He solved for me one of the great mysteries of paying off debt - everyone says there's no point having savings when you're paying off debt. But what happens when the car blows up. Or the boiler breaks down. How do you pay for emergencies? On credit? Then what's the point of paying off the debt in the first place?
Dave's plan makes a lot more sense.
Step 1 - First you start paying the minimum amounts on your credit cards. As quickly as you can you build up an emergency savings pot. Dave recommends $1000, although if you earn less than $20,000 drop this to $500. I'm working on worst-case scenario and assuming that I will bring in only part-time income for six months - which amounts to £16,200 before tax - so I intend to have an emergency account of about £500. If I earn any extra I will add my estimated self-employed tax payments (30% of my income) into this as an extra buffer. That means once business expenses are taken into account I should have some leftover at the end of the year and I can use it as an extra debt payment.
Step 2 - Then you take the smallest debt and pay that off. Once that's gone, you add what you used to pay onto the next debt. This starts a snowball. Dave suggests starting with the smallest debt so you get a quick win under your belt. Again, a lot of debt payment plans suggest paying the debts with the highest APR first, but for me that's the biggest debt. If I started by doing that I'll be paying that thing for months and months. I'm someone who needs a reward now and then, and Dave's way I would get a reward more often in the beginning when my debt-paying muscles are weak. By the time I get to the biggest, ugliest debt I'll be stronger and desperate to see it go. If you have an emergency, you use the money in the savings account. Then you go back to baby step 1 and minimum payments on the debts and build that emergency savings up again.
"When you pay off a nagging $52 medical bill or that $122 cell-phone bill from eight months ago, your life is not changed that much mathemetically yet. You have, however, begun a process that works, and you have seen it work, and you will keep doing it because you will be fired up about the fact that it works." Dave Ramsey
Step 3 - Once the debt is gone, you then start building up your savings to cover 3-6 months of living expenses, so if you lose your job or need money for medical expenses etc you can afford it.
Step 4 - Once that's done, you then increase your payments (or start paying) into your retirement plans. Dave suggests 15% of your income should be put into this in addition to what your employer pays in but exclude any State pension. Do not rely on this in any way, shape or form.
"I don't count on an inept government for my dignity at retirement, and you shouldn't either. Getting older is going to happen. You must invest now if you want to spend your golden years in dignity." Dave Ramsey
Hubby has a pension at work he has been paying into for the last 16 years. It's not a lot, but it's a start (I have to check what he pays and what his employer pays). I don't have one but will need to sort something out when I start work next week otherwise I will be enrolled into the company's scheme. As the job is only a six-month contract, I think that would be a waste to leave the money sat there after I go so I've got to sort out a stakeholder pension. I will be putting in 3.75% every month and the company will be putting in 7.5%.
Step 5 - The next part of the plan won't apply to us - college funding for your children. We have decided not to have children. We can't rule out the possibility that one of us may go back to university, but at the moment I can't see that happening unless hubby is twiddling his fingers when he retires.
Step 6 - Pay off your mortgage early. We are already paying extra this off to the tune of £150 a month. We are breaking with Dave's plan on this point and carrying on doing it all the way through. We've been doing it for nearly four years.
Step 7 - Build wealth and give. This is a long time in the future ad I can't right now even imagine what this would look like.
I want us to have paid the debt off and be working on baby step 3 within 3 years.
I want us to be at baby step 6 within 5 years.
We have life insurance so if anything happens to one of us the mortgage is covered. We have wills, although I'm not 100% happy with how they have been written so I need to check and see if they are fully legal.
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