Use salary hike to pay off debt
Posted: September 11, 2007 1:00 a.m. Eastern
Dave Ramsey is a nationally syndicated radio talk-show host and best-selling author. His life experience gives him an unusually deep perspective and insight into life and money matters.
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I’ll be graduating college in December with a degree in elementary education, and I have a job waiting for me. It will be the first time in my life I’ve made more than minimum wage, and it will bring our household income up to about $75,000. I’ve got $15,000 in student loan debt, $6,000 to pay off from a repossession a while back and $3,000 in credit card debt. How should I handle this salary increase?
Congratulations on your degree and the decision to get serious with a plan for your money! And here’s some more good news for you. If you guys keep living the way you have been and put the rest toward debt, you can have it knocked out in about a year.
But just because you’re making some money doesn’t mean you should double your entertainment budget or pick up a car payment. Sit down together and work out a written monthly budget. Give every dollar a name before you spend it, and don’t forget to work the debt snowball, too. List your debts from smallest to largest, pay minimum payments on the two largest and then attack that credit card debt with a vengeance! Chances are you can get these taken care of in a month or two. Once you’ve paid that off, roll the money from that payment over and apply it plus any other cash you can scrape up toward the car repo. If that debt has any age on it you can probably work a deal for 50 cents on the dollar and get out paying just half.
Once you done this, you’ll have a bunch of cash to throw at those students loans and get the debt off your back once and for all. Good luck, Mickey!
I like Dave. He’s one of the sources I often cite. He wants people to be debt free. Admirable, but I’m not sure that I agree with that strategy.
Here’s a classic case of that disagreement.
I think that there is “good debt” and “bad debt”.
“Good debt” is a 30 year fixed home mortgage, a fixed rate student loan for an education that earns income, or such. I’ll even go so far as to call a fixed rate credit union car loan that is tuned to the depreciation of the car and enables one to earn a living as a “good” debt. I think that he’s wrong to characterize these in the same way as “bad debt”. The credit cards, the car leases, the home equity loans for frivolous purposes. Anything that is a variable interest rate.
I think that he ignores the tax aspects of some transactions. And, his advice borders on the immoral. (Which is why I’m blogging about it!)
Let’s take the example at hand.
There’s no disagreement about the credit card debt. That needs nuking right away. The fact that there is credit card debt implies that the person doesn’t have a budget. Which is really not OK. Even though lot’s of people do it. (When you don’t have a destination, any road is going your way.)
Where I have a moral quibble is about settling the repo for pennies on the dollar. Just because when CAN do it, doesn’t make it morally right to do it. If the person borrowed it and got repoed, they are MORALLY obligated to pay the whole thing. It’s about doing the right thing.
Now on to the “student loan”. I’m assuming that it’s a typical fixed rate low interest student loan. I’ll quibble about paying that off early.
I’d be stressing an emergency fund. (Maybe even before paying off the credit card or the repo!) I’d want a savings account equal to an appropriate number of months of the “burn rate”. The number of months is determined by how long it would take to replace the income stream.
After the efund, credit card, and repo, but before the student loan, I’d be thinking IRA. (Early money is so much more important than late money.)
Then, I’d be thinking of home ownership.
Those are two tax advantaged investments that shouldn’t be ignored in a sem-religious fervor to be “debt free”.
IMHO, I think he’s wrong. But, he’s the big columnist and I’m just an injineer. And, in the case of the repo, I think his advice is “immoral” which is why I took the time to write this post. Just a voice crying in the wilderness.
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