Dave Ramsey's Baby Steps:
1) $1000 in Savings - unexpected events WILL happen and you need to be able to address them with cash when they do. This is your Emergency Funds, and is not to be touched for anything else. One person that Dave talked about called this fund her GOK Fund. What's GOK? "God Only Knows."
2) Pay Off Debt
3) Debt Free/3-6 months of expenses in bank
4) invest 15% into 401-k or Roth
5) College Savings (529 accounts)
6) Pay off home early
7) invest into mutual funds/real estate
and now the 3 steps, yes only 3, that John Cummuta teaches to transform Debt into Wealth:
Stage 1: Stop Using Credit - Operate 100% on cash
Debt is not a useful tool in building a successful life, credit makes things cost more, so why would you want to use it?
2: Pay off ALL your debts, including Mortgages.
Simultaneously with a cash-based lifestyle, we'll begin eliminating your debts. The first step in that process is the creation of what Cummuta calls your Accelerator Margin (TM). This is an amount of money that will help you accelerate your debt-elimination.
stage 3: Focus All available cash on wealth-building
After your debt is paid off, it's time to start the first step of the wealth building phase. That first step is create an emergency savings fund.
As you can see there are some minor differences. For one Ramsey says to create to emergency fund first where Cummuta says to start that after the debt is paid off. Another difference is that Ramsey separates the mortgage from the rest of the debts and pay that off at later time. While Cummuta says it's all debt so it all needs to be eliminated. I personally like both teachers and am gleaming what I can from both, however, when it comes to debt retirement I am leaning more towards Cummuta, because it makes more sense to get rid of the higher interest then trying earn 2% on a little savings account, while try to lower that debt level. Once, I am debt free, I personally, will be very aggressive to build the savings.
I would love to hear what each of you think.
Awesome articles, Kevin. Thanks for coming to class last week. I'll add a little bit to where Dave Ramsey is coming from when he says to pay off the mortgage early.
ReplyDeleteMOST Americans, when paying off a mortgage, will be several (10+) years paying it off. Statistics say that 8 out of 10 Americans will experience a major crisis every given 10 year period of their lives to the tune of $8-10k.
So, if you are pay off all other debts (1-2 years), and pay off the mortgage (10+ years) BEFORE "baby step #3" (which is the fully funded emergency fund of 15-20k), you may be 12+ years before you get your Fully Funded Emergency fund. Given that 80% of us will experience a major crisis within this timeframe, as Dave says, it just makes sense to get that rainy day fund out of the way sooner rather than later.
What happens if you experience a major life crisis and you DON'T have your emergency fund in place? You guessed it...you have to BORROW the money, whether its a HELOC or Credit Card...which is always a bad thing.
Anyway, I look forward to seeing you again this tonite!
Sorry. Scratch that.
ReplyDeleteLast sentence, first paragraph:
I'll add a little bit to where Dave Ramsey is coming from when he says to pay off the morgage later.
see ya.
Dave isn't advocating a 2% rate of return in a dinky savings account - he's adamant that you invest in mutual funds, specifically one that has a long track record of success. Many of the mutual funds he recommends have a 12% rate of return - much better than 7% loan on a house. That's why the 15% savings of your income comes prior to paying down the mortgage. Once you're investing at 15% and you're still finding yourself with excess cash every month, then work that mortgage down. Of course, Dave himself wouldn't take out a mortgage and would prefer to pay in straight cash always.
ReplyDeleteThanks Rodedaddy, but who said anything about only a 2% return? If you read one of my more recent posts, I talk about wanting to use a very aggressive "unit investment trust," to quickly build my "automobile savings," once I get my car paid off, so that I can start saving for that next car.
ReplyDelete