Author Topic: Coming From the School of Dave Ramsey...  (Read 11179 times)

ReRush

  • 5 O'Clock Shadow
  • *
  • Posts: 7
Coming From the School of Dave Ramsey...
« on: October 02, 2013, 12:42:08 AM »
It's been a long time since I've found a topic that I've been interested in and indulged in a forum (they seem to be dying nowdays) so I'm excited to be here.

I'm 23 - and married for 3 months!

I've worked hard since age 16 - and so has my wife. We're debt free and my wife is done with school. We've both been helped a little by our parents with cars, but I'm grateful to say that my wife is much better at saving than my past spending habits.

Right before we got married, I started listening to the Dave Ramsey podcast for several months - not missing a single day.

Basically, Dave Ramsey's personal finance philosophy goes like this:
Baby Step 1
$1,000 to start an Emergency Fund
Baby Step 2
Pay off all debt using the Debt Snowball
Baby Step 3
3 to 6 months of expenses in savings
Baby Step 4
Invest 15% of household income into Roth IRAs and pre-tax retirement
Baby Step 5
College funding for children
Baby Step 6
Pay off home early
Baby Step 7
Build wealth and give!

So now in October, I run into the Money Mustache blog on reddit and have begun to dabble and excited for more frugal advice/thinking.

Dave Ramsey is HUGE on Roth IRA's and I was a little surprised to see Mr. MM recommend an index fund without a Roth IRA. Maybe he's commented on them, I haven't read enough to see if he has. But I figured I might as well seek advice for investing for my personal situation.

Currently we sit at an emergency fund of $9000. So we're done with babystep 3.

Our budget:
Income Wifey (Teacher): 2200 After Taxes
My Part-Time Income: 800 After Taxes
Internet: $37
Power: $70
Transportation: $150
Insurance: $92
Charitable Donation: 10% of Income (Around 350-380)
Rent: $652
Food: $400 (We're shooting for $300 but she was raised in a family that hardly ate at home, so it's an adjustment)
Entertainment/Dates: $100
Shopping: $150 (I spoil her a little bit with letting her get clothes. this includes other random expenses like her unions dues)

So while we could save around $1000 - at least $800 of it has to be saved for our annual budget of the rest of my undergraduate and her masters degrees.

We really haven't been married to establish much of a trend, July and August net-income was skewed by furnishing our apartment - so maybe we can save more than these general outlines - (and maybe they're better than I'm giving myself credit)

How our life would be according to Dave Ramseys school of thought:
We'll cash flow school until we're done at the end of 2015 - our home goals - my wife (thankfully) does not want to be in a home until we find the house we want to stay and raise our children in. One of the things I'm absolutely set on is a 15 year mortgage. And the ideal home in our area is about $250k. For me, my goal would be to have a $100,000 downpayment so that with a 4-5% interest rate (we'll go high since we won't be buying for several years) that would only be $50000-60000 of interest. (I'm not sure my wife is quite on the boat of this big of a downpayment) Thus making a mortgage payment of $1100-1200 and thus being around 25% of our monthly budget - assuming it's reasonably safe to say I'll make $40000 when 2015 strolls around. Thus taking about 2 years to save up for a downpayment and be in a home by 2018 sometime. (These are safe assumptions, and I'm quite certain I'll make even more with consorted effort!) In Dave Ramsey's school of thought though, after you have an emergency fund you put at least 15% into ROTH IRA'S and THEN after that any money left over you put towards paying off the mortgage early. Right now anything remaining in our budget is negligible, so I'm just not sure what my thought about investing is.

So what would Mr MM thought say about Roth IRA's and the my life according to Dave Ramsey. Would I be better off investing now into non-ROTH-IRA index funds like Mr MM suggests now? Or wait until we're done with school at 25 years old and then start one of the two. Or do I not throw all my extra "savings" from 2016-2018 at a downpayment and start investing it during that time.

I guess because of this whole house thing (which is debt) - I don't understand how it factors into Mr MM's philosophy of saving 30-75% of your income and retiring early. The thought that I wouldn't have to wait til' 60+ to withdraw from a RothIRA is appealing, but I would really appreciate some # crunches and whatever advice you can throw at me!

Thanks again!



arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28264
  • Age: -999
  • Location: Seattle, WA
Re: Coming From the School of Dave Ramsey...
« Reply #1 on: October 02, 2013, 01:09:44 AM »
Where does MMM say not to use a Roth?

He's all about low-cost index funds because he believes they are the best way to invest, but absolutely you can invest in them within your Roth, you don't have to use a taxable account.

I sense there may be some confusion, so I ask this not in a condescending way, but just for clarification purposes: are you clear on what exactly a Roth IRA and what exactly index funds are?

Welcome to the forums!
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

ReRush

  • 5 O'Clock Shadow
  • *
  • Posts: 7
Re: Coming From the School of Dave Ramsey...
« Reply #2 on: October 02, 2013, 01:18:53 AM »
Index fund: a collection of stocks.

Roth IRA: you can roll anything into a roth (including an index fund, whatever stocks) but you pay taxes up front so when you take it out and you're in a higher tax bracket - you don't have to pay nearly as much taxes.

Edit: Correct? I never said Mr. MM doesn't believe in Roth's... I'm just saying he hasn't mentioned them at all from what I've read - and my understanding with a roth is you can't take the money out until you're in your 60's so... that would lead me to believe most of Mr. MM's money is just in a traditional account.
« Last Edit: October 02, 2013, 01:20:34 AM by ReRush »

Vitai Slade

  • Stubble
  • **
  • Posts: 114
  • Age: 30
Re: Coming From the School of Dave Ramsey...
« Reply #3 on: October 02, 2013, 01:22:45 AM »
Honestly? If it were me, I'd be taking $5,500 of that $9,000 you have saved up and shove it into the ROTH IRA bucket immediately. Go with some Vanguard index funds: Total Market [https://personal.vanguard.com/us/funds/snapshot?FundId=0085&FundIntExt=INT) would be best if you are just starting out with investing and it is your only/core holding). The great thing about a ROTH is that if an emergency comes up (which would be the ONLY reason you would touch that money ANYWAY) you can pull out the full $5,500 (assuming it hasn't gone down below that in value) and fund your emergency. You can always pull out the principal, just not the gains. You still have $3,500 with which to fund any emergencies that come up before dipping into the ROTH (unless you wanted to shove that in your wife's ROTH too). My ROTH doubles as my emergency fund. I don't want idle dollars sitting around losing 3% every year guaranteed (due to inflation) The other great thing about the ROTH accounts is that you can pull out the full amount (including gains) later down the road to pay for a down payment on your first house.

The only reason you would ever invest outside of your ROTH (or 401k) would be because you have already maxed out the ROTH this year and can't put any more money into it (last year was $5,000 max contribution, this year is $5,500 per person) Once you get into that sort of investing, that's when allocation of funds would matter more. You'd put tax efficient funds in your taxable accounts and tax inefficient funds in your ROTH.

ReRush

  • 5 O'Clock Shadow
  • *
  • Posts: 7
Re: Coming From the School of Dave Ramsey...
« Reply #4 on: October 02, 2013, 01:29:31 AM »
Vitai, that makes a lot of sense. Thank you! How long does it take to pull the principal out of vanguard - do you have an experience with this?

The other great thing about the ROTH accounts is that you can pull out the full amount (including gains) later down the road to pay for a down payment on your first house.

Can you explain more about this?

Edit: In particular, say this year I max out at the 5500 - then next year I add 1000. Can I only take out the 1000 the second year or as long as theirs 6500+ I can take 6500 out?

Maybe nevermind?

Source: http://www.rothira.com/traditional-ira-vs-roth-ira
Traditional IRAs:
Contributions to traditional IRAs lower your taxable income in the contribution year. That  lowers your adjusted gross income, helping you qualify for other tax incentives you wouldn’t otherwise get, such as the child tax credit or the student loan interest deduction.
Up to $10,000 can be withdrawn without the normal 10% early-withdrawal penalty to pay for qualified first-time homebuyer expenses. However, you’ll pay  taxes on the distribution.

Roth IRAs:
Roth contributions (but not earnings) can be withdrawn penalty- and tax-free any time, even before age 59 ½.
five tax years after the first  contribution, you can withdraw up to $10,000 of Roth earnings  penalty-free to pay for qualified first-time homebuyer expenses.
« Last Edit: October 02, 2013, 01:47:27 AM by ReRush »

Vitai Slade

  • Stubble
  • **
  • Posts: 114
  • Age: 30
Re: Coming From the School of Dave Ramsey...
« Reply #5 on: October 02, 2013, 01:48:33 AM »
To explain retirement accounts better, you have to look at each account as a BUCKET of funds. Each BUCKET has its purpose and reason for existing.

IRA: (Max $5,500/yr.) BUCKET started by yourself used to avoid taxes on principal and gains until retirement time. You CANNOT touch the principal OR the gains until retirement date set by government.
(OR)
ROTH IRA: (Max $5,500/yr.) BUCKET started by yourself used to avoid paying taxes on gains. Taxes on principal are paid that tax year. Good for stuffing more value into your IRA accounts than a regular IRA considering you haven't paid taxes yet on the $5,500 in the regular IRA, but the amount is still the same. (This is only the case if you max it out. If you do not max it, you may get better value out of the regular IRA) You can also touch the PRINCIPAL (not the gains) at any time should an emergency come up.

401k: (Max $17,500/yr. or plan Maximum) BUCKET started by your employer used to avoid paying taxes on principal and gains. You CANNOT touch the principal OR the gains until retirement date set by government.
(OR)
ROTH 401k: (Max $17,500 or plan Maximum) BUCKET started by your employer used to avoid paying taxes on gains. Taxes on principal are paid that tax year. Good for stuffing more value into your 401k accounts than a regular 401k considering you haven't paid taxes yet on the $17,500 in the regular 401k, but the amount is still the same.

Taxable Account: (No Max) BUCKET started by you to invest with. You can do whatever you want with the money at any time with no penalties, gains included. Taxes are paid on principal and gains each year.



As for your questions about taking the principal out of vanguard, I would assume at most a week or two? I've never done it myself, but I don't see why it would take longer than that. Again, this is emergency use only. I'm sure you could use a credit card for the emergency (whatever it is) and pay it off when you receive the funds a week or two later.

As for the ROTH, forgive me, it's ALL of the principal and up to 10 percent of the gains (without paying taxes) provided it has been at least five years. With the regular IRA, it's a max of $10,000. More info here: http://www.wikihow.com/Buy-a-Home-With-IRA-Money

EDIT: Each BUCKET mentioned above holds the money with which you purchase index funds, stocks, bonds, etc. Those index funds, stocks, bonds, etc. sit inside that bucket alongside your money.
« Last Edit: October 02, 2013, 01:52:25 AM by Vitai Slade »

ReRush

  • 5 O'Clock Shadow
  • *
  • Posts: 7
Re: Coming From the School of Dave Ramsey...
« Reply #6 on: October 02, 2013, 02:02:34 AM »
Thank you! That helps a lot! I'll talk with my wife and probably open up a ROTH IRA then!

Vitai Slade

  • Stubble
  • **
  • Posts: 114
  • Age: 30
Re: Coming From the School of Dave Ramsey...
« Reply #7 on: October 02, 2013, 02:07:06 AM »
Good luck! Make sure you ask the Vanguard representative all your questions! =D

EDIT: Also, make sure you understand what it means to withdrawal funds from your ROTH after they've been deposited. There is a maximum contribution each year so after you withdraw, you may not be able to put some of it back!
« Last Edit: October 02, 2013, 02:09:52 AM by Vitai Slade »

clutchy

  • Bristles
  • ***
  • Posts: 339
Re: Coming From the School of Dave Ramsey...
« Reply #8 on: October 02, 2013, 11:41:03 AM »
I was a Dave Ramsey guy and still am to a degree.  His advice is useful for many and I won't downplay that. 

That being said I wish I had invested more and paid down debt less aggressively than I did.  To be fair though I may feel that way because I don't have the stress of lots of debt... 

either way I think it's important to take a balanced approach and objectively evaluate your goals.  This site can help you be as aggressive as you want with your finances but be sure not to neglect your newly minted marriage.  Money stressors are the #1 decimator of marriage so keep that in mind.

dragoncar

  • Walrus Stache
  • *******
  • Posts: 8966
  • Registered member
Re: Coming From the School of Dave Ramsey...
« Reply #9 on: October 02, 2013, 12:11:51 PM »
To explain retirement accounts better, you have to look at each account as a BUCKET of funds. Each BUCKET has its purpose and reason for existing.

IRA: (Max $5,500/yr.) BUCKET started by yourself used to avoid taxes on principal and gains until retirement time. You CANNOT touch the principal OR the gains until retirement date set by government.
(OR)
ROTH IRA: (Max $5,500/yr.) BUCKET started by yourself used to avoid paying taxes on gains. Taxes on principal are paid that tax year. Good for stuffing more value into your IRA accounts than a regular IRA considering you haven't paid taxes yet on the $5,500 in the regular IRA, but the amount is still the same. (This is only the case if you max it out. If you do not max it, you may get better value out of the regular IRA) You can also touch the PRINCIPAL (not the gains) at any time should an emergency come up.

401k: (Max $17,500/yr. or plan Maximum) BUCKET started by your employer used to avoid paying taxes on principal and gains. You CANNOT touch the principal OR the gains until retirement date set by government.
(OR)
ROTH 401k: (Max $17,500 or plan Maximum) BUCKET started by your employer used to avoid paying taxes on gains. Taxes on principal are paid that tax year. Good for stuffing more value into your 401k accounts than a regular 401k considering you haven't paid taxes yet on the $17,500 in the regular 401k, but the amount is still the same.

Taxable Account: (No Max) BUCKET started by you to invest with. You can do whatever you want with the money at any time with no penalties, gains included. Taxes are paid on principal and gains each year.



As for your questions about taking the principal out of vanguard, I would assume at most a week or two? I've never done it myself, but I don't see why it would take longer than that. Again, this is emergency use only. I'm sure you could use a credit card for the emergency (whatever it is) and pay it off when you receive the funds a week or two later.

As for the ROTH, forgive me, it's ALL of the principal and up to 10 percent of the gains (without paying taxes) provided it has been at least five years. With the regular IRA, it's a max of $10,000. More info here: http://www.wikihow.com/Buy-a-Home-With-IRA-Money

EDIT: Each BUCKET mentioned above holds the money with which you purchase index funds, stocks, bonds, etc. Those index funds, stocks, bonds, etc. sit inside that bucket alongside your money.

TLDR:


ReRush

  • 5 O'Clock Shadow
  • *
  • Posts: 7
Re: Coming From the School of Dave Ramsey...
« Reply #10 on: October 02, 2013, 12:31:55 PM »
clutchy,

Thanks. That's really good to remember. I know I'm very lucky to already have a fantastic wife who lives good financial principles... so I do feel like I'm going a bit fast for her - probably because I've been a bit wasteful with my money. I really could loosen up a bit - especially ask her more what her goals and get her input. Too often I'm the one that's giving her information and I don't think she resents it... but I do think it stresses her out a bit. So thanks.

brewer12345

  • Handlebar Stache
  • *****
  • Posts: 1383
Re: Coming From the School of Dave Ramsey...
« Reply #11 on: October 02, 2013, 01:36:17 PM »
Ick, Dave Ramsey.

I would encourage you to read a few books on personal finance/planning NOT written by Mr. Ramsey.  He has several peculiarities to his ideas that are, um, suboptimal for many people.  Get some more information and perhaps you can do better with what you have.

Simple Abundant Living

  • Pencil Stache
  • ****
  • Posts: 579
    • Simple Abundant Living
Re: Coming From the School of Dave Ramsey...
« Reply #12 on: October 02, 2013, 02:48:20 PM »
We'll cash flow school until we're done at the end of 2015 - our home goals - my wife (thankfully) does not want to be in a home until we find the house we want to stay and raise our children in. One of the things I'm absolutely set on is a 15 year mortgage. And the ideal home in our area is about $250k. For me, my goal would be to have a $100,000 downpayment so that with a 4-5% interest rate (we'll go high since we won't be buying for several years) that would only be $50000-60000 of interest. (I'm not sure my wife is quite on the boat of this big of a downpayment) Thus making a mortgage payment of $1100-1200 and thus being around 25% of our monthly budget - assuming it's reasonably safe to say I'll make $40000 when 2015 strolls around. Thus taking about 2 years to save up for a downpayment and be in a home by 2018 sometime.

I'll just address you goals for homeownership.  Every area is different, but make sure you crunch the numbers and see the cost/benefits of owning vs. renting.  If you live in an area with high rents and rising home values, you might want to consider an entry-level home for a few years.  That way you can keep up with the real estate market.  On the other hand, if you live where rents are low and Real Estate gains are dubious, renting might be your best option until you want the stability of home ownership. 

clutchy

  • Bristles
  • ***
  • Posts: 339
Re: Coming From the School of Dave Ramsey...
« Reply #13 on: October 02, 2013, 03:24:56 PM »
clutchy,

Thanks. That's really good to remember. I know I'm very lucky to already have a fantastic wife who lives good financial principles... so I do feel like I'm going a bit fast for her - probably because I've been a bit wasteful with my money. I really could loosen up a bit - especially ask her more what her goals and get her input. Too often I'm the one that's giving her information and I don't think she resents it... but I do think it stresses her out a bit. So thanks.

appears you are of sound mind and good reason.

partnership partnership partnership.

trust trust

unity

ReRush

  • 5 O'Clock Shadow
  • *
  • Posts: 7
Re: Coming From the School of Dave Ramsey...
« Reply #14 on: October 02, 2013, 08:34:49 PM »
Ick, Dave Ramsey.

I would encourage you to read a few books on personal finance/planning NOT written by Mr. Ramsey.  He has several peculiarities to his ideas that are, um, suboptimal for many people.  Get some more information and perhaps you can do better with what you have.

I'm going to leave this relevant blog post by a CFP.

http://www.hullfinancialplanning.com/six-areas-where-i-disagree-with-dave-ramseys-investing-and-retirement-withdrawal-advice/


Hey, I really appreciate it. That's why I wanted to get advice on what you guys thought of Ramsey's investing advice. I'm here to learn, and have a lot to still read up on. :)

thosemiddlesons

  • 5 O'Clock Shadow
  • *
  • Posts: 5
Re: Coming From the School of Dave Ramsey...
« Reply #15 on: October 06, 2013, 02:06:35 PM »
And I'll say this. I was into Ramsey for a long time, and I'm still active on a Ramsey-relevant discussion board. His advice is, frankly, the financial equivalent of triage. If someone comes into the ER hemorrhaging in 5 places, you first goal as a doctor is to stop them from bleeding out, even if that means doing something in a sub-optimal manner that may lengthen their recovery time or cause long-term damage. If your financial state isn't full of blood gushing, overspending-inflicted gunshot wounds, his advice has less utility. And once you get rid of your debt, it has even less.

This is a pretty good analogy.  I used to listen to a lot of Davey Ramsey too but it seems that it's directed towards people that have extreme debt issues.  As a person without debt issues, I'm more interested in the investing stages of finances.  I'm still learning about being Mustachian but I'm wondering if there's a similar step by step set of goals that you could use with MMM?

gotaholen1

  • 5 O'Clock Shadow
  • *
  • Posts: 40
Re: Coming From the School of Dave Ramsey...
« Reply #16 on: October 07, 2013, 10:01:19 AM »
I also think you may want to reconsider the concept of being "set" on a 15 year mortgage.  I would guess that this thought is bleeding through the Dave Ramsey teachings.  At current rates, the difference between a 15 and a 30 is maybe percentage point.  The opportunity cost of not investing this money could be very high. 

Paying off mortgage early vs. investing more is heavily debated on this forum, and is a very personal decision.  At the same time, I decided to refinance from a 15 year mortgage to 25 year mortgage in order to invest the difference.  Dave Ramsey would argue that this was foolish and that we would just spend the extra money that would have paid down the mortgage faster. 

Mustachians would make sure to invest this extra money.  We decided to avoid the temptation by increasing the amount that is put into a 403B for my wife so that we never even have that money deposited into our account. 

I would also advise that your wife (the teacher), looks into a 403b.  It may be a better option than a ROTH in some circumstances long term.  Right now a ROTH is probably better as you should be in a very low tax bracket, but as you income increases you may want to consider putting more money into the 403b bucket instead of the roth bucket.

Mazzinator

  • Pencil Stache
  • ****
  • Posts: 574
  • Location: Pa, Ga, Fl, Pa, Az, Tn, Va, Hi, Va, Pa, NoVa
Re: Coming From the School of Dave Ramsey...
« Reply #17 on: October 07, 2013, 01:09:25 PM »
DR also has "expanded baby steps"

3. Save 3-6 months EF
3.1 Car replacement fund
3.2 save 20% for down payment
3.3 Furniture replacement fund
3.4 Move up in car by cash

So, as you can see this all happens "before" retirement...(i'm just sayin') so therefore you screwed up big time..furniture before house??? How could you?? (Sarcasm)

I was a big follower of the DR plan before I found MMM... I'm just toooo stupid to map out a plan for myself, so yes I have to follow someone (at least in this area of my life)

Anyways, my point being...be sure to fully understand whatever "plan" you get on!

And a big congrats on being debt free!!

smedleyb

  • Bristles
  • ***
  • Posts: 434
Re: Coming From the School of Dave Ramsey...
« Reply #18 on: October 07, 2013, 01:34:32 PM »
Everytime I read Dave Ramsey I just wanna run out and max out my credit lines.

Born-again non-debtors are the worst!

DocCyane

  • Bristles
  • ***
  • Posts: 390
  • Location: USA
  • Keep going. You're doing just fine.
Re: Coming From the School of Dave Ramsey...
« Reply #19 on: October 07, 2013, 01:45:18 PM »
Your wife makes the bulk of the income and you "spoil her a little bit with letting her get clothes".

Wow. Aren't you the amazing husband.