Total Survivalist Blog: cash

First and foremost I am not a financial planner or a financial adviser or an econ major or really anything at all that is close to an authority on things financial. What I am going to say is a combination of what I personally do and what I think. If you choose to follow my lead odds are it will work fine for you because it is a pretty generic and conservative way of doing things BUT all decisions you choose to make and their consequences (good or bad) are yours and yours alone. Use your head, study up and make decisions but OWN THEM because the consequences are yours alone. Consider yourselves disclaimed.

On a semi random note while writing this I found an

interesting blog post about some guys thoughts

on the Dave Ramsey 7 Baby Steps plan. I will go step by step and then give some more general thoughts at the end.

Anyway to my thoughts. The steps will be bold and my thoughts on each will follow.

Step 1: $1,000 to start an Emergency Fund.

The first step is good. $1,000 for most people and $500 for those with pretty low incomes. Some folks might say this is not enough and that it will not ‘cover’ a lot of emergencies. I duno entirely about that but the big thing to keep in mind is that this is just the first step and you will save more later. As he says “$1,000 will not cover every emergency but it will cover a lot of them”. I am inclined to agree with that statement and especially for someone who had absolutely no savings this is a big improvement. If you think that amount of money is a bit low because you have a big family and such then go with one months cash expenses.

I personally thing this is great because it more or less meshes perfectly with my concept of a

cash emergency fund

if you just have it in cash.

See my old post

for thoughts on what denominations this should be in.

Step 2: Pay off all debt using the Debt Snowball

. In this phase you pay off every debt except a home mortgage if applicable. I do not think this is a bad idea and it is designed to give some quick wins which can be rewarding. It is worth mentioning that higher interest rates should probably have some priority. Also if you have a debt that has significant emotions attached to it such as a loan from a friend or family member it might be good to pay that off first regardless of interest. In any case paying off all your debts is a good thing to do. There is of course the implied task to avoid getting back into debt or at least use it in a better manner in the future.

Step 3: 3 to 6 months of expenses in savings.

This is a very important piece also.

As Dave Ramsey pointed out in his book

“Money Magazine says 78% of Americans will have a major unexpected event in the next 10 years”. Things happen, jobs are lost or you are cut to part time, income fluctuates, cars blow up, medical problems bring unexpected expenses, homes are damaged and all sorts of other crappy stuff happens. This will cover you in a lot of situations or at least give you time to figure something else out.

The biggest thing I learned here from the book is that most of these events are non job related so even those with a secure income need an emergency fund because stuff happens and from time to time you need more cash than can be massaged out of the monthly budget. Leaning more toward 3 months living expenses will probably work for those with secure jobs is probably reasonable and for those with fluctuating incomes (real estate or any sort of contract or comission work) and those in job fields where layoffs are frequent (construction, consulting, etc) 6 months or maybe even longer would be prudent. The point that single folks or one income families need to have a bigger emergency fund was pointed out because if the wage earner looses their job for whatever reason 100% of their income is gone instead of just part of it for a dual income family.

My biggest disagreement with this program is that (at least in the beginning which can take years) it over emphasizes getting out of debt at the expense of setting up

a real emergency fund

by waiting until you have absolutely no debt (except a home mortgage) to save more than the original $1,000 from step one. While having cash in the bank earning 3% and debt at a higher interest rate doesn’t make absolutely perfect financial sense I believe holding more cash is probably wise. The reason I believe in saving even if you have some debt is that if things get completely fucked you can live off of savings for awhile. While lower bills will help some they will not keep a roof over your head or the power on or food in your stomach or gas in the car.

Lets say you owe $10,000 in miscilanouse debt and instead of putting every available dollar towards paying off that debt you save some. You have squirreled away about $4,000 in savings (which is about three months living expenses for you)and the $1,000 from step 1. All of a sudden out of the blue you loose your job. Having only $6,000 in debt would be helpful because you would have somewhat lower expenses but what you need is cash to survive until you replace the lost income from your job. Absolute worst case you can prioritize essentials (shelter, food, transportation, etc) and use cash to survive for awhile which makes holding some cash even if you have debt better than less debt and no cash.

While it is true that the place between steps 2 and 3 is temporary it averages almost two years which is a long time, I believe 18-24 months is what the book says. I would personally rather have debt for 2.5-3 years and have money in the bank to cover us should it be needed.

Step 4: Invest 15% of household income into Roth IRAs and pre-tax retirement

. I find nothing to argue with in this one though getting back to my last point I do think it is dangerous to postpone saving for retirement. If you stick perfectly with this plan it will work but it is always easier to save for something (especially as abstract for us youngsters as retirement) next month. Maybe you aren’t able to save 15% but at least save something NOW AND EVERY PAYCHECK. We need to up the amount we put away for retirement. Got to think some and talk to Wifey about this matter at a later date.

Step 5: College funding for children

. I think if parents have their financial house in order making preparations for childrens higher education is absolutely the right thing to do. How much, when and under what conditions Mom and Dad will help Timmy go to school is a stand alone book. However isn’t it best to let your opinion and the circumstances decide these matters with enough cash saved to back it up whatever seems best? There was some fairly specific advice on this matter in

the book

. It seems like the key to this is planning early and sticking with it. Unless you are fabulously wealthy and know 100% that when the time comes you can just write a check you need to plan.

Step 6: Pay off home early

. Can’t argue with this step in any way. The great point was made that while most people say this just isn’t realistic it is IF YOU DO NOT HAVE ANY OTHER DEBTS!

Step 7: Build wealth and give! Invest in mutual funds and real estate

. Got nothing to argue with about this one.

Now for some more general thoughts. I think all do the steps are good but don’t really think that working on one means another can not be addressed. In particular I think that following the steps exactly is a great thing to do to get out of being in a real crappy financial situation. However I am not convinced that someone who is already working on their debts (if applicable), saving for emergencies and retirement needs to radically change their plan.

Also I sort of disagree with Dave Ramsey on one thing. He is absolutely against car loans and often the first suggestion is to get rid of a car with a loan and buy a couple thousand dollar junker for cash untill you can pay for better. Of course having a brand new truck that cost 30k and a car which cost 20k and payments for both with a combined income of 50k a year is insane. Selling these expensive cars which the people can not afford is an easy decision to make.

I think saying that all car loans are equally horrible is overly simplistic. Having a huge loan on an expensive car is stupid but a smaller loan on a reasonable car is not the same thing.

I personally disagree with that plan simply because junker cars break all the time. Of course any used car (heck any car really) are a bit of a craps shoot but those in the $2,500 and below price range seem to cause the most problems. Realistically for a lot of folks $2500 or so is about the amount of cash they can readily scrape together in cash.

Maybe I feel this way because we took this advice and got burned. The last car we bought fell into this range and we bought it for cash.

It cost us several hundred dollars in miscilaneous repairs over the course of a few months and then died

. We later sold it for $400. I know lots of people who have had similar experiences. Sometimes you might get Grandma Johnsons used Honda civic and drive it for 100k but at least as often you will get a car that either $500’s the crap out of you or just dies, or both. [Yes I am aware that some good reliable vehicles can be found in this range and I am super happy you had great luck with the one you bought. That you need to mention it goes a long way towards the exception proving the rule. Also for the super mechanical these cars may turn out OK for you. ]

What we should have done is taken a couple thousand bucks of our money and then got a loan for enough to get something relatively new and low mileage say 7,000 dollars for a good few year old Toyota with reasonable mileage. Yeah having debt sucks and so does paying interest. Then again at least in that situation you know what you will be paying every month and the odds are high you will have a car that is trouble free for awhile.

I certainly do not think having a car/ truck payment is ideal. However you can probably make a lot worse decisions then getting a loan (at a reasonable rate) to purchase a reasonably priced reliable used car which you will drive until the wheels fall off.

Guess those are my thoughts. Would you like to share yours?