A few months ago I went through the 9-week Financial Peace University Flex online course by Dave Ramsey. Dave teaches his financial strategies with “baby steps” – even though each one is far from little or quick.
After you save up $1000 and create a budget you can stick to, your #1 goal should be getting out of ALL debt except for your mortgage.
This means stopping all savings and putting every spare penny towards your debt.
Even putting a hold on your 401K contributions.
Even using up all your savings (except the $1000) to pay it off.
After considering what this would look like for our finances, I decided not to follow Dave’s advice. Instead, I’m keeping the savings we have in our account, continuing to contribute 10% to our 401K, and using whatever is left to pay down our debt.
I’m sure Dave is speaking from his extensive experience and research, but I’m going with my gut on this one. And here’s why.
We Need To Build Painful Memories
My husband and I have never had, worked towards, or achieved a common financial goal.
We have never “partnered” in our finances. We’ve been married for over 23 years. We’re just now learning how to stick to a budget.
On top of all that, he’s not completely convinced that any of this is a priority.
Right now, we have about 4 months of expenses in our savings account. We didn’t work to save that up, we didn’t sacrifice anything, we didn’t feel any pain to get it. We simply sold a house and put the money in the bank (and then spent most of the proceeds).
We also have just about as much debt to pay off. We have a history of getting out of debt with windfalls of cash – from parents, from an IRS refund, from selling a house. We have never clawed our way out of debt. We’ve just been fortunate to have generous family and lucky breaks.
But then, once it’s paid off, we start building it up again. (I know, I know. We’ve been pretty immature and foolish and damn ungrateful.)
You see, because we’d never gone through the pain and sacrifice it takes to pay off debt, we had no discomforting memories to keep us from making the same stupid mistakes.
Paying off our debt with our savings would have no impact on our lack of discipline with money. It would just be simply transferring money (that we never learned to save in the first place) from one account to another. There would be no mindset adjustment or behavior modification required.
That means we would be putting ourselves in a position with no savings and shaky money management at best.
This could easily – easily – lead to more debt.
I strongly feel that we need to hang onto our emergency fund while we learn how to follow a budget, get comfortable with making sacrifices, and create some painful memories that will keep us from repeating the same bad habits.
And hopefully, in the meantime, I can convince my husband that being like-minded in our finances is a wise and worthy practice to follow.
Time Is Not On Our Side
My husband and I are both in our 50s. If we want to retire when we’re 65, we need to start kicking some serious ass.
Thankfully, we’ve been putting money into a 401K since he started with his company 20 years ago. There were many years when we could only put in the 3% that was matched by his employer.
We’re not panicking (er, I’m not panicking – my husband doesn’t look at the 401K), but I am aware that we will not retire in 15 years with a comparable income if we don’t start putting it in high gear.
The more we contribute, the faster compound interest will get us to our goal faster. At this point in our lives, time is not on our side. We need to leverage every minute we get to grow our retirement savings.
Also, because of our age, we can now take advantage of “catch up” contributions. Once I can find a way to increase our income, my goal is to max out the limit so our savings can really start to skyrocket!
The Difference In Interest
I have moved many a credit card balance to a 0% promotional rate card. The typical 3% fee I have to pay is always lower than what I’d be paying in interest over the long run.
My student loan rate is below 6%, which is pretty reasonable, but I will still look around for a better deal. I just started paying it back, so I’ll be doing a little research to see if I can find a better rate.
And lastly, our medical bills have no interest (yay!). I have payment plans for each of them (some only $20 a month) and then I make those payments from our HSA card. As long as I’m not paying interest, I’m fine just paying what I can every month until they’re paid off.
So, all in all, I’m not paying much interest on the debt we do have.
And even though paying any interest is like throwing money down the garbage, I need to consider how much interest we’re gaining with our savings.
I’m happy to say that our retirement plan (as of today) has averaged over a 13% return since the first of the year. That’s over twice as much as what I’m paying for the debt!
To me, this is a no-brainer. If I make double the interest on my savings that I do in what I’m paying on debt, I need to maximize those returns by continuing to pour into that account.
We make less than 3% on our personal savings account, so that’s not a priority. I won’t be taking money we could use to pay debt to put into our savings account.
And because our college fund isn’t for retirement, we’re just keeping that at a minimal monthly contribution as well.
But for the 401K, as long as I can keep the debt interest considerably lower than what we’re getting in returns, I have no problem making those contributions the priority.
Follow Your Gut
I’m so thankful we have experts like Dave Ramsey who we can learn from. Even just going through the 9 videos from the course, I feel more confident in how to manage our finances.
And I do believe that the majority of what FPU teaches is the best plan of action for most people. Like Dave says, the steps are simple. There’s no point in complicating things. If you follow the plan, you will experience success.
But I still think you need to consider your own personal situation, the little details and dynamics that set you apart from others, and how the baby steps fit into all of that. Then make adjustments accordingly.
I am not encouraging you to cut out steps, or rearrange them, or just pick and choose what you want to use. Do a self-awareness check and determine if you’re operating out of any level of denial.
Each baby step is necessary to reach the ultimate goal of financial peace, but I feel there is some liberty you can take to ensure the execution of each one is the best for your own situation.
If you feel that any changes you’ve made aren’t helping you get out of debt and increase savings, then I would say go back to the original plan. I may even do this myself after a few months on Baby Step 2. If my husband & I can develop strong money management skills and get to the same level of commitment, it’s possible I’ll feel more comfortable using up our savings to pay off the rest of our debt.
But for now, we’ll make savings the priority.