Dave Ramsey's debt plans

Radio host and author Dave Ramsey was recently featured in the New York Times as an anti-debt crusader. While his ideas about credit are a bit extreme, Ramsey's debt reduction plans are valid for anyone who wants to go from being in debt to saving for their future. His main debt reduction plan goes like this:

• Establish a $1,000 emergency fund first
• Then pay off all your debts
• Build up a larger emergency fund
• Establish an IRA savings program
• Save for your children's education
• Pay off your home
• Invest seriously

Along with these steps Ramsey advocates not using credit cards or loans. This is a great plan for someone who is dedicated and has the means to get started. But many people may stall out on the first step before they even start paying off their debts. Without the emergency fund and without credit cards, a consumer could end up in more trouble than before.

In the financial world, balance is key. Having a balance of accounts, debts and credit limits, savings and income, all add up to healthy finances. CreditBloggers recommends following Ramsey's debt reduction plans but also keeping a healthy and moderate amount of credit. Using one or two credit cards each month and paying the balance in full will not add to your debt problems and will help you keep a high credit score.

Just like a glass of red wine once in a while is actually good for you but a bottle of wine a day is a sign of a problem, using credit moderately is good for your finances but carrying thousands of dollars in balances is a sign of a serious problem. If you are a true debt-aholic, following Ramsey's advice for a debt free life may be the only way to have healthy finances. But most people have the power to maintain a healthy balance of credit, debt and savings.

Comments

[Emma]

"This is a great plan for someone who is dedicated and has the means to get started."

It has little to do with means, and more to do with behavior. If you already talk yourself out of the first step, nothing is gonna help you get financially fit. And loans are not the solution.

"CreditBloggers recommends following Ramsey's debt reduction plans but also keeping a healthy and moderate amount of credit."

You know what I'm gonna say about this one, but I'll say it anyway, healthy finances don't involve credit. They have to do with using the money you have wisely and responsibly. If people do that, they won't need credit. And that doesn't change based on how much money you make.

"But most people have the power to maintain a healthy balance of credit, debt and savings."

I hate to say this Emily, but you're wrong. Just look at the numbers of people in debt and the negative savings rate that is now lower than it has been since the great depression.

[Emma]

These are links to reinforce that last paragraph:

http://moneycentral.msn.com/content/SavingandDebt/P70581.asp
http://www.forbes.com/personalfinance/2005/01/11/cx_sr_0111consumerdebt.html
http://www.cbsnews.com/stories/2006/02/07/business/main1293943.shtml?CMP=OTC-RSSFeed&source=RSS&attr=Business_1293943
http://www.chicagotribune.com/business/chi-0601310156jan31,1,6429103.story?coll=chi-business-hed

Those numbers don't lie.

[EmilyPeters]

I agree that the current credit card debt averages ($9,000) and the savings averages ($0) are obscene. Americans definitely need to rethink their financial management ideas. However, it is true that people have the power to use a balance of credit, debt and savings responsibly. It may not be easy but it is possible. And if there is a choice between using credit responsibly or not using credit at all, it is better to try to use credit responsibly.

It's similar to the choice between paying for health insurance or not paying for health insurance. Sure, there is a choice and you certainly could save money by not paying for health insurance, but overall it's better to be insured.

[Emma]

I like that we can discuss this like mature adults, given that we don't agree on everything.

A few years ago, I could've cared less about our finances or financial matters as a whole. Once we hit bottom, we were forced to look at it and Dave Ramsey was that light at the end of tunnel. Now, I can't not read financial articles and books. I've always enjoyed reading, but money was not on the list. Now, it's one of the top on my list.

I have my own blog, where I talk about our financial journey, opinions, and books I'm reading or have read. I would appreciate your feedback. http://underclings.blogspot.com/ I don't want it to look like I'm spamming. I just wanted to get your thoughts since I enjoy your commentary.

Thanks.

[EmilyPeters]

I like our discussions too! There are certainly few absolutes in the personal finance world...the rest is up for debate. Basically, whatever sort of financial strategy works to get you back on track is great! I'll check out your blog soon.