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

Pilotdude3407

Here is the core of what DR preaches.

1.) Home mortgage is the only appropriate debt because you (should) have a decent amount of equity in your home. Cars keep very little if any equity so it is bad debt and in his perfect world you shouldn’t get a car loan anyway. We all know that is not always feasible so you can have one but it is as bad as credit card debt. Pay it off.

2.) In terms of paying off debt, he would want you to keep your emergency fund in tact Vs paying off the debt however it should be a priority to pay off debt.

3.) how to pay off debt he says to budget your monthly expenses including some fun money but any remainder should go to debt. You will pay the minimum on all credit cards and cars and take the lowest debt and add anything extra you can to it. When it is paid off, use all of the minimum+extra you used for that debt and apply it to your next lowest. Pay that off, then take all of that and apply it to the next highest, so on and so forth until you have snowballed your debt gone.


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drywhitetoast

Dave's getting out of debt program is awesome. His investing advice is terrible.

iceman21

Www.choosefi.com

I love Dave's method but once you are in control of your money, as the previous poster stated, you are not getting the best bang for your buck using Dave's investment advice.

JayBee

"In terms of paying off debt, he would want you to keep your emergency fund in tact Vs paying off the debt however it should be a priority to pay off debt."

That was my biggest hang up, didn't make sense to abandon the emergency fund to payoff what amounts to a pittance of interest money. I agree in a 'perfect world' I would pay cash for a car and plan to in future purchases. I accept that the car loan sets me back to a degree and that's the price I pay for convenience of a new car now versus later.

"His investing advice is terrible."

Interesting.

"choosefi"

thanks for the link

loganeich

I paid my house off around 5 years ago, and incredible how much freedom you have to save with no payments. My retirement and daughters college fund are growing very quickly.

Pay your car off as soon as possible, but keep existing emergency fund. Maintain the same lifestyle and roll the savings from your car payment into your mortgage payment as extra. Let’s say your car payment was $400, then that would be an extra $4,800 a year in principal reduction on your mortgage. You can look at an amortization schedule to see how far this shortens you’re mortgage just by doing one year. The reason he says to pay smallest debt first is to snowball those payments towards the larger debt. “Debt snowball.”

I’m not a great source for flying knowledge, but know a good bit about money, taxes, and business. I regret at 42 is that I was not more aggressive in my 20’s. A little more effort back then compounded over 20 years would have been great.

aviatormjc

Can you explain your reasoning?


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SonicFlyer

Because it is a one-size-fits-all square peg in round hole very generic and overly simplistic advice. Also past performance has nothing to do with how an investment instrument will perform in the future, Dave doesn't understand this (or bother to explain it to his listeners).

In short, he is on the right track, but he leaves out a lot of detail which will cause people to not see the returns they should be seeing for the same amount of risk.

Telling people "broad based mutual fund" is silly.

How about this:

no load, not actively managed funds in US large, value, large value, small, small value, int'l large, int'l small stocks, and of course some in bonds and cash. Dave's advice isn't diverse enough.

Also, a bit riskier, is to do real estate / rental properties with loans if you're smart about it the risk is still pretty minimal. You have to be in a financial position to do this but it is possible. Rental debt secured with real estate is pretty low risk, but again, it assumes you know what you're doing and are careful.

SonicFlyer

There are some good low risk options for just that out there:

https://youtu.be/UwWeHSuU4WA

aviatormjc

Graham Stephan is a cocky 29 year old that has no business giving financial advice. I followed him for a few weeks and his videos are clickbait packed with no real substance. I disliked and unsubbed from his channel. Just like his merch that says “dislike. unsub.”

I’ve followed Dave Ramsey for 8+ yrs and have gone from step 1 to 7 in those 8 yrs. I’ve just completed Step 6 end of OCT and I fully standby Dave Ramsey and his teachings.

Dave Ramsey does not teach broad stroke mutual funds. He suggests mutual funds that are Growth, Growth & Income and Aggressive Growth which are also classified as Large Cap, Mid Cap and Small cap. And then one International mutual fund. So that’s 4 funds, 25% each.

He does suggest no load mutual funds if your are saving up to buy real estate with cash. So once you hit $100-$150K you pay less in fees when you pull that money out to buy the real estate.

He does not suggest REITs. He believes in owning real estate you can physically put your hands on.

Dave Ramsey loves real estate. He suggest that every time you save up $100-$150K, you go buy some property.

He believes the quickest path to wealth is by not having debt.

The advice he gives is the same advice he follows. He has a net worth close to 60 million and zero debt.




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