Anyone here do the Dave Ramsey thing?

[MCgrease08]

Bumping this old thread because I've been reading one of Dave Ramsey's books and I'm considering starting the baby steps. Having recently come out the other side of a divorce and a long term job loss, I've racked up some debt and burned through my savings.

My debt isn't unmanageable, about $4500 in CC debt and $3600 left on a car loan. Fortunately I bought the car from a family member, so I'm not paying interest on it. It's the lack of any type of savings that lit the fire under me. The ex spent like a drunken sailor, so the divorce got me out of that mess, but the money it cost to get out, plus being unemployed for 6 months wiped out any reserves I had.

I can't afford another emergency, so paying off the CC and building the reserves back up is a must. Ramsey recommends forgoing any retirement contributions until doing both of those things, but I'm struggling with the thought of cutting off the 401K contribution and leaving the employer match on the table.

The program is greatly simplified. One could easily apply the core principles and still save for retirement.

Being mathematically inclined, I would take whatever I planned to use for retirement and figure out how much interest that would cut off my debt compared to the interest made over the estimated life of the investment.

I did the math and I can pay off all debt (including the car) and get 5-6 months of expenses into savings in 20 months if I really push it hard and stop the 401k contributions.

The problem is, I'm nearly 40 and I'm already pretty far behind on the 401k. I just got back into contributing when I took a new job 3 months ago, and I don't like the thought of losing out on $12K in contributions over the next 20 months, especially when $4k of that is free money from the company match.

I've already dropped the contribution down to where I'm still getting the full match, but that really only frees up about $100 a month in take home pay, which pretty much triples my time frame to get all of this done.

I'm trying to figure out if the long-term growth on that $12k is too much to pass up for short term success. The other factor is, once the debt is gone and savings is back up, I can pretty easily double my retirement contributions. If I keep contributing now, I'll only be able to increase total contributions by about 1% per year, meaning it will be 5-6 years until I'm fully fueling the retirement fund (Baby step 4).

Has anybody tried to do the baby steps while still trying to fund retirement? For me it will seriously slow down the process, which kind of defeats the point.

 

[CampingJosh]

Has anybody tried to do the baby steps while still trying to fund retirement? For me it will seriously slow down the process, which kind of defeats the point.

My rule for myself was that, if I could get all the debt paid off in under two years, I would keep funding retirement. (It ended up taking 16 months.) But I was 24 when I started the baby steps.

The immediate return of a 401(k) match is nice, but if it sounds like even with that you'd be better off to pay the CC immediately. The 401(k) is paying 50% (match) + 10% per year. The CC is costing 20% per year. If saving for retirement makes you stretch the CC payoff for 5 years, you're probably behind if you just paid off the CC as quickly as possible and then started the 401(k) savings.

You're newly single again you say? What about temporarily switching a bit of your leisure time to second job time? Seemingly everywhere is hiring part time, and even working two evenings per week could probably allow you to pay off the CC by April while still getting the full match in the 401(k). Car loan and everything by this time next year easily.

 

[schmart]

Mcgrease,
I've been through Financial Peace University several times, taking one of my children each time as they were a senior in high school. Following Dave's rules has certainly improved our financial picture.
As far as your question on retirement... if you stop your 401(k) contributions it sounds like you are only $4K behind (the amount you miss out on company match). After you become debt free, if you kept up with the same lifestyle it would only take you another 10 months to catch up with that. Even if you never caught up... will $4K make a difference in whether you can retire? After 20 years at 9% it is worth about 22K. If you sign on and save the 15% after you are out of debt, I surmise it will be a minor point in your retirement accounts.

One point Dave makes though is that this doesn't work if you are going to "play around" with getting out of debt. if you are going to follow his gazelle intensity run of getting out of debt, I'd suggest looking into other areas you could reduce expenses (cable.. cell phone? etc.) or increase your income (sell some stuff {I sold some guns} , second job, etc) and try to get out of debt in 10 months instead of your projected 20.

One final thought.. Both my and Dave's advice are only a person's opinion. Dave's at least is based on well founded principles and has a proven track record with many many people becomming successful by doing them.

 

[jkaetz]

If you can't increase income, reducing fixed costs is your next best option. Also make you KNOW what the fixed costs are and how much you spend on essentials/month (Gas, Food, Utilities, etc...). Then you know what you have left to reduce the CC bills and pay off the car. Food is usually another place where you can find savings depending on your eating out and shopping habits.

 

[MCgrease08]

If you can't increase income, reducing fixed costs is your next best option. Also make you KNOW what the fixed costs are and how much you spend on essentials/month (Gas, Food, Utilities, etc...). Then you know what you have left to reduce the CC bills and pay off the car. Food is usually another place where you can find savings depending on your eating out and shopping habits.

I've already done all of this. What I'm trying to figure out is is if forgoing the 401k contribution in the short term hurts me long term, or if clearing the deck now and maxing out contributions.in two years, will make up for the delay.

I think I have an investment and growth calculator spreadsheet stashed somewhere on my hard drive. I need to crunch some numbers.

My gut says I will end up trying someway to keep making the contributions for now, but I need to see what the math says.

 

[BugI02]

And don't underestimate the psychological benefits of being debt free and knowing you have a reserve. The reserve is the most important because at your age you would take a beating from the tax man if you needed to access 401k money in extremis, and taking on new debt for an emergency would just set you back

 

[rhino]

I'm 54 and probably further behind the curve than MCgrease08. I will likely focus on replenishing liquid reserves first and foremost. On the bright side, I won't have a 401K, so I won't have to make any decisions in that regard.

Retirement isn't looking like a possibility at this point, unless I win a lottery!

 

[1775usmarine]

We're 33 and besides her student loans and our home we'll have no other debt. Planning on using my va disability to buy a new bike in 3yrs.

 

[MCgrease08]

I've already done all of this. What I'm trying to figure out is is if forgoing the 401k contribution in the short term hurts me long term, or if clearing the deck now and maxing out contributions.in two years, will make up for the delay.

I think I have an investment and growth calculator spreadsheet stashed somewhere on my hard drive. I need to crunch some numbers.

My gut says I will end up trying someway to keep making the contributions for now, but I need to see what the math says.

I did some basic calculations using a retirement calculator I got from a financial planner I trust. It looks like if I stop putting the money into the 401k for now and blast through baby steps 1 and 2 in under two years, the projected value of the 401k is almost $300K more because I'll be able to jump back in at a contribution level of 15% (Assuming an 8% rate of return for both scenarios). That seems like a pretty compelling argument to me.

All of this assumes I keep making the same annual income for the next 25 years, which seems unlikely. Hopefully it goes up, making the outlook even better.

 

[Big Flounder]

My wife and I took the Financial Peace University class at our church a few years ago. I strongly urge anyone remotely interested to read Dave's books and take the class. Even if you only use a little bit of what you're taught, you'll be way better off. And if you follow the plan as Dave lays it out, you'll be way ahead of the game compared to most of Americans.

 

[Airtevron1]

I taught his material at the local correctional facility a few times. His stuff isnt any huge revelation, just common sense. Unfortunately its really is geared to folks say in their 30's and make a very comfortable living, its downright discouraging to a felon trying to move on.

My biggest thing with him is he's a sarcastic arrogant pompous jerk. It really kills me he preaches pay cash for everything to the point of having no credit rating at all, coming from somebody who charges $100.00 to hear his "gospel".
Shame on churches that promote him, fleecing the flock a 100.00 to get a cut from ramsey.

Just live within your means and save for the future, there I saved you 100.00

 

[rvb]

The problem is, I'm nearly 40 and I'm already pretty far behind on the 401k.

IMO put what you can into 401k. If you do, You won’t look back 20 yrs from now and say, gee, I wish I had Pd that debt off 6 mo sooner. Do it the other way and in 20 yrs you WILL be saying gee I wish I had put more into 401k earlier. Compounding interest is a powerful tool. At least get the company match if you can. That "free" money is part of your total compensation and will be worth much more down the road. To not get the employer match is like saying "no thanks" to a paycheck.

 

[rhino]

I did some basic calculations using a retirement calculator I got from a financial planner I trust. It looks like if I stop putting the money into the 401k for now and blast through baby steps 1 and 2 in under two years, the projected value of the 401k is almost $300K more because I'll be able to jump back in at a contribution level of 15% (Assuming an 8% rate of return for both scenarios). That seems like a pretty compelling argument to me.

All of this assumes I keep making the same annual income for the next 25 years, which seems unlikely. Hopefully it goes up, making the outlook even better.

Haha! I can't imagine having a 401K with $300K in it, much less having $300K more. It's good to be young and wise enough to be working on it, you young'n!

 

[jkaetz]

IMO put what you can into 401k. If you do, You won’t look back 20 yrs from now and say, gee, I wish I had Pd that debt off 6 mo sooner. Do it the other way and in 20 yrs you WILL be saying gee I wish I had put more into 401k earlier. Compounding interest is a powerful tool. At least get the company match if you can. That "free" money is part of your total compensation and will be worth much more down the road. To not get the employer match is like saying "no thanks" to a paycheck.

Agreed on keeping the match. It should be relatively easy math to see how much potential is lost by using the $7k to pay off the debt faster instead of putting it into the 401k and letting it gain interest.

 

[CampingJosh]

Agreed on keeping the match. It should be relatively easy math to see how much potential is lost by using the $7k to pay off the debt faster instead of putting it into the 401k and letting it gain interest.

He ran the calculation. He comes out ahead by paying off the debt first.

Post #149

 

[ATOMonkey]

Debt usually isn't a math problem, it's a heart problem. May be different in this case, if it was the divorce that caused him to go into debt. No more divorce, no more paying attorneys.

Overspending falls into the same category as most addictive behavior.

That is why Ramsey lays it out the way he does. His assumption is that you will still be tempted to make bad decisions, so he tries to take most of those decisions out of your hands, and lays everything out step by step with a binder and book and an accountability group.