The Dave Ramsey Method

Image result for google image total money makeover

As I’ve mentioned before on the blog, we use the Dave Ramsey method of budgeting and finances. If you want to know more about Dave Ramsey, I recommend starting with his book- The Total Money Makeover. This is the book that really lays out the budget-specific parts of his financial plan.

We chose the Dave Ramsey plan for a couple of reasons.

  1. Someone my husband worked with recommended it – We weren’t really looking for a budget or financial plan, but someone recommended this book to my husband and after we both read it, we really felt inspired by the plan (note- not inspired enough to actually commit for another 2-3 years, but inspired to at elast start thinking about money)
  2. It’s a financial independence plan (not just a budget)- My husband and I are fiercely independent people, so neither of us really liked being financial beholden to others. But growing up, my experience was that was just a way of life. You had credit cards and debt and car payments and a mortgage and that was just normal. Dave Ramsey’s idea that you pay for things in cash and not buy them if you can’t pay cash was revolutionary to me (which sounds super sad in retrospect, but there you go). In any case, his plan is all about getting rid of debt, not just organizing your life and finances around paying for your debt.
  3. It’s behavior based- The principles that Dave outlines in his book (more on that in a minute) are based on behavior. His book uses behavioral principles, rather than solely financial best practices. His reasoning is that all the good finance in the world won’t help someone with a behavior problem, so you need to address the behavior problem to sort out the finance problem (I’m dramatically oversimplifying here, but that’s the basic gist). This principle is so true of pretty much anything that presents a challenge to someone and I’ve found myself applying this principle to other areas of my life beyond budgeting.

The Dave Ramsey Plan

I’m going to be concise and gloss over a lot here, but these are the basic tenets of the Dave Ramsey plan (with more attention given, by me, to the beginning of the plan). You are supposed to follow, in order, the baby steps that Dave lays out.

Step 1: Save $1000– Did you know that 60% of Americans wouldn’t be able to cover an unexpected $500 bill? This is the point of this baby step. Emergencies happen and the first thing you have to have in place is some easily accessible cash to cover that.

Step 2: Debt snowball– This is where the magic happens. In this step, you make a list of all your debt (not including your mortgage) and list it from smallest to largest. Then, any extra money you can cut from your current spending gets applied to the smallest debt first. The idea is to get something paid off quickly and get what Dave calls “quick wins.” Then, you take whatever you were paying on that debt and apply that amount to the next smallest. And so on. Hence the snowball- each paid off debt snowballs more money into the larger debts.  This step is controversial for a lot of people, because you pay off debts in order from smallest to largest and ignore all other details (like interest rate). So you could theoretically be paying a student loan with a low interest rate first over a credit card or car loan with a higher interest rate.  It seems counter-intuitive, but the psychological win of actually paying something off helps motivate you further. And it’s true! Paying off debt makes me want to pay off more debt.

Step 3: Build a true emergency fund that covers 4-6 months of basic expenses.  Basic expenses include housing, utilities, transportation and food.  The essentials. What you would need to get by until you found another steady source of income.

Step 4/5: Fund retirement and fund college savings accounts. These are the steps that happen only once your debt has been paid off. The idea here is that you put nothing  toward any of these accounts until the debt is gone (more on that tomorrow). Dave always says “pay yourself first,” hence the reason that funding retirement comes first.

Step 6: Pay off the house!

Step 7: Build wealth and give back

Ahem. We’re obviously a LONG way away from steps six and seven.  But hopefully one day I’ll be able to come back here and tell you all that we’re there. But not yet.

That’s it, my friends. The Dave Ramsey plan in a nutshell. Deceptively easy and simple. Check back in tomorrow- I’ll be talking about our take on the Dave Ramsey plan.

 

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Our Financial Journey/ Welcome to the Blog!

Our family’s financial journey starts with a whole lot of debt.

Hi!

I’m Liz and this is my blog about my family’s journey to financial independence. My husband and I have been working (for a long time) to pay off student loans, but it’s easy to fall into the mindset of “needing all the things.” At least, it is for me. So I’m hoping that this blog will keep me accountable for our spending as a family (and help me commit to things like updating my budget monthly and tracking expenditures). Expect posts that are part finance, part frugality and a lot of humility. Hopefully we can all have some fun along the way!

About our finances:

My husband and I use and follow Dave Ramsey’s* Total Money Makeover plan and we use his EveryDollar budgeting software to create and track our expenses on a monthly basis. We’ve also been through his Financial Peace University (FPU) course, which was fantastic. This software can be linked to both credit cards (although Dave Ramsey strongly discourages the use of credit cards) as well as bank accounts.

About our debt:

Oh man. This is a hard section to write. I never like talking about money (half of the motivation for starting this blog is to make ME feel more comfortable talking about this stuff) and I REALLY don’t like talking about all the money we owe (or owed). I’m a little late to the blogging game, as we’ve already paid down some debt, but back when we started the Dave Ramsey plan (like…6 years ago?), this is what our financial picture looked like:

DEBT (seriously, all the debt).

  • Car Loan (I want to say this was roughly $10,000? I can’t remember now)
  • Student loans. The big motherload. Roughly $225,000. Maybe more. I can’t remember exactly, we’ve been paying on them so long. It was so much money that the FPU leaders thought we’d messed up and included our mortgage when reporting our debt (HAHAHA). This was a mix of both federal loans (slightly less bad, still bad) and roughly $60,000 in private student loans (holy batman bad. So bad. Don’t do this.)

In total seriousness, those numbers above are why I need this blog. It makes me sick to think that we jointly owe ANYONE that much money.

Where we are today (June 1, 2017): 

  • NO car loan
  • NO private student loans
  • $153,108.14 in federal loans

For those of you doing the math, we’ve paid off about $70,000 in debt over the last six years. $11,500 a year. I am PROUD of that number. Sometimes debt can feel pretty overwhelming, so it’s nice to look back and celebrate everything we’ve accomplished so far.

So welcome to my financial life! It’s going to be a messy ride!

*I have to be honest and say that I do have some ethical qualms with Dave Ramsey and this plan. This may have changed recently, but when we went through Financial Peace University, we found out about halfway through that LGBTQ couples weren’t allowed to participate. This is horrendously awful and I know our church at the time would have allowed them to participate anyway, but I felt like crap knowing that they wouldn’t be *technically* allowed to participate. This is an issue I continue to wrestle with, because we have not found as much success with any other budgeting plan (and paying off debt will allow us more money to donate to causes that are near and dear to us) but again, discrimination.