Radio host and author Dave Ramsey has been featured on numerous radio and tv shows as he tackles the problems that having too much debt cause and the challenges they create for personal finances. While his ideas about credit are a bit extreme, Ramsey’s debt reduction plans are valid for anyone who wants to go from being in debt to saving for their future. His main debt reduction plan goes like this:
• Establish a $1,000 emergency fund first
• Then pay off all your debts
• Build up a larger emergency fund
• Establish an IRA savings program
• Save for your children’s education
• Pay off your home
• Invest seriously
Along with these steps Ramsey advocates not using credit cards or loans. This is a great plan for someone who is dedicated and has the means to get started. But many people may stall out on the first step before they even start paying off their debts. Without the emergency fund and without credit cards, a consumer could end up in more trouble than before.
In the financial world, balance is key. Having a balance of accounts, debts and credit limits, savings and income, all add up to healthy finances. We don’t necessarily recommend following Ramsey’s debt reduction plans but also keeping a healthy and moderate amount of credit. Using one or two credit cards each month and paying the balance in full will not add to your debt problems and will help you keep a high credit score.
Just like a glass of red wine once in a while is actually good for you but a bottle of wine a day is a sign of a problem, using credit moderately is good for your finances but carrying thousands of dollars in balances is a sign of a serious problem. If you are a true debt-aholic, following Ramsey’s advice for a debt free life may be the only way to have healthy finances. But most people have the power to maintain a healthy balance of credit, debt and savings.
Foe example the debt snowball plan is a bit controversial with many financial experts who argue you should be focused on paying of debts with the highest interest rates first.