Here we are in Barcelona, sitting in our hotel room, just before heading out to dinner when I got an email that our balance transfer to consolidate $10,000 in credit card debt was going to be delayed, which would result in us having to pay $1200 in delayed interest payment. We were on day 6 of a 10-day trip through Spain, and this email could have ruined a wonderful vacation.
Instead of enjoying the sites and heading to dinner like we had planned, I had to call the credit card company, and pay international calling fees to try to straighten out the transfer. The irony was that I had the money in various bank accounts, but I did not want to pull the money out of our emergency fund and instead wanted to once again transfer the balance from one zero interest credit card to another. Like Dave Ramsey likes to say, I was playing footsy with the banks and this time it was going to get me.
I spent two hours, delaying our excursion, just so I could figure out how to get the credit card company to go through with the payment. At the end they said it would take another week for the payment to process, which would result in the interest fees being activated.
I was not going to pay the interest so I started to transfer money from different accounts to pull together the $10,000 to make the payments. Another hour and I had transferred the cash to my main checking account and it would take another two days for all the transfers to finalize. Three hours later, I could now head to dinner.
Mrs. Chocolate meanwhile was patiently sitting in the lobby waiting for me to work out the issue. I definitely would not have been as patient as her and would have been questioning why we were trying to make credit card payments while vacationing in Barcelona. Needless to say, I came back from the vacation vowing to never have to be in a position where I needed to make a balance transfer from one credit card to another.
Dave Ramsey’s baby steps
Though a friend tried to tell me about Dave Ramsey back in 2011, the idea of not investing in my 401k and IRAs so that I could pay debt went counter to the idea of paying yourself first before paying debt. The problem is that I had gone completely in the opposite direction by maxing out our 401ks and IRAs while trying to manage debt payments and using balance transfers when I didn’t have enough to pay the accounts in full. Granted I always used balance transfers where the transfer was less than $250 for anywhere between 12-24 months transfers, I was robbing Peter to pay Paul.
In 2013, another friend suggested Dave Ramsey again and I wasn’t ready to listen because of the concept of stopping all investments to pay debt. I wasn’t having it.
In 2015, after the trip to Spain, a free Dave Ramsey class was being offered. I was still skeptical on the concept, but I felt I owed it to myself to see what it was about since my way of doing things resulted in the fiasco in Barcelona.
Here are Dave’s famous 7 baby steps:
Step 1-save $1,000
Step 2-pay all non-credit card debt, pay the minimum on all debt and put all available cash towards the lowest balance. Follow the snowball concept of paying down the debt. Stop all investments to concentrate on paying the debt.
The “stop all” investments is what I would not do, but I vowed to concentrate more on paying the debt.
Step 3-Once all non-mortgage debt is paid, save 3-6 months as an emergency fund.
Step 3b-(almost as if he forgot to include this) save towards a down payment for a home.
Step 4-Save 15% towards your retirement. Finally, you can start paying yourself first by investing.
*However, think about it, if you’re paying down debt and avoiding interest on those debts, it is a form of paying yourself.
Step 5-Save for your children’s college
Step 6-Pay off the house early
Step 7-Financial freedom.
I respect the concept of the baby steps but I haven’t fully adopted them and have tweaked them to fit my personal financial journey. Nonetheless, if you’re trying to get out of debt and haven’t found a system to keep you on the journey, I highly recommend the baby steps. If you are a savvier, albeit slightly misguided person like myself, I recommend you tweak the baby steps to meet your goals. For instance, while I do not get a match in my 401k, I would recommend you continue getting that match while you’re trying to pay down your debt and follow the steps. Deviating from the baby steps means that you’re doing “Dave-ish”, which means not fully incorporating the steps as outlined. Do “Dave-ish” if you believe it is in your best interest. But remember this, if your way had worked well, you wouldn’t need to do “Dave-ish” or need Dave’s concept altogether. For a different take on building wealth, check out this article on wealth building.
I had to admit that my way of doing it before had not worked as well as I had wanted to. I had become the king of balance transfers, a tool I used ever since we got married as a way to get interest payments as low as possible while trying to get out of debt. Since 2009, I have had enough money in the bank or in investment accounts to pay all the credit cards, but I didn’t want to pull the money out when I could earn more interest in my savings account (this was the days when you could earn 5% interest using online saving accounts) or in the stock market.
This was in no way a good idea as a long term debt repayment method, but I tested that theory until it almost bit me in Spain. At some point, you will miss a payment and you will be hit with all the interest. Thankfully I had enough in my accounts to pull the money together and I was able to make the payment two days before the balance was due. Three days later, the new credit card company sent a check for $10,000 to pay for the old credit card balance. So the old company received $20,000 payment, processed both payments, sent me a check for $10,000, and once again I had a $10,000 balance with zero interest for 15 months. Thankfully, I didn’t end up paying the $1,200 in interest.
Don’t play footsy with the banks. You can transfer high interest balances once or twice, but you are risking disaster when you continually transfer those balances thinking that you’re taking care of the debt. I had to learn to control my spending, get on a zero-based budget, and pay the cards and not transfer them any longer. This is where Dave Ramsey’s system helped me the most. I learned to get on a realistic budget that changed every month. Before I had tried to make one budget work for every month and it doesn’t work that way. I learned to do a zero-based budget so every dollar was accounted for. I learned to pay closer attention to my spending so that my monthly budget covered all my expenses. Granted there have been months where I had to pull money out of my emergency account to pay off an expense, but I’ve never had to do another balance transfer or pay recurring interest on my credit cards. I also learned to pay cash for everything other than a house, this also includes paying cash for the last two cars we purchased.
Have you been playing footsy with the credit card companies?
Transfers are a good way to stop paying interest but you’ve got to pay them off within the allotted time.
3 Steps you can take to get those credit cards under control:
1-Save an emergency fund equaling at least one month’s income. If you’re financially stable, save 3-6 months of expenses as an emergency fund. This emergency fund, whether 1 month or 3-6, will serve as money to use in lieu of credit cards to pay for emergencies.
2-If you’re not paying your credit cards in full every month and are paying interest, once you’ve done step one, it’s time to cut those credit cards so that you can pay them off and not get tempted to use them again. Just cut the card. Dave Ramsey recommends you close the account, but I’ll leave it up to you to follow up with that step. At least do the minimum by cutting the card. It’s hard to stop using them when they are readily available.
3-Get on a budget and use the zero-based budgeting method. You can start learning about budgeting here.
As always, if you need help, feel free to drop us an email.