Quote:
Originally Posted by lisacb 
My BIL is hell-bent on being debt free. They've paid off everything but their house and they're working on that. I worry that if they ever need credit, they will not be able to get it or will have very high interest rates.
Oh well, not my problem. But I find it interesting how it all works.
Lisa
|
If he is following Dave Ramsey and following the steps in order, he would have a baby emergency fund of about $1000 in place and a fully funded emergency fund of 3-6 months expenses in place before he started working on completely paying off their house, and would be thinking of future non-emergency purchases to save up for, thus eliminating the need for credit.
For those of you not familiar with Dave Ramsey, he has 7 Baby steps to financial peace.
Copied from the total money makeover website forums:
Baby Step 1.0 Save $1000 In baby Emergency Fund (EF)
1.1 Chop up CC's (You have an EF now, no NEED to keep those CC's !!)
1.2 Amputate cars that you can't pay off within 24 months (You have an EF to fix the "bondo buggy" if something should happen)
1.3 Consider raising insurance deductibles to $500 or $1000 and dropping full coverage on paid for "bondo buggy" (You have an EF ya know)
2.0 Do debt snowball
Make a list of all of your debts, lowest to highest. Pay off the lowest balance first while paying minimum payments on the other debts and "snowball" the payment of the debt that you just paid off onto the next highest debt. Soon you will have a snowball effect where all of the minimum payments on the previous debts really start adding up and your debt starts diminishing quickly.
2.1 Start car replacement fund (do not PURCHASE car until step 3 is done or old car dies)
3.0 Save 3-6 months EXPENSES in EF
3.1 Start furniture or other non-essential stuff replacement fund
3.2 Move up in car if you still feel the need to (must pay cash for it)
4.0 Contribute 15% to retirement
4.1: Take your first vacation since finding Dave if you can pay cash for it (no using the EF !!!)
4.2 Save up 20% for home purchase OR pay down existing mortgage to the point you can drop PMI.
5.0 Save for kids college fund 6.0 Pay off house 7.0 Live like no one else since you have lived like no one else
I'm mostly all for what Dave says, but I do think it is smart to keep one cc open for credit history sake, preferably the one you have had the longest, just cut up the card so you don't start using it again. If you run into something that really requires a credit card, you can always call the company and have them send out a replacement card.