dave ramsey Archives — Page 3 of 3

How Much Should Your Emergency Fund Be?

September 4, 2008 By Shane Ede 6 Comments

If you’re smart, and you are since you’re reading Beating Broke, you’ve got an emergency fund. But just how much do you have in your emergency fund? And how much should you have in that fund?

Ramseyan thought: Start with a goal of $1000 and then after your bills are paid off, move it up to cover at least 6 months of expenses. This is the current plan that my wife and I are using. We built up our intitial fund of $1000 and have been letting it sit in our e-trade savings. It’s just under $1050 at the moment and growing at about $2-$3 a month. Nothing big, but much more than we ever had before.

Some will say that Ramsey is a little off on this thinking. Many people, my wife and I included, couldn’t even make it a month on $1000. Those same people would suggest that you build up a 1 month expenses emergency fund at the minimum. They may be right.

The key here, is that we’re discussing personal finances. It’s personal. When my wife and I decided to take the reins and take control of our personal finances, we didn’t have an emergency fund at all. We had just completed reading Dave Ramsey’s Total Money Makeover, so we followed (are following) his baby steps plan to get ourselves out of the hole. We’re Beating Broke. (Do you like how I slipped that in there? 😉 )

The Beating Broke thought: Because we’re talking about personal finances, it’s important for you to gauge your risk and build an emergency fund that is appropriate. Certain things will raise the risk of an emergency. If you’re driving an old car, for instance, the risk of a breakdown is higher than if you were driving a newer car. If you’re health is a little worse than average, the risk of you having a medical emergency could also be higher.

The higher your emergency risk, the larger your emergency fund should be. I suggest starting with at least $1000. It’s a good number, and for many, it’s more than what you already have. If you can continue to grow that emergency fund without derailing your excess debt payoffs, do so. Continue to build it until it is at least 3 months expenses. In the end, shoot for a constant emergency fund of at least 6 months expenses. Try to keep it to no more than 12 months though.

Why no more than 12 months? Because you’re likely keeping it in a high-yield savings. The 3-4% that they are currently paying is good, but you can do better elsewhere. If you’ve already got 12 months of expenses in the bank, you can take any excesses and do much better through investments that will get you a higher return. Presumably anyways. History would say so, and it usually doesn’t lie.

Most importantly, you must have an emergency fund. If you don’t then this whole article is pointless. It will give you a peace of mind that you’ve been missing and make it easier to pay off your debt.

As usual, the advice here is merely that of a lowly personal finance blogger and not that of a financial professional. Before making any big money moves, you should consult a professional.

Debt Avalanche? Correct?

July 8, 2008 By Shane Ede 15 Comments

There are many theories as to how best to pay off your credit card debt. One, the Debt Snowball, was popularized by Dave Ramsey and has many followers. In it, a borrower pays off the lowest balance rate card first and then “snowballs” the payment from that card onto the next lowest balance until they are all paid off. One of the benefits of doing it this way is that you get a “quick win” when you pay off the first card. And because you are “snowballing” the payments onto the next card, as the balances go up, so does the payment and your first “quick win” turns into another. Then another.

Flexo at Consumerism Commentary seems to think that that isn’t the best way to do it. According to him, the method that he calls the “debt avalanche” is the “correct” way to pay off debt. In this method, you arrange your debts in order of highest interest rate first to lowest interest rate last. As you pay off your debts, you are saving more money on interest and paying the grand total off in a faster length of time because of it. In his words:

By choosing the Debt Avalanche method, you will pay off your total debt faster, you will pay less interest, and you are mathematically efficient.

And he’s right. Mathematically. And if we are all robots, it will work for each and every one of us. What he fails to do is take into account the human factor. Let me make an example for us.

[Read more…]

Where We Began

July 1, 2008 By Shane Ede 6 Comments

I’ll spare you the pre-story except to say that my wife and I both did a lot of things wrong financially in our college years. Lots of college loans, credit card debt, and little to no savings to speak of. We got married, and still we continued on our merry way. We bought a house long before we really could afford to and even added a dog. Then we got pregnant and our financial inproprieties caught up with us. We struggled and struggled and eventually, just months before the birth of our son, we saw the light.

That light, courtesy of a book called Total Money Makeover by Dave Ramsey, may have saved our financial lives. Maybe we would have continued to barely make it, but we would have never made it to where we are now. It’s been a little over a year since we started our makeover and we’ve seen some pretty amazing results so far.

When we started the plan, we were struggling financially. Our debt to income ratio was well over 40% and the best we could do was to pay the minimum on everything and hope that there was still money in the bank when the checks came through. All told, we had debt of over $100,000 and total income of less than $50,000. We may have been on the verge of bankruptcy. Our net worth was a horrible -$85000. But we turned it around.

We started with a budget and built up a $1000 emergency fund. We still have that $1000 in the bank earning interest at etrade. We still use a budget every month. We’ve paid off one of our cars, several credit cards and have moved a couple credit cards to 0% intro rates. We’re nowhere near being out of the fire yet, but we are getting there. Our one year review shows a net worth of -$58000. An impressive increase. It was helped by a nearly $10,000 increase in the value of our home, but still reflects the work we’ve put into our finances.

We’re on our way to financial independence and a debt free lifestyle.