Originally Posted by
JayBee
Any of ya'll follow Dave Ramsey? A friend of mine turned me on to him. Seems pretty legit but I do have a question about his process.
For those unfamiliar he has this deal called 7 baby steps -
1 - Save $1000 emergency fund
2 - Pay off all debt except house
3 - Save 3-6 months of expenses in an emergency fund
4 - Invest 15% of income in retirement
5 - Save for children's college fund
6 - Pay off home early
7 - Build Wealth
So basically on my own I was already doing some of this so my question has to do with procedure. I have steps 1,3 & 4 done. Step 5 does not apply. My only debt other than the house is a car loan. I have enough money to pay off the car, however before coming across Dave's advice I was going to put that money towards my mortgage. I'm not the most mathematically minded guy but I assumed I would save a ton in amortization over the long term.
If I was to follow Dave's advice I would pay the car off and then work toward paying off the mortgage. It makes sense but as previously stated wouldn't the money go a longer way over the long term if I threw it at the mortgage? What about putting into retirement savings?
Also, paying the car off would take my 6 month emergency fund down to 1-2 months... I know I can build it back up at a faster rate but... its kind of relaxing to know that I have 6 months of bills in the bank. That begs the question though - what can I do with that money to earn back on the short term? something that I can access the money if need be? rather then just sit in my bank at 2%
Thanks
If you are serious about cleaning up your finances you first need to see where you are spending your money. Check out a financial aggregator like Personal Capital (my favorite) as it will boil down where your spending goes each month/year.
What is interesting about this approach is it allows you to focus on where your money is going. If you want to become financially free you must do two things a) reduce overhead expenses and b) buy things that make you money, not cost you money.
The argument that a car is bad debt is superfluous. I would argue it can be good debt (if reasonable and reliable) AND bad debt (if you bought a luxury car). Same goes for a house. You have to live somewhere, but at some point a house really becomes a liability as it costs money to maintain, heat/cool, and pay taxes on. So clearly something larger and more expensive than needed (not wanted; two very different things) becomes a liability.
I have no idea what your background/working history/age is. But at the money we are making now as professional pilots, there is ZERO REASON to be struggling. And a 15% savings rate is absolutely horrendous.
In 2019 our net worth increased $600k (we are in our 30's). If I had decided to pay off mortgage debt instead of investing the money instead, it would've been a LOT less.
As an example, $250k would've returned $75k in the market last year. At 3% interest you would've "saved" under $10k in interest paying that down. You would've lost over $65k paying off your mortgage...in a single year...
Low interest debt is not a big deal as long as you are accumulating assets. It's leveraging up and buying the big house, $40k-$50k car, etc while having nothing to your name that gets people in trouble.
Things will turn for this profession. If it's not the economy it will be single pilot or autonomous vehicles. The getting is good right now. Stuff cash hand over fist into investments (SP500 fund 100% is my recommendation, nothing else needed beyond rentals if you want to expand your base after hitting a mil or so) and keep expenses low. Make hay while the sun is shining.