Me vs Dave Ramsey: Using Debt to Pay Debt

I have heard Dave Ramsey say, "You can't borrow your way out of debt."

He is absolutely right, if you are constantly moving money around you can get burnt bad. However, I believe that debt consolidation can be OK ...sometimes.

When we were originally putting together our debts we were looking at 12 different credit lines (credit cards loans etc.) some of which had Interest Rates over 25%! As we were putting everything in order we received an offer from CitiBank for another signature loan (no home equity!) for $19,000 @ 10.49% interest.

After deep thoughts and mixed feelings, we decided to do it and we paid off our first four snowball items, our property taxes and got 100% caught up with any late bills. Since the payment was lower than the combined payments would have been, we had a larger snowball to start out with.

Where Dave is coming from is where I am usually on credit cards, cut it out of your life, you don't get a drunk to stop drinking by giving them a shot to cure their chest cold! However you WILL pay down your debts faster when you are paying a lower interest rate, it is simple math, when you apply more to the principle, you pay it off quicker!

All that being said, I have seen plenty of people in this vicious circle of debt: rack up bills, get a home equity loan and pay them off, swear it won't happen again, credit cards raise your limits since you are sooo responsible to pay it off, you rack them up again, but now even higher!

For our debt, we will still investigate credit offers to lower our rate on our remaining snowball debt, however even if we get a savings we will keep the total snowball number in order to pay them off faster, and to us that is really the point...

In Managing Your Money; Hope for the Best, Plan for the Worst...

How do you know a crisis is coming? When you aren't prepared for it.



It at least seems like that to me. I would have money in my checking account, my bills paid, so I would go buy something pretty for myself (like a nice Sand Wedge :) ). The next day a bill would arrive from the IRS asking for $1200 I didn't realize I owed them. Scramble time! I would run around, maybe do a Direct Deposit loan at Wells Fargo, use a credit card, whew..all is well. Of course, I racked up debt, blew my budget and didn't manage my money well at all.



I have extolled the virtues of having an Emergency Fund before, but I believe being prepared for success mean, not setting yourself up for failure. Here are my top five ways I have seen me and my friends set ourselves up:

• No Emergency Fund - Enough of me beating a dead horse to death, but I disagree with some that say pay your Credit Cards off first, because you can charge any issue that comes up. This was my fervent believe, but I didn't pay it off right away. Plus I never broke the Credit Card vicious cycle.


• Budgets like a dictatorship couldn't live under - You really want your budgeted amounts to be based in reality. Not, we'll I read you can live on $40 a month per person even though we always spend $150. You are setting yourself up for failure. Nothing wrong in beating your budget! Successes breed more Successes, Failures breed Pop Stars..sorry I meant Failures.


• Not reviewing at least the last two years expenses - You will miss large swaths of land if you don't. Like "oh yeah, I need a car battery every x year, and tires."


• Cut up your cards, but don't cancel your accounts, yet - I disagree with Ramsey a bit here. Bad things do happen. As you are paying off your credit leave the accounts open. This is in case something happens that swamps your Emergency Fund. Not to mention that a big part of your FICO Score is your percentage of available credit and credit length. Better scores mean better rates.


• Expect Everything to get Better in a Month - You hopefully didn't spend it overnight, ingrain the habits overnight, don't expect now that you are working it rain will stop falling. Too many get discouraged by a setback. Setbacks are learning experiences! Embrace them and move forward

As with everything I post I am not a CPA, nor did I sleep in a Holiday Inn last night, do what works for you and your budget, it is the only way you will ever stick to it and that's all that matters...

Emergency Fund vs Ninja Bills...

Many self-help finance books discuss the need to have some back-up Emergency Fund. Well for years I resisted, and I am sure some of you are right now as well.

"I have Credit Cards! Why would I stick my hard earned money in a savings account with less then 1% of Interest. I am so much more flexible this way I have the access to emergency funds in my wallet at all times!"

Problem was I was using my card for everything: car expenses, golf clubs, trips, signed pictures of Bradgelina (kidding). I wasn't paying them off every month and often when something would come up I would rob Peter to pay Paul (or at least blackmail him).

For the last 90-days I have had a $2000 Emergency Fund in my Wells Fargo Savings attached to my Checking account. We came up with that amount by looking back for the last few years issues that have come up. Car issues, Home issues, illness and found that while most were under $1000, a couple (car) were closer to $2000. This cushion helped us sleep at night knowing that if most things came up we could handle them.

How did we get it saved up? Basically we paid the very minimum on anything we could, i refinanced a much lower rate on some bills and paid our property taxes and we had some left over. (Before we would of spent this as a bonus to ourselves for being so good!) It took a couple of months with NO extras for us.

But now we have it. This fund is especially great for what I call Ninja bills. When you are first getting your finances together bills seemingly pop out of nowhere...like Ninjas..."Honey what is this bill from a Wine Club?" "What is this old gym bill still being sent", etc..

In the old system Ninjas were deadly. If we had the credit we charged it, if not we would get some stupid interest signature loan until my next (hopefully) bonus.

This is known in psych terms as a viscous circle. No money to pay debt so you borrow to pay debt which you can't pay back because of your debt...

Now we have had a couple Ninja jump out at us, but we have defeated the evil "nomoney clan" with our emergency fund armor.

We broke the circle. Now even when things come up we can handle it. We only use the fund for emergencies (non-shopping kind!). Since then we haven't yet had to touch a credit card!

In the words of Keanu Reeves...we know Kung Fu...