So I read the Total Money Makeover and took notes after I started my first real job post law school. My two big take aways from Dave Ramsey's Total Money Makeover were that if you make sacrifices today you can be safe and secure tomorrow and debt payments are bad because you could be using those payments on things you wanted in the past for things you need or want now.
He recommends a seven step total money make over: (1) You start by putting aside a small emergency fund, (2) then you focus intently on paying off your debts, (3) once your debts are paid off build up a bigger emergency fund, (4) start investing 15% of your before tax income for retirement, (5) save for your children's college, (6) pay off your mortgage, and (7) then have fun and be charitable. I haven't followed his 7 steps perfectly.
|via 401kcalculator.org and flickr|
We do not have a dedicated emergency fund but we maintain a large cushion in our accounts which serves the same purpose as an emergency fund--we have cash money that we can use if anything goes wrong. I'd recommend having two emergency funds--one for real emergencies like loosing your job or a bad injury and a replacement fund for things that you know will happen but are unpredictable like car maintenance or replacing your computer.
I also disagree with Ramsey about his absolutely no debt philosophy. He says you should rip up your credit card and only use cash. I think if you can you can you should have a little debt to build up credit and I think there are times it makes sense to have debt. If you're going to need a loan to buy a home or anything else you'll want to have a good credit score. Some employees and landlords will check your credit score and in order to have a good credit score you need to borrow money.
I also think that it makes sense to go into debt now so you can make more money later. Student loans are a great example. Hypothetically my BA and JD enable me to make way more money than I could if I only had a high school diploma. Car loans also make sense if you live in a rural area, like we do, and you need reliable transportation to get to work to make money. A mortgage makes sense if buying a home is over all less expensive than renting.
|This was a very expensive purple hood and|
velvet hat. Hopefully, I will have a good return
on my investment in this academic regalia.
I do think he is wise to encourage caution about loans. You have to be smart about taking out loans. My law school loans have higher interests rates between 8.5% and 6.5% and I borrowed more money than I needed since I rejected my parents' help to pay for living expenses. Student loans for undergrad seems to have far lower interest rates. But you shouldn't borrow any more than you need to get through school and I wish I would have paid interest on my law school loans while in school so the interest wasn't capitalized. You should look at your student loans as an investment so try to pick a field of study that has a high rate of return (computer science, not law school for example).
My husband has good credit so the interest rate on his car loan was low. He bought a used Prius with low milage so we save money on gas. We're paying extra on the car loan so we can pay it off faster. But we didn't do that with his student loans because he knew they'd be forgiven after he taught math in an underserved area for five years.
|Filling up the Prius, a Rare Event|
Some people say that if you have a low interest rate on a loan, less than the rate the market would return if you invested it, then it makes sense to invest that money instead of pay off the loan faster. I think it depends on what kind of a person you are. I am incredibly risk adverse so I would rather pay of debts that I have to pay off before investing money.
Ramsey's advice to go cash only is great, however, if you've had trouble with credit cards in the past. If you know you'll buy things you don't need and can't afford if you have a credit card then not having a credit card is probably the best thing for you.
This hasn't been a problem for Hubs or me. I forgot to pay my bill once then set it up for autopay and once I charged more than I could pay off at the end of the month (this happened during the most stressful time of my life a few months before the bar exam and I was engaging in so much needed retail therapy but I have better coping strategies now). Hubs and I both like using our credit cards because we don't charge more than we can afford and we get rewards (cash back, we were looking at a getting a card with airlines rewards) so it we get some of the money we spend back.
Have you read the Total Money Makeover? If so what did you think? What's some good finical advice that's been given to you?