Total Money Makeover questions.

brij2006 · December 2013

H and I started doing little bits and pieces of Dave Ramsey's TMM last year, but we finally sat down and discussed the next 3 years and have decided to go 100% into his plan and get ourselves in a better financial state.

Mind you, we aren't in bad financial shape at all, but we have student loan debt of almost $45k and we've both been out of school for 5 years. So that payment and burden just keeps lingering, and we're ready for it to be gone!

But I have a few questions in regard to it, and I know quite a few of your ladies (and gents) have done TMM and follow Dave Ramsey's plan. So here's my questions.

1. Is the $1,000 as an efund truly correct? Both of our jobs are pretty stable, but this seems like nowhere near enough. Especially when we currently have 3 months of expenses saved up.

2. We both have custom whole life insurance policies. According to DR we should cancel those and get term policies. No problem. But do we apply that extra money toward the loans, or do we invest it?

3. We beefed up H's 401k this past spring, and he's contributing 10% with the employers 1% match. Should we lower that and start applying that extra amount toward the loans, or keep it where it's at?

4. I receive $2k in employer contributions for my IRA each year. Should I continue to put that in my IRA or apply it to the loans?

5. Do all cash gifts go toward loans? Or are those used for "extras?"

6. We are trying to figure out what to do with my car. It is a 2011 Ford Flex (SUV) that we just purchased in August. The loan is for $18k, and the payment is $350/month. The interest is at 2.35%. H says it's up to me on whether or not we keep my current car or if I purchase something cheaper. So there are a couple of options if we chose to get something cheaper. I could get a couple of year old mid sided sedan like a Chevy Impala or Toyota Camry for about $15k, then we would be financing around 12k. Or I could get something really cheap like an 03 Ford Taurus and not finance anything. Freeing up $350/month in our budget. But H has expressed that whatever car I drive will be something I have to keep for 5 years (I put 20k miles on/year). 3 of those years being while we pay off debt, and 2 of those years would be beefing up our nestegg and saving up to get him a newer car since his will almost have 200k miles on it at that point. We are also hoping to begin to TTC again once the debt is gone. So I want it to be something I can easily fit a carseat into, and that is safe.

I think that's it for now. I'm very excited that we're finally going to be making our debt a higher priority in our lives. We've always been big ones to travel, go out to a nice dinner, and always be doing things. All of that was always paid for with cash, but when we got pregnant and lost the baby last month after fertility assistance, we realized that having a child was going to hinder our current lifestyle and make it so our debt wouldn't be paid off early anymore. We don't want that to be an issue or a problem we have to face, and we want to be able to go through fertility assistance again and not worry about how we're going to be able to afford it. Or not continue with more assistance because it isn't financially feasible.

smbenevides1989 · December 2013

I'm currently doing the TMM, and only started a few months ago I do not follow the plan to a T; I merely use it as a guideline as I focus on paying down my debt. There are other pps who are better to answer, but here is my opinion:

1. The $1000 is only for immediate emergencies, like if your car breaks down. Some people are not very comfortable only saving this much. Do what you are comfortable with. If you have 3 months already saved, and you are comfortable at that amount, I would keep it and move to step 2.

2. I would apply that extra money toward the loans to pay it off quicker.

3. I would keep it where it is. Investing is very important for your future.

4. I would put the $2000 towards your IRA. Like #3, it's important for your retirement.

5. I would do a 80/20 on any cash gifts. Keep 20% for yourself, and put the 80% for the loans. But do with what you are comfortable with. I always feel you still need to do something for yourself while taking care of your financial responsibilities first.

6. I can't really answer this one, only because I'm debating this question with myself. If I had the choice, I would pick the car that I would not have to finance. Saving that 350 will help your debt down by $4200/year, $21000/5 years. I would only do it if the car will be dependable and it has a great safety rating for your family.

hoffse · December 2013

I'm not Dave Ramsey's biggest fan. In fact, I disagree with a lot of what he says. So take my advice with a grain of salt.

1) $1,000 probably isn't enough. You need to have enough in an e-fund to cover all your insurance deductibles simultaneously. Plan for a tornado to hit your house and both cars with your husband and yourself in them. On December 30. So you might even have a hospital stay billed for both 2013 and 2014.

2) I agree with term life. But I would save it/invest what is leftover instead of putting it toward debt.

3) I would increase it. You really want to be at 15% of your gross income (always) to know you won't run out of money when you retire.

4) Keep it in the IRA. This counts as part of the 15% goal.

5) I split bonuses/windfalls into two piles - half goes toward debt and half goes toward savings.

6) I would probably just keep the car you have, but that's inconsistent with the DR model. Part of it depends on how long you will be paying it back - if it's 3 years or less, I'd keep it. It's likely you could drive it much longer than 5 years if it's in good shape.

And here's my issue with Dave Ramsey: the man went bankrupt, and so that colored his relationship with debt in a massive way. Is it great to be debt free? Of course - but not at the expense of your emergency fund and certainly not at the expense of your retirement. H and I will have about 7 years of student loan debt. But we're going to have (hopefully) 30-40 years of retirement. I think paying off student debt early is a great goal - but you have to balance it with other savings, and I think the other savings need to be a higher priority than DR gives them. I think his system is great for people who are up to their eyeballs in CC debt and who can't control their spending on plastic. But for student loans, mortgages, and other low-interest and manageable debt, I think the allocations have to be different.

vlagrl29 · December 2013

I agree with Hoffse. I would love to pay my loans off early, but I'd rather make sure we got plenty in retirement first. Since it's our only debt right now it's not a big deal to us.

brij2006 · December 2013

@hoffse I actually disagree with a lot of DR's ways too, but I know for H it has to be an all or nothing approach and it has to be over as quickly as possible. We were gradually paying extra toward them, and still are. But he wasn't seeing much results, and hates that we're making about $40k more now than we were 5 years ago and we haven't paid much extra on these loans.

I also agree about the retirement stuff, but I did the math and if we were to lower his 401k contribution, then that extra money would cut 6 months off our payoff time. Which means investing 15% of BOTH our salaries after the loans are gone (6 months earlier). For what it's worth, we're going to be 26 and 28 and I have been investing since 20. So there's a good amount already in there. H started investing at 27.

ETA: As far as the car situation. My current car has 26k miles on it, and our initial plan was to keep it for 5 years. The loan term is for 5 years also, and we truly love that car and it's AWD which is great for the 35 miles commute in midwest winters. But is it a necessity? No. I'm just trying to figure out if we're really going to get that far ahead by getting rid of it. Yes a 15k car will put about 5k less in car debt and it will get better gas mileage than my current car. But those also have higher miles already and we would be looking to get rid of it not long after the debt is paid off.

Erikan73 · December 2013

I'm part of the partically believe in Dave Ramsey. I've learned a lot of good tips from his website and a few of the broadcasts I've listened to. But I think you have to customize it for your needs and life too.

Wulfgar · December 2013

I would keep your current car and see if you can't stretch it to 10 years or 200k.

I will also agree with those that say to keep your current savings alone since I know how fast this goes away if you have to cover your deductibles for health insurance and make other necessary car repairs etc.

I would at most drop your retirement accounts down to what your employers will match to be able to throw more money at your debts. If your husband is really serious about repaying debt that means not getting a new car until you can put enough down to either pay for it out right or to get no more than a 3 year loan.

My wife and I are doing a modified Dave Ramsey/ Suzi Orman/ Gail Von Oaxley philosophies where we are working at tackling her student loans first while I am focused on maintaining our emergency funds above water. I am hoping to move up the pay ladder at work next year so that will help with our cash flow.

If you really wanted to knock out the debts earlier, both of you could get a part time job for say 6 months to a year with all of that income going to debt repayment.

brij2006 · December 2013

H works 50-80 hours a week at his regular job. So on average he brings home $600/month in overtime. This will be applied directly toward debts.

I also earn commissions and sell Tastefully Simple. My usual commissions are $200/month, and I make about 100-500 a month with Tastefully Simple. All of that will be applied toward the loans.

We broke it down last night, and if we apply the retirement amount, all of our savings minus $2k, and all of those extras listed above on top of the extra $500-800 in our monthly budget we can apply toward them. Then we will be debt free by Sept 2015 at the latest. If we get the highest amounts each month of all of these, and I get my usual bonus each year at work. Then we could be debt free in March 2015.

Would we be detrimenting our retirement that much if we don't do 15% for the next 18 months? Or should we be okay at our ages?

hoffse · December 2013

A lot of it depends on your age, how much you already have stashed away, and how much you will be able to ratchet it back up once the debt is gone.

I use this to see where I'm at with it because it's a pretty comprehensive calculator. You might want to project out where you think you will be 18 months from now and use those numbers to see if you will have enough:

http://www.aarp.org/work/retirement-planning/retirement_calculator.html

lifeonthehill · December 2013

1. Is the $1,000 as an efund truly correct? Both of our jobs are pretty stable, but this seems like nowhere near enough. Especially when we currently have 3 months of expenses saved up. If you have 3 mo. saved I think another 1,000 for immediate emergencies is fine.

2. We both have custom whole life insurance policies. According to DR we should cancel those and get term policies. No problem. But do we apply that extra money toward the loans, or do we invest it? I personally would use the extra money for loans because it seems like you have a good amount going for retirement at the moment.

3. We beefed up H's 401k this past spring, and he's contributing 10% with the employers 1% match. Should we lower that and start applying that extra amount toward the loans, or keep it where it's at? Keep this. Retirement is important. I agree with Dave Ramsey's plan but you already have this in place so I would keep it as is.

4. I receive $2k in employer contributions for my IRA each year. Should I continue to put that in my IRA or apply it to the loans? IRA.

5. Do all cash gifts go toward loans? Or are those used for "extras?" We used cash gifts and any extras for loans. Example. I made 125 proctoring the SAT's today and that wont be used as extra it will go to our financial goals.

6. We are trying to figure out what to do with my car. It is a 2011 Ford Flex (SUV) that we just purchased in August. The loan is for $18k, and the payment is $350/month. The interest is at 2.35%. H says it's up to me on whether or not we keep my current car or if I purchase something cheaper. So there are a couple of options if we chose to get something cheaper. I could get a couple of year old mid sided sedan like a Chevy Impala or Toyota Camry for about $15k, then we would be financing around 12k. Or I could get something really cheap like an 03 Ford Taurus and not finance anything. Freeing up $350/month in our budget. But H has expressed that whatever car I drive will be something I have to keep for 5 years (I put 20k miles on/year). 3 of those years being while we pay off debt, and 2 of those years would be beefing up our nestegg and saving up to get him a newer car since his will almost have 200k miles on it at that point. We are also hoping to begin to TTC again once the debt is gone. So I want it to be something I can easily fit a carseat into, and that is safe. I would buy a car that is about 4 years old already and sell the one you have now. H and I decided if our car died we would get a car costing about 10,000 so it is a dependable car but not a ton to finance.

Hope some of this was helpful. Good luck!

CuriousKiddosMama · December 2013

1. Is the $1,000 as an efund truly correct? Both of our jobs are pretty stable, but this seems like nowhere near enough. Especially when we currently have 3 months of expenses saved up.

A lot of people on this board feel like $1000 is too low, however if you do have stable jobs, it may be enough for you. Otherwise consider keeping 1 month of expenses and put the other 2 towards your debt.

2. We both have custom whole life insurance policies. According to DR we should cancel those and get term policies. No problem. But do we apply that extra money toward the loans, or do we invest it?

Cancel them!!!! They are horrible. My DH had a whole life policy from his parents, they had been paying it for 38 years- we canceled it and got 7k- they had paid in over 40k. They are horrible investments. If you want term life, maybe use the cash you get to pay for 1 years worth of term life insurance, and then apply the rest to your debt. You should put off investing for the most part until you are done with your debt.

3. We beefed up H's 401k this past spring, and he's contributing 10% with the employers 1% match. Should we lower that and start applying that extra amount toward the loans, or keep it where it's at?

I differ with Dave here. He would tell you to cut all retirement until you have debts paid off, but for me it's hard to give up a match. I would contribute the match, and then put the rest towards your debt. Dave's goal is to get you super gazelle intense, so he doesn't want you splitting your focus, and so that's why he says throw ALL your $ at the debt.

4. I receive $2k in employer contributions for my IRA each year. Should I continue to put that in my IRA or apply it to the loans?

Can you use that for loans? If they are giving it for IRA contributions, you may have to use it that way. (Really not sure on this one)

5. Do all cash gifts go toward loans? Or are those used for "extras?"

Dave would say any found money- gifts, bonuses, etc would go towards loans. Again, it's about being gazelle intense and not distracting yourself from the real goal. Once you get done with your loans you will have lots of money for those extras.

6. We are trying to figure out what to do with my car. It is a 2011 Ford Flex (SUV) that we just purchased in August. The loan is for $18k, and the payment is $350/month. The interest is at 2.35%. H says it's up to me on whether or not we keep my current car or if I purchase something cheaper. So there are a couple of options if we chose to get something cheaper. I could get a couple of year old mid sided sedan like a Chevy Impala or Toyota Camry for about $15k, then we would be financing around 12k. Or I could get something really cheap like an 03 Ford Taurus and not finance anything. Freeing up $350/month in our budget. But H has expressed that whatever car I drive will be something I have to keep for 5 years (I put 20k miles on/year). 3 of those years being while we pay off debt, and 2 of those years would be beefing up our nestegg and saving up to get him a newer car since his will almost have 200k miles on it at that point. We are also hoping to begin to TTC again once the debt is gone. So I want it to be something I can easily fit a carseat into, and that is safe.

I think the general rule is that if you can pay off the car in a year or two, you should keep it. If you can't get it paid off quickly you should sell it and buy something else.

ta78 · December 2013

I think it'd be fine to wait to put 15% towards retirement. Good for you for starting to save at a young age.

As far as the car goes, will you be able to sell it for what you owe? If not, I would keep it. Actually, I would probably keep it regardless. We bought both of our cars with cash (2002 and 2003), but have also had to put as much as we paid into repairs since.

sillygoosegirl · December 2013

I don't think TMM is appropriate for your situation. I'd suggest "Smart Couples Finish Rich" as a far better plan for someone in your situation.

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