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So I just finished reading Baby Step #2 in Dave Ramsey's Total Money Makeover.
Step #1: Save $1,000 Emergency Fund
- I can do this with the money I have in savings. I like the idea of of framing the $1,000 in a cheap glass frame and writing on the front, "In Case of Emergency, Break Glass."
Step #2: The Debt Snowball
- I've been up in the air about Dave's plan because of my Credit Card and the desire to pay if off sooner rather than later. The problem with "my desire" is that I don't have the cash to pay off the entire balance so I don't get the momentum that the snowball plan offers. So...
- The rate on my credit card with a $18,500 balance is Prime + 6.99% or 10.24% today. The promotional rate on some of the balance has already expired. The remaining promotional rates expire in 1/2011 and 3/2011 and then the entire balance will be at Prime + 6.99%.
- I called around and the balance transfer offers weren't great. I transferred the balance from Chase to Bank of America at 1.99% through my statement cycle ending in 1/2012. Unfortunately, I could not get the 4% transfer fee waived or lowered. Trust me...I really tried. In the end, I am still saving with the balance transfer at 1.99% for 14 billing cycles.
- So, the issue with whether to use my savings and bonus to pay down my credit card is null at this point. If I use Ramsey's plan which I am betting 100% I will, I will be paying off the balances smallest to largest. That means, I will be knocking out a couple of student loans in full in January.
- The pain of having the credit card debt is probably still good for me. I know when it's paid off, it will be paid off for good.
On a side note, my grandmother has a severe case of alzheimers and we moved her into hospice care on Thursday. So, I will be coordinating with my Mom to get her services and arrangements in order. I will post more on that experience later but for now, we are just spending as much time with her as we can. Tell someone close to you today that you love them. =)
8 comments:
This is a fantastic spreadsheet that lets you look at different options for paying off your debts.
I personally used the debt snowball method.
http://www.vertex42.com/Calculators/debt-reduction-calculator.html
Here is a terrible question, but if you lost your job suddenly for whatever reason, how long could you meet all your payments for ? I just ask as although using savings to pay off debt helps reduce interest charges it might increase the risk of being under pressure if you lost your job.
Just saying to be helpful rather than pretend i know what i am talking about ! :) How many months expenses should an emergency fund cover ? I don't know but a question to ask as imagine the stress of losing your job and only having enough money to service debts for 1 month ! Still you probably have this all covered.
I'm so sorry to hear about your grandmother. I hope you and your family are okay.
As for the Debt Snowball, some do disagree with Dave. I think the main point is that if you pay off smaller ones first, even if they have lower rates, you free up a larger monthly payment to tackle the larger debts. Also, you need to try to scrape up any additional amount you can pay monthly. But I think you have already been doing that, so that won't be easy for you to do.
I also don't think I'm too comfortable with only $1,000. Maybe set aside 1 month of living expenses as you can rather than just $1,000.
You are on your way and I think you will do very well.
@ Anon: I've used this spreadsheet before and I love it. Thanks for the link because they've updated it since my last download. =)
@ Anon & Zuzu: I feel like I have pretty good job security for the next few years given that I work in the troubled loan department at the Bank. It is going to take years for the department to wind down all of these troubled loans and my portfolio has only grown over the past few months. There is no slow down in sight.
I am leary of the $1,000 eFund but I feel like if I have more than $1,000, I will just find a way to spend it. I know this is dumb but the reality is that I only have $5,000 left of my $10,000 eFund for exactly this reason. I might as well put it towards the debt before it's all gone.
At a salary of $75,600, gross monthly income of $6,300 and take home pay of $4,575. Do you guys know how much my unemployment might be should I get laid off or where I can go to look for information on how to calculate?
@ Zuzu: Thanks for your words about my Granny. ((hugs))
I've kept an eagle eye out for balance transfer offers in the last year, so I feel like I'm a pseudo-authority on this topic. Due to the CARD act passing, a lot of benefits for people that pay bills on time and use credit wisely went bye-bye. Another side effect was the balance transfer fees, typically 3-4%, had the maximum cap removed - I think it had to do with creative ways of finding new fees to charge consumers. No cap = more fees. Previously, one used to be able to pay $100 or $150 max. Now, there is no cap. Trust me, *I've* looked too.
As your credit card is over 10%, it may be worth it. Most of my debt is at 5% so it isn't really worth it to move it for a 1% gain, and even then, I'd have to make sure I only transfer what I'd be able to pay off in their low-interest time period, before it adjusts to a normal/high rate after 6 or 12 months. Another thing for you to keep in mind.
I have no idea how unemployment is calculated. You could probably get a rough estimate on the Illinois site - I would think.
I believe the point of the $1,000. efund is to get those who have none to save the $1,000 as fast as possible.... since you have a savings... I think Dave would say to keep $1,000. and then use the rest to pay off dept. I've been working on BS2 for a few months now and I see it is starting to work, I've paid off one little CC and one stupid tax... and now I have a goal to pay off the IRS in January....I have more after that but at least I have a direction now. I'm feeling very gazelle about it... even with Christmas fast approaching.
Sorry to hear about your Grandmother. Keeping your family in thoughts and Prayer.
Like I mentioned in my other comment, I love Daves plan... but I modify it just a little to fit me. I still do the debt snowball, however I moved my debt around. I took our a loan with a lower interest rate to pay off my credit cards with higher rates then I broke up my loan because BOA was offering 0% interest until March 2012... of course like you there was a 4% transfer fee, but my loan rate was a litter over 9%, so it still saves. So now I have 2 payments, I'm paying the minimum on the biggest one and everything else I have on the smaller one. So following the debt snowball is a great plan, just try to move your debt around to make it work the best for your plan.As far is the emergency fund… $1000 should be enough if you are disciplined… I’m trying to be, but I haven’t quite made it, so I’m putting $2000 in mine. Any bonuses and raises should definitely go to the snowball, seeing debts paid off is motivation to tackle the bigger ones. Good luck!
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