart stuff and don't do dumb stuff. Have your feet under you. Think. Plan. Prepare. Execute. All this prepares you to avoid the things that keep broke people broke: Lotto; rent-to-own; car/bike/bass boat loans; "I'll never get ahead" thinking; payday loans; gambling; "Wall Street Secrets" stock schemes; late-night-cable get rich quick in real estate; new cars; and an overarching desire to spend money you don't have to buy stuff you don't need to impress people you don't really like.

If you thought way back then "yeah, that sounds nice. Maybe I'll do that some day", and now regret not doing it - don't despair. We all make money mistakes - didn't Microsoft come out with a phone to compete with the iPhone a few years ago? You can only begin where you are. You can't go backward. But you can make your future more secure, more serene, more confident, more prosperous. But you can't keep doing what you've been doing and expect a different result. You have to change. You have to get mad and say "I'M NOT GOING TO LIVE LIKE THIS ANY MORE!". Draw a line in the sand and change what you're doing.

There WILL be another economic downturn, even if we are at the end of this one. Be prepared for it this time. Bring some peace and security to your family finances. It'll pay off in ways you haven't even thought of.

Excellent read!