Dave Ramsey Fans, Help Me Out Here
December 16, 2007
In the last year or so, I’ve become a fan of Dave Ramsey and his 7 baby steps. We’ve started the debt snowball, but I can’t seem to agree to putting $1000 in an emergency fund while I could be using it to pay down debt that is actively accruing interest a higher interest rate.
As I mentioned in my goals for 2008, I’ve been able to put together $1000 before in a savings account, but I ALWAYS get ants in my pants about paying off my debt. If I have $489 left on a 9% credit card, wouldn’t it make sense to pay it off with money from a 1.8% savings account? I can’t escape this thought, and it’s preventing me from saving the $1000.
I mean, if I’m really supposed to be saving 3-6 month worth of expenses for my emergency fund (which I totally agree with, and plan to do), what good is $1000 going to do? Say I have $1000 in my emergency fund and I need my car fixed for $1400? Where am I going to get the extra $400? Probably a credit card. So what’s the point if I have to use my credit card anyway?
I thought that paying down higher interest debt trumps saving.
I understand that his point is to limit or remove the dependency on credit cards, but isn’t it better to continue “playing the odds” and get gazelle-intense and put all extra available cash toward debt? I think so.Some will say that this mentality is what got me into debt in the first place, but I disagree. I understand that it’s my behavior and my past attitude that credit is like free money that has gotten me here.
I guess I’m just struggling with the math of it and every ounce of me wants to put every cent I can toward my debt.
Interestingly enough, looking back at my post for my goals for 2008, I noticed that I put it 2nd, behind paying off all my debt. I guess my goals don’t exactly align with Dave right now, like fully funding my Roth IRA before I save the 3-6 months in my emergency fund. I’ll have to look at that one again, but for now I feel comfortable with them.
Right now, facing credit card bills, I’d rather use my credit card as an emergency fund than have $1000 sitting around doing nothing for me.
Please don’t shoot me DR fans! I’m a fan too, and this is really the only beef I have with him.
photo by Arkansas ShutterBug
Posted in Credit Cards, Dave Ramsey
January 1st, 2008 at 11:34 am
I think we have to do what works for us. Not having an emergency fund and using credit as the emergency money can work for people. It is all a matter of what works for you.
For me, credit makes me anxious. The idea of using credit for my emergency fund makes me uncomfortable and I know I would be worked up and obsessed over every emergency. For example, my car’s brake lights have decided not to work and it isn’t the bulbs, it is probably something electrical. Without my $1000 emergency fund, I would feel sick right now. Instead I just feel a bit worried and mostly irritated.
Of course emergencies over $1000 can happen but for me it is a balancing act – how much to save that isn’t paying down debt vs how much I think an emergency might be. there isn’t a one size fits all.
January 1st, 2008 at 10:54 pm
paidtwice – thanks, I’m glad to hear your perspective that it can be different for different people. I DO feel better having 1K in a savings account, but I feel even better paying off 1K in debt.
But having said that, I’ve started an automatic transfer to my savings account that should get me to $1000 in a few months. I just feels WISE, i guess.
March 31st, 2010 at 10:42 pm
Good Gracious, O’Malley! No one should have less than a thousand dollars in cash beyond their monthly expenses.
My own personal opinion.
One thing I do in situations like you are describing is calculate how much overall it’s going to cost me to keep the money in savings. For a $468 debt at a 9% interest, that’s $42 if you let it run for a year. But you can’t do that, so let’s say you’d pay it off in one year. Then it’s costing you about $21 for the year. And if you’re paying the debt off in 6 months, about $10 total. And paid off in 3 months it only costs you like $5 total interest.
Actually, the real cost is less because I forget to use the interest rate differential between the credit card and the savings account, which is probably around 7.1% instead of 9%.
AFter running a calculation like this, I can see the cost of different approaches and if I can live with any of these figures. And make my decisions accordingly.