Some of the basic principles are: debt is bad, once you can pay off your debt you will reduce your stress dramatically, increase your quality of life dramatically, and begin to quickly build wealth. In America we are raised in a society of instant gratification. If you can't afford it, charge it! Everyone has two car loans, a mortgage they can't afford, and some credit card debt, as long as you can make the payments it's no big deal, right? Wrong!
Dave Ramsey's plan is laid out clearly and simply. The first step is to build a "baby emergency fund" of $1000 so you can stop putting emergency purchases on the credit card. Then you start hacking away at your debt in a very deliberate manner. You list all your debts, smallest to largest, regardless of interest rate and you start throwing all your extra money at the smallest. I would've paid towards the highest interest debt but seeing one thing after another paid off encourages you to keep going. At first you think you have no extra money but once you make a budget you realize you probably do and you probably can make some cuts to the budget. If you absolutely have no extra money Dave Ramsey suggests getting a 2nd job in the short term, selling items you can live without, or even selling cars with big car payments to free up money in the budget. If there's a will, there's a way!
Another thing he hammers home is delayed gratification. You do not buy a new car or go on vacation until you can pay for it with cash. How many people do you know without a car payment? Not many, I bet! I will tell you from personal experience this has freed up the most money in our budget and helped us the most in making progress in paying off our debts. Prior to starting the Total Money Makeover hubby and I each had $300 per month car payments, yikes! If you need or want a new car you don't buy it until you have the cash to pay for it. Even if you can afford it he never suggests buying a brand new car because they lose so much value in the first two years. If you can afford it he suggests buying a 2 year old car with low miles. This way it is very reliable but has already depreciated significantly while you weren't the owner. Saving cash to pay for a car in our credit based society sounds crazy but it is easily attainable once you pay off your other debts. For example if you previously had $600 in car payments and $400 in credit card payments. Once those are paid off you have $1000 extra each month. If you want to buy a $12,000 car you would only have to save for 12 months and you'd never have a car payment.
Since we started the plan we have paid off both our car loans, all our credit debt (we had A LOT), and have a 4 month living expenses emergency fund (though as a single income household our goal is 6 months living expenses). Due to financial freedom we now have without all that debt, we were able to purchase our first house this year. Our new home is much nicer and much bigger than our rental home but the mortgage is the same. Hubby and I both still have large balances on our student loans and our next goal will be to pay those off entirely. Since we owe so much it will likely be at least 3 years before we meet that goal but it will be so great to be debt free besides our mortgage. After that we start chipping away at our mortgage. Long before retirement our mortgage will be paid off and we'll enter retirement completely debt free. We are also able to be a single income family and I am able to stay home now while our children are little, which I am very thankful for.
We made a big step in our Total Money Makeover journey this past week. We purchased our first new (used) car entirely with cash. What an amazing feeling! In the process of negotiating the deal the dealer could not get the car within our budget at first and suggested we finance the difference. We held firm and told him we don't finance cars and don't take on new debt. The dealer flat out told us that paying cash for a car is un-American. Hubby and I silently chuckled to ourselves and knew we were on the right track. Dave Ramsey says in his book when people start telling you you're crazy for doing things this way you know you're on the right track! Another family with 5 kids was purchasing a different minivan and peeked their heads in at the end and said good job paying cash for our car. Apparently they overheard and the dealer said they also paid cash for their van, another Dave Ramsey follower I bet.
We now have a van that seats 7 and plenty of room for our soon-to-be family of 6. We got what we wanted and still don't have a car payment. It truly is an amazing feeling and I couldn't be happier!
Front view of our 2005 Toyota Sienna
Side view of our new car