The story of how I paid off $60,000 in student loan debt in two years: Part 3
cherrypicking the advice of an imperfect guru
This post will make more sense if you read part 1 and part 2.
If you read neither, just remember this disclaimer from part 1:
What I do with money, even as a financial counselor in-training, is not necessarily what you “should” do with money. What people do with money is dictated by their individual circumstances and by their values, both of which can change over time.
So I’m at my computer, typing “How do I pay off my student loans as soon as possible?” into Google.
And what I found was a man named Dave Ramsey.
Dave is a controversial figure for many reasons. I didn’t know all of those reasons when I found him, but I was immediately skeptical of his debt pay-down system.
It is rigid, it is extreme, and it is mighty hubristic—Dave believes his system is best, works for everyone, and that no one should try to modify it.
But I believe in imperfect teachers. I modified the hell out of Dave’s system to fit me and my life at the time. And after two years, I paid off all of my student loan debt.
In the next section I’ll take you through Dave’s system. I’ll tell you what I followed and what I changed.
Dave breaks down his one-size-fits-all financial advice into seven “baby steps.” I’ll just focus on the first two.
Baby Step 1: Save $1,000 in a starter emergency fund
On his call-in radio show and podcast, Dave would often say that most Americans can’t afford a $1,000 emergency. He’s right about that. Only 44% of Americans say that they could cover a $1,000 emergency, and about a quarter of adults have no emergency savings at all.
In order to build that $1,000 emergency fund, Dave tells people to:
Stop all contributions to retirement accounts (which runs counter to conventional advice).
Make a zero-based budget:
Figure out how much you take home each month, then give every one of those dollars one of three “jobs” to do:
Pay for absolute essentials – rent, utilities, groceries, phone bill, etc.
Pay off debt.
Tithe (Dave & co. are conservative Christians) or find some way to give some money away.
Cut out all “wants” from your budget and throw all of that extra money at your debt.
Find extra sources of income to accelerate your progress.
Objections
A $1,000 emergency fund would barely cover a month of expenses in most places in America. His advice runs contrary to standard financial advice out there, which says you should aim for a 3-6 month emergency fund before trying to tackle your debt. (I do appreciate that the 3-6 month goal can also be a barrier to people new to money management, and that Dave’s system gives people a lower bar to clear to begin their debt repayment journeys). But Dave also doesn’t believe in using credit. He wants people who are following his plan to shun the credit system too. He tells people to cut up all of their credit cards, and only use this minuscule emergency fund to cover unexpected expenses.
Cutting out all “wants” is unrealistic and unsustainable, imo.
What I did:
I did make a bare bones, zero-based budget.
I did add a budget line for giving - felt good.
What I did not do:
I did not knock my emergency fund down to $1,000 – I made it one month of expenses instead.
I did not eliminate all of my “wants” - I treated myself to big and small things, including an international bachelorette trip.
I did not cut up my credit cards because:
I had no credit card debt. I paid off small balances every month and racked up points and cash back in the process.
There are better protections on purchases when you use a credit card. It’s very hard to dispute purchases on debit cards compared to credit cards.
Credit is important to build if I want a mortgage or car loan someday.
I did not stop contributing to my 403b. I did reduce my contributions, but only to the point where I could still get a company match.
I did not take on a second job – I was still grieving when I started this journey and grief zapped me of excess energy.
Baby Step 2: Pay off all debt, except mortgage debt, using the debt snowball method.
Dave believes people should use the “debt snowball” method to pay off debt. It works like this:
List your debts from smallest to largest by total
Pay off the debt with the smallest total first while making minimum payments on all the rest.
Once you’re done paying off the smallest debt, move onto the next smallest debt
So let’s say you’re in $25,000 in debt, and the debt breaks down like this:
$10,000 car loan (7% interest)
$12,000 private student loan (10% interest)
$1,000 credit card debt (9% interest)
$2,000 federal student loan (3% interest)
If you follow the debt snowball method you’d pay off your debt in the following order:
$1,000 credit card (9% interest)
$2,000 federal student loan (3% interest)
$10,000 car loan (7% interest)
$12,000 private student loan (10% interest)
Eat the small fish, then eat the bigger fish.
Objection
There is another debt repayment option out there that makes more mathematical sense.
It’s called the “debt avalanche” method and it works like this:
List your debts from the lowest interest rate to the highest interest rate.
Pay minimums on all of the debts except the one with the highest interest rate.
Throw all of your money at the debt with the highest interest rate first.
Once that first debt is paid off, move on to the debt with the second highest interest rate, and so on. This will save you money on interest payments in the long run.
If you follow the debt avalanche method you’d pay off the same $25,000 debt in the following order:
$12,000 private student loan (10%)
$1,000 credit card (9%)
$10,000 car loan (7%)
$2,000 federal student loan (3%)
Dave does says it’s psychologically easier to use the debt snowball method instead. With the debt snowball method, you get fast wins early on, which Dave says will keep you motivated to keep your head in the game, even if you accrue more interest on the high interest debt in the meantime.
What I did:
My student loans were broken up into smaller loans. It just so happened that all of those loans had comparable interest rates.
So I picked the Dave-endorsed snowball method. I did notice that getting those smaller wins felt good and motivated me to keep going.
Less was more
The process of using my zero-based bare bones budget was life changing.
Going without a ton of excess luxuries freed me up to understand that those weren’t essential to living a fulfilling life.
I’m not saying I’m grateful for the debt I was in, and I’m not saying that becoming debt free solved all of my problems, but those two years on my zero-based monk budget showed me – with striking clarity — what I actually need, what I actually want and what I actually value.
Next week, I’ll show you my budgeting system and what exactly was in my zero-based, bare bones budget. In future posts I’ll tell you what I learned from other teachers I stumbled upon along the way.
ETC.
When Dave Ramsey Changes Your Life - Joel Anderson, Slate
4 Things You Should Care About More Than Having a Dream Job - The Financial Diet
“Once you're able to look at a situation for what it is and you don't lie to yourself, you’re able to look at death straight in the eyes, you’re able to deal with it.
And this is not some grandiose philosophical statement. I see that every time I go back to
Cameroon.
Coming from the perspective of somebody who has lived most of her life overseas, yes, you can come and be like, ‘Oh my God, these people are suffering. They don't have this. They don't have that.’ So you can look at their daily lives from a perspective of lack and deficiency. But that is not how they're living their lives…They're still trying to work whatever job they can do. They’re still having children. They're still having a certain kind of joy.
Horrible things happen to them, but they don't sit in a state of pessimism and paralysis…
But then at the same time, I'm also fully aware that life could be so much better…What about making sure that people have decent housing, free health care?
So you see, that's why I'm constantly engaging the material conditions of our lives... it's not just up to the individual. That's where the political comes in.”
- Nathalie Etoke on The Gray Area
Thanks for writing this, Bethel. It's an excellent analysis of varying approaches to basic tools and, more importantly, ways of thinking about living, wanting, needing, spending. I find I do - and regarding a home loan - once did a number of these practices, both Ramsey's and yours. I found your comments on the psychology of spending, the process toward discovering what you need, to complement many thoughts I had about the same things in the past few years as I saved money to start a house reno in the Azores. I'm glad I subscribed.