Baby Steps and Debt

[EconoMutt]

I would like to start following the DR babystep program. At least a modified version of the program.
Does anyone know which categories the following debt would fit in to?

$40,000 total debt. Currenty all debt is in a HELOC.

The breakdown is approximately $20,000 of this debt is for a home addition. (Bathroom and Bedroom)
$10,000 is for a car purchase.
About $10,000 represents a bunch of consumer purchases.

[mommyof4]

Good for you for attempting to tackle your debt! I've done the DR program, and believe me, it does work.

I'm assuming you have your initial $1000 in savings built up? If not, do this first.

I would then take a look at the interest rate and the principal balance on each of your debts. Dave recommends starting to pay the smallest balance first, and then snowball those payments into each suceessive debt. Some people recommend tackling the debt with the highest percentage rate (slightly more bang for your buck that way,) but it may be harder to stay motivated that way.

One website that I used a lot was this onehttp://www.whatsthecost.com/snowball.aspx?country=us to help me decide on which debt to tackle. It will let you amoritze it either according to interest rate or smallest to largest balance. Play with the numbers a bit and see what you're most comfortable with.

Hope this helps.

[creditcardfree]

Step 2 is snowballing your debt and at least the car and credit cards would fall into that category. Some people put the HELOC into step 6, which is paying your mortgage off early.

[SCsailor]

If all of your debt is in a HELOC, then it really doesn't matter what you used the borrowed money for. If that's your only source of debt, then start paying it off as quickly as you can provided you have an emergency fund set aside.

[disneysteve]

Originally Posted by EconoMutt

Currenty all debt is in a HELOC.

If you only have one debt, your HELOC, there is nothing to snowball. Just put all your money toward the HELOC. it doesn't matter how you spent the money.

[creditcardfree]

Originally Posted by disneysteve

If you only have one debt, your HELOC, there is nothing to snowball. Just put all your money toward the HELOC. it doesn't matter how you spent the money.

I agree. I misunderstood the question.

[EconoMutt]

I Just wondered if the $20,000 for the car and consumer purchases would fit in to
Baby Step 2 and the $20,000 for the home addition would fit in to Baby Step 6.

I can't see putting everything on hold until I get the $40,000 paid.

[ea1776]

Originally Posted by EconoMutt

I Just wondered if the $20,000 for the car and consumer purchases would fit in to
Baby Step 2 and the $20,000 for the home addition would fit in to Baby Step 6.

I can't see putting everything on hold until I get the $40,000 paid.

"Putting everything on hold" is the Dame Ramsey plan for that step. He recommends paying off ALL debt.

Personally, I prefer a slightly modified version. Particularly:

1. I think you should pay higher interest first, rather than smallest debt (unless the smallest debt is < $500, then go ahead and zap it).
2. I don't think you should stop 401k contributions if you are receiving a match. I can't understand putting off this extraordinary benefit for ANY amount of time, much less 1-5 years to pay off debt.
3. I think $1K can be a little small for an EF. For those who have a lot of debt, I actually believe you should build it up to at least a couple months.

just my $0.02

[maat55]

In some cases, DR considers HELOC's and 2nd mortgages part of the regular mortgage. He has an % of income ratio. I think it is if the 40k is more than 50% of your yearly income, you should consider it part of your mortgage.

This would move you to baby step three. I would likely work on baby step three then apply 10% of income to retirement and 5% to HELOC.

[creditcardfree]

Originally Posted by EconoMutt

I Just wondered if the $20,000 for the car and consumer purchases would fit in to
Baby Step 2 and the $20,000 for the home addition would fit in to Baby Step 6.

I can't see putting everything on hold until I get the $40,000 paid.

I think DR often does put the HELOC into step six. If it were me, I probably would pay off $20K of the HELOC, save additional emergency funds, start retirement and college, focus on the remainder HELOC and then the first mortgage.

But hey if you get really fired up and want to do the whole thing no one is going to get upset at that!

[EconoMutt]

Originally Posted by creditcardfree

I think DR often does put the HELOC into step six. If it were me, I probably would pay off $20K of the HELOC, save additional emergency funds, start retirement and college, focus on the remainder HELOC and then the first mortgage.

But hey if you get really fired up and want to do the whole thing no one is going to get upset at that!

I've been able to pay down $10,000 per year. I've also been contributing 10% in to a 401k.

[coach2wealth]

Get aggressive with the debt. If breaking it up in psychological buckets helps motivate you then do it. Just get it paid off.

[mommyof4]

Originally Posted by disneysteve

If you only have one debt, your HELOC, there is nothing to snowball. Just put all your money toward the HELOC. it doesn't matter how you spent the money.

Originally Posted by creditcardfree

I agree. I misunderstood the question.

Sorry, I misunderstood, too.

[creditcardfree]

Originally Posted by EconoMutt

I've been able to pay down $10,000 per year. I've also been contributing 10% in to a 401k.

That is great! Keep up the good work. You will get there and it will be worth it.

[bjl584]

The only part of Dave's plan that I don't agree with is that he recommends that you stop saving when paying down debt. I agree that you should put every extra penny into paying off the HELOC, but I would still take advantage of a 401K, 403B, etc. if you have access to one.

[disneysteve]

Originally Posted by bjl584

The only part of Dave's plan that I don't agree with is that he recommends that you stop saving when paying down debt. I agree that you should put every extra penny into paying off the HELOC, but I would still take advantage of a 401K, 403B, etc. if you have access to one.

I would agree if there is a company match. Even if your credit card is at 30%, it still makes sense to do a match with a guaranteed 50% return. That's pretty tough to beat. If there is no match, I think a reasonable case can be made to pay off debt first.