A Love Hate Relationship with Dave Ramsey
I really can't stand Dave Ramsey. I am not sure what is. Possibly, his voice or just his demeanor, but he really just annoys the hell out of me, but I would like to thank him.
About 7 years ago, my wife and I decided to take his Financial Peace University class after being convinced to by my brother and his wife. This included going to a weekly 1-2 hour class at nearby church for about 3 months, doing a bunch of paper budgeting and worksheets, and reading one of his books. I was super turned off by the idea of the class because of the religious undertones of it, but we decided it couldn't hurt. I must say it was quite compelling hearing all of the different financial situations that other people were facing. Some people's were very promising while others were not so much. For the most part, we had it pretty good.
My wife and I were in our twenties. We had a very modest mortgage (around $800), around $25k in student debt, and two cars that weren't paid off which totaled about $15k. It was a very typical situation for most mid to late-twenty year-olds; finish college, get married and buy a house and a car. We had little debt compared to some, but we knew wanted to get rid of it before starting a family.
So we started following the plan. Step 1: Save $1,000. This was already complete. We both had decent jobs at this point, so it wasn't difficult to gather up that amount of cash. We typically keep that amount in a savings account at the same bank as our checking account so we can access it within seconds.
Step 2 is the "Debt Snowball". This means pay off all debt except for your mortgage. Essentially you pay off your highest interest debts as fast as you can. Once, that debt is gone, you rollover that payment into the next debt. You do this until all debts all gone. This is obviously the hardest step and takes a lot of time and dedication. Most people finish this many years after taking the course. This one was a bastard. 99% of every Christmas bonus, tax refund, and raise went to pay off our debts. I am not quite sure how long it took, but we paid everything off. I would say it took about 2.5 years. Then we were off to Step 3.
Step 3 is having 3 to 6 months worth of expenses in savings. After completing this step about 1 year later, we have found that some emergencies cost more than $1k and therefore we are dipping into that savings occasionally. We then have to devote our efforts to getting that back up. Now, I am not sure where exactly this money should be. People have their own opinions. Some say Savings Accounts, Money Market Accounts, and some say even an IRA is okay. This step is so f'ing important to me, especially now that we have kids. The security of knowing that we can handle most emergencies is amazing. These emergencies happen all of the time and being able to handle them with financial grace is priceless.
Next up is Step 4, which is saving 15% of your gross income for retirement. This isn't hard. Easiest way is to just up your 401k contributions. Some say raise your contributions to get your employer match and then do an IRA with someone like Vanguard. This is probably your best bet considering expense ratios are cheaper with Vanguard.
Step 5: Save for your children's college education. So do I have to use a 529 or ESA? In my mind, just save the money somewhere. Max out your IRAs and then move to education specific vehicles if you feel it is necessary.
Step 6 is pay off your house.
And Step 7 is "Build Wealth and Give".
These last few steps aren't really steps. You just do all of those at the same time. Basically, if you get to Step 4 you are building wealth and you are in a great place.
So this is why I love Dave Ramsey; he got me and wife on the same page with money and kicked our asses in gear to get out of debt and start saving. I can't thank his system enough for that. But, I want to retire early. I want to save more than 15%. I plan on saving more like 40%-50 and becoming Financial Independent before 45. Dave doesn't really touch on that. His plan gets you there eventually, but Early Retirement isn't his goal. He just wants you retire sometime. He motivates you to start the journey, but his way path takes a bit more time. His course and book changed my life for the better, but I am shooting for something a bit more aggressive. Check out his most popular book The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness