Highlights from the Dave Ramsey Show

Question: Elizabeth in Texas and her husband have $68,000 in debt. Elizabeth makes about $105,000 a year, and their income will double when her husband graduates in January. She was in a car accident five years ago and received a $365,000 settlement. They also have investments in mutual funds. Should they cash out some mutual funds to pay off the debt?

Answer: You've been very protective of that money and have protected it from yourself, which was very wise. I don't know who helped set that in your psyche properly, but they did. Dad or Mom or somebody needs a hug. They did a great job of setting you up to go, "Don't freaking touch this!" That's really drilled down inside of you to the point it kept you from spending it. You didn't go on a European vacation and buy two BMWs with it, which was brilliant to not do that. You didn't consume this money. But now that you're living on a game plan, you are telling your money what to do, you are as likely to put that money back in the mutual fund as you are to pay off the debt by August, and the two of you have this tremendous income—it just keeps growing by leaps and bounds as you continue to hit these milestones of graduation and entering your careers and those kinds of things.

Yes, I would write a check today and be debt-free. Let's be so excited that we ask what's the next goal? Pay cash for a house. Then we've got to say, "All right, we need $X. We have $180,000 minus $70,000. We now have $110,000, and we need $X and we have this income. Let's map that out and be excited about building that $310,000 or whatever-that-target-is nest egg to buy that house with for cash." Just be as excited about that as you are about becoming debt-free. In other words, you've got to have something you're aiming for as a reason to keep you reasonable on your consumption and reasonable on your giving. You want to be consuming reasonably, and you want to be giving a lot, but you want to do it in such a wise way that it allows you to completely change your family tree, which you are setting yourself up to do.

What I would do is say you need to be saving $4,000 a month or $5,000 a month or $8,000 a month—whatever it is depending on when he goes to work, that kind of thing—and we're trying to hit this certain goal. The fact that we don't have these payments anymore allows us to do it that much faster. I would today be debt-free. Then I would reset my savings goals to replace my get-out-of-debt goals. Just keep trucking. You're really, really doing well.

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Question: Chris in Arizona and his wife are at odds. She wants to pay off the truck first and Chris wants to start with the smallest debt. She thinks paying off the truck will free up more money to attack the other debts. Dave sees how she wants to pay on something with a big interest rate, but in doing so she is overlooking something important to the debt payoff process.

Answer: Her plan isn't working, so you need to try a plan other than you guys' plan. Truthfully, I have a tendency to do what she's doing. My tendency is to be the nerd boy with the calculator. I look at the interest rates and the payment rates and those things. The mistake she's making is the same mistake a lot of people make in the world of finance, and that's thinking that personal finance is about math. It's not. It's about behaviors.

As smart as she is, you guys have been in debt for 18 years. It's not about being smart or intellect. It's about the behaviors of controlling your spending. Right now, you need to control your spending so much to get extra money to throw at the debt. I think that's what matters here.

The beauty of paying off the smallest debt first is that you get to feel traction and you start to believe that your sacrifice is going to pay off. When you knock off that little one, it gives you a little confidence. When you knock off two or three of the debts, you get excited. The more you knock off, the more pumped you get.

After that, here's what happens. The more pumped you get and the more you believe, the deeper you sacrifice because now you believe it's going to work. The deeper you sacrifice, the faster you get out of debt. The faster you do that, the more you have control over your income. If you don't have any payments, you can become wealthy, which is the whole reason for this discussion.

Try it my way for six months, because you tried it her way for 18 years. I admit to her and to you that it's counterintuitive to math nerds. Math is not the problem. We need to have some traction, and we need to have a sense of hope that creates passion, that creates deeper sacrifice, that creates a faster win.

That is why the debt snowball, which is listing your debts smallest to largest, works.

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Question: Chris in Phoenix says his 15-year-old daughter fell and broke her back. She's now paralyzed from the waist down. He and his wife are now facing changes financially due to the accident and have exhausted their liquid assets. They need a wheelchair-accessible van but don't have the money. Should he use his retirement to buy this van?

Answer: You're not going to get $30,000 because you're going to have to give up 40% of that in taxes and penalties. You're only going to get about $18,000. They'll withhold only 20%, but your taxes will be your tax rate, which will be the 30% range with this withdrawal plus a 10% penalty, so a total of 40%. They're not going to withhold all of it, but you're going to have it due next April. You have a $12,000 tax bill created by a $30,000 withdrawal. Just count on that. The net effect is only $18,000. In a sense, you're saying, "Would I borrow money at 40% interest to buy a wheelchair van?" because that's what you're doing.

I've got a niece who has CP and has been wheelchair-bound most of her life. We've had wheelchair vans in the family, so I've watched them with that, and I've got a couple of friends who are adults who operate in the same situation just to get around and drive themselves. I know they're a) ridiculously expensive, and b) they wear out. They get ragged after a while. It's almost like you've got to constantly be setting money aside to replace and fix the thing once you've gotten it.

The question is can you pull this off for $18,000, and are you willing to give up $12,000 of your $30,000 to get there? If you are, I probably would do it. There are almost no cases I'm going to go along with that, but I'm going to do that before I borrow money in your situation.

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