Dave's Baby Steps: Which are you on and is it working?

[wwjdmsl]

Re: Dave's Baby Steps: Which are you on and is it working?

The other concern about student loans is there is no tangible collateral to back them up, technically they increase your earning capability but, to me, I would want to get rid of that "pet" as soon as possible...just an opinion.

[cbmeeks]

Re: Dave's Baby Steps: Which are you on and is it working?

The other concern about student loans is there is no tangible collateral to back them up, technically they increase your earning capability but, to me, I would want to get rid of that "pet" as soon as possible...just an opinion.

Me too. In fact, if something really bad ever happened and the world was coming to an end (for you) and you were living in the streets after a bankruptcy, you STILL have to pay back every penny of that loan. A student loan can haunt you more than a mortgage if things get out of hand.

And anyone that thinks they are immune is crazy.

[Ima saver]

Re: Dave's Baby Steps: Which are you on and is it working?

Step one, save up $1000 for emergencies
step two, pay off all debt except house
step three, save the rest of your emergency fund(3-6 months of living expenses)
step four, fully fund all pre tax retirementsavings, 401's, roth ira's, etc.
step five, start college funds
step six, pay off your mortgage
step seven, start getting rich, mutual funds, bonds, stocks, etc.

[b4freedom]

Re: Dave's Baby Steps: Which are you on and is it working?

Well, I still think his plan is solid. What a lot of people complain about is that his plan doesn't apply to them 10000%. Hey, his plan is only 7 steps and you can't make everyone happy.

His plan works for most people. Simple people like me.

I doubt the bank is loosing money on your loan. Even at 2.5%. I mean, maybe they are but I am sure they are making it up with some other sap paying 17%.

My student loans are 4.85% but I can assure you, inflation or not, I FEEL that money leaving my account. I don't see how she can't FEEL the money leaving her account. :-)

Do the math: $45,000k over 20 years at 2.25% equals a monthly payment of $233.01. $233.01/month multiplied by 20 years equals $55,923.29. Inflation rate is historically 3% a year. (Inflation is currently over 4%). $55,923.29 adjusted for 3% inflation over 20 years is equal to $30,410.77. $30,410.77 is less then $45,000. If you think I'm wrong on the math, consult a mathematician.

Combine that with the tax breaks and it works out nicely for us.

I have a friend who has $153k in student loans (law school) she hasn’t consolidated and is paying around 8% over 20 years. In her situation, I’d say pay them off as soon as possible. She is only earning around $30k a year. I’d advice her to go bankrupt, except you can’t include student loans in bankruptcy.

What most people don’t realize is that they are losing money when they put savings into a low yield savings account. Currently, inflation is over 4%. If you’re not earning more then 4% on your money, you’re slowly losing it. Inflation is an invisible beast.

[Ima saver]

Re: Dave's Baby Steps: Which are you on and is it working?

I do have a car payment but I could pay it off in a second. I am paying such low interest on it, that I make more money earning interest on the money.

[cbmeeks]

Re: Dave's Baby Steps: Which are you on and is it working?

Do the math: $45,000k over 20 years at 2.25% equals a monthly payment of $233.01. $233.01/month multiplied by 20 years equals $55,923.29. Inflation rate is historically 3% a year. (Inflation is currently over 4%). $55,923.29 adjusted for 3% inflation over 20 years is equal to $30,410.77. $30,410.77 is less then $45,000. If you think I'm wrong on the math, consult a mathematician.

Combine that with the tax breaks and it works out nicely for us.

I don't need to do the math. The math isn't what I disagree with.
You borrow money with interest, you pay back more than you borrow.

Here is some more math. $0.00 borrowed over 20 years at any interest rate equals $0.00 I have to pay per month regardless of inflation. I would take that over your/her deal any day of the week.

But if paying interest is a comfortable thing that works out nice for you then enjoy. I'd rather take that money and give it to people like, oh, airlines when I travel to Paris. That's a lot easier when you have no debt.

I have a friend who has $153k in student loans (law school) she hasn’t consolidated and is paying around 8% over 20 years. In her situation, I’d say pay them off as soon as possible. She is only earning around $30k a year. I’d advice her to go bankrupt, except you can’t include student loans in bankruptcy.

No offense, but I can make $30k/year as a manager of McDonalds and not need $153k of loans. I hope for her sake she is just starting out.

What most people don’t realize is that they are losing money when they put savings into a low yield savings account. Currently, inflation is over 4%. If you’re not earning more then 4% on your money, you’re slowly losing it. Inflation is an invisible beast.

I won't argue that. But you don't realize that the faster you can remove debt, the MORE you can put into savings and the more money you make.

If inflation is 4% like you say and you are paying 2.5% on a loan, guess what, you are paying 6.5% on money that could be earning more.

But, I am more upset at myself. I keep getting into these arguments. It freaking baffles me the amount of people on here that are "getting rich" by shuffling debt. Money they don't own.

And I will quote a movie here, "Doesn't anybody notice this? I feel like I'm taking crazy pills!"

[Ima saver]

Re: Dave's Baby Steps: Which are you on and is it working?

Oh, I don't think anyone here is getting rich on it. I got two coupons for free dog food, but that is not getting me rich!! I don't change accounts from bank to bank ever time the rates are raised. I probably should, but it is annoying to me, to do.

[b4freedom]

Re: Dave's Baby Steps: Which are you on and is it working?

I don't need to do the math. The math isn't what I disagree with.
You borrow money with interest, you pay back more than you borrow.

Here is some more math. $0.00 borrowed over 20 years at any interest rate equals $0.00 I have to pay per month regardless of inflation. I would take that over your/her deal any day of the week.

But if paying interest is a comfortable thing that works out nice for you then enjoy. I'd rather take that money and give it to people like, oh, airlines when I travel to Paris. That's a lot easier when you have no debt.




No offense, but I can make $30k/year as a manager of McDonalds and not need $153k of loans. I hope for her sake she is just starting out.




I won't argue that. But you don't realize that the faster you can remove debt, the MORE you can put into savings and the more money you make.

If inflation is 4% like you say and you are paying 2.5% on a loan, guess what, you are paying 6.5% on money that could be earning more.

But, I am more upset at myself. I keep getting into these arguments. It freaking baffles me the amount of people on here that are "getting rich" by shuffling debt. Money they don't own.

And I will quote a movie here, "Doesn't anybody notice this? I feel like I'm taking crazy pills!"

Yes, my friend is just starting out as a lawyer.

Yes, you are correct when you say “You borrow money with interest, you pay back more than you borrow.” However, the value of the money you pay back decreases over time. And if the inflation rate is above the rate of your loan it pays to not pay it off.

If my wife had $45k to pay for college, she would have paid cash, but she didn’t have that. So, she borrowed. Now the choice is, do we pay it off now or do we pay it off tomorrow. And the answer is, pay it off tomorrow. And the reason is because $1 today is worth $0.97 next year. And, it’s worth $0.94 the year after that. In fact, after 20 years of 3% inflation, $1 is only worth only ~$0.54.

Also, you can’t just add 4% inflation to 2.5% to get 6.5%. 4% inflation is the amount of money that you are losing every year. That’s the amount of money all Americans are losing every year by saving.

No offense, but, I see why the simple rules work.

I’ll tell you what; I’ll give you $100, if you can get Dave Ramsey to agree with you and you can prove it. If he has a show, call in and ask him, “I have a student loan of $45,000 for 20 years at 2.25%. Is it better to prepay the principle on that loan or is better to invest?” If he says, "prepay the principle", you earn $100 that I’ll send to you via paypal. If he says, invest, you send me $1.00 via paypal.

[cbmeeks]

Re: Dave's Baby Steps: Which are you on and is it working?

If my wife had $45k to pay for college, she would have paid cash, but she didn’t have that. So, she borrowed. Now the choice is, do we pay it off now or do we pay it off tomorrow. And the answer is, pay it off tomorrow. And the reason is because $1 today is worth $0.97 next year. And, it’s worth $0.94 the year after that. In fact, after 20 years of 3% inflation, $1 is only worth only ~$0.54.

So, in theory, the longer you keep a loan, the less you pay back because the actual dollars you send them is worth less each year? Oh wait, only if the interest of the loan is LESS than inflation?

hmmmm.....

lol


Seriously, I KNOW what you are saying. You are saying that paying the minimums on a loan and taking the extra that I would send in to pay it off and invest that extra is smarter because the return on that extra in 20 years would be worth more than the money I lost paying towards the principal. I imagine on paper this works quite well. And I surely can't lecture on taking out loans (read my sig). BUT, the world isn't a perfect formula like the one you are living. And contrary to popular belief, DR isn't my God. I actually disagree with a few things he says (religion, etc).

But my theory is to reduce debt the best/fastest way you can.


Oh, and if you listened to DR a lot you would know that he always says to STOP investing TEMPORARILY while you are Baby Step 2. I've never heard him say that "Sure, it's ok to stop paying of debt and send that extra money into investments."

The only time he says to invest before you are debt free is when you only have a mortgage (step 6).

BUT, here is what is really important. What works for me may not work for you and vice-versa. I am only $14,000 in student loans. I will pay mine of quicker (based purely on total value of loan).

I DO hear what you are saying. I only have one giant loan and that is my mortgage. Your wife has a giant student loan. So, it probably works better for you to pay the minimums since it is so high.....just like a mortgage.

cbmeeks

**** EDIT ****

Oh, one more thing. You are working on the premise that your wife will keep the loan for the 20 years. Yes, your numbers add up of 20 years. But pay that loan off in 1-4 years and see how much difference it makes.

Granted, you might not be able to pay that off that quickly.

But the numbers change a bit. ;-)

[puck36]

Re: Dave's Baby Steps: Which are you on and is it working?

Thanks for the link.

I glanced at his stuff briefly. I don’t agree with some of it. But, I could appreciate the simple steps. Maybe I should share them with my mom.

I don’t agree when he says in his second step, “…begin intensely getting rid of all debt (except the house)…”. Some debt isn’t worth paying off. For example, my wife has a student loan for around $45k with a 20 year fixed rate of 2.25%. Yes, 2.25%. We pay the minimum monthly payment. We get a tax credit for the interest we pay. Additionally, paying additional principle would be a waste of money because 2.25% is below the inflation rate. Because it’s below the inflation rate, we will actually pay less in “real” dollars then what the loan actually cost (aka, the banks lose money). Furthermore, the additional principle would be better applied towards an account earning a higher interest rate.

But…
But…
But…

You can start step 5 today and it will cost you nothing. Go to upromise.com and sign up. I signed up 3 years ago. My son, less then a year old, already has nearly $1500 thanks to upromise. AND, IT COST ME NOTHING!!!

Why don't you pay off the student loan and give the money to a church. You still get the same tax write off.

[Lemony]

Re: Dave's Baby Steps: Which are you on and is it working?

We're working on all the steps at once, but our current focus is strongest on step 2 (paying off debt.)

We still contribute to long-term savings and retirement because the interest rate differential between savings and debt is beneficial for us. Our retirement contribution is also matched by DH's company, so we don't want to lose out on that.

We started with $60K in debt, and 18 months later we're down to $30K. In that time it has been necessary to purchase a brand new water heater (used a cashback CC and PIF immediately), and a new-to-us minivan (paid cash), so we're doing pretty good. All else being equal, we'll be debt free in 2 years and mortgage free in 6 years.

We also do baby step 7 (build wealth and give it away) because it gives us warm fuzzies. I would feel selfish if I didn't share my good fortunes.

[b4freedom]

Re: Dave's Baby Steps: Which are you on and is it working?

The only time he says to invest before you are debt free is when you only have a mortgage (step 6).

BUT, here is what is really important. What works for me may not work for you and vice-versa. I am only $14,000 in student loans. I will pay mine of quicker (based purely on total value of loan).

I DO hear what you are saying. I only have one giant loan and that is my mortgage. Your wife has a giant student loan. So, it probably works better for you to pay the minimums since it is so high.....just like a mortgage.

You're right, what works for us may not work for you.

Also, our mortgage is 5.625% over 30 years. I'd prefer to pay the higher interest rate off and not the lower one (2.25%). Please understand that I don’t like debt. Except for the mortgage and student loans, we don’t have debt.

[b4freedom]

Re: Dave's Baby Steps: Which are you on and is it working?

Why don't you pay off the student loan and give the money to a church. You still get the same tax write off.

What church?

[debtfreesteve]

Re: Dave's Baby Steps: Which are you on and is it working?

You're right, what works for us may not work for you.

Also, our mortgage is 5.625% over 30 years. I'd prefer to pay the higher interest rate off and not the lower one (2.25%). Please understand that I don’t like debt. Except for the mortgage and student loans, we don’t have debt.

No difference in student loan debt, and any other type of debt. It has no corresponding asset value, just like credit card debts, or personal loans, et all.

[sweeps]

Re: Dave's Baby Steps: Which are you on and is it working?

No difference in student loan debt, and any other type of debt. It has no corresponding asset value, just like credit card debts, or personal loans, et all.

True, student loans are not backed by an asset, but they are different from credit card debt and personal debt in that (1) the interest is tax-deductible and (2) most student loans are simple interest loans as opposed to compound interest loans like many other types of debt.