Mark from North Carolina is 65 — but he’s not retiring any time soon because he’s made “absolutely horrible decisions with money all my life.”
He told The Ramsey Show that his wife has about $10,000 in a 401(k) and he has “maybe a couple thousand” in savings. [1] Their total debt includes a $115,000 mortgage and about $22,000 in credit card debt and a car loan.
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While retirement may seem impossible, host Dave Ramsey told Mark he can still enter retirement debt-free with savings — but it will take some sacrifice.
“The house will be paid for and you’ll be debt-free,” Ramsey explained. “But you’re working a while.”
Paying off consumer debt
Mark and his wife have a couple of good things going for them — both of them are still healthy enough to work, and together will earn about $105,000 this year.
“First time we’ve ever broke $100,000,” he said.
Assuming that level of income can be maintained going forward, the couple can afford to aggressively pay down their unsecured debt. Ramsey suggested putting at least $2,000 a month toward their car loan and credit card debt. Doing so should get rid of those debts within a year.
Next, the host — recounting his “7 baby steps” money plan — told Mark to build an emergency fund with three to six months’ worth of expenses. This will safeguard the couple from any financial surprises that pop up.
Finally, after all that, Ramsey said Mark and his wife should focus their efforts on tackling the mortgage while also establishing a nest egg. If they work until they’re 72, Ramsey estimated, they could have about $200,000 in retirement savings, the house will be paid off and they’ll be free of debt. It may not be much, but it’s a far more tenable situation than the one they’re facing now.
Ramsey labelled Mark’s case as “sobering” and said it should serve as a cautionary tale to frivolous young spenders.
“If you’re 35 and you’re listening, that should be a warning shot across your bow,” the host said. “Don’t show up at the doorstep of 65 broke with a car payment.”
Read more: Want an extra $1,300,000 when you retire? Dave Ramsey says this 7-step plan ‘works every single time’ to kill debt, get rich in America — and that ‘anyone’ can do it
Debt-to-income ratio
Understanding your debt-to-income (DTI) ratio is an important part of personal finances. Depending on your age, income level and financial goals, the amount you put toward paying off your consumer debt may be different.
To determine this amount, you could follow the 50/30/20 rule, in which you spend 50% of your budget on household expenses, including your mortgage or rent, utilities, monthly bills, transportation and groceries. Another 30% goes toward “wants” and the remaining 20% goes toward debt, savings or investments.
Depending on your circumstances, however, you may want to adjust this ratio — maybe to 50/20/30, meaning you would spend 10% less on “wants” and put that money toward debt payment instead.
Another general rule of thumb is called the 28/36 rule, which stipulates that while your mortgage should be no more than 28% of gross income, your total debt payments (including car loans, student loans and credit card debt) stays below 36%.
Lenders may use this rule to determine whether to extend credit to borrowers, as it sheds light on the amount of debt a consumer can safely take on. Income and credit score can also be large factors.
How to manage consumer debt
If your DTI ratio is high, there are options to help you manage and pay down debt. If you have multiple credit cards, consider a balance transfer option that may provide 0% APR for a limited time, giving you a window to pay the debt without accruing interest. You could also take out a debt consolidation loan or refinance other loans.
Longer term, you could look to increase your income, such as taking on a side hustle or moving into a higher-paying role, either with your current employer or elsewhere. You could also reduce your housing expenses, which may involve downsizing, renting out a room or getting a roommate.
In the case of Mark and his wife, paying off their debt and saving for retirement likely means working into their 70s. But it also means when they do officially retire, they’ll be debt-free.
“The best time to plant the tree was 20 years ago. The next best time is today,” said co-host George Kamel.
If you plough through debt with “focused intensity,” he said, “you’re going to get through it faster, make more progress, and then when you do get to building that nest egg, you’ll make serious progress fast.”
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[1]. YouTube. “I’m 65 And Made Horrible Decisions With Money My Whole Life (This Is Your Wake-up Call)”
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