Dave Ramsey's voice is in my head...(Updated 1/15/2021)

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Topic Author
Shredder
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Dave Ramsey's voice is in my head...(Updated 1/15/2021)

Post by Shredder »

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I was a follower of Dave Ramsey in the past and he is an all or nothing sort of man. I was wondering what your priorities would be in my shoes.

Here are the first 4 of his 7 'baby' steps to financial freedom:

Step 1: $1000 E-Fund
Step 2: Eliminate all Debt but your mortgage using a snowball strategy
Step 3: Save 3-6 months worth of expenses in savings
Step 4: Contribute 15% of household income to retirement savings

I have 38.6k in auto debt (2 loans - 10.8k @ 1.9% and 27.8k 2.75%) and 4.4k in student loans ($106/mo) in addition to my mortgage. Believe me - if I could go back 12 months i'd have bought a more modest SUV than I did but I feel stuck under it at this point. I only have 3-4k equity in it from my negotiating and trade while figuring in depreciation. My goal going forward is to cash flow my vehicles as much as I can. My credit cards are paid off each month.

What would be your priorities of attack for e-fund (getting from 3 up to 6), paying down debt (above minimum which I always make) and investing (I currently do the minimum to get our matches).

Sorry for the ramble. Have a good night and I really appreciate everyone's generosity on this forum.
Last edited by Shredder on Fri Jan 15, 2021 7:18 pm, edited 8 times in total.
Khanmots
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Re: Dave Ramsey's voice is in my head...

Post by Khanmots »

It'd be worthwhile to have an idea of your income and major expenses as well as the rate on the mortgage.

The auto-loans are at pretty decent rates, although if your credit is solid you might consider refinancing the 2.75% one since you're not underwater on it. I just took a glance at penfed and they're doing 1.99% for an auto loan refi.

Personally I'd first try to refi that auto-loan. I'd then be getting rid of the student loans ASAP, you should be able to clear it out pretty quickly, it's likely at higher rates than the others, and will free up that $100 a month.
Then, I'd be saving up an emergency fund of 6 months expenses, although this will somewhat depend on what your job is and how hard it'd be to get a new one if you lost it...
At this point the question becomes do you want to save the most on interest and get out of all debt the fastest or do you want to free-up cash flow. If the former, start paying down the principle on the mortgage and don't pay any extra on the car payments. If the latter, then pick the lowest balance car payment and direct extra cash at it to get it paid off and free up cash-flow. Alternatively, one could start taking more advantage of tax-advantaged space instead.

Also, depending on your mortgage it might be worthwhile to consider a refinance, but we'd need more details.
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Shredder
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Re: Dave Ramsey's voice is in my head...

Post by Shredder »

Khanmots wrote:It'd be worthwhile to have an idea of your income and major expenses as well as the rate on the mortgage.

The auto-loans are at pretty decent rates, although if your credit is solid you might consider refinancing the 2.75% one since you're not underwater on it. I just took a glance at penfed and they're doing 1.99% for an auto loan refi.

Personally I'd first try to refi that auto-loan. I'd then be getting rid of the student loans ASAP, you should be able to clear it out pretty quickly, it's likely at higher rates than the others, and will free up that $100 a month.
Then, I'd be saving up an emergency fund of 6 months expenses, although this will somewhat depend on what your job is and how hard it'd be to get a new one if you lost it...
At this point the question becomes do you want to save the most on interest and get out of all debt the fastest or do you want to free-up cash flow. If the former, start paying down the principle on the mortgage and don't pay any extra on the car payments. If the latter, then pick the lowest balance car payment and direct extra cash at it to get it paid off and free up cash-flow. Alternatively, one could start taking more advantage of tax-advantaged space instead.

Also, depending on your mortgage it might be worthwhile to consider a refinance, but we'd need more details.
My mortgage rate is 5% fixed 30 year FHA ($1653/mo). I looked into streamline refi options but we bought in October 2009 and would have to use today's PMI rates which offset the benefit of a reduced principal payment. If we started over now we'd not benefit until we refi'd out into a standard mortgage since PMI is for the life of the loan for new loans.

I can copy in my budget but required expenses are $3750/mo including all loans, utilities, food, and gas. That will get up near 5k when daycare starts up in a few months.

I'm more interested in cash flow at this point.

Thanks for the response.
Carl53
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Re: Dave Ramsey's voice is in my head...

Post by Carl53 »

How close are you to having paid your home loan down to 80% LTV?

Assuming you paid $316k with 3.5% down and rolled a nominal 1% PMI into your loan, you still owe $286k if you never paid any extra on your principal. In that case you are still over 5 years and $34k away from getting your LTV down to 80% unless you are in an area that the home values has substantially appreciated. If the home has appreciated half or more of that delta, I would consider using your efund to make up the difference to get you a refi into something closer to 4%.

What is your student loan rate? It likely is high enough that knocking it out ought to be a priority. I know DR would say to sell your SUV and buy something cheaper, and that certainly is an option, but if you are quite happy with it, just see if PenFed will refi it for less as Khanots suggested.

You mention that you soon will have day care expenses. Will one of you be going back to work and income level changing?
mnvalue
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Re: Dave Ramsey's voice is in my head...

Post by mnvalue »

+1 to refi the car(s) and/or house, if possible. Keep investing to get the match (but no more). Keep paying on the student loans (snowball style--smallest balance first).

I would suggest you take your $11k emergency fund and put it into Roth IRAs at Vanguard. Put $5,500 in for each of you (assuming you're married). Be sure to mark it as a 2013 contribution. You have until April 15th to do this. But don't invest it in the stock market. Just leave it in the money market fund. You can withdraw Roth contributions (but not earnings) any time tax and penalty free. So if you end up needing some of that money, you're no worse off than when you started. But if you don't, you've locked in some tax-advantaged space. As you work to increase your e-fund, you can put that in the Roths as well. Once you have 10k in a single Roth, maybe shift that into Admiral Shares of a short-term bond fund, VBIRX.

It sounds like you might be looking for a middle ground between saving and investing. Here's a possible idea: Maybe at $17k in total, you shift all of both Roth accounts into LifeStrategy Income Fund (VASIX) and at $20k into Vanguard LifeStrategy Conservative Growth Fund (VSCGX). If you reach the point where you've maxed your Roth limits for the year but haven't completed your emergency fund, then you can open a taxable account to hold the same fund.

Once you reach 30% more than your target (6 months), so 6×1.3×5k=$39k, consider the emergency fund "complete". The extra 30% is to allow for the 40/60 Conservative Growth Fund to drop up to 20% and you still have your target of 6 months worth of expenses available. Once it's complete, if your marginal tax bracket is 15%, keep putting retirement money (besides what is required to get employer matches) into the Roths; start investing the new money in Target Retirement funds or if the target date is too aggressive for you, a LifeStrategy fund. On the other hand, if you're in a higher bracket, then prefer pre-tax plans (401k, etc.).
stormswami
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Re: Dave Ramsey's voice is in my head...

Post by stormswami »

As previously mentioned, a rough idea of monthly/annual income might be helpful, but otherwise here are some thoughts... I would think the Dave Ramsey notion would be to ignore the 3-6 months of expenses e-fund for now and to halt all investing until the student loans and auto debt is resolved. I'd guess he might also suggest selling at least the most expensive vehicle.

That said, I can't really argue with continuing to make the minimum retirement contribution to get the full match, but I would otherwise halt any other excess investing (retirement and taxable). I personally tend to subscribe to a hybrid of the mathematical and (more behavioral) snowball/momentum strategy. Perhaps for both reasons, I would throw all excess money at the student loans first (w/ presumption of continuing to pay off the CC's each month). I would also strongly consider selling the $27.8k vehicle. Would it be possible to find a similar enough used vehicle for something like $10-15k (equity plus any efund excess as down payment) in order to more quickly pay off debt and build up cash? From there, student loan payments will then go toward the car loans.

Just from my personal experience, I almost made a huge mistake (again, just my personal perspective) about 10 years ago. While I could have technically afforded it, I came all too close to buying a new $33k SUV (thought I "had" to have it and would have financed it all). Instead, I got cold feet at the last minute and ended up buying a private sale used SUV for $15k. It certainty would not have been the end of the world, but I consider it a lesson learned and a pivotal debt-awareness point relatively early in my working career. After paying off the car loan within 2-3 years, I'm still driving the same SUV 10 years later (200k+ miles and counting) and now hate the thought of us having to spend on a new vehicle any time soon.

Otherwise, I agree with others about exploring ways to refinance the mortgage, particularly as you near 80% LTV. However, I would make the student loans/car loans the highest short-term priority and avoid extra retirement/taxable investing at least until non-mortgage debt is resolved.
snyder66
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Re: Dave Ramsey's voice is in my head...

Post by snyder66 »

Assuming your student loan rate is fairly low...I would attack your lowest loan, which is the 10K car loan. Pay as much as your can toward knowcking that off of your list. Then, Do the same with the next lowest loan.
mnvalue
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Re: Dave Ramsey's voice is in my head...

Post by mnvalue »

snyder66 wrote:Assuming your student loan rate is fairly low...I would attack your lowest loan, which is the 10K car loan. Pay as much as your can toward knowcking that off of your list. Then, Do the same with the next lowest loan.
Umm, what? The OP has $4.4k in student loans, so obviously one of those is the smallest balance, which is what I assume you mean by "lowest", since paying off the lowest interest rate first makes no sense. I assume you misread that as $44k in student loans.
snyder66
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Re: Dave Ramsey's voice is in my head...

Post by snyder66 »

What I meant was the loan with the lowest amount of money. Sorry, I mad a mistake. I would also like to know the interest of the student loan.
gvsucavie03
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Re: Dave Ramsey's voice is in my head...

Post by gvsucavie03 »

We are doing the Dave Ramsey baby step plan. The only difference is that I am completely ignoring his investment strategy except the 15% part. He still thinks he can beat index funds and that everyone's asset allocation should be exactly the same... silly Dave.

We had a car loan and a lot of student loan debt (over $50K total) back in 2009. Since then I got my Master's degree and paid everything down to about $16K on 2 student loans. I couldn't see that it was smart to have payments of over $700 of my ~$3,500/month income going out the window anymore.

I'd personally follow the steps if it is what you believe in (again, modify step 4 to something that is actually smart). You could refi the car loans, but if you pay the loans off rapidly, it'll only be a few dollar's difference. Just pay them off.
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Random Musings
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Re: Dave Ramsey's voice is in my head...

Post by Random Musings »

Change your spending habits. Refi if you can.

RM
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jimb_fromATL
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Re: Dave Ramsey's voice is in my head...

Post by jimb_fromATL »

If you’ve followed Dave’s advice to postpone or reduce retirement contributions while paying down debts, chances are that you are much further behind in investing for retirement than you may realize. So much more important than which loan to pay first is to make sure you are paying yourself first by contributing the max possible to any available tax deferred or tax-advantaged retirement plans such as a 401(k), 403(b) TSP, IRA, etc before paying any extra on any reasonably manageable debts.

Assuming you have enough income to cause you to pay any significant income taxes, postponing virtually any retirement investments to pay down debt faster can literally cost you anywhere from tens to hundreds of thousands to millions of dollars out of your probable future retirement income in exchange for saving only a tiny fraction as much interest on the debt.

If you want to put your money to its best use to build wealth and security for the future:

After paying yourself, and after building a substantial emergency fund of at least 6 months to a year of living expenses and after eliminating most other consumer debts other then low-rate car loans) and after having a schedule to pay enough extra on your own residence mortgage in no more than about 15 years; then consider paying extra on student loan debts.

If you are still following Dave's plan and are not contributing enough to retirement, I thnk it can be wll worth taking the time to read my posts in the following threads.

Swamped in Debt -- thoughts?
Re: Student loans now refinanced - pay down or invest?
Student Loans manageable - start investing - advice needed
Re: Investing vs Mortgage Priority
RE: $1M in debt -- numbers to ponder
Re: $1M in debt -- putting it in perspective
Re: Advice when to start investing considering Student Loan
Re: Which debt to pay off first and why?
Re: If You Were 24 Years Old What Would You Do?

Then if you want to post some more details about your income, budget, tax brackets and cash flow, we can explore which way might save you the most money and end up with the most wealth in the long run -- rather than paying down any of those debts too fast.

jimb
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yatesd
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Re: Dave Ramsey's voice is in my head...

Post by yatesd »

I am doing a modified version of the snowball effect. Although admittedly, not with full gazelle like intensity.

A few years ago to improve cash flow, we did a budget, got rid of any optional expenses and attacked lowest balances first. The only real variation was with the 401K (I lowered our 14% contribution down to 6% (company match)).

Last year I noticed our "pay down" momentum was slowing (still going in the right direction). Since our cash-flow and financial stability improved, we reinstated our 529 contributions, maxed 401K, and building our emergency fund. We now have no car loans, but still have $24K in student loans and a mortgage (fortunately both around 3% interest).

For me, reading Dave Ramsey, attending finance classes at church, and hanging out on sites like Bogleheads have all helped me to remain focused. This is important because I still tend to enjoy spending more than saving. Good luck!
NorCalDad
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Re: Dave Ramsey's voice is in my head...

Post by NorCalDad »

Agree with mnvalue that you should place your emergency fund in your Roth IRA account but leave it in low-risk investments. Keep building that e-fund within the Roth account.

If I were in your position, I would sell the car and use the $3,000 to $4,000 in equity as a down payment on a used car costing less than $10,000. Yes, that car will be a beater compared to what you now drive, but based on what you said, that's what you can reasonably afford if you want to get on stable financial ground.

Edited - overlooked the fact that you are already getting the match.
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Re: Dave Ramsey's voice is in my head...

Post by YttriumNitrate »

Shredder wrote:I have 38.6k in auto debt (2 loans - 10.8k @ 1.9% and 27.8k 2.75%) and 4.4k in student loans ($106/mo) in addition to my mortgage. Believe me - if I could go back 12 months i'd have bought a more modest SUV than I did but I feel stuck under it at this point. I only have 3-4k equity in it from my negotiating and trade while figuring in depreciation.
If Dave "Sell the Car" Ramsey was here he'd probably tell you to sell one of those cars and start driving a beater for a little while. While Dave's baby step program might not be the ideal path from a mathematical approach, I do think it's great in terms of emotions. In a previous post you mentioned a household income of around 120k a year, so if you wanted you could have all that $42k in debt knocked out by June (maybe May). Since the time frames we're talking about are fairly small, I'd probably go straight through steps 1-3.
Longtimelurker
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Re: Dave Ramsey's voice is in my head...

Post by Longtimelurker »

Seems to me that you overspent on both housing and cars, as evidenced by the very high loan balances and inability to get to 80% LTV on mortgage. This is a common mistake, but a big one. Its very hard to dig out of a hole like this.

What you should do depends on how draconian you want to be. If your goal is debt free living, then sell your expensive car and buy one much cheaper. That could knock off $15k from your balance without sacrificing the ability to have flexible transportation (you know, the goal of having a car in the first place). From there, find other expenses to cut and knock out the student loans. If the car loans are < 2% interest, I would leave them alone and focus on getting to 80% LTV on the mortgage and re-fi. After that, I would save aggressively by maxing tax advantaged accounts.

Good luck.
Stay the course. If you can't resist greed, and fear is proven to be 2x as strong, you are doomed as an investor.
Laura
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Re: Dave Ramsey's voice is in my head...

Post by Laura »

I also think selling the car would be a good idea. You mention day care ahead in the next few months so getting your cash flow under control is really critical. I suggest you really focus on getting out of as many debt payments as absolutely possible as quickly as you can so you have the space to pay for day care. In order to help I suggest you take a hard look at every single expense. Cable TV, cell phones. magazines, newspapers, dining out, gas, electric, ... I did this a few years ago and was surprised at how much I could cut without really impacting my quality of life. Now is the time to do this. Remember, if you stop a subscription to something then realize you can't live without it you just start again in a few months once the debts are gone.

I would make sure to keep some investing going on since the debt isn't hugely expensive except for the mortgage.

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.
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Shredder
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Re: Dave Ramsey's voice is in my head... [Portfolio help]

Post by Shredder »

First, wow! Thanks for all the responses. There is so much to think about and act on. But first, here are some answers to the questions you asked for. I apologize it took a bit to respond to. I was up late on the west coast and slept in a bit. If you have further questions i'll keep any eye out and try to get to them faster.
It'd be worthwhile to have an idea of your income and major expenses as well as the rate on the mortgage.
My wife and I have a rough household income of 120k (pre-tax) but this will decrease slightly when my wife goes back to work. She will have to say no to more committees and overtime depending on our daycare situation. We will also have an increase in insurance premiums with the little one. Right now I estimate after 401k and medical insurance we will take home 6.4k as a household for a 2 paycheck month.

Mortgage (5.0%): $1653
Car1 (2.75%): $434
Car2 (1.9%): $300
StudentLoan (2.1%): $107
Daycare?: $1000-$1400?

Federal Tax rate is 25%. I believe it'll remain there

I can list out more budget items but these are my main cash flows items. I have bills like power, electric, and then novelty charges like cable and cell phones.

We were paying in 15% of our income into 401k (each) including our match but this does not seem possible at the moment. I have dropped to the minimum to get our match which is 6% for each of us. That gives us an effective 10.5% contribution including matches.

His 401k: 6% to get 3%
Her 401k: 6% to get 6%
How close are you to having paid your home loan down to 80% LTV?
The purchase price for our home was $244k. We ended up having our loan for 239k. That was 4.5 years ago and we owe 219k now. According to Zillow our home is only worth $214-$216k so we are underwater at this point barely. Unless the market jumps up in Washington I'm stuck with PMI for a while.
What is your student loan rate?
Effective rate is 2.1% on 2 loans ~ 2.2k each. Payoff for the pair is just under 4.4k.
You mention that you soon will have day care expenses. Will one of you be going back to work and income level changing?
My wife is going to go back to work but I doubt her income will remain the same. She participates on many committees and does work OT as needed. With daycare in place these sporadic work events will become few and farther in between. I am certainly hoping for a ~6k bump in the next few months but that is not guaranteed.
I thnk it can be wll worth taking the time to read my posts in the following threads.
Thank you so much! I will get to reading this weekend.
Longtimelurker
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Re: Dave Ramsey's voice is in my head... [Portfolio help]

Post by Longtimelurker »

What is your free cash flow per month now?

You have low interest loans. Still I would:

- Sell the car you cannot afford and buy one you can
- Get the mortgage to a point where you can eliminate PMI

Potentially you would want to knock out the student loans.

Good luck.
Stay the course. If you can't resist greed, and fear is proven to be 2x as strong, you are doomed as an investor.
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JPH
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Re: Dave Ramsey's voice is in my head... [Portfolio help]

Post by JPH »

I have nothing to add. But, I suggest when you call Dave to scream "I'm debt FREE!" that you plug the Bogleheads. :idea:
Last edited by JPH on Sat Feb 08, 2014 12:51 pm, edited 1 time in total.
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Shredder
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Re: Dave Ramsey's voice is in my head... [Portfolio help]

Post by Shredder »

Longtimelurker wrote:What is your free cash flow per month now?
$2.2k. This is bare bones meaning nothing figured in for things the baby may need, day care, haircuts, home repair, clothing, or medical bills. We could say 1.2k for daycare leaving 1k left over for the remaining items.
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fourwedge
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Re: Dave Ramsey's voice is in my head... [Portfolio help]

Post by fourwedge »

Shredder wrote: Here are the first 4 of his 7 'baby' steps to financial freedom:

Step 1: $1000 E-Fund
Step 2: Eliminate all Debt but your mortgage using a snowball strategy
Step 3: Save 3-6 months worth of expenses in savings
Step 4: Contribute 15% of household income to retirement savings

I have 38.6k in auto debt (2 loans - 10.8k @ 1.9% and 27.8k 2.75%) and 4.4k in student loans ($106/mo) in addition to my mortgage.
If you are smart enough to know Dave's baby steps... Then how in the heck did you get 38K in car loans? Advice #1 is follow Dave's advice and don't borrow anymore money! Then like Dave says get on a written budget and attack your debt. Smallest debt to largest....and yes sometimes its better to sell the cars and bite the bullet and pay cash for everything but mortgages from now on. BTW.....I'm currently on Baby step 6 and getting close to debt free! Its easy to become rich if you have no debt.
Max out your tax sheltered retirement accounts with inexpensive, well diversified, index funds and you will beat 90% of all investors.
NorCalDad
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Re: Dave Ramsey's voice is in my head... [Portfolio help]

Post by NorCalDad »

That's more info than we had before. Given what you said, I would still prioritize your Roth IRA and let it double as an emergency fund. I would also direct money into your 401k rather than pay off low-interest debt.

If you feel you must focus on one of your debts, I would make it your mortgage since that appears to be the highest effective interest rate that you are paying. If the market comes back to build your home equity, that has the added bonus of letting you potentially refi into a conventional mortgage with a lower interest rate. I'm not a big snowballing fan unless it's the only thing that would keep you heading in the right direction and stop you from spending the extra cash flow.

I would consider trading down your car to reduce your loan and insurance, but I'm a little more understanding given that you have a kid.

Since you are considering daycare, make sure you set up a Dependent Care FSA, assuming that is more beneficial than the Child and Dependent Care Tax Credit (you can only take one or the other).
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Shredder
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Re: Dave Ramsey's voice is in my head... [Portfolio help]

Post by Shredder »

If you are smart enough to know Dave's baby steps... Then how in the heck did you get 38K in car loans? Advice #1 is follow Dave's advice and don't borrow anymore money! Then like Dave says get on a written budget and attack your debt. Smallest debt to largest....and yes sometimes its better to sell the cars and bite the bullet and pay cash for everything but mortgages from now on. BTW.....I'm currently on Baby step 6 and getting close to debt free! Its easy to become rich if you have no debt.
I purchased the SUV in February of 2013. My wife and I started cash flow budgeting this year so that is why I have the car debt. If I were following Dave Ramsey to a T i'd deplete my E-fund down to pay off my student loan and part of my lesser car loan. I'm not willing to have only $1,000 in savings. I think our jobs are secure but that is a little too close for comfort.
Longtimelurker
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Re: Dave Ramsey's voice is in my head... [Portfolio help]

Post by Longtimelurker »

Dude… $2.2k to take care of a baby and cover all repairs, clothing, living expenses etc?????????? I don't know if you are being dishonest with yourself, or you don't see… You are in financial TROUBLE!!!!! I cannot believe how relaxed you are about saying "well, we made the SUV decision before we decided to get serious about not spending out entire lives in debt. So, thats water under the bridge." Its insane!!

You are more then welcome to join the herd and live pay check to pay check, blaming everyone and everything except for yourself for the financial position you find yourself in - god knows the vast majority of Americans do this. But if you are in fact serious about financial health, I would not be dismissing past mistakes as "water under the bridge" that you choose to do nothing about. Lets be clear. YOU CANNOT AFFORD YOUR CURRENT LIFESTYLE + DAYCARE + RETIRE ON TIME. Period. End of discussion. The question is what are you prepared to do about it. From your posts thus far, I would say … not much.

Sell the car you cannot afford
Pay down the mortgage to get rid of PMI
Get you savings rate to 20%

Fail to do these things, and be prepared to spend your life on the treadmill - working for the banks. Good luck. Get SERIOUS!
Stay the course. If you can't resist greed, and fear is proven to be 2x as strong, you are doomed as an investor.
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yatesd
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Re: Dave Ramsey's voice is in my head... [Portfolio help]

Post by yatesd »

I don't think things look too bad. Almost the same as me. Same income, but I have higher mortgage (more equity), no car debt (just paid off), more student loan debt ($24K).

Don't know ages or current retirement savings to understand whether they are on track, but it sounds like they have been pretty committed to 401K. Personally, I would squash the student loans right away and not let the e-fund get below $1K.

Going forward it is about being committed to living below your means and cash flow (share same challenges, but on the upswing). :sharebeer
YttriumNitrate
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Re: Dave Ramsey's voice is in my head... [Portfolio help]

Post by YttriumNitrate »

Shredder wrote: If I were following Dave Ramsey to a T i'd deplete my E-fund down to pay off my student loan and part of my lesser car loan. I'm not willing to have only $1,000 in savings. I think our jobs are secure but that is a little too close for comfort.
I'm pretty sure that's the point of Dave's plan. You're not supposed to be comfortable on the first few steps...you're supposed to be scared out of your wits so you slash your expenses to bare bones to get out of debt and then rebuild the emergency fund as quickly as possible.
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Shredder
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Re: Dave Ramsey's voice is in my head... [Portfolio help]

Post by Shredder »

Longtimelurker wrote:Dude… $2.2k to take care of a baby and cover all repairs, clothing, living expenses etc?????????? I don't know if you are being dishonest with yourself, or you don't see… You are in financial TROUBLE!!!!! I cannot believe how relaxed you are about saying "well, we made the SUV decision before we decided to get serious about not spending out entire lives in debt. So, thats water under the bridge." Its insane!!

You are more then welcome to join the herd and live pay check to pay check, blaming everyone and everything except for yourself for the financial position you find yourself in - god knows the vast majority of Americans do this. But if you are in fact serious about financial health, I would not be dismissing past mistakes as "water under the bridge" that you choose to do nothing about. Lets be clear. YOU CANNOT AFFORD YOUR CURRENT LIFESTYLE + DAYCARE + RETIRE ON TIME. Period. End of discussion. The question is what are you prepared to do about it. From your posts thus far, I would say … not much.

Sell the car you cannot afford
Pay down the mortgage to get rid of PMI
Get you savings rate to 20%

Fail to do these things, and be prepared to spend your life on the treadmill - working for the banks. Good luck. Get SERIOUS!
I've wrote out several replies to this and nothing seems worthy. It is hard for me to grasp selling the car will fix things because it is not a fix that provides immediate relief. It is a long term fix. I will still need a car and the loan thing is not going to go away. I'll need one to get another vehicle. Even though things will eventually look up it doesn't help me from feeling down about this situation.
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Shredder
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Re: Dave Ramsey's voice is in my head... [Portfolio help]

Post by Shredder »

yatesd wrote:I don't think things look too bad. Almost the same as me. Same income, but I have higher mortgage (more equity), no car debt (just paid off), more student loan debt ($24K).

Don't know ages or current retirement savings to understand whether they are on track, but it sounds like they have been pretty committed to 401K. Personally, I would squash the student loans right away and not let the e-fund get below $1K.

Going forward it is about being committed to living below your means and cash flow (share same challenges, but on the upswing). :sharebeer
I have always contributed to my 401k since I had access. I am 29 and I started contributing when I was 22. We have roughly 85k. My wife just got access to a 401k so we are now getting her match as well.

We have 11k in our e-fund now. I'm getting some sort of bonus in the second week of April that i'll be putting toward either the student loan or the lower car loan. Once we get the hospital bill from our daughter's bill and have that covered i'd be okay spending a little of the e-fund if necessary. We are looking at $500 plus a maximum out of pocket of $3,000.
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Re: Dave Ramsey's voice is in my head... [Portfolio help]

Post by Longtimelurker »

You have a $32k vehicle that you have "$3-$4k equity" in. Yet you don't understand how selling it and buying a $15K vehicle helps? Here is the math:

$4k Equity
$28k Debt
=
gets you from point a to point b

alternatively

$4k equity
$12k debt
=
gets you from point a to point b

delta? $16k. What do you need to get to 80% LTV? About $40k. What do you need to get to 80% LTV after taking care of transportation much more cost effectively than today? $24k.

Its your choice. If the incremental ego boost of the nicer SUV is worth that $16k to you, at this point in your life - which is probably another 3 years of paying PMI - then have at it.

BTW: I am the tough love type. If you react poorly to that sort of coaching, please ignore me. I am not trying to de-motivate you. I am trying to give you a reality check.
Stay the course. If you can't resist greed, and fear is proven to be 2x as strong, you are doomed as an investor.
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Re: Dave Ramsey's voice is in my head... [Portfolio help]

Post by Laura »

You really do need to get rid of that heavy car burden. You are about to take on another, higher priority life expense, that baby. Babies cost a lot of money and you have little disposable cash income. You need to try to reduce your debt burden as quickly as possible or you will never dig out from where you are. This isn't meant to be discouraging but if you don't take some drastic steps now before the baby arrives you are going to quickly find your cash flow to be very tight. You and your wife need to sit down and really make some significant cuts to your spending and you need to do it quickly. Selling that car will either shorten the number of years you are paying or lighten your monthly cash flow for loan payments. It will make a big difference. It doesn't matter that you only have $3-4k of value in the car. The fact that you have been investing for many years is great so congratulations for that. Keep it up. But that $85k is offset by a huge amount of consumer debt (ignoring that mortgage) so your overall net worth still isn't where it needs to be.

Cut your expenses to the bone for a few months, sell the expensive car, and focus all extra cash on your debts. Keep adding to your investment accounts and by the time the baby is 2 or 3 you will find yourself in a great financial spot.

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.
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Re: Dave Ramsey's voice is in my head... [Portfolio help]

Post by yatesd »

Shredder wrote:
yatesd wrote:I don't think things look too bad. Almost the same as me. Same income, but I have higher mortgage (more equity), no car debt (just paid off), more student loan debt ($24K).

Don't know ages or current retirement savings to understand whether they are on track, but it sounds like they have been pretty committed to 401K. Personally, I would squash the student loans right away and not let the e-fund get below $1K.

Going forward it is about being committed to living below your means and cash flow (share same challenges, but on the upswing). :sharebeer
I have always contributed to my 401k since I had access. I am 29 and I started contributing when I was 22. We have roughly 85k. My wife just got access to a 401k so we are now getting her match as well.

We have 11k in our e-fund now. I'm getting some sort of bonus in the second week of April that i'll be putting toward either the student loan or the lower car loan. Once we get the hospital bill from our daughter's bill and have that covered i'd be okay spending a little of the e-fund if necessary. We are looking at $500 plus a maximum out of pocket of $3,000.
Fortunately, you are still young. I would get back to at least 10% on the 401K after getting rid of the student loan debt and the small car payment. Then ramp it up 1% a year until you are around 15%.

http://www.forbes.com/sites/baldwin/201 ... t-account/
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Re: Dave Ramsey's voice is in my head... [Portfolio help]

Post by Shredder »

I walked into a dealership to try to trade in my SUV and it didn't go well. I wasn't even able to get them to offer to pay off my loan much less 3-4k. I guess I should try somewhere else. I don't know the first thing about private selling but that may be my only option. Darn - I was hoping to get this done and moving in the right direction.
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Re: Dave Ramsey's voice is in my head... [Portfolio help]

Post by clubby »

Shredder wrote:I walked into a dealership to try to trade in my SUV and it didn't go well. I wasn't even able to get them to offer to pay off my loan much less 3-4k. I guess I should try somewhere else. I don't know the first thing about private selling but that may be my only option. Darn - I was hoping to get this done and moving in the right direction.
Private selling is your only option. You're NEVER going to get a stealership to pay you anything over low wholesale book for a trade in.
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Re: Dave Ramsey's voice is in my head... [Portfolio help]

Post by Shredder »

clubby wrote:
Shredder wrote:I walked into a dealership to try to trade in my SUV and it didn't go well. I wasn't even able to get them to offer to pay off my loan much less 3-4k. I guess I should try somewhere else. I don't know the first thing about private selling but that may be my only option. Darn - I was hoping to get this done and moving in the right direction.
Private selling is your only option. You're NEVER going to get a stealership to pay you anything over low wholesale book for a trade in.
What is the process for a private sale of a financed vehicle? Is there a release of interest? What is generally expected by and acceptable to a buyer?
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Re: Dave Ramsey's voice is in my head... [Portfolio help]

Post by jimb_fromATL »

Shredder wrote:
clubby wrote:
Shredder wrote:I walked into a dealership to try to trade in my SUV and it didn't go well. I wasn't even able to get them to offer to pay off my loan much less 3-4k. I guess I should try somewhere else. I don't know the first thing about private selling but that may be my only option. Darn - I was hoping to get this done and moving in the right direction.
Private selling is your only option. You're NEVER going to get a stealership to pay you anything over low wholesale book for a trade in.
What is the process for a private sale of a financed vehicle? Is there a release of interest? What is generally expected by and acceptable to a buyer?
It’s great that you are investing for retirement, and that you have reduced your debt and are living within your means – although just barely. IMO you should not reduce your contributions to retirement just to be able to keep an expensive vehicle. But your car payments are a BIG problem. If you or your wife were unable to work and/or have a reduction in pay for even a short while you’d be in a heap of trouble.

A big problem--that you've already found out-- is that vehicles depreciate pretty fast in the first few years, with the biggest drop the second you drive it off the lot. The more expensive the vehicle, the more it typically drops in value in the first mile and first few years. So you’re most likely upside down, probably owing several thousand more than you can actually get for it.

Since it is apparently upside down, the main question is whether it’s better to take that loss out-of-pocket now in order to free up the cash flow, or try to tough it out until it’s paid down enough to sell, or whether to keep it to amortize the depreciation out over several years.

As you’ve already learned, you are probably going to have to come up with a lot of cash in order to trade it or sell it. Trading it will just result in a bigger loan and bigger markup on the car you're buying (to hide the upside down amount). And selling it privately is not going to help much.
  • No astute buyer who has the cash is going to pay much over the true market wholesale value.

    Smarter buyers who do their homework and determine the fair market value in advance and arrange their own financing will not pay more than it's worth and will be limited to borrowing the amount that their bank or credit union considers to be the safe "bank loan value".

    And less-astute "payment buyers" who go by the payment alone and thus often end up paying more than fair market value will have to go through dealers who help arrange the financing in a smoke-screen of nebulous profit margin on the car being bought, an inflated trade-in value on the car they're trading, and financing ledgerdemain typically at higher than market rates. (by the way, that's essentially where the inflated KBB values for sales and trade-in values come from.)
So the first thing to do in this decision process is to find out how much it is really worth... what you can actually expect to get for it without having that amount hidden in a smokescreen of trading it to a dealer.

When you have a good idea of exactly how much you can get for it wholesale, then you can decide if it's worth the hassle and true risk to try to sell it yourself for a little more than wholesale value. (Though that's going to be a problem when you owe money and are upside down to boot.)

My post in This Thread goes into a lot of details to think about in determining its market value and how to try to sell it, including how to sell it when you’re upside down on it.

Another factor in your case is what make and model it is. If it’s a vehicle well know for longevity and dependability, it might be a slightly better bet to try to keep it. On the other hand if it is any European vehicle like a Volvo, Mercedes, BMW, Land Rover (or any Chrysler product) --which may routinely cost thousands more for maintenance and repairs even in the early years compared to makes like Toyota, Honda, or Nissan or even other American name brands-- then it’s probably better to go ahead and take the depreciation loss now in order to avoid the probable high maintenance and repair costs in the future, as well as to get rid of the big payment.

Another point to consider is whether you have the cash to pay off the difference if you can't get more for it than you owe on it. That would be hidden in a bigger loan and higher rate if you were trading it in and letting a dealer arrange the financing. If you sell it your self but don't have the cash, you'll have to talk with your bank or credit union about an unsecured loan for the difference -- which you will need at the time of the sale.

jimb
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Re: Dave Ramsey's voice is in my head... [Portfolio help]

Post by clubby »

Shredder wrote:
clubby wrote:
Shredder wrote:I walked into a dealership to try to trade in my SUV and it didn't go well. I wasn't even able to get them to offer to pay off my loan much less 3-4k. I guess I should try somewhere else. I don't know the first thing about private selling but that may be my only option. Darn - I was hoping to get this done and moving in the right direction.
Private selling is your only option. You're NEVER going to get a stealership to pay you anything over low wholesale book for a trade in.
What is the process for a private sale of a financed vehicle? Is there a release of interest? What is generally expected by and acceptable to a buyer?
Private vehicle purchasers understand that almost nobody but bogleheads have the title to their vehicle. :mrgreen: If it's a local lender, a credit union for example, you can simply walk in their and have him pay them directly at which point the credit union will have him sign some papers and then have the paid off vehicle titled in his name or if it's a national lender with no local branch, he can make a cashier's check payable directly to the lender. They'll reimburse you the difference after applying the current payoff. It involves some level of trust. Remember, if the guy somehow manages to steal your vehicle, it makes him a felon and that's covered under your insurance. That's actually the best thing that could probably happen. :moneybag
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Re: Dave Ramsey's voice is in my head... [Portfolio help]

Post by Laura »

Congratulations on making the difficult decision to sell the expensive car. That decision alone will go a long way to improving your overall financial situation. It was a tough thing to decide but a very wise decision. To help you figure out the value of the car you can look at websites like Kelly Blue book at http://www.kbb.com. That should help you figure out a range of prices. You can also look at how much the recommending paying to buy a car like yours which will be what buyers are looking at. Hopefully this gives you just enough to pay off the loan so you end up back at zero when looking for a new car.

At the same time, you should be looking for another car financing option for the next car. Look into credit unions, your bank, and dealer financing. You do not want to buy a new car the next time around so look for a slightly used vehicle in good condition that offers the best financing deal. The car is to get you from point A to point B as inexpensively as possible in a reliable vehicle. Your insurance rates will probably go down as well as you lower the value of your vehicle. That will give you some additional savings.

I have sold several cars myself and this isn't difficult at all. A craigslist announcement, newspaper announcement, or other relevant announcement for the area you live is all you need to get you started. Put a sign in the car window as well. Make sure you are in touch with your loan company in advance to understand what you need to do to pay off the loan and how long it takes to get the title or to clear the title. The release on the title will probably be reported electronically to places like the department of motor vehicles (or whichever agency handles car titles in your state) so the new owner can do the paperwork quickly. When you sell the car, remove the license plates. They are in your name and should stay with you, not the car.

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.
clubby
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Re: Dave Ramsey's voice is in my head... [Portfolio help]

Post by clubby »

The license plate things varies from state to state. In CA, all but personalized plates follow the car. Check with your individual state.
Laura
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Re: Dave Ramsey's voice is in my head... [Portfolio help]

Post by Laura »

Thanks for the correction on license plates. As always, everything varies from state to state. :happy

Laura
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Re: Dave Ramsey's voice is in my head... [Portfolio help]

Post by Longtimelurker »

OP - I am IMPRESSED! Most people who receive advise they don't want to hear will ignore it. Congrats on having the courage to pursue the right course for your family. :sharebeer
Stay the course. If you can't resist greed, and fear is proven to be 2x as strong, you are doomed as an investor.
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Re: Dave Ramsey's voice is in my head... [Portfolio help]

Post by Longtimelurker »

I sold a car privately. I used Craigs list and eBay. My buyer came from the eBay channel. Very easy to do. Require Certified Check, Money Order, or Cash.
Stay the course. If you can't resist greed, and fear is proven to be 2x as strong, you are doomed as an investor.
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Re: Dave Ramsey's voice is in my head... [Portfolio help]

Post by Shredder »

I had checked KBB and Edmunds to get an idea of the worth but they don't have 2014 model years yet. It is a Kia Sorento SX AWD. The MSRP is near 39k and invoice is 36k. It is financed through a local credit union. I imagine it will be paid off with a private sale. At least I hope.
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Re: Dave Ramsey's voice is in my head... [Portfolio help]

Post by Laura »

You will probably be able to get a very good price for a nice 2014 with low mileage in a private sale. Good luck with that process. While doing that, starting to narrow the focus for a replacement vehicle would be a good idea. You will want to move quickly once you sell your current car.

Laura
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Re: Dave Ramsey's voice is in my head... [Portfolio help]

Post by jimb_fromATL »

Laura wrote:You will probably be able to get a very good price for a nice 2014 with low mileage in a private sale. Good luck with that process. While doing that, starting to narrow the focus for a replacement vehicle would be a good idea. You will want to move quickly once you sell your current car.

Laura
I do think it's a good idea to sell the vehicle. I suspect that it will most likely be at a several thousand dollar loss, but it's probably worth it provided it will bring at least enough to pay off the loan. Even better if there's enough extra to make a down payment on a much less costly vehicle.

(Considering the OP's cash flow, tax bracket, budget, and family status, it's probably better to finance a new(er) but much less expensive vehicle at today's low car loan rates than to tie up a lot of cash in it for the time being.)

The problem with getting a great price for it is that a 2014 has depreciated considerably compared to a new one. Just a few thousand off the cost of a new one's MSRP is not a good deal for most folks who can afford and are willing to pay 35-40K for a vehicle -- other than payment buyers who don't shop for price -- but who can only go through a dealer for financing.

Plus, since this is a top-of-the line model, a lot of folks would choose a few less gizmos in order to have a new slightly less expensive new one than pay more for a used one that isn't essentially any better and has much less warranty. (Another downer for resale to compete with new less loaded ones is that the KIA 10 yr 100K extended power-train warranty drops to 5 yr 60K for the second owner.)

Yet another problem for getting a lot in a private sale is that some dealers are already advertising the updated 2015 model. That means that dealers and the manufacturer will probably soon be drastically discounting 2014 models to make room for the 2015s.

So ... except for payment buyers at dealers, most potential buyers who do their homework aren't going to be willing to buy even a slightly used high-line 2014 model unless there's a many thousand dollar advantage over the price of a discounted slightly less fancy new one -- not just a few thousand.

jimb
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Re: Dave Ramsey's voice is in my head...

Post by LadyGeek »

This thread is now in the Personal Finance (Not Investing) forum (car affordability, loans). I restored the thread title, as it's mainly about personal finances - not constructing a portfolio (my error).
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Re: Dave Ramsey's voice is in my head...

Post by Shredder »

I'll post it privately and see if I have any action show up. I appreciate everyone's contribution. I hope to be back on track shortly.
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Re: Dave Ramsey's voice is in my head...

Post by NorCalDad »

Shredder wrote:I'll post it privately and see if I have any action show up. I appreciate everyone's contribution. I hope to be back on track shortly.
Given your positive attitude and willingness to move forward, I'd say you're already on track. Good luck!
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Re: Dave Ramsey's voice is in my head...

Post by wannabefree »

I have been reading this thread with interest because I also went through the Dave Ramsey classes about 5 yrs ago . I even hosted a class for our Church so I am pretty familiar with what Dave says and preaches. First I am not a DR koolaid drinker and do not think everything he says is the gospel. I do believe that at least in the beginning is way is best until you get a good grip on your true financial situation mostly because the biggest thing you need to do is retrain your brain on how you look at money and get really honest with yourself. Debt is evil and in my opinion and should be avoided when ever possible. I do think that some debt is almost unavoidable such as a Home mortgage and even your primary car but it can and should be limited when ever possible. Credit card debt on the other hand is just plain dumb and is normally just the by product of living beyond your means. I am not the kind of zelot that says you have to cut up all your cards but they should only be used when necessary and paid of monthly if at all possible. OK sorry if that sounded like a promo for DR but I just wanted to set the stage.

Most all of the advice to sell the car and increase your savings is good advice but ! Before I would make such blanket suggestions I would need to know in much more detail what your monthly budget looks like on both a monthly and annual basis. Most folks do not actually track every penny they spend and set up rainy day funds for things like insurance , cloths, vacations, car repairs and all the other known or predictable expected expense. it took me a minimum of 6 mos budgeting and tracking every dollar and where went or as DR would say giving every dollar a name. Most folks just so not want to do that and cheat themselves out of the opportunity to actually get a grip on there finances. I found that once I knew where EvERY DoLLAR WAS going could make better choices and skipped a few trips to Starbucks and did not need to go out for lunch every day or any number of other ways I was blowing money on things that really were not necessary. I had more money to pay down my debts which in turn was like getting a raise , It was like free money.

So before you make any rash decisions about selling your car vs paying off your student loans do some serious work on you budgeting skills. I would bet that there is a lot more money being wasted that could be redirected at debt or savings goals than you realize. Also some may disagree but I would rather be debt free than have a lot of money in savings that was owed to someone else. In the end your net worth is what is important not the size of your retirement account. I make a game of it now and its fun to budget as it is empowering. if you want a good budget program i suggest YNAB " you need a budget". Its sort of a modified DR plan on steroids where the goal is to budget one month ahead always always budgeting this month on last months actual income staying one month ahead. its better than the DR $1000 emergency fund idea. imho

good luck, Dave
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Re: Dave Ramsey's voice is in my head...

Post by Shredder »

wannabefree wrote:

So before you make any rash decisions about selling your car vs paying off your student loans do some serious work on you budgeting skills.
Dave, thanks for the advice. I have spent the weekend going through my budget trimming some fat. I downgraded my tv package. I even found that my budget is only for 2 pay check months so I'm missing 4 household pay checks yearly. That is 6-7k that can go toward a loan this year. My mother is quitting her job to watch my niece while my sister finishes her RN and offered to watch my daughter too for free. I know they will be tight due to her lost income so I offered to pay $500/mo for the halftime coverage we need. This is a lifesaver over paying full time for partial use. That's $700 saved in daycare and $50 saved in TV fees monthly. I am using Mint and I love how easy it is to track things with. My only issue is that it counts purchases in my 401k against me but I have them already deducted from my check so I'm doubly impacted. I just hide those each pay period.
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