Dave Ramsey.. Total Money Makeover... Question

myfampgJune 13, 2011

This is a question I would love to ask Dave but since I got such great feedback here last time I posted, I thought I would start here this time.

Husband and I are on our 'snowball' adventure, babystep 2.. Paying off credit card debts, then to pay off 1 car, a personal loan and last but not least attorney fees to my parents which they so generously helped me with on a custody case. I was awarded attorneys fees to be paid by my ex husband so hopefully if he ends up paying, we won't owe so much.

This all should take just under 2 yrs. Of course the ever so optimist I am married to says, it could be sooner should we get raises and bonuses as we 'hope' to receive, however I am making future plans based on my income today.

We are renting and our lease is up in April 2012. We have always planned to move and lease a home rather than the apt we are living in now. To move in April we will need a deposit, first months rent and any additional moving expenses. We also have found most rental homes do not provide a fridge, so we would have to purchase one. In order to have this type of savings we would have to stop our snowball plan and start throwing large amounts of money towards the savings and after we get that $ amount we could begin our 'debtfree' plan again. My suggestion was that we should probably stay where we are instead of moving. The rent on a house is going to be similar to what we already pay now and we would also have to consider the 'extras' of having a house. Such as lawn care, a fridge, a possible landlord that doesn't repair problems as quick as we are used to here. My husband is ok with that decision but also reminded me 'we hate it here'. Doesn't it sound like a better idea to stay here for another term while paying off our debts, instead of stopping for ten months to save? Opinions please?

Also, once we are debt free we are going to be able to throw $2500 a month into savings to start saving for a home. I suspect that after a year of savings we should be ready to buy a house. Where is the best place to put $2500 a month for savings for a down payment on a house purchase?

Thanks so much in advance for taking the time to help me out.

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I'm not Dave, but I can tell you what he would say.

No, you shouldn't be saving for a home yet or moving to a bigger rental. You need to keep your expenses low, really crank down on all spending, and pay off your debts as quickly as possible. If you start spending more before you get your debts paid off, you lose intensity and will have a much better chance of not seeing it through and remaining in debt.

In his program, you should pay off your credit cards, car, and any other bills. After that, you need to save up 6 months of living expenses. If you anticipate those expenses going up, then you need to save for the new higher amount. Once you get those debts paid off and build a true emergency fund, then you need to start your retirement savings. If you have money left over after that, then you can start saving to be home owners. Dave would tell you that you need at least 20% down and should only buy a home that you can afford to finance on a 15 year fixed mortgage. If it takes you a couple extra months or an extra year to lay that foundation, so be it. It is a small price to pay for a lifetime of financial freedom.

The best place to keep short term savings is a bank. You will get basically 0% interest, but it will be 100% safe and insured. An alternative is a money market fund. It is 99.99% safe but not insured. They typically pay better interest rates. At this point though, interest rates are so low that I wouldn't even bother. Just stick the money in a FDIC insured savings account at a bank and call it a day.

    Bookmark   June 13, 2011 at 9:01AM
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Sometimes the best advice is the advice you don't want to hear. Thanks Bill.
let me ask you this.. In Dave's book if I remember correctly, if you are not a homeowner, there is a point where you stop and start saving for a down payment, I believed it to be before retirement savings. I need to look but dont have the book with me. He doesn't go in to much detail on the purchase of a home or the savings because his book is geared towards current home owners which we are not. I read but filter the homeowner stuff because at this point it does not apply to me. Why would I begin saving for retirement before providing a home for my children? I'm just curious? I'm not arguing -- I just need to understand why retirement savings at 30 is more important than no longer throwing 17% of our monthly income into a rental and owning a home of our own.

I dont think I will be able to convence my husband that saving for retirement at 30 yrs old is more important than saving for the down payment on a home. I wouldn't be able to convence him of 4 more years in the rental... And his argument might be that we are alreading contributing to our 401K through our employer (but not at 15%) Thanks again so much! I know for certain my children will be educated in finances before leaving home... This has been a very difficult life lesson...

    Bookmark   June 13, 2011 at 9:29AM
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I've never bought a Dave Ramsey book, but I listen to him. His plan is to put 10% into retirement before you start paying down the home or buying new property. That is the age-old savings rate that your grandparents probably believed in - 10% of your paycheck goes immediately to savings. Of course, if you want to retire early, you'll probably need to save more than that. Also, if you believe that Social Security won't be there when you retire, you'll want to plan accordingly.

"Why would I begin saving for retirement before providing a home for my children?"

Come on - no playing the "for my children" card in the Dave Ramsey plan or any other plan for that matter. Your children have a home - your apartment. What you want is a nicer home. That isn't a "need", it is a "want." Planning for your old age is a "need."

"I just need to understand why retirement savings at 30 is more important than no longer throwing 17% of our monthly income into a rental and owning a home of our own. "

So, the answer is to "throw" more than 17% of your money into a house? If you haven't owned a home before, you'll be in for a big shock when you get your first mortgage statement. You'll see that you pay $1,000 with $800 going to interest and $200 going to principle. More of your money will likely go to pay interest, insurance, upkeep etc than what you "throw" into your current rent.

As for why investing early is important - compound interest!!!! If you save 1k per month and get 7% returns, you'll accumulate about $1.7 million by the time you are 65. If you put that off for 5 years, you'll have about $600,000 less. That equates to a 31% cut in the monthly retirement income that this money will generate. Putting off retirement savings is like volunteering to take a 31% salary cut!

I'm not a Dave disciple in terms of the order to do things. There is obviously more than 1 way to save and become financially secure. His methods have worked for many people, but obviously, there are lots of wealthy people who have never even heard of him. If you want to buy a house sooner than he would recommend, that is up to you. I would suggest you don't do that at the expense of your retirement savings though. That might mean putting off the purchase, but it might just mean buying a less expensive house. If you have $2,500 to save after you pay rent and other expenses, I think it is totally reasonable that you would be able to buy a house that is $500-$1,000 more per month (including insurance etc) than your apartment and put the rest into savings. Just be careful that the new house doesn't turn into an excuse to buy a new couch, table, tv etc. It is awfully hard to accumulate wealth while you are accumulating "stuff." The 2 generally don't go hand in hand.

    Bookmark   June 13, 2011 at 10:43AM
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Exactly! I agree with everything you say. I don't want a bigger house than what we are paying now and that would include taxes and insurance. A huge down payment will get me the monthly payment (including the ins/tax) but maybe a 'bigger' house. Yes I want to have a home for my children. I have owned a home before and I think we were smart in our purchase then but we sold with the divorce. So I feel like I am literally starting over now. And that's ok.. It's never too late (well until I'm ready to retire). 10% sounds better. 5% could go in to savings for a down payment. It would take longer but would be worth it in the end.

I think I got jumbled in my thoughts thinking if I'm constantly putting 15% I won't have room to put money into savings. I'll just keep putting all of my extra money into retirement BUT I was not calculating correctly, I can still 'save' for a house and be putting 10%. Now let me ask you this just to be clear: with the calculations that you have come up with, is that 10% of my income or 10% of our combined income? We should each be putting 10% of our pay into retirement correct?

As far as purchasing items for the house, I am hearing you on that. We would end up putting ourselves back into debt to furnish a new house. That is absolutely not what I want to do and I've made my goals clear to my husband as far as not ever financing another piece of furniture or accessory again. My husband always used credit and would pay off at the end of the month because he was taught that having credit was important. That's all good until you are in an accident or become Ill, get laid off, have a baby or whatever may happen, and then you can only pay the minimum payment 'maybe'.
I would hope that we would set aside 'spending' money for purchases like that -- I know there will be things we do have to purchase when we do buy a house like a fridge, lawn mower and other accessories, lol a water hose...

You opened my eyes there, thanks again Bill.

    Bookmark   June 13, 2011 at 1:22PM
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Well, the 10% rule developed before the idea of a 2 income household, but yes, that would be 10% of total household income. :)

It isn't an exact number, just a starting point. Most people will work 35-40 years. If you save 10% over that time period and get average returns, you'll end up with a nestegg that is 15-20 times your salary by the time you retire. If you get 5% return in retirement, that will generate the 80% of pre-retirement income that most planners recommend. Of course, every situation is different, so the 10% is just a starting point.

Anyway, it sounds like you are on the right track. If you pay off your debts, build an emergency fund, live in an affordable house, don't go crazy with consumer purchases, and continually put money aside for retirement, you'll be in good shape. I know you think of it as "starting over", but there are a whole lot of 30 year olds that haven't "started" the first time yet!

    Bookmark   June 13, 2011 at 2:40PM
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Heck, we didn't buy a house until we were 42. And if we'd waited until we were 45 the price would have been 35% lower (yes, we bought at the previous 1989 'bubble').

The banks have a HUGE shadow inventory to work off. Home prices are forecasted to go lower until mid to late 2012, and after that begin rising SLOWLY. You have a lot of time to save up money for a downpayment.

You need that emergency fund because unless you buy a new developer's home, you'll have repairs and maintenance to deal with.

Definitely, stay where you are if you can. Moving is a much more expensive proposition than people think.

    Bookmark   June 13, 2011 at 5:07PM
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A couple corrections on Bill's take of "What Would Dave Say?":
1. He puts saving for a down payment as baby step 3B. Once you've got your fully funded emergency fund, you can save up your 20% down payment. 20% down is important to avoid PMI (rip-off!). Paying off the house faster is the part that comes after retirement savings.
2. On baby step 4, he says to save 15% of your household income for retirement, not 10%.

I would definitely not move while you're in BS2. It would really take 10 months @ $2500 = $25K to move???? Something's not right with those numbers.

    Bookmark   June 13, 2011 at 8:40PM
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No the $2500 comes AFTER we are debt free. Right now we can put $2500 a month towards our debt pay off for about 18 months. Then $2500 a month away for a year... Equaling $30k downpayment. We don't want to finance more than $170k on a house. So we will be able to get a great house in our area.
But I wasn't certain what order it goes in once we are debt free... House or retirement. I might need to read that chapter again.

If we move in 10 months, we would have to stop putting extra to our debt and the extra would have to go in to savings until we save $3k and then we would be able to move and restart paying debts. We only need about $3k to move into another lease with deposit, first months rent and any 'extras' that come up in a move... But in my mind, 3k will pay off a medical bill that we have so... Staying (although a little miserable with neighbors) is the very best option to stay on track. We have been here for over 2 years, we hate to move, so we really only want to move ONE more time...

I have decided because I am very motivated to get where I want to be in the end, staying is what is best. I have had to learn to swallow my pride a bit more and suck it up. It's HARD! Lol

    Bookmark   June 13, 2011 at 9:31PM
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You all missed reading what she said. She said they are renting an apartment and want to RENT a house.

In part she said "We also have found most rental homes do not provide a fridge, so we would have to purchase one. In order to have this type of savings we would have to stop our snowball plan and start throwing large amounts of money towards the savings and after we get that $ amount we could begin our 'debtfree' plan again."

myfampg, if the cost of fridge is a deciding factor then you cant afford this move yet. Keep on paying off credit cards, car loan personal loans and those lawyer fees.

    Bookmark   June 14, 2011 at 7:59PM
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Our bad, you're right gammyt, we did miss the renting of a house. But the advice about moving, as you point out, still stands. Stay put and pay off the bills first.

    Bookmark   June 14, 2011 at 8:28PM
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In re-reading your first post, your lease is for 10 more months, you're not pausing your debt repayment for 10 months. I stand corrected. But I'd still stay put.

Staying put may be painful, but it can also be motivating. Motivating to cut the budget a little further, get an extra job, work a little more overtime, whatever it takes to get the pain over with a little sooner and be able to move on the more enjoyable part of life. Live like no one else....

    Bookmark   June 16, 2011 at 1:25PM
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Yes weedy - can't wait because this part of livin like no one else sucks!

I'll explain better.

We are renting. Our lease is up in April. We planned to move into a rental house in April. In order to move we would need to save $3k. $3k includes a deposit, first months rent and other expenses such as a fridge, movers any other deposits we may come across. In order to save $3k by April we would have to just pay minimum payments and the additional that is going towards our snowball would go in to savings. Once our debt is paid off, we would be able to put all the money that was going to pay off debt into savings for a down payment to purchase a home. Because saving to move would slow down our deb pay off, we decided to stay where we are until we are debt free and have a down payment to purchase a house instead of saving to move in to a new lease in April. Hope that makes more sense. Thanks for all the advice!

    Bookmark   June 16, 2011 at 7:23PM
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Myfampfg, please stay where you are. Pay off all of your debts and do not incur any more until you have six months of net income in savings AND you are putting away 10% of your gross (before tax) income into retirement. Please look into (STUDY) compounding interest to understand why it is important to start now. If you wait until you are 45, you will need to put 30% or more into retirement (with little left to pay college tuition, etc). If you wait until even later, you will need to save 50% for retirement in order to end up with a decent retirement fund.

Think about how hard it is now, with all of that debt keeping you from being free to go anywhere. It would be worse if you were not working and could not pay the bills. That is why saving is so important; it gives you flexibility. Trust me, as long as your neighborhood isn't a drug den or has gang wars, you can live there until the debt is paid off, your savings give you some security in case one of you loses your job, and you have a good start on retirement savings.

There are articles now that say if a couple is good at saving, they will come out better if they do NOT buy a house. Buying a house is often not a wise investment; you need to sell it to realize any "return" on the purchase. Meanwhile, you have to pay for upkeep, etc. One alternative is to buy the smallest house possible in a decent neighborhood and get a mortgage that you can pay with ONE paycheck/month (i.e. 1/4 of your total net income). That will allow you more financial flexibility to save, pay off the mortgage, etc.

I hope I have described this clearly. Let me know if you have questions.

    Bookmark   June 18, 2011 at 11:33PM
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