Debt is something easy to obtain but most difficult to discard. Many people start with a variety of small and manageable debts but see those debts spiral out of control. Before long, a person can have a difficult time just making minimum payments on account balances.
How We Nearly Drown in Debt
I never thought I was in financial danger because my income was high enough to pay off my debts. As my family and I traveled one year, we discussed taking out a home-equity loan to finance an addition to our house. At the time, we had about $60,000 in equity in the home, which would have given us plenty to pay for the new addition.
We did not follow through with it, and thank goodness for that. At the time, we had a mortgage with $112,000 remaining, plus we had consumer debt of $136,000. The consumer debt consisted of the following:
Student Loan #1: $1,000
Credit Card #1: $1,000
Mortgage-Related Debt: $4,000
Student Loan #2: $7,000
Credit Card #2: $10,000
Student Loan #3: $10,000
Car Loan #1: $12,500
Car Loan #2: $18,500
Student Loan #4: $72,000
We had discussed getting the home-equity loan during the summer of 2007, which was before the big housing crash. We would have increased our total debt to more than $300,000. Meanwhile, the value of our house took a nosedive, and we would have been under water on the house in a matter of months.
Dave Ramsey's Plan
We never pursued the home-equity loan because of one event. We stopped to eat at a Cracker Barrel on the way home from our vacation (paid largely with a credit card, by the way). I looked briefly at the books on CD available and saw one by Dave Ramsey. I had never heard of him. I had little initial interest in the book, but for some reason I read the cover. I decided to buy it.
Our lives have never been the same.
Ramsey follows a seven-step program for eliminating debt. He calls these the baby steps. These include:
1. Build a starter emergency fund of $1,000.
2. List debts from lowest to highest. Pay the minimum balance on all bills, and then focus attention on paying off the lowest first. When that is done, pay off the next highest. As this plan progresses, you will have more money to direct to the higher balance.
3. Establish an emergency fund of three to six months of living expenses.
4. Invest 15% for retirement.
5. Fund the children’s college fund.
6. Pay off the home mortgage.
7. Build wealth and give to others.
I am usually the type who likes to follow my own plan, but we stuck with Ramsey’s plan throughout. When I first calculated in August 2007 how long it would take us to get through Baby Step #2, I thought we would not finish until February 2012. Instead, we paid off our last debt in June 2010. We built an emergency fund over the next four months, and we took Baby Steps #4 and #5 immediately after building that fund. We have worked on the home mortgage since January 2011.
My Final Review
I have read criticisms of Dave Ramsey on the Internet. I know that some think he is overly simplistic and that there are more mathematically sound methods for eliminating debt. What these commenters don’t seem to get is that personal finance is much more about behavior than it is about math.
On Ramsey’s plan, you will see bills disappear one by one because you tackle them one by one. It is the most gratifying feeling to know that you will never see a certain bill again because you no longer own money on that bill. And when all of the bills are gone, you are likely to scream.
It is well worth the effort.