I believe the author of the blog made few incorrect points and with my rambling still I thought a blog might be needed to encompass what I wanted to say.
So the major assumption that Dave makes is that the individual is not making enough to attack all the goals on has (reducing debt, saving for college, saving for retirement, emergency fund, etc.). So he lays out a road map to get you to a stable base as quick as possible. These are the first three steps (1,000 emergency fund, all debt paid off but house, and fully funded emergency fund).
And, he wants these three steps not to linger. You want to get on them and knock them out. He wants you very focused on these steps. Once you get through step three, he usually let’s people loosen up. You want a vacation? Go ahead but pay for it in cash. You want to go out for dinner and a night out. Go ahead, make sure it’s in the budget.
As for step 4, 5, and 6; these should all be done at the same time (15% in retirement, college for kids, and pay off home).
As for the compounding argument made by the author, it really doesn’t hold much weight. Isn’t the compounding on your debt working against you? And aren’t those interest rates generally higher then what you are earning in your retirement accounts? Also, Dave Ramsey has said that the first 3 steps should only take a couple of years and not longer.
In general, people who are trying to reduce their debt are not saving 15% towards requirement. In fact in general, I would argue that most people are not saving 15% of their income.
The argument I make is that if you could get out of debt and live within a budget, it is far easier to reach that goal then if you have to make debt payments.
And if you look at his plan as a diet, it is an intense diet for about a year. During that time, your doing things like changing your attitude and habits with a small safety net to catch you. And after step 3, it’s all about maintaining.
And, step 7 is all about getting to the point in life where your money makes more then you and you can coast. Do what you want. And that is living like no one else.
Now in all honesty, if I was following Dave’s advice. I would dropped my emergency fund to $1,000 and stopped contributing to 401(k). I didn’t do this, but I am on a budget and intense on getting rid of my debt. And I will be through step 5 by the end of the year.
Response to SA Blog
May 19th, 2008 at 04:52 pm
May 19th, 2008 at 05:41 pm 1211218912
May 19th, 2008 at 05:50 pm 1211219438
Target up 76 cents .. nice.
It was "the" SA Blog not "a" SA blog.
May 19th, 2008 at 06:02 pm 1211220128
Yeah, the day is ticking up so far... momentum probably by a soft but still positive earnings preview. I kind of guessed that might happen... and even if I was wrong, I figure the risk of a serious loss is still unlikely (short of a big wheel making a huge sell).
But I'm not going to lie. This is me speculating on the future, and even I realize how dangerous that can be.
Still, relative to the rest of the portfolio, the money is only a small percentage of the total involved, so the risk isn't as bad as it may seem.
Hey, everybody needs a hobby right? For once, at least this one is posting a paper gain... even if it's only been for one day.
Oh, but but didn't mean to hijack your entry.
May 19th, 2008 at 06:34 pm 1211222078
May 19th, 2008 at 07:47 pm 1211226446
May 19th, 2008 at 09:01 pm 1211230896
sagegirl - Why is getting rid of debt ASAP a bad thing? Because sometimes it makes more sense financially to invest rather than pay off debt. Mortgages are the perfect example. I could pay off my mortgage tomorrow with savings if I chose to, but our investments earn far more than our mortgage costs us. We would lose money if we paid off our debt and that just doesn't make any sense.
May 19th, 2008 at 09:18 pm 1211231896
May 19th, 2008 at 11:00 pm 1211238056
Personally, I think you should do both. Pay more than the minimum so that you aren't carrying that debt forever, but also be investing at least enough to get the full company match.
If you don't have a 401k, at least fully fund a Roth.
May 20th, 2008 at 03:13 am 1211253203
To tell you the truth, since I've never had debt (other than mortgage), and by the time I heard of Dave Ramsey I was already well on my way to knocking off Step 6, I have never read any of his books....Not because I thought his advice was bad, but just because I thought it did not apply in my case.
It's good to hear that he allows for some flexibility ... I do have a problem with "my way or the highway" approaches. Since there are so many variables in personal finance, I cannot imagine any one approach that could fit all people.
My mantra is that the "best" financial plan is the one that works for you!