I am grateful for all the insightful comments and good discussion that was generated by my last post. I thought I would respond to them all in a new post.
First, let me clarify that Dave Ramsey encourages people to do Baby Step 4 (save for retirement), Baby Step 5 (save for children’s education) and Baby Step 6 (pay down your mortgage) simultaneously. He doesn’t necessarily advocate that one is more important than the other. I do believe that saving for retirement is a higher priority than saving for your children’s education since, you can’t borrow for retirement like you can for education. I think Dave believes that saving money in a conservative mutual fund will end up benefiting you more than paying off your mortgage early. Mortgage interest is generally 6% or so, while a good mutual fund historically can earn an average of 8-12%. Obviously the market has been hammered recently so we’re all somewhat leery into putting our money there. However, it has performed very well over the long term, despite the bubbles and busts.
Once you have no high-interest consumer debt (credit cards, cars, etc.), you can start on the path to wealth building and saving for the future. But Dave believes that if you’re paying 18% on a credit card and, instead of paying that off, you put it towards your mortgage or into a 529 for children’s education, you’re making a mistake. Free yourself from the bondage of debt FIRST before you start down the path to wealth building. Of course, if your company offers a 401(k) match, I believe you should try to contribute at least up to the company match, otherwise you’re foolishly leaving money on the table. But before you contribute more, pay off those high interest rate loans. Believe me, debtors are slaves to their lending masters.
As for the emergency fund, it is really important to have that money saved up for a rainy day. Unemployment, health problems, car issues and other unforeseen events WILL happen. The cushion needs to be there. If you’ve sunk all your money into paying down your mortgage, you can’t take part of your house to the bank to get cash. Sure, you can get a home equity loan (assuming you still qualify), but that’s debt and you’ll be paying interest on it. So I agree that an emergency fund of 3-6 months of cash is really important. All the financial advice I’ve been hearing lately supports this position. It provides peace of mind in difficult times.
Dave advocates not buying too much house. The payment should be 25% of your take-home pay. And he thinks no one should have more than a 15 year mortgage, since a 30-year mortgage will cost so much more in interest. Now that’s tough. Most people can’t or won’t do that. But ultimately, it’s better to buy less and have more in cash if at all possible.
As for giving (tithes, offerings, help to friends and relatives), Dave Ramsey believes that tithing is essential to pay all along, not as a final step. I agree with him. Tithing means 10% of income and I know I’ve been blessed for paying it faithfully, even when I was unemployed and not making much money. The Bible says the Lord will “rebuke the devourer for you sakes” if we pay an honest tithing. Dave believes that offerings are also important, but that it is essential to take care of your own household first. Once you have the necessities of life covered, find opportunities to give. I believe that an important element in giving is sacrifice. C.S. Lewis put it bluntly and powerfully in his book Mere Christianity when he said:
“I am afraid the only safe rule is to give more than we can spare. If our charities do not at all pinch or hamper us, they are too small. There ought to be things we should like to do and cannot do because our charitable expenditures excludes them.”
That quote from a person I highly respect (and who is quoted frequently in general conference), really makes me think. Once I have properly fed and clothed my family and have provided them with shelter and medical care, then I need to give to those less fortunate. Perhaps that means not going out to eat as often, or spending less on discretionary things. It’s hard though. But I guess that’s the way it’s supposed to be.
So what are your thoughts on giving? How do you determine how and to whom to give?