I am continuing to analyze the Baby Steps organized and promoted by Dave Ramsey in order to ascertain their efficacy for single parents. Is it truly irresponsible to follow these baby steps to a T?As I move the next step, a new question is emerging: do the baby steps have enough wiggle room built in to comfortably accommodate all financial situations? Or are they really so stringent that only a nuclear family with 1.8 children making over $85,000 a year can find them useful without "breaking" the rules?
Let's take a look at Baby Step 2:
Debt Snowball: Pay off all your debts from lowest balance to highest.
- This is snowball. The avalanche method starts with the highest interest rate and works down; there is also a variation of starting with the highest balance and working down. Both of these mathematically work out to less interest paid over time. But....
- Here is what TIME Magazine has to say about the snowball versus the mathematically "better" options.
- List your live debts, those that are not in collections, from smallest to largest. Note which ones have minimum payments, subtract that amount from how much money you have available each month or that pay period to pay debts. Hopefully, this leaves you in the positive! That amount leftover is what you will send to the debt with the lowest balance. Repeat that payment amount each month until that lowest debt is paid off. Congratulations! Now, the minimum payment on that one is GONE! You can take that quantity, add it to the total amount you have been paying, so now you have MORE to go the next lowest balance. Rinse and repeat!
- Don't have enough to cover the minimums? Can you sell something more? Get a side job? Increase income at work? Worst thing, call the companies you owe and ask them for some options; let them know how much you can pay and when. Work with them before it gets sent to collections.
- Repeat all of the above with your debts in collections. This is especially important if you will be needing a mortgage down the road!
- If you have a mortgage at this point, the snowball does NOT include your mortgage. Save that for another step!
You can also take a vacation during this time period, if you can pay in cash (cash flow it).
- If you're adding to debt while paying it off, is that really helping anything?
- Besides, this is a great way to find out about all the low-cost vacation options available!
"But, but, but, but. My circumstances are different!" Are they?
Ok, maybe they are.
Dave is very much known for adjusting for particular circumstances. See this particular call where he says that he normally says to tackle the live debts (not yet sent to collections) in snowball fashion, then tackle those in collection also from smallest to largest. Yet he adjusts the plan for this caller whose only live debt is a student loan that she can easily pay the minimum on and clear up all the collections first.
https://www.daveramsey.com/askdave/debt/attack-live-debt-or-dead-debt
My journey:
- Our vacations at this time involved going back to our home state to visit with family. Gas money only was needed. And I usually earned that doing some housecleaning for an old friend who still lived in the area.
- I did the debt snowball and knocked out everything everything under $1000.
- Student loans were broken down into the individuals, but with the deferred subsidized ones set aside so I could pay off more items elsewhere first. Items around the same balance, I prioritized some over others: the car (it could be taken away!) and the educational loan co-signed by my mother (co-signed loans are a bad idea!). I got a lot paid down this way, including all but one credit card (the remaining was in a monthly repayment mode where it wasn't adding interest). I was so stoked! From there, I took new stock, looking forward to see my new *lower* total balance. It was slightly higher than when I started!
- By this time I was MOTIVATED. I had the fire burning, I had a good system in place; my new home business was bringing in steady, if low, income, so after much conversation with those closest to me, I chose to move two student loans into immediate payment, because these were HUGE balances and the highest interest. They were essentially undoing all of my debt repayment work with what they were adding in interest in the same time frame. They had to die!
- And die they did. I got to the point where every time a customer placed an order, half the income from that payment was being sent to debt, within an hour of the order placed. I was that motivated! And burning it up that hot! Making almost daily payments was powerful.
- Once those two loans were gone (it took some time), the rest were knocked out in what felt like no time. Because I kept that intense behavior going. We had some financial dips during these last few months where I had to slow down, but I was so far ahead on all payments, that if ever I had to miss one or a partial one, it wouldn't have counted against me.
- One set of loans sold out to another company during this time. Despite trying to stay on top of everything, I was marked as delinquent for 2 months on those ones. THANKS NAVIENT! I was calling the old company and the new company daily to find out how to pay my loans. It was two months before I got answers and I paid IMMEDIATELY upon payment being available.
- This is one part of debt that SUCKS. You do everything right and STILL get dinged because they haven't set up payment options yet.
- Guess who is slave to who? Not them to me, that's for sure!
- Would it have been irresponsible to keep doing the snowball straight? Not at all! If that's what I needed to ensure the 80% behavior, then it would have been the smartest thing. But I had the 20% head knowledge, I was committed to the 80% behavior and I had the motivation, I had the fire. And THAT is the key principle here.
- The RESPONSIBLE choice was to get the debts gone, in whatever method would actually get us there, with the greatest motivation.
And I'll tell you what - when you have a starter emergency fund (after never having had one at all!) but not credit cards, you really have to change your mindset about what constitutes emergencies versus what can be left aside and what could be cash-flowed. I didn't want to touch that emergency fund, so I did whatever I could to cash-flow. No new debt and no touching that emergency money was top priority for me!
It really led to a serious prioritizing soul search. I also learned that I could anticipate things coming up. I knew when Murphy was heading around the corner down the street and I had time to prepare! Spidey-sense! Admittedly, it was a wee bit freaky when I first realized it was happening. Whoa! And the "emergency" was totally averted.
Part of my budget was that anything I didn't spend in a category (gas was cheaper, or I got a discount on insurance), went into a separate savings for when those things went up in cost or to pay towards a bigger something. I ended up being able to use that money to avert several a potential crisis. Only later did I learn the term "sinking fund." Sinking funds are money set aside for a future planned spending, maybe you know the date and maybe you don't, but it WILL happen: car repairs, visiting the doctor, car insurance, clothing replacement. None of those things are emergencies! They WILL happen! So in a sense you could say that this added to my emergency fund, padded it a bit. That may be a bit of a misnomer. Again, these aren't emergencies - these are expenses you know will happen. But I understand that many people have a looser of emergency, out of necessity in their own life situation at the time and historically.
I made minor adjustments. Were those entirely outside the plan? Perhaps on the edge a bit since I switched out the loans that made me the angriest. Watching the second segment of Financial Peace University reminds me though that the anger is the whole point. You won't do something until you are ANGRY about it. And angry I was. Hence, the knowledge versus the behavior. I think I fell within the parameters on this baby step: anger, intensity, motivation, get the job done!
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Now, here's where the rubber meets the road: You NEED to be gazelle intense about all of this debt repayment. You need to get these lions off your back as quickly as possible so that you can get back to building the rest of your emergency fund and stocking retirement. Right now you've stopped all retirement contributions, even matched ones!
If you’re looking at two years or less to get out of debt in Baby Step 2, yeah, I’d stop the 401(k). I’ve been doing this a long time, and I still get a lump in my throat when I say to do that. But it’s really what Sharon and I did, and it’s really worked for a lot of people. It’s that power of focus thing. You’re permanently searing into the relationship in your household and into the two of you a whole new way of looking at things.
By being gazelle intense, focusing on the debt then building the emergency fund before saving for retirement (still gazelle intense!), you are ensuring there is NO REASON TO DIP INTO RETIREMENT WHEN EMERGENCIES HIT.
If you start retirement now, guess what you will touch when an emergency happens.
Guess how I know.
Now guess if I think these baby steps are truly irresponsible for a single parent to follow.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Previous posts:
Irresponsibility and Baby Step 0: Commit to No New Debt
Baby Step 1: Starter Emergency Fund
No comments:
Post a Comment