I have been asked a lot lately about what plan we are using for debt repayment and why, so I thought it might be a good idea to lay it out clearly in a blog post.
The Dave Ramsey Plan – Gazelle Intense
In Dave Ramsey’s book he lays out the baby steps which are:
- Save up a $1000 emergency fund
- Pay off all debt using the debt snowball
- Save up an actual emergency fund of 3-6 months expenses
- Save for your children’s college education
- Put 15% into retirement savings
- Put any additional income into paying off your mortgage early
- Be outrageously generous
Baby step 1 – $1000
There is no debating that this simply is not enough cash for any significant emergencies. This is the little cushion against things like your tire or windshield getting blown out on the car. Dave meant for you to pay your debt off quickly – like a gazelle escaping a cheetah. RUN FOR YOUR LIFE!
$1000 will work for a year or two while becoming debt free, and is intended to be a very short lived emergency while you remove the threat of debt over your life.
There is a caveat to this emergency fund, and those are sinking funds. Sinking funds are expenses you anticipate coming, and you might be saving for them along side the emergency fund. This might mean that your savings account my have more than $1000 in anticipation of things like homeowners insurance, car insurance, licence renewal fees, back to school needs ect.
If you have sinking funds to cover anticipated expenses, you will be able to keep your emergency fund intact, awaiting a true emergency.
Baby step 2 – pay off debt
There are so many different ways that you can go about this. Dave’s book recommends the snowball, where you knock out debt in order from smallest to largest, and paying only the minimums on everything but the smallest debt.
The major advantage to the debt snowball is that it is incredibly motivating to see one debt after another completely disappear. This is especially true if you have several smaller debts that are easy to knock out in the first few months.
We have chosen the debt snowball to pay off our debt. It was not as motivating for us because we had three large loans, each one taking nearly a year to pay off. We are currently working on our second of three loans, and we will be paying off debt until 2020 unless my income takes a sudden significant jump.
Choosing a deby repayment method 100% depends on what kind of person you are. If you need motivation to keep going the snowball is the way to go, having said that, you can pay off debt by largest minimum payment, highest to lowest interest rates, loans you hate the most… you name it. There is a really cool tool to calculate which methods will get you out the quickest at Undebt.it – be sure to check it out.
Chose a plan of attack and stick to it. Be consistent over time, and you will see that total debt amount dropping faster than you might think.
Baby step 3 – Save a real emergency fund of 3-6 months expenses
This part is totally up to you, but you should be able to fully cover at least 3 months of living expenses… if you are anything like us, and have experienced a major financial crisis, then I am sure you would feel better if that number was closer to 6 months.
Dave recommends keeping this amount in an account that is easily accessible should you need it, with no delays, and no penalties for removing it. He also recommends not using it as an investment, because anything that is an investment for less than five years has a greater likelihood of losing money, and that’s not what you want.
“Normal” is doing what we did the first time, and meander out of debt.
I came across a book by Dave Ramsey called the Total Money Makeover way back in 2008 just after getting out of university. I had $40,000 in student loans, a $10, 000 buy out on my car, and had no emergency fund in sight. I knew that I wanted to start getting on top of my debt and so I read this book.
I started to think about getting out of debt, and taking it more seriously… but I got shiny object syndrome, and was growing tired of living with my parents (I know the feeling was mutual), so I bought a duplex instead.
Once I was settled in the duplex, I had two co-workers move in with me to make the mortgage payment more manageable, and got going again with the debt.
Next, I knocked out the car loan, which I was incredibly proud of, and owned my little Honda Civic outright.
I should have let that momentum keep carrying me into paying off my student loans, but I went hiking in Peru instead.
When I got back from Peru, I got shiny man syndrome (is that a thing?!) and met my soon to be husband. The debt snowball was as far from my mind as humanly possible, and while I was halfheartedly making random extra payments on my student loans we got engaged. All debt payments stopped again.
Then there was a wedding…
Then we climbed mount Kilimajaro, and travelled for a month in Africa, because debt?!? What debt?!
Then we added a baby to the mix.
We build a house together.
We got pregnant again.
Then we sold the duplex and paid off all of our debt. For the first time in our lives we were completely debt free WITH an emergency fund for the first time in our marriage….
SO we financed a mini-van. *facepalm*
It took us 7 years to pay off 50K of debt the first time around, and that was with rental income, and two full time incomes making around 140K a year.
When you are young you don’t think about all of the things that could go wrong. You don’t think that when you use debt to get the things you want that something could happen to your ability to pay them.
You don’t think that one day your husband will walk into your bedroom, while you are nine months pregnant and no longer know that you are about to have a baby. Yeah. That happened.
I am so thankful to have my husband fully restored and back to me. I am thankful to be able to be home while our kids are little, and get back some of the time I lost while I was trying to juggle our terrifying financial situation, raising a newborn, a toddler, and nursing a concussed husband back to health.
It taught me something about being laser focused. I refused to be that scared about our financial situation ever again. I refuse to allow this to happen to us again. If you want to read more about how we got into debt all over again you can read it here).
Just call us Gazelles!
It was time to actually pull out what the Total Money Makeover taught me, and not look back. This time when we get out of debt we are doing it with gazelle intensity. I am not wasting YEARS getting distracted because I refuse to allow us to sit in this place of vulnerability for one second longer than we have to.
As of Feb 1, 2019 we have paid off $27, 500 of our total of $51, 156! We are doing this on $50, 000 LESS a year, and plan to be paid off completely in 3 years. Its amazing what you can accomplish when you get laser focused.
If you are just getting started and you want to know what it looks like to decrease your monthly living expenses significantly, check out this post here.
If you want to see how to cut your grocery bill in half (without clipping coupons), click here.
If you think you might be in the middle of a major financial crisis as well, and just need to know what to do, click here.