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Tuesday, 1 May 2007

money and security

In another doomed attempt to win a competition for which I am not eligible, I'm going to give a response to a post on five cent nickel's blog. Here is the mandatory link to his welcome page - sorry couldn't work that into the intro.

Apparently, Dave Ramsey is a well known personal finance guru in the US. The Dave Ramsey plan is multi-step and simple. The second step is the most ubiquitous. Pay off all your consumer debt using "The Debt Snowball".

In the debt snowball, you pay off your debts in the order of smallest balance to highest balance, the principle being that with early accomplishments you are more likely to stick to the program.

Five cent nickel's most commented upon post is Dave Ramsey is bad at math, later he responded to the comments with another Dave Ramsey is good at psychology. Its undoubtably true that the debt snowball will not necessarily save the most money when it comes to paying down debt. As explained in the bad at math post, the cheapest way to pay off all your debt is to order the debts from highest interest to lowest interest. The key point that most of his commentators wanted to say was that it wasn't about the math, which nickel summarised in the good at psychology post.

Its true that debt - especially debt caused by overspending - isn't about the math, or the money. Its in the mind. In my favourite money programme, Spendaholics, the individuals cannot stop overspending until they address the underlying cause(s). But what if your money issues don't revolve around overspending? In my case, I have no consumer debt, just some exceedingly low interest student loans and I'm soon to take on my first mortgage. I'm not a good candidate for Dave Ramsey's plan because I don't have issues with too much debt. My money issues resolve around security.

I often work out worse case scenarios, like I lose my job, or I become permanently disabled, or I unexpectedly have a child. Not in the case of how this would affect my life, but whether or not I would be able to cope financially. Is this healthy? Is there a plan that will enable me to feel truly free, without sitting on a massive pile of cash in a savings account? Should I mentally rely on the safety net of my parents, even though I'm extremely loathe to ask them for help?

I feel like, maybe this is an age thing. I'm in my late twenties, and I've been living more or less independently since I started university. Perhaps I'll just get used to this feeling and learn to cope. What do other wiser (older?) people do? The feeling of being permanently on the precipice of disaster needs to be mitigated. Perhaps as in Spendaholics, therapy is the best answer - but if I have to pay for that, thats more money spent and less money saved. And how can an independent individual with a traditional British stiff upper lip, truly contemplate therapy anyway. Isn't it all a bit, well American?

Suggestions on a postcard please (or if you don't know my address, just add to the comments).

2 comments:

moneymonk said...

Congrats on your 1st house. I'm like you. I'm not big on debt, so I don't follow Dave Ramsey as much. Althought he makes sense on some of the issues he talk about. I have student loans and my home mortgage as debt.

Debt Snowball is one way to tackle debt. But I think everyone has different ways to clear debt.

DB said...

plonkee, I am new to your blog, so I don't know if you've talked about setting aside emergency funds.

If you don't have money set aside for an emergency (a big one, like losing your job or urgent medical care), that can lead you to feeling insecure. Likewise, having that money set aside can greatly lead to a feeling of increased security.

The standard recommendation is 3-6 months. On my blog I talk about why I am shooting for a full 12 months. Likewise, I'll keep this money liquid. I will probably end up keeping 1/2 of it in a savings/money market account and 1/2 of it in equities, though I'm not against keeping it all in high-interest savings.

DB