In my last post, I discussed how I’m using Dave Ramsey’s method of radical debt elimination. The plan is radical and some of my modifications may change as I get deeper into it but some of it is a lot to take in all at once.
Dave Ramsey starts with baby steps. Here are the baby steps: 1. Save $1000 to an emergency fund 2. Pay off all debt using the Debt Snowball 3. Save 3 to 6 months expenses in Savings 4. Invest 15% of household income in Roth IRAs and pre-tax retirement 5. Save for college for any children you have 6. Pay off your home 7. GIVE!
The first modification I’ve made is to not put my federal student loans in my debt snowball. Actually my private student loans aren’t in it either yet. As many of you know I started with $36k in credit card debt. The amount of my credit card debt isn’t actually the reason I’m not putting my loans into the snowball, it’s the amount of the loans. My student loan debt total (which I haven’t shared yet) is the amount of a mortgage in some places, so I’m treating it like a mortgage in Dave’s plan. I don’t currently have children so I won’t need to save for college yet. Also steps 4, 5, and 6 are usually more simultaneous than one before the other. So, I want to pay off all my credit card debt and then save 3 to 6 months of expenses then I’ll go back to the student loans. I just didn’t want to go more than 3 years without the 3-6 months expenses saved.
My next modification is that I’m not stopping my pre-tax retirement savings. Dave suggests that you put all possible funds towards debt. There are a couple reasons I won’t be doing this. The first is that the contribution is required and matched by my job for a good percentage. So, that won’t stop. The other involves my illness. While I don’t have an emergency fund, I do have a retirement fund. God forbid that I have to be hospitalized again or need a surgery that has me out for several weeks. I need a backup plan somewhere. So, for my situation, that contribution will remain.
The third modification I made may change but we’ll see. I don’t plan to cut up all my credit cards as I pay them off. Based on Dave’s plan, you don’t really need your credit score or any debt at all. Once I’ve paid off all the debt, I plan to keep one personal and one business credit card. I have some travel goals and since by then I will be very diligent about how I spend my money, I plan to pay some bills on my rewards card so that I can fly to family and friends for free. It’s economical right?