I recently bought The Total Money Makeover on your recommendation and I’ve been enjoying it. It seems like a lot of your ideas and Dave Ramsey’s ideas overlap. What differences are there between your ideas?

Before I get started on this article, I want to point out that I agree with Dave Ramsey’s personal finance plan on about 99% of the specifics. I totally agree with putting debt freedom above all else. I totally agree with him in terms of psychological milestones. I totally agree with him that a simple plan is usually the one that works the best.

Still, there are a few specific recommendations of Dave’s that I do not agree with. I’m pretty sure that across the thousands of hours of Dave’s show and the many books he’s written that he might have said somewhat contradictory things on these issues. However, the stances I’m describing here are ones I’ve heard him advocate before either in writing or on his show at some point.

First of all, I don’t think cutting up all of your credit cards is a good idea. That’s really the biggest disagreement that I have with him.

Dave Ramsey often advocates for people to just completely cut up all of their credit cards and completely disavow them. I think that credit cards have some limited uses and some value and that simply chopping them all up and closing all credit card accounts does more harm than good.

For example, I feel much more safe when I’m out and about with a credit card in my wallet than with cash in my wallet. A credit card takes care of virtually all purchases that I might make. If I’m robbed, I can just call my credit card company and report the robbery. If I lose my wallet, I can do the same. On the other hand, if I have just cash on hand, that cash is lost. It’s gone.

What about debit cards? I don’t feel comfortable carrying around a card that offers total access to my checking account. If someone swipes that number without my knowledge, I’m going to have a mess of a time getting everything cleaned up. It’s just not worth the risk to me.

Using a credit card and paying it off in full every month means that you have to have some degree of self-control, whereas cash-only does more to force that self-control on you. Still, I’m more uncomfortable with the risks of going cash-only than I am with the risks of using a credit card.

Second, I don’t think your credit score is useless. I’ve heard (and read) Dave advocating for people to just stop worrying about their credit scores.

While I know that paying attention to credit scores adds complexity to the situation, credit scores are used all of the time for situations that have nothing to do with debt. Do you have car insurance or homeowners insurance? Those guys are checking your credit. Have you applied for a job? Those people are probably checking your credit. In both cases, they’re assigning rates and deciding whether to hire you based, in part, on your credit score.

Yes, just ignoring this factor and focusing entirely on debt repayment will probably have relatively positive results. However, you need to be checking your credit report regularly, just to keep bad things off of it for the reasons mentioned above. You can engage in that process by starting at the FTC’s website, http://www.annualcreditreport.gov/.

Third, the financial returns he expects are completely out of this world. When Dave starts talking about investing, he starts referring to models that involve a 12% annual return. Unless you’re investing in something illegal, there’s nothing you’re going to find that will return anything close to 12% year after year like clockwork.

Warren Buffett, whose investment advice I deeply trust, has suggested that people should expect a 7% annual return over a very long period in the stock market, with much more fluctuation over the short term. I don’t even expect that much, to tell the truth, mostly because I tend to make conservative estimates on my investments. I usually figure on 6%.

Yes, I know that optimism is going to push people to really invest hard, but I don’t agree with selling an unrealistic picture of the future.

Those are the three points that Ramsey sometimes makes that I just can’t agree with. All three of them are minor points and don’t really change the meat of the plan, but they do change some of the details of it.

I think, to some extent, Dave argues on the other side of these points for motivational purposes. It’s thrilling to chop up your credit cards! It’s awesome to think about getting big returns when you invest! However, the results of those stances will often let you down.

The post Three Drawbacks to the Dave Ramsey Plan appeared first on The Simple Dollar.

I’ve written about 250 book reviews on The Simple Dollar since I started the site in late 2006. Along the way, I’ve found a few books that I just immediately recommend for certain topics. My general personal finance recommendation is Joe Dominguez and Vicki Robin’s Your Money or Your Life. My regular debt management recommendation is Dave Ramsey’s The Total Money Makeover. For investing, I usually recommend Larimore, Lindauer, and LeBoeuf’s The Bogleheads’ Guide to Investing. Time management? I’ll point to David Allen’s Getting Things Done.

Throughout all of those books, though, I’ve never really found a single book I could recommend about entrepreneurship. There’s not been one book that really talks about the process of taking an idea you have in your head, investing your spare time and effort into it, and building it into something sustainable that can earn you significant money over time. The closest book I’ve found to that goal is Michael Masterson’s Ready, Fire, Aim, which does a very good job covering the topic, but feels incredibly rushed in places.

That’s why I felt pretty optimistic about reading Dave Ramsey’s latest, EntreLeadership. Ramsey is very good at hammering home the basic ideas you’ll need on a topic and pairing it with enough motivation to get you to go out there and try it yourself.

EntreLeadership Defined
In order to be successful, an entrepreneur has to be a leader. Even at the very start, when a business is nothing more than a side gig or the germ of an idea, it will never get started if you don’t step up to the plate and say that things need to happen. Even then, you’ll have to communicate with people and likely delegate some of the tasks that have to be done. Without some leadership skills, it will never happen. Entrepreneurship and leadership are intrinsically connected, and the principles of leadership help even the nascent entrepreneur.

Start with a Dream, End with a Goal
A lot of us have dreams of what we’d like to do with our lives. I’ve made no secret of my dream to be a writer. Others dream of other things. The difference between a dreamer and an entrepreneur is whether or not they can convert that dream into a goal, particularly a goal with a plan to get there. A dream is a fun indulgence, but it doesn’t come true if you don’t set it as your destination and focus on how exactly to achieve it.

Flavor Your Day with Steak Sauce
A big key of entrepreneurship is good time management. In order to have the time each day you’re going to need to make your business work, you’ve got to have a great grip on your time. Ramsey advocates using to-do lists, but also reflecting on Covey’s four quadrants (important and urgent, not important and urgent, important and not urgent, and not important and not urgent), where, obviously, important should always trump urgent.

“Spineless Leader” Is an Oxymoron
The best thing you can do as a leader is to make decisions quickly based on the information you have and be able to explain why you made those decisions. “Leaders” who don’t make decisions tend to lead organizations that fall apart. Leaders who make decisions without basing them on information tend to make horrible decisions. Leaders who make decisions based on information but can’t explain them tend to sow mistrust with their team.

No Magic, No Mystery
This chapter is most of the key ideas of a “business 101″ class wrapped up into a single chapter. Ramsey covers the life cycle of a product (introduction, growth, peak, decline) and how to start over again. There’s also a deep look at marketing a product, with basic ideas such as scarcity and appeal covered in the discussion. Almost any business you get into will involve some level of marketing, so it’s important to understand the basics of it.

Don’t Flop Whoppers
Here, Ramsey discusses the process of turning a detailed idea or a small side business into a larger entity. There are two keys to this, in Ramsey’s eyes: passion and calling. Passion is something that gets you excited to get out of bed in the morning. You can’t wait to get started on the activities at hand. Calling is what you want to achieve in your life. I’m passionate about writing, but my calling is using my words to change people’s lives.

Business Is Easy… Until People Get Involved
One of the biggest challenges in growing a business beyond a solo gig is the people. I can speak to this from experience: it was dealing with employees (interviewing, training, cleaning up their mistakes, etc.) that was the single worst experience of running The Simple Dollar, in my eyes. Ramsey offers a lot of good material that covers the entire life cycle of an employee, from the hiring process to maintaining good work to letting go of problematic employees.

Death of a Salesman
The best thing a good salesman can do is to focus on the customer and come up with solutions for that customer in mind. Sometimes, that means doing things that aren’t directly beneficial for your business, such as helping with things that are outside of your business or suggesting products and services that you don’t sell. If a customer walks away from you happy with the exchange and in a better place because of it, you’ve succeeded in your goal.

Financial Peace for Business
Businesses need to manage their finances well and, yes, be frugal. Owning a business isn’t a ticket to spending like a madman. Here, Dave takes the personal finance advice from Financial Peace Revisited and applies the advice to small business management. It actually works quite well, because the basic principles of personal finance – spend less than you earn, avoid debt, etc. – work very well for small businesses.

The Map to the Party
When a business grows into a multi-person outfit, the key to success is communication. The more people feel that they’re able to communicate and that their ideas are of value, the more they actually do communicate, the more involved they are, and the better decisions you can make for the business as a whole. Good communication feeds on itself, as does bad, so the best thing a leader can do is be candid and open.

People Matter Most
The people in your business matter more than anything else. If you can’t do right by them, you can’t do right by the rest of your business, and if you can’t do right by that, your business will eventually fall apart. Treat the people who work for you well. Respect what they need and work with it. Listen to what they’re telling you and don’t brush it off. The more you do that, the more they’ll respect you (if they’re good people that you want working for your business).

Caught in the Act
One key way to build your business is to make sure your business is recognized, particularly when you’re doing good things. Little steps, such as your email signature or your stationery, makes a difference. Mentions in the media also help. The more little pieces of positive recognition you have floating around out there, the more likely it is you’re going to draw in a random customer off the street.

Three Things Successful People Never Skip
Contracts, collections, and vendors. Dealing with each of these is the kind of detail work that can drive a person mad, but it’s the details of these things that can make or break a small business. Being detail-oriented in these areas almost always pays off.

Show Me the Money!
Be generous to the people that cause you to win. There are a lot of ways to do this – bonuses, higher salary, and so forth. Keep in mind, however, that the reason to do this is to reward the people that are showing good performance – and good performance is demonstrated in the form of happy customers.

Mastering “the Rope”
At some point, you eventually have to start delegating decisions to others as your business grows. The key to that is to make sure you’re surrounded by people you trust who you know will make decisions that are good for the business as a whole, people who share your perspective on how the business should be run. Your immediate team should consist of these people.

Is EntreLeadership Worth Reading?
This is the best single book on entrepreneurship that I’ve yet read.

Most of my problem with other entrepreneurship books is that they give short shrift to the early growth of a business, when it grows from an idea to a side business to perhaps a full time solo endeavor or one with one or two employees. They skip this part and move on to the point where a business has a handful of employees.

While that latter part is important to understand, so is the infancy of the business. It’s often that infancy that makes or breaks potential entrepreneurs, and Ramsey spends a good half of the book talking about issues at that level before moving on to growth issues.

Ramsey maintains the friendly tone that has worked well for him in personal finance books, and it works well here with entrepreneurship. There’s just the right level of detail in the information, mixed with great anecdotes.

If you’ve ever thought about launching your own business, this is a great book to start with.

Check out additional reviews and notes of EntreLeadership on Amazon.com.

The post Review: EntreLeadership appeared first on The Simple Dollar.

One of the first books I reviewed on The Simple Dollar was Dave Ramsey’s More Than Enough. I found it to be an interesting take on personal finance, as it ties together personal finance and character and personal growth into a single package. While I didn’t think that it was the first book you should read if you were in personal finance panic mode, I did recommend it as a worthwhile read.

A few weeks ago, a reader emailed me and suggested that I read what my reader described as a “companion” to More Than Enough, entitled How to Have More Than Enough. My reader suggested that it was a much better read than the first book.

Store Manager, to Aisle One, Please!
Many people feel unhappy with big aspects of their life, but they also find change to be stressful. The key thing to remember about any change that you take on in your life is that the end goal of it is to put you in a place where you are no longer unhappy with some aspect of your life. For example, choosing to live a life that involves less spending can be really stressful, but the end goal of it is actually a stress-reducer: freedom from debt and financial worry.

Foundation Failure
Why do people get into situations where they’re unhappy with some aspect of their life? Ramsey’s argument is that some basic foundation of their life has failed in some fashion. Ramsey argues that most lives are held up by a series of posts, and when one or more of those posts begin to rot and fall away, the entire structure of our lives begins to fall apart. Thus, the best thing we can do is to constantly shore up those things that we rely on. This chapter focuses a lot on values – the immediate things that we hold true and hold dear in our lives. What are we doing to reinforce those things? Most of the rest of the book focuses on nine more of these “poles” that hold up everyone’s life.

Vision – Binoculars Looking at Your Future
Vision refers to knowing where you want to go in life. This ranges from something as simple as what you want to accomplish this week to what you hope to accomplish over your entire life. If you focus on nothing but today, you’re going to walk in a rut in your life and never get to any of the places you’d like to go someday. The big key is to just start thinking about it and writing it down. What would you like to have people say about you at your funeral? What has your life meant? What can you do to get there?

Unity – A Tangled Rope Is Just Loops
Unity simply means doing things with respect to the people around you. So often, it’s easy to just do what we want and ignore what others need or want. However, if you focus on listening to the needs of others and incorporating those needs into your daily actions and choices, you’re going to find that your entire life flows much better. This goes from things like cleaning out the dishwasher to big things like how to spend a big windfall. The more you listen to the key people in your life and involve them in your major decisions, the easier your life will flow and the more they’ll involve you.

Hope – Fuel for the Explosion!
Is the future awash with possibilities or is it something to dread? If you look at the future as something to avoid and to fear, then you’ll find that your future is indeed a darker place. A much better approach is to look at one’s future as a place for hope and optimism, where the things you want in life are destined to happen. A key part of this equation is to look for the good “what-if”s and chart a path to them, and also look for paths away from the bad “what-if”s.

People Who Need People – Support and Accountability
You need other people in your life. For many people, though, it’s a surprise to learn that others need them in their lives. There are people out there who need you to be at your best. At the same time, those people are often the ones who can be there for you when you need help. It’s a two way street of support and accountability that can constantly push you on to better things if you let it happen.

Intensity – Move the Rock
Many people are willing to give up at the first obstacle. If you come at your goals with a low intensity, it’s going to be very easy to derail you, and any goal that’s worth achieving is going to have some obstacles along the path. Instead of letting those challenges derail you, you’ve got to focus hard on those challenges and overcome them. For example, if you’re watching your weight, instead of eating that delicious piece of pie, you’ve got to have the intensity and content of character to push it aside.

Diligence – That Dirty Little Secret
On the flip side of intensity is diligence – the ability to stick with something through thick and thin. It’s easy to ramp up the intensity in challenging moments, but it is diligence that will get you through the plateaus and the valleys where success seems far off. For example, intensity will get you through Thanksgiving dinner without gaining five pounds, but diligence will keep you from eating 500 calories a day more than you should and slowly gaining weight. It’s a focus for the long term.

Patience Is Power
Hand in hand with diligence is patience. Most goals don’t happen overnight. Many goals don’t happen in a year. In the society we live in today, it’s easy to have a mindset that you need results now and if they don’t immediately happen, something’s wrong. That mindset will keep you from achieving great things because it will cause you to abandon goals before you can possibly achieve them. Patience is an essential key for building a great life.

Contentment
It’s easy to fall into a mindset where you want what others have. It can be a very pernicious mindset to crawl out of, too. The key to success is to simply be happy with the things you have, even when you could have other things if you were willing to sacrifice some of your goals. Without goals, it’s easy to fall into a trap of keeping up with the Joneses and never being truly content with what you have.

Giving – The Great Misunderstanding
When we are scared or when we don’t feel confident about our lives, we tend to clench our fists and hold on to what we have. A big step towards being happy with our lives is a willingness to let go of that tight grip and give of ourselves to others, not just in the form of money, but in the form of time and talent and energy. By doing this, we can begin to see that the bounty of gifts we have is actually more than enough.

Is How to Have More Than Enough Worth Reading?
This book is actually very much like More Than Enough except with some additional workbook elements added in. I compared the two books side by side and found that there really wasn’t very much material at all cut from the original book. Instead, this version mostly just benefits from the direct addition of workbook materials.

If you’re just looking for a book that focuses on character and personal growth and how it relates to personal finance, either How to Have More Than Enough or More Than Enough will suffice. However, I think I would give this one the edge because, due to the workbook elements, it provides just a little bit more push for you to actually start evaluating your life and making positive changes and some more food for thought about living a values-oriented life.

Check out additional reviews and notes of How to Have More Than Enough on Amazon.com.

The post Review: How to Have More Than Enough appeared first on The Simple Dollar.

Ronald writes in:

I really loved your series of posts on The Total Money Makeover. I decided to pick it up for myself but when I went to the store they had The Total Money Makeover and The Total Money Makeover Workbook. Which one should I get?

I think the best way to answer that is to review the workbook, since I’ve already thoroughly covered the original book.

The Total Money Makeover Workbook is essentially the content of The Total Money Makeover presented in a workbook format, with lots of blanks in the text for the reader to fill in with their own information as they go through the book.

The biggest difference I’ve found in the content of the two books is that the original book offers up more detail while still being readable.

Since Dave’s message is fairly simple and straightforward, does that really matter?

1 – The Total Money Makeover Challenge
The book opens with a section on evaluating your relationship with money and your knowledge of how it works. I find such sections to be most useful in a book like this one, where people are likely coming in the door with a poor understanding of money. If that weren’t the case, why would they be in a desperate debt situation? The exercises in the chapter focus heavily on self-evaluation, forcing people to look at why they got into the situation they’re in.

2 – I’m Not That Out of Shape: DENIAL
The theme of looking at the current situation continues here, but the focus is on how bad the situation really is. People who hit some sort of financial bottom are often coming out of a big state of denial about how bad things are, and the best recipe for curing that state of denial is to simply look at all of the numbers in black and white, which is the guidance that this chapter provides.

3 – Debt Is (Not) a Tool: DEBT MYTHS
So many people are used to the treadmill of buying cars with a loan, buying homes with a loan, buying furniture with a loan, and so on. That treadmill does not help you get ahead. It only helps the banks in the long run. To succeed financially, you have to break out of that treadmill running.

4 – The (Non)Secrets of the Rich: MONEY MYTHS
Getting into a financially secure position doesn’t involve being a genius and it doesn’t involve a bunch of secrets. It involves following some pretty simple principles all the time. Spend less than you earn. Pay yourself first. Don’t put all of your money in one place. The principles are really simple, but it’s hard for many people to follow them.

5 – Ignorance and Keeping Up with the Joneses: TWO MORE HURDLES
People fall for the pictures they see in advertisements and believe products will make their lives better. All it does is hurt their financial future. People see their neighbors buying things (often bought on credit) and think they deserve these items for themselves. Again, all that’s happening is damage to their financial future. Don’t fall into these traps.

6 – Walk Before You Run: SAVE $1,000 FAST
The first step is a small emergency fund. You can get there several different ways. One effective way is to “clean out your closet” and sell off a lot of the items that you don’t often use, like rarely-watched DVDs and unused exercise equipment. Another big step is to buckle down tightly on your unnecessary spending.

7 – Lose Weight Fast, Really: THE DEBT SNOWBALL
A while back, I wrote a detailed article about creating a debt repayment plan. The basics of this plan and the one presented in this book are very similar, with the biggest difference being that Dave encourages people to order their debts by size so that you get the “psychological win” of paying off a debt quickly, while I usually encourage the mathematically superior method of ordering debts by interest rate (highest to lowest). Focus on paying off the worst debts first – the really high interest ones are usually credit card debts, which often have manageable balances.

8 – Kick Murphy Out: FINISH THE EMERGENCY FUND
Dave encourages people to build an emergency fund that equals six months’ worth of living expenses. This money should sit in a savings account and be left untouched until a genuine emergency comes along, and if you use it for such an emergency, your focus should immediately be on replenishing that debt.

9 – Be Financially Healthy for Life: MAXIMIZE RETIREMENT INVESTING
Dave suggests putting 15% of your annual income into retirement savings. Doing this will help secure a very healthy retirement for you, particularly if you start before the age of 35 or so. The younger you start, the healthier your retirement will be and the younger you can be when you walk away from your current job. Remember, retirement doesn’t have to mean sitting around doing nothing. It can be a chance to start a second career.

10 – Make Sure the Kids Are Fit Too: COLLEGE FUNDING
The best gift you can give your child is help with the costs of their college education. So many students leave college with a big hole of student loan debt already dug out for them. If you have children, start saving something for their college education as early as possible. It’s vital, though, that you not look at your emergency fund as college savings or vice versa. College is not an emergency. It’s something you plan for.

11 – Be Ultrafit: PAY OFF THE HOME MORTGAGE
If everything else is taken care of, start hammering away at your home mortgage with extra payments (this happens to be where we’re at with regards to the future). The sooner you get your home paid off, the better. Having a paid-off home lowers your monthly living expenses substantially, giving you a lot more room to breathe.

12 – Arnold Schwarzedollar, Mr. Universe of Money: BUILD WEALTH LIKE CRAZY
Once you’re debt-free, your focus should be on wealth building. Here’s where I diverge from Dave a bit, as I think his views on investment returns are a bit inflated. However, we both agree that the best thing you can do is diversify and not fall back into spending unnecessarily. You want to build a future without worry, right?

13 – Live Like No One Else: REACH THE PINNACLE POINT
The “pinnacle point” that Dave describes comes when you’re able to live off your investments and do whatever you’d like. Dave describes it as being possible when you can live off 8% of your investments each year, but that again assumes a very healthy annual investment return. I’d shoot for being able to live off of about 4% of your investments each year. For example, if you can actually live off of $40,000 a year, you need $1 million in investments locked up.

Is The Total Money Makeover Workbook Worth Reading?
The Total Money Makeover Workbook covers the exact same ground as The Total Money Makeover. They’re both fantastic books for dealing with a mountain of debt. They both have some Christian undertones, but not overwhelmingly so. They both present an extremely straightforward plan for getting out of a debt situation.

So, what’s the difference? The original book, The Total Money Makeover, is more detailed. This workbook, in many places, felt as though content was ripped from the original book in order to make space for fill-in-the-blank spots.

If you really desire a one-single-book journal of your money recovery, The Total Money Makeover Workbook will do that for you. However, I’d strongly recommend going through The Total Money Makeover along with a notebook and a pen. Virtually all of the ideas from the workbook are found in the original book along with a lot more detail, motivation, and useful information.

In my eyes, The Total Money Makeover Workbook is trumped by simply reading The Total Money Makeover with a notebook and a pen at your side. I’d only pick up the workbook if having all of it in a single book really appeals to you.

Check out additional reviews and notes of The Total Money Makeover Workbook on Amazon.com.

The post Review: The Total Money Makeover Workbook appeared first on The Simple Dollar.

At the end of the conversation, this person gave me a pamphlet describing a local business that offers personal finance counseling locally. This business uses a lot of Christian material in the advice they offer – in fact, I could count twelve different direct quotes from scripture in the pamphlet I had in my hand.

When I took the pamphlet, the person I was talking to immediately compared the people at the business to Dave Ramsey and implied that their advice had an additional strength due to it being Biblically based.

This business – and people like Dave Ramsey and Lary Burkett that mix Christianity and personal finance – ties Christian beliefs and strong personal finance ideas together in ways that reinforce each other.

Let’s see if I can spell it out a bit more clearly. You have a person who is in personal finance trouble and they’re also a devout Christian. Their Christian faith attracts them to a person like Ramsey or Burkett, a person who ties some very solid pieces of personal finance to Christian themes. These tactics work, reinforcing to the person not only that the personal finance ideas work, but that their Christian faith is true as well.

I see absolutely nothing wrong with that. In fact, I think it’s a very good thing.

In fact, I think a lot of books try similar approaches, tying personal beliefs to personal finance. Your Money or Your Life spends at least some of the pages appealing to community-oriented people and environmentalists. A lot of books focus heavily on women’s issues, mixing some feminism in with the personal finance message.

Here’s the thing, though. The personal finance information provided by these books work without the other material. It’s because of the strength of that personal finance material that it’s able to be coupled sensibly with religious views and secular views, with liberal views and conservative views.

I often look at such material as being something of a candy coating around a bitter pill. To a person who really hasn’t evaluated their personal finances and their future, the things you have to do to find great money success seems really difficult. However, if you can tie the principles to other core values that already exist in your life, the ideas become a lot more palatable.

In fact, as micropublishing begins to take off, the door is open to this type of theming to ever-smaller groups. Personal finance for atheists? Personal finance for liberals? Personal finance for Christian conservatives (well, we already have that to an extent)? Personal finance for Democrats or Tea Party members?

Sure, why not? As long as the personal finance principles are true (and aren’t twisted into an advertisement for buying overpriced gold or other such nonsense), it’s a great idea to tie the core beliefs of someone to good personal finance practices. Why? Good personal finance practices work hand in hand with most human beliefs, and good personal finance practices allow people to be more effective at following those beliefs.

A Christian with good personal finance habits can support a mission. A liberal with good personal finance habits can run for office or financially support candidates they believe in.

Personal finance works. It can support you no matter what your other beliefs are. If you’re finding it difficult, there are almost always powerful ties between your other beliefs and personal finance. Never be afraid to bring them together.

The post Theming in Personal Finance: Do Dave Ramsey and Larry Burkett Work Without Jesus? appeared first on The Simple Dollar.

To a degree, this put a damper on the book club. It’s always interesting when there’s disagreement, after all, if everyone conducts themselves in a mature fashion.

(Perhaps this means I should have a book club on Rich Dad, Poor Dad…)

Anyway, after the book club finished, a reader wrote in and asked me that very question. You agree with Dave Ramsey so much. Where do you disagree with him?

I spent some time thinking about that question and came up with five strong principles where my perspective on personal finance disagrees with Dave’s. It’s worth nothing that these are merely five points in comparison to dozens where I do agree with him – there’s a lot more that he says that’s spot on than things I disagree with.

Let’s dig in.

A 12% annual rate of return in stocks is not realistic.
If you look at the amazing run of the stock market from 1980 to 2000 – the years when Dave was actually figuring out his financial state – it’s easy to see where his concept of a 12% annual rate of return comes from. The stock market actually did return 12% or so a year.

During that timeframe, the baby boomers were putting tons of money into the stock market – an unprecedented flood of new investors. And as with any market, if demand goes up, so do prices.

Today, though, boomers are starting to retire and many others have moved – or are moving – their investments into something more conservative than stocks. The demand is slipping a little bit, so prices are adjusting accordingly. They’ll still go up (because more investors all over the globe are getting in than getting out), but the people getting out is going from a trickle to a big stream – and will gradually become a flood.

The 1980 to 2000 bull market is gone and is not going to return any time soon. Sure, you can still earn a nice, healthy return in stocks, but a much more reasonable estimate is Warren Buffett’s long term prediction that stocks will return about 7% annually.

So what’s the big deal? Much of Ramsey’s investing advice revolves around the idea that investing in stocks will return you 12% annually. It won’t. You can still build up the kind of nest egg he talks about, but you have to invest more yourself. The market won’t do that much work for you any more – and if you expect the market to return 12% for you on average over a very long period, you’re in for a very nasty surprise down the road.

Personal responsibility is the problem, not credit cards.
Dave is pretty much a credit card absolutist – cut ‘em up and get rid of ‘em. For people who have problems with credit cards, it’s not bad advice.

However, he goes too far, stating unequivocally that credit cards are bad and that people should live without them. This flies in the face of his usual message, which is that personal responsibility is what really matters.

A personally responsible person – one who does not carry a balance on their cards – can use credit cards as tools. Over the past three years, my wife and I have saved about $500 using our Target Visa without buying a frivolous thing with it – just food and household supplies, which we could easily buy with cash. Instead, each month the statement comes in and we just send out a check. Then, every few months, we get a 10% off card, which enables us to take a shopping trip at Target and get 10% off our total bill. We make an effort to save larger purchases until we have such a discount.

I could tell a very similar story about our Citi Driver’s Edge card, which provided us with about $700 cash to help with a recent auto repair. All we did is use the card on gas and minor auto expenses and pay off the balance each month.

If you’re personally responsible, you can handle your urges and keep the spending on such cards down to the staples. That means you’re never carrying a balance – no interest payments – while also building up a strong credit rating, which helps with your insurance rates.

Credit cards aren’t the problem when it comes to credit card debt – personal responsibility is.

A $1,000 emergency fund is enough if you’re paying off credit card debt.
One of the big parts of the Dave Ramsey plan is that one should save up a $1,000 emergency fund, then turn all extra money towards paying off debts. This is a great way to get rid of those debts as fast as possible, of course.

Dave’s argument is that the $1,000 emergency fund is more than enough to take care of most of life’s problems and that you can negotiate your way out of the rest. I disagree with that – many events that would require me to turn to my emergency fund would go far beyond that $1,000 level.

How exactly, pray tell, can one negotiate themselves out of a job loss in a tight job market, or barter when it comes to a broken arm?

Instead of just stopping when hitting that $1,000 emergency fund, I suggest setting up an automatic savings plan, dumping $25 a week into the emergency fund (or $50 if you can swing it), then forgetting about it. Use everything else that’s left to hit the debt hard and let that emergency fund slowly build.

Why do this? Here’s an example. Let’s say you set up that savings plan to sock away $50 a week, then you start whacking at your debt as hard as you can. Six months later, you lose your job. You turn to your emergency fund. Thanks to your savings, you have $2,300 there, enough to keep the bills paid for two months or so. Without that plan, you only have $1,000 – things aren’t going to go nearly as well.

If everything goes perfectly, Dave’s plan is better.

But when in life does everything go perfectly? That’s the point of an emergency fund. Fund it appropriately, and you’ll always be glad you did.

“Growth” mutual funds are not the be-all end-all of investments.
Whenever Dave talks about specific stock investments, he always mentions putting his money into a “growth” mutual fund. There are two problems with this.

One, it’s not diversified. Buying nothing but growth stocks makes your investments less diverse. Quite often, growth stock funds are very heavy into a few specific “hot” sectors – and when those sectors go cold, ouch. Growth mutual funds didn’t do very well in 2001 after the dot-com bubble burst, for example.

Two, an ordinary “mutual fund” charges a lot of fees. Invest instead in a low-cost index fund. An index fund is basically an automatically-managed mutual fund, one that operates according to some publicly-defined easy-to-follow rules instead of relying on the research of a team of fund managers. You can get similar returns with an index fund without the huge fees (which many mutual funds take to pay the salaries of the fund managers and pay for advertising).

What’s a better solution? If you’re investing in stocks, buy a very broadly based low cost index fund. You won’t ride the bull markets quite as strongly, but you won’t fall nearly as far during down markets or changing market conditions. More importantly, you won’t be paying huge fees to ride the roller coaster – index funds are pretty cost-effective.

Before you put big money into the stock market, at the very least, read more than one voice on stock investing. In fact, read as many voices as possible. You’ll find that diversity is good and low costs are even better.

Do not cut your retirement savings during the initial push to pay off debt.
One final piece of Dave’s advice that really bothers me is that he suggests people trim their retirement savings during their initial push to pay off their debt, even if it means foregoing matching from employers.

To me, this is simply throwing money away. No matter how bad your situation, refusing to get an immediate 50% or 100% return on your money – risk free – is a bad idea.

No matter what, if your employer offers matching funds on your retirement accounts, invest at least enough to get all of the matching they’re offering. You’ll never, ever regret it – it’s basically free money that enables your retirement savings to grow much more quickly than if you turned away.

Sure, it means that you’ll pay off debt a little more slowly. What you’ll gain, though, is a lot of free money for retirement from your employer. Never turn that down, no matter what.

The post Five Ways I Disagree With Dave Ramsey appeared first on The Simple Dollar.

The Total Money Makeover ends with a very brief chapter that includes a few thoughts about what comes next once your finances are rolling along. Since this chapter is just a very brief coda, I’m also tying in my thoughts as a whole on the book, as well as links back to the older entries in the series.

Wealth As a Prison
On page 219, Dave hits upon the idea that it’s not a good idea to let wealth control your life:

The wealthy person who is ruled by his stuff is no more free than the debt-ridden consumer we have picked on throughout the book. Antoine Rivaroli said, “There are men who gain from their wealth only the fear of losing it.”

I think that anything in your life that fills you with more negative feelings than positive ones is a prison. It might be debt. It might be your job. It might be your wealth. It might be anything.

Whatever those things are, you need to eliminate them. If it’s your wealth, you need to give some of it away. Seriously. If it’s your debt, you need to get hard core about repaying it. If it’s your job, you need to focus intensely on a career change. If it’s your marriage, you need to face it and work hard on it.

If you don’t, it’s just another prison. People wonder how I can feel sympathy for famous people – I often do – when they have all of this wealth and stuff. What they don’t have is the freedom to go on a walk in the park. Is it their choice? Sometimes it is, but sometimes they’re trapped by their own fame and their only choice is to completely drop out of their career – and for some, that isn’t even enough (a la Britney Spears, circa 2007, when she was obviously trying to take a time out but kept getting hounded nonstop).

If it’s causing you more hurt than happiness, you need to do something to change it.

A Few Thoughts on the Book in General
Here are a few general thoughts I had on The Total Money Makeover from reading through it again in detail.

First, there’s more than a little “marketing flavor” in this book. Dave makes a lot of references to his other media properties – other books, his DVDs, his radio show, and so on. While I don’t mind it when those other resources are free (like the radio show), it seems a bit disingenuous to talk a lot about saving money while pitching other books and DVDs. I didn’t like this part at all.

Second, some pieces of the book have surprising depth. It’s easy to come away from this book just remembering the big points, like the “baby steps,” and Dave’s folksy tone often disguises things. However, if you peel away that stuff, you find lots of interesting things under the surface, ideas that, if you let them, guide you to reflect deeply on your life in ways you may not expect.

Third, the Christian overtones aren’t as strong as I remembered. On my original reading of the book, I had a perception that it was very full of Christian overtones. Reading it again, I realize the Christian themes are actually pretty sparse. He hits upon a Biblical idea perhaps once a chapter and spends maybe two sentences on it.

Of course, it’s not hard to see the connection between many of the other ideas and general Christian teachings, but if you study religions, you’ll find that many moral teachings are common from religion to religion. Why? I think they’re part of a moral code that exists in most humans, religious or otherwise. Dave’s book calls to the good side of our morals.

Finally, the central theme of this book is obviously “intensity.” If you’re going to do something big in your life, you have to hit it hard. You can’t do it half way. I find this really true in my own life: the things I’ve been successful with (getting my money in order, getting a writing career launched) were things I did with a deep passion and focus.

Do You Want to Know More?
Here are the previous eleven entries in this “book club” series on The Total Money Makeover. Please, dig back into the earlier entries – there are tons of good ideas and comments there.
1. The Challenge … and Denial
2. Debt Myths
3. Money Myths
4. Two More Hurdles
5. Save $1,000 Fast
6. The Debt Snowball
7. Finish the Emergency Fund
8. Maximize Retirement Investing
9. College Funding
10. Pay Off the Home Mortgage
11. Build Wealth Like Crazy

Do you have any other thoughts on this chapter of The Total Money Makeover, the book as a whole, or on how this book club went? Please share them in the comments – and feel free to respond to any of my impressions as well. After all, a good book club is all about discussion!

The post The Total Money Makeover: Live Like No One Else appeared first on The Simple Dollar.

A financial recovery plan reminds me of a well-thought-out video game. The first levels are fairly easy – get a $1,000 emergency fund, build the snowball, and so on. The middle levels get harder – saving big for retirement and college. The final level is very hard – getting completely debt free.

So now we’ve beat the game. The princess is no longer in another castle.

But where do we go next? Anywhere you want.

Three Good Uses for Money
On page 204, Dave argues that there are really only three:

After years of studying, teaching, and even preaching on this subject across America, I can find only three good uses for money. Money is good for FUN. Money is good to INVEST. And money is good to GIVE. Most anything else you find to do with it doesn’t represent good mental and spiritual health on your part.

I agree for the most part with what’s being said here. Pretty much everything worthwhile that one could do with money revolves around fun, investing, or giving – or some combination thereof.

I spent some time asking myself what sorts of things I would do if money were no object. I’d probably give a serious crack at writing a great novel. I’d move out in the country somewhere with a lot of trees and a pasture. I’d probably spend two or three months a year living in another country. I’d consider homeschooling, but not without a lot of research.

In short, I’d do a lot of things that are just extensions of my values. I wouldn’t really become a different person even if I had limitless money.

When Dave says that things you would find to do that aren’t fun, investing, or giving would constitute poor mental or spiritual health, I think what he’s getting at is that some of the spending choices made by people who suddenly have plenty of money go away from the core values that get them there. Stick with what’s really important to you, and you’ll be fine.

Winning
On page 207:

The grown-up inside us likes the INVESTING of money because that is part of what makes you wealthy. Also, the growing dollars are a way of keeping score in our Total Money Makeover game.

I like the idea of keeping score, because I think it’s important no matter where you are in your financial turnaround. I’ve kept careful track of my family’s net worth since 2006 on a monthly basis (I even did it weekly for a while) and I found that watching the progress of it is incredibly motivating.

It’s pretty simple. Each month, I calculate my net worth, adding up all of my debts compared to all of my assets (my assets are the balances of my investment accounts and the tax assessed value of my home, nothing else) and see where I stand compared to previous months. Almost every month, my net worth goes up – it only takes a hit when I do something major, like buying a car.

This is a good sign. Your overall balance of assets and debts should improve every single month unless there is a very big, very significant purchase in the way.

Keeping score is a huge psychological motivator, no matter what you’re doing. Personal finance is no different.

Simple Investing
Many people get obsessed with perfect portfolios and the like – I admit that I find it personally interesting, too. But is it necessary? On page 208:

You can choose to be a little more sophisticated, but until you have over $10 million, I would keep your investing pretty simple. You can clutter your life with a bunch of unnecessary stress by getting into extremely complex investments. I use simple mutual funds and debt-free real estate as my investment mix – very clean, simple investments with some basic tax advantages.

In other words, if you own less than $10 million in investments and things are so complicated you’re using a financial planner, it’s time to simplify. Unless you have a huge bankroll, the advantages of getting too complex are eaten up completely by the complexity itself.

I agree with this, with one caveat: if you actually enjoy managing your investments yourself, by all means, jump into the deep end of the pool. To put it frankly, I enjoy it to a certain extent, but I’m nowhere near as interested in it as I am in other areas of my life. Investments are a tool to get me to where I want to be, in my eyes.

If things are so complicated that you need a financial planner and you’re not exorbitantly rich, you’re paying that planner for a service you don’t really need. You’re far better off learning a little bit about investing and taking care of it yourself using the countless services out there. Don’t pay a salesman to be the middle man – it’s not that hard.

The “Pinnacle Point”
Dave gets really into the concept of the “pinnacle point,” going on about it for several pages. I’ll pick out a money quote, on page 211:

It is hard to describe reaching the “Pinnacle Point” without some emotion. This Baby Step takes us to the point at which your money works harder than you do, the “Pinnacle Point.” It is the instant in time where focused gazelle intensity has reached critical mass, and your money takes on a life of its own.

I’ve had inklings of this feeling here and there. I noticed it most strongly during the handful of months just before we moved from the apartment to our home, when I had very little debt at all and the vast majority of my income was going straight into savings for it. It was amazing watching the savings grow at that rate. I was living my life happily and the money was just racking up.

Over the last two years, with my job change (resulting in a loss of income but an increase in personal happiness), the stock market downturn, and our home mortgage, I’ve lost some of that sense of the “pinnacle point” – and I miss it. I want back there pretty badly at times and I’m currently evaluating my income and other choices to figure out how exactly to get myself back there as efficiently as possible without sacrificing what we have.

I don’t think there is a strict dollar amount that matches up with the “pinnacle point” – it varies a lot between people and situations. I think it happens when you don’t have any debt, have a real, adult income, and aren’t spending most of it – the savings just rolls along.

Giving?
One of the big things I look forward to in the future is more giving. I have some plans for charitable giving and a lot of volunteer work once I reach that “pinnacle point” and I know that my family is safe and my children are protected from whatever may happen to me.

Dave gives several impassioned examples of the personal power of giving, but one sentence on page 215 sums it up:

The givers often report having more fun than the receivers.

The ability to do something that makes a positive change in someone else’s life is incredible. I’ve been able to see that in things I’ve done already in my life, and every time I’ve perhaps received more joy from it than the person receiving the gift.

If you don’t know what I’m talking about, try it sometime. Help out someone who really needs it in a pinch. If you hear about someone who is really in trouble, give them $100, no questions asked, and see how they react. Spend a day working for a volunteer project. The impact on you is amazing.

Sure, there are some people out there who don’t see any value in this. Personally, I think I’ll avoid such people.

Do Something
I think there is some danger of becoming a miser if you watch every penny for too long. As Dave says on page 217:

Someone who never has fun with money misses the point. Someone who never invests money will never have any. Someone who never gives is a monkey with his hand in a bottle.

In other words, if you have a lot of money and your bases are all covered, do something with it. If you’re not, what is the point?

I know of a person who lives in what I would describe as shocking poverty. This person lives in a trailer on the verge of falling apart, rarely does anything outside of the home, eats an awful lot of bologna and cheese, and counts every single penny. This person is bitter and unhappy most of the time, wondering why others have fun when this person does not.

That person I mention has over a million dollars in the bank.

What’s the point of having that money if you don’t enjoy your life? Sure, there’s no reason to just throw money out the window, but making your life miserable in exchange for a few more dollars in the bank – particularly when your bases are covered – isn’t a good trade at all.

Do you have any other thoughts on this chapter of The Total Money Makeover? Please share them in the comments – and feel free to respond to any of my impressions as well. After all, a good book club is all about discussion!

On Saturday, we’ll tackle the thirteenth chapter – Live Like No One Else.

The post The Total Money Makeover: Build Wealth Like Crazy appeared first on The Simple Dollar.

This is a stage that I see us approaching as time goes on. We’re not quite there yet, but we’re close. Right now, I’m trying to knock out my final student loan (it’s a doozy), and then start focusing on my home mortgage.

Our home mortgage payment is just shy of $1,100 – that doesn’t include homeowners’ insurance and taxes, so when we get the house paid off, we now have $1,100 more a month to spend on whatever we choose.

I, for one, would roll that extra amount directly into savings. I’d simply change the automatic payment to be an automatic transfer into a savings account of some sort – perhaps an index fund. Then I just keep living life as normal until one day that account is full of cash for something great. For us, that “something great” is our long-dreamed-of house in the country, with a small barn out back, a big garden, and a chicken coop.

Is It A Crazy Goal?
My parents recently finished off their home mortgage after paying on it for thirty years. They’re pretty much debt free at this point for the first time in their marriage. So, for me, I have a great example in front of me that you can get rid of all of your debt. However, many people don’t have that example and it seems like an impossible goal. On page 186:

Anytime I speak about paying off mortgages, people give me that special look. They think I’m crazy for two reasons. One, most people have lost their hope, and they don’t really believe there is any chance for them. Two, most people believe all the mortgage myths that have been spread.

The “hope” factor is something I see popping up over and over again whenever I talk to people about money. Many people I talk to view their mortgage as simply a fact of life. If they were ever in a position that their mortgage became really easy to pay, it wouldn’t be time to double-up on the payments – no, no, it would be time to upgrade their homes.

I think this points to a prevalent mindset out there when it comes to debt. Many people simply view debt as a way to leverage the lifestyle they want now. It comes from a lack of patience – people don’t want to live in a small apartment watching their savings grow slowly when they could just get this loan and be in that house now – even if it costs them hundreds of thousands of dollars.

I think patience is one of the biggest tools a young professional can have when it comes to his/her money. Just wait for a while – you’ll be way better off over the long run.

The Tax Deduction Myth
Owning a mortgage just to get a tax deduction is something of a fool’s game, as outlined on page 187:

If you have a home with a payment of around $900, and the interest portion is $830 per month, you have paid around $10,000 in interest that year, which creates a tax deduction. If, instead, you have a debt-free home, you would, in fact, lose the tax deduction, so they myth says to keep your home mortgaged because of tax advantages. [...] If you do not have a $10,000 tax deduction and you are in a 30 percent tax bracket, you will have to pay $3,000 in taxes [...] According to the myth, we should send $10,000 in interest to the bank so that we don’t have to send $3,000 in taxes to the IRS.

All the tax deduction does is lower the effective interest rate you’re paying on your home loan a little bit.

In fact, Dave doesn’t even make the case as well as he could. If you’re using your mortgage interest on your tax return, that means you’re foregoing your standard deductions because you have other things to deduct. So, take our situation – we have two adults in our home. Our standard deduction in 2009 is $11,400. If we choose to itemize our taxes (which we’d have to do to deduct our home interest), we have to have more than $11,400 in interest on our home mortgage (or other deductible expenses) to beat what we would already get.

So, if your only significant deductible expense is your home mortgage – and your mortgage isn’t gigantic – you’re not actually gaining much of anything at all in terms of taxes.

The Risk of Having a Mortgage
Another disadvantage of holding on to a mortgage is the risk – if something goes wrong in your life, it’s a lot better to not have a mortgage payment than it is to have one. On page 189:

If I own the home next to you and have no debt, and you (because of your investment adviser guy) borrowed $100,000 on your home, who has taken more risk? When the economy moves south, when there is war or rumors of war, when you get sick or have a car wreck or are downsized, you will run into major problems with a $100,000 mortgage that I will never have. So debt causes risk to increase.

I think this is a vital, overlooked point. Having a mortgage – or any debt – is a type of risk. You’re gambling that your future will be stable, no different than putting cash down at the roulette wheel. With a mortgage, your life is simply more at risk than it was before.

I have two young children at home. Risk stares me in the face every day. I encourage our children to push their limits a little, but I still stand very close by when my three year old grabs onto playground gymnastics rings and hangs there. Having a mortgage is something like telling my three year old to grab the rings for the first time while I stand far away. Sure, he might hold the rings for a while and then drop without a problem, but my distance increases the chance of a hurt elbow or a broken arm.

The risk of owning a fat mortgage is much like the risk of putting your child on a bike for the first time and shoving them down the sidewalk. Sure, they might ride like the wind, but they might also fall flat on the pavement. Instead, it’s better to do a bit of planning (like saving for a home) and then let go when they’re ready (like when you have enough saved up for a house). No broken bones, no broken lives.

Thirty Years Versus Fifteen Years
Many people advised me to get a thirty year mortgage instead of a fifteen year mortgage, arguing that I could make an extra payment each month and get the same speed benefit of a fifteen year without the risk of the larger minimum payments. That’s a bad idea because something will often come up, as is spelled out on page 190:

A big part of being strong financially is that you know where you are weak and take action to make sure you don’t fall prey to the weakness. And we ALL are weak. Sick children, bad transmissions, prom dresses, high heat bills, and dog vaccinations come up, and you won’t make the extra payment. Then we extend the lie by saying, “Oh, I will next month.”

A higher minimum payment is actually a good idea, because it forces us to work with what we have left over. A lower minimum payment means that we just have more to work with – if that extra payment isn’t required, it’s easier to argue that something else is more important for the moment.

With expenses like prom dresses, heat bills, bad transmissions, and dog vaccinations, you can always find ways to make it work. If you have a decent emergency fund, it shouldn’t be too tough at all.

What do you get in exchange for these little sacrifices? Your mortgage goes away in half the time. You find yourself free of that load much, much faster. Plus, the interest rate on a fifteen year loan is lower, meaning your payments won’t actually be anywhere close to double what they would be for a thirty year mortgage.

Home Equity Loans Make Poor Emergency Funds
One common question I get from readers is whether or not they should take out a home equity loan to deal with some problem in their lives. My feeling is that if you’re in that situation, you need to rethink about your emergency fund. Sure, the home equity loan might be the right solution for right now, but if you’re living your life in such a way that it has to be used, you might want to rethink how you’re managing your money.

On page 197, Dave dips his toes into this idea:

Even a conservative person who doesn’t have credit card debt and pays cash for vacations can make the mistake of the HEL by setting up a loan or a “line of credit” just for emergencies. That seems reasonable until you have walked through an emergency or two, and you realize very plainly that an emergency is the last time you need to be borrowing money. If you have a car wreck or lose your job and then borrow $30,000 against your home to live in while you make a comeback, you will likely lose your home. Most HELs are renewable annually, meaning they requalify you for the loan once a year.

Think of it this way. You’re using your home equity loan as an emergency fund. You lose your job, so you take out $30,000 to live on – it’s fine, since you have tons of equity in your home, right? Well, the end of the year comes and you still don’t have a job. The bank says, “Sorry, we’re not renewing your loan,” and they call in the $30,000. You don’t have it. They repossess your house. Any equity you built up is gone.

An emergency fund needs to be cash, period. If it’s not liquid or it puts you at risk to get it, then it’s not an emergency fund.

Our local credit union has hinted to us that we should have a home equity line of credit. I have torn up every single offer they have sent to us. I’m not interested in that kind of risk.

Paying Cash for a Home Is Impossible
I agree with Dave that it is indeed possible to pay for your home with cash. So why don’t people ever do it? It’s not easy. It’s a lot harder to go this way than it is to just go get a mortgage. On page 198:

Paying cash for a home is possible, very possible. What’s hard to find is people willing to pay the price in sacrificed lifestyle.

I think the problem is that many people view their home as more than just living quarters. They view it as a status symbol – they need a house they can show off to family and friends. It’s more impressive to live in a house than an apartment, isn’t it? So, if you back up and think about it, you pay hundreds of thousands of dollars in interest, home maintenance, and other costs – not to mention time – in order to impress others.

Again, the only people impressed with such things are people that you never speak to, who don’t matter in your life. They look at you and admire your home, but they don’t build a relationship with you. The people you build lasting relationships with like you, not your house.

We chose to buy a home with a mortgage. I don’t regret it, but if I had to do it all over again, I would have looked intensely for a great rental situation instead (since we originally lived in an apartment too small for two toddlers and two adults – we had to move) and kept saving.

Do you have any other thoughts on this chapter of The Total Money Makeover? Please share them in the comments – and feel free to respond to any of my impressions as well. After all, a good book club is all about discussion!

On Wednesday, we’ll tackle the twelfth chapter – Build Wealth Like Crazy.

The post The Total Money Makeover: Pay Off the Home Mortgage appeared first on The Simple Dollar.

When I was growing up, my parents didn’t save any money for me for college. Not because they were neglectful, but mostly because there weren’t resources for such saving.

Where are we at now? I’m doing just fine, with just one college loan remaining, and my parents are safely in retirement, leaving me without worrying about how they’re going to make ends meet.

This experience, when I reflect on it, makes me question the value of college savings. I do understand the benefits of helping my children through school, especially if they realize the value of it. However, looking at things from a post-college perspective, I’m actually much happier that my parents are safely retired than I would be if they had floated my college bill and were still working.

For me, at least, it makes sense to focus on retirement savings and make absolutely sure that it’s covered before even considering college savings. I think we’re there.

What to Expect from College
Many parents seem to expect that once the kids are out the door to college, they’re well on their way to a lucrative career. Ha. On page 169:

If you are sending your kids to college because you want them to be guaranteed a job, success, or wealth, you will be dramatically let down. In some cases, the letdown won’t take long because as soon as they graduate they will move back in with you. Here me on this: college is great, but don’t expect too much from that degree. [...] Because we have turned a college degree into some kind of “genie in a bottle” formula to help us magically win at life, we go to amazingly stupid extremes to get one.

This kind of talk is anathema to some. How dare someone impugn the value of a college education!

Here’s the thing: the actual college education only teaches you a bit of what you’ll actually need to know in the workplace. The value of college comes in other areas: the relationships you build and the skills and ability to actually get through the minefield. The college degree merely says that you were able to navigate the minefield, not that you picked up invaluable knowledge that will help a business make money.

I found that the “cramming” skills I learned in college didn’t pay off until I had secured a job. The relationships I built paid off helped me get my foot in the door for my first big job interview, but I had other opportunities on the table that weren’t connected at all to those relationships. My actual college degree? It was a nice resume filler, but it was not what got me the job and it was not what helped me succeed when I got there.

Devaluing the Pedigree
Page 171 discusses the idea that where your degree comes from doesn’t matter that much:

In some areas of study and in a very few careers, where you graduate will matter, but in most it won’t. Pedigree means less and less in our work culture today.

The panic that people feel about how they “must” get into this certain college is completely overblown, from my perspective. You succeed or fail based on what you do and the relationships you build, not the environment around you. You can flame out just as well at MIT and at your local tiny state school. You can also succeed dramatically at both if you work at it.

I would far rather have a child that went to a small school without a great pedigree, took advantage of all of the opportunities there, built some great relationships with people, and got good grades in an area they’re passionate about than to go to Harvard and flunk out after two semesters.

Pedigree matters less. What matters more is the individual: did they take advantage of their opportunities, or let them idle around them?

College Lifestyle Adjustments
When I was in college, there were two groups of kids. There were the kids with “helicopter parents” who gave them plenty of cash to spend, seemed to stop by the dorms all the time, and would actually call professors on their behalf. There were also the “free” kids, the ones whose parents dropped them off, came and visited on occasion, but mostly let the kids do their own thing.

I was in the latter group. My parents came and visited regularly, especially when I was a freshman, but success was largely up to me. They never contacted a professor, and outside of a $10 or a $20 bill left behind on occasion, they didn’t provide me with funding beyond buying some of my textbooks as my “birthday” or “Christmas” present. I had a job starting my first semester and I kept multiple jobs throughout my college years.

Dave riffs on this on page 171:

[T]hose precious kids can probably get a good degree if they will suffer through lifestyle adjustments and get a job while in school. Work is good for them. In past generations, students lived with relatives, slept in dorms, ate cafeteria food, and endured other hardships to get a degree.

I do not want the path my children have to college to be incredibly easy. For me, the aspects of college where I actually learned things were the areas where I was pushed and challenged. Having everything paid for makes big swaths of college incredibly easy – and many college students, especially those lacking self-motivation, will fill those gaps with gratuitous wastes of time and money.

Obviously, the path shouldn’t be impossible, but no path that is a cake walk is one worth taking.

Tuition Inflation
College tuition goes up by leaps and bounds. On page 174:

College tuition goes up faster than regular inflation. Inflation of goods and services averages about 4 percent per year, while tuition inflation averages about 7 percent per year. When you save for college, you have to make at least 7 percent per year to keep up with the increases.

In other words, if you want your investment today to actually grow faster than the rate of tuition growth, you need to be making more than 7% on your return.

How can you do that? Well, there’s no guaranteed way to get that kind of return. However, if you start early in your child’s life, you have a period of almost twenty years to watch your dollars grow in a long-term investment, which means you can take on more risk than you could if your kid is fourteen.

I have my children’s college savings almost entirely in stocks (the oldest child is three years old). As they get older, I’ll slowly begin to shift their savings towards bonds and safer things, but for now, the potential growth of the stock market and the time frame I have for saving makes stocks a great choice.

Will Baby Life Insurance Work?
I know of several grandparents who have written to The Simple Dollar asking whether buying whole life insurance for their newly-born grandchildren is a good option. I told them no – I suggested starting their grandchild a 529 if they’re saving for college and if they really wanted life insurance they should buy a small term policy for the grandchild. Dave seems to concur on page 174:

Baby life insurance, like Gerber or other Whole Life for babies to save for college, is a joke, averaging less than a 2 percent return.

Whole life insurance is never a good deal. If you’re tempted to invest in it, consider something different. Instead of dumping, say, $100 a month into a whole life policy, buy a similar insurance policy for $10 or so a month, then invest the other $90 or so into a dedicated investment – a 529, a Roth IRA, or even just a taxable account. Put it into index funds through Vanguard (that’s what I do with my dollars) and just sit back.

You will be ahead. Why? The $90 you’re investing in index funds won’t have commissions taken out – the cost of a typical index fund is about 0.2% a year, while whole life funds have commissions so large that they often eat the entirety of your first few years’ worth of contributions.

If you’re thinking about it, get the information and projections from your insurance salesman, step back, and run the numbers yourself. Compare your investment in that policy with an investment in an index fund like VFINX and see where things wind up.

What Kind of Account Should I Use?
On page 175, Dave points towards a Coverdell account:

I suggest funding college, or at least the first step of college, with an Educational Savings Account (ESA), funded in a growth-stock mutual fund.

An ESA is often referred to as a Coverdell, named after the late Senator Paul Coverdell.

I usually recommend a 529. What’s the difference? The Coverdell has the advantage of enabling you to choose your investments on your own instead of choosing among the plans offered by various states. Iowa’s plan, though, is handled by Vanguard, which is who I would choose, anyway.

The big drawback to a Coverdell, from my perspective, is that it has to be used by age thirty or else given to a younger relative. I don’t like this at all, which leans me towards the 529. Many students who go on to graduate school often wind up in school past age thirty; others may make the choice to go back for a different degree after some years in the “real” world. If I invest in my child’s 529 and they have money left after getting that four year degree, I’d like it if that money sat around in case they chose to go back to graduate school or for another degree later on in life. That option is cut off with a Coverdell.

What I hope for is that my children will earn enough scholarships to cover their undergraduate degrees (I earned enough for a majority of my expenses). If that happens, they can keep that 529 for any graduate work they might do.

Do you have any other thoughts on this chapter of The Total Money Makeover? Please share them in the comments – and feel free to respond to any of my impressions as well. After all, a good book club is all about discussion!

On Saturday, we’ll tackle the eleventh chapter – Pay Off the Home Mortgage.

The post The Total Money Makeover: College Funding appeared first on The Simple Dollar.

A few weeks ago, I took my three year old son to the theater to see Up. It was his first time in the theater and he loved the movie, particularly the friendly dog character, Dug.

I was much more entranced by the central character, Carl Fredricksen. Much like me, he married an adventurous girl he’d know since he was a child – I couldn’t help but see myself in Carl right off the bat.

Watching him progress forward to retirement – and finally realizing that this is his opportunity to do something he had dreamed about with his wife for their whole lives – really hit me with the idea that retirement isn’t just about stopping your work. It’s about continuing your life’s work, except without the constraints of having to beat the pavement each day.

The Total Money Makeover touches on this theme right off the bat.

Retirement Isn’t the End; It’s Security
On page 152, Ramsey makes the point that retirement means security, not just freedom from work:

When I speak of retirement, I think of security. Security means choices. (That’s why I think retirement means that work is an option.)

I agree wholeheartedly with this perspective, to the point that I no longer think of 401(k) savings or Roth IRA savings as retirement savings. In fact, I often have to change things I write about both accounts for simplification.

If I don’t think of them as retirement accounts, what are they? I think of them as “crossover point accounts” with some very nice tax benefits.

Here’s why I think of them this way. I have two young children. Realistically, I know that, unless a major windfall comes my way, I won’t be reaching my own “crossover point” (the point at which I can survive on my own investments) until after they’re out on their own for at least a few years. This puts me at an age that begins to approach the minimum ages for non-penalized withdrawals from my Roth IRA and my 401(k).

Do I intend to “retire” at 59 1/2? Not at all. I have a lot of plans for my life after the point where I am financially self-sufficient that don’t involve golf and fishing. They involve large volunteer projects and activities that simply wouldn’t be feasible without a large financial cushion. The last thing I want to do is waste away.

The Job You Hate
I really like this bit, from page 152:

If you hate your career path, change it. You should do something with your life that lights your fire and lets you use your gifts. Retirement in America has come to mean “save enough money so I can quite the job I hate.” That is a bad life plan.

This idea really hit home for me at a time when I was becoming unhappy with my career in many ways. Over the course of several years, I went from being very passionate and involved and pushing forward a fascinating project to being a system administrator charged with also maintaining a very large code base, something I absolutely didn’t want to do.

To me, the idea of simply switching careers was anathema. I had invested so much effort into my career at this point that I didn’t want to lose it. I was also trapped financially – I needed that income to keep coming in.

I knew what I wanted to do – creative-oriented work that really got people to think about their lives – but that seemed light years from what I was doing. But the investment I had already made and the financial state I was in kept me mentally locked into the idea of keeping on with it.

Don’t let your life be controlled by the need for a few more dollars. It’s not worth it.

15 Percent?
On page 155, Dave encourages people to invest big in their retirement plans:

The rule is simple: Invest 15 percent of before-tax gross income annually toward retirement.

In other words, your 401(k) contributions plus your Roth IRA contributions should add up to 15% of what you earn before taxes in a year, not what you bring home.

I think that 15% number is a bit loaded in a way that Dave doesn’t discuss. I think he makes an enormous assumption in this book, that people reading it are at the very least over the age of 30. The thought process behind this is simple: if you’ve dug yourself into an enormous debt hole, figured out that this is a problem, and dug yourself out, you’ve likely got quite a few years under your belt already.

The catch is that it’s those under the age of thirty that can really make a killing with retirement savings. If you save 15% a year from age 22 to age 30 for retirement in an account that returns 8%, you’ll make more just from those early years than you would if you started at age 30 and saved until age 65. Thus is the power of compound interest.

I think Dave’s absolutely right – if you’re over 30 and have peanuts saved for retirement, 15% is a requirement. If you’re just getting out of college, 15% would be sweet, but you can have a healthy retirement for less if you’re committed to contributions throughout your entire adult life.

What About Employer Matching?
Dave offers up his thoughts on how to consider employer matching on your 401(k) on page 155:

When calculating your 15 percent, don’t include company matches in your plan. Invest 15 percent of your gross income. If your company matches some or part of your contribution, you can consider it gravy. [...] By the same token, do not use your potential Social Security benefits in your calculations.

Why not include these things in your calculations? We all know about the lack of stability in Social Security – I, for one, have little interest betting my long term stability on it. But why not the matching?

Dave really doesn’t give an argument for why he believes you shouldn’t include it beyond “consider it gravy.” I tend to think the reason that ignoring matching is a good rule of thumb is that quite often employee matching money has special investing rules tied to it.

Another good reason – perhaps even more important – is that it’s better to save more than you need than less than you need. If you wind up at age 60 and have more money than you expect, that’s a good thing (provided, of course, that you’re not negatively affecting your life along the way).

Another interesting question: is investing in your own business worth considering for retirement savings? I don’t think it is. For one, a small business is notoriously unstable. For another, I think a small business functions more as a giant emergency fund than as a retirement account, since it can be tapped regardless of where you are in life. I wouldn’t include any sort of business as part of one’s retirement plan.

At Age Sixty Five…
An interesting fact worth thinking about, from page 164:

The investing you do systematically and consistently over time will make you wealthy. If you play with this by jumping in and out, always finding something more important than investing, you are doomed to be one of those fifty four out of one hundred sixty-five-year-olds still working because you have to work.

When I read that quote, I immediately began thinking of all of the people I know that are close to sixty five years of age and whether they still need to work. According to my math, seven still have to work and six do not. From my little bubble, it looks like that 54% figure is pretty spot-on.

One interesting difference between the two groups is that the working group tends to spend money more easily than the non-working group. The people I know in the working group tend to go on a lot of vacations and have shiny new cars, but their days are still filled with their jobs. The people I know that are not working for an income at age sixty-five are not doing as many expensive things, but instead are involved in things like volunteer work and actually working at their own small business that doesn’t turn a big profit but is a lot of fun for them. They don’t have shiny new cars and they don’t fly to Europe regularly, but they’re doing things they value.

I’d like to be able to go on some trips when I’m that age, but overall, I’d rather be in the group that doesn’t work for a living income then.

The Rose
On page 165, there’s a short parable about a rose growing from a plain seed into a beautiful bloom. The comment on this parable is interesting:

The story of the rose is about human potential and about not being defined by what you do, but rather by who you are. [...] Push with gazelle intensity [on your savings] to bloom, but know that as long as you take the progressive steps, you are winning.

For me, this all comes back to the idea of spending less than you earn – it’s the engine that drives everything that I truly value in life. Spending more than I earn means lots of little trifling goodies right now, but it means pain in the future – something I learned the hard way.

Spending less than I earn, though, is much like planting a seed and watching it grow. At first, it seems painfully slow, as a seedling barely peeks through the soil and seems to grow at a snail’s pace. But if I keep fertilizing it and working with it, it grows.

Before I know it, it’s a large blooming bush and the fragrance of freedom is in the air.

Do you have any other thoughts on this chapter of The Total Money Makeover? Please share them in the comments – and feel free to respond to any of my impressions as well. After all, a good book club is all about discussion!

On Wednesday, we’ll tackle the tenth chapter – College Funding.

The post The Total Money Makeover: Maximize Retirement Investing appeared first on The Simple Dollar.

I’m a big believer in the unpredictability of life (in fact, this unpredictability is a major theme in my upcoming book). Life deals you things you don’t expect all the time, from small (like an unexpected wet diaper on your way out the door) to big (a sudden death of a close relative) and from good (finding a $100 bill in a parking lot) to bad (breaking your big toe after dropping something heavy on it).

Yet, even given that hugely unpredictable nature in life, most people do not have an emergency fund. Many of those who do only have a tiny fund. What happens to them if they lose their job and can’t get another one for a year? What happens if their child is invited to go to a very prestigious music school? What happens if one of them falls down a flight of stairs and has to spend six months in a wheelchair?

The solution to all of these things is a big, fat emergency fund. A big healthy wad of cash in the bank makes all of these problems easily bearable. For Ramsey, this is the next step after your debt snowball is done and all you’re left with is a mortgage – get a big chunk of change in the bank for those rainy days.

How Big?
One big point of contention about emergency funds is how big they should be. Dave offers his opinion on page 133:

A fully funded emergency fund covers three to six months of expense. What would it take for you to live three to six months if you lost your income?

I think it’s key here to point out that by “you,” the quote most likely refers to the full spending of a household – if it doesn’t, then you might be building an emergency fund that’s too small.

Three to six months? Think about how much you spend each month, then multiply that by, say, five. That’s quite a serious chunk of change. For us, it would probably be somewhere in the ballpark of $20,000, with almost half of that being our mortgage and homeowners’ insurance.

Is it enough? I think you have to look at it from the perspective that no amount will cover every possibility that could happen. Instead, you should be seeking an amount that’s large enough to cover every doomsday scenario you can reasonably think of. Consider the people around you and their most desperate moments. How much would they have needed in those situations?

Easy to Access
Dave basically argues for a savings account on page 137:

Keep your emergency fund in something that is liquid. Liquid is a money term that means easy to get into with no penalties. If you would hesitate to use the fund because of the penalties you’ll incur to get it, you have it in the wrong place.

That basically means a savings account. It’s accessible at any time without penalty and it doesn’t fluctuate in value.

Obviously, you want it to be as safe as possible. This eliminates stocks – they’re inherently risky and fluctuate too much. The value of bonds can fluctuate, too, though not nearly as strongly. You don’t want to lose your balance once it’s invested.

At the same time, you want to be able to get at it without a penalty of any kind. Dave argues that this is a black mark against certificates of deposits. I disagree with that. With some careful planning, you can use certificates of deposit in a “ladder” system and never have to crack one. I like this idea because it helps you get a better rate of return and it’s a psychological barrier that keeps you from digging into it.

Dave points towards money market accounts, another little hint that this book was written prior to 2008. Money market accounts might have great returns sometimes, but they’re not as safe as FDIC-insured savings account. Even better, if you hunt around, you can find FDIC-insured savings accounts that have a nicer return than pretty much any money market account and come with the insurance.

Three Months? Six Months? In the Middle?
The entire point of an emergency fund is to absorb risk, and some families are simply more at risk than others. On page 139:

For example, if you earn straight commission or are self-employed, you should use the six months rule. If you are single or you are a one-income married household, you should use the six-month rule because a job loss in your situation is a 100 percent cut in household income. If your job situation is unstable or there are chronic medical problems in the family, you, too, should lean toward the six month rule.

Personally, I feel as though children are a significant risk addition to one’s life. An adult can go out there and get a job. A three year old can’t do the same – they’re wholly dependent on the adult. Thus, if you have kids, I’d lean strongly towards a bigger fund.

I also think that six months isn’t necessarily the maximum. If all of your household income comes from freelancing, you have three kids, and there may be health issues in your future, six months probably isn’t enough. I’d have more than that – a year’s worth, perhaps?

We have about ten months’ worth of purely liquid cash sitting there for emergency purposes right now. That’s an amount that feels right for us, with the majority of our household income coming from freelancing and two children under the age of four.

Is Everybody on Board?
One issue I see readers writing to me about time and time again is the question of what to do when their partner isn’t on board with the financial changes they want to make. Dave hits on this a bit on page 142:

I don’t suggest you clean out your savings [down to $1,000 in order to pay off debt] if everyone isn’t having a Total Money Makeover.

I go further than that: if you’re in a relationship and your partner is not on board with making financial change, you’re wasting your time with it. Their actions will undermine everything you do and you’ll find yourself constantly at odds and angry with each other without making a drop of additional progress. That’s a dangerous recipe, right there.

If your partner is not on board with making some real financial changes, your focus shouldn’t be on charging full steam ahead without your partner. Instead, your focus should be on talking through your situation with your partner. You’ve got to understand where they’re coming from. Just pushing what you want won’t cut the mustard here – they’ll just see you as pushy and you’ll make negative progress, or you’ll get an act that makes it look like they’re on board when they’re really not.

Talk about your money. You’ve got to, or none of this will work.

Women and Men?
Are women more suited to have emergency funds than men? On page 144:

God wired ladies better on this subject than He did us. Their nature causes them to gravitate toward the emergency fund. Somewhere down inside the typical lady is a “security gland,” and when financial stress enters the scene, that gland will spasm.

The argument here is that by their very nature, women are more likely to see the value in an emergency fund than men. Men tend to be task-oriented, while women tend to be process- and security-oriented.

I think there’s actually something to this. I’m all in favor of gender equality, but different does not mean unequal. Different means that each side has traits that are beneficial. Guys are better at focusing in, at breaking down barriers. Women are better at planning and cooperation, at building fortresses of safety. Different attitudes are useful in different situations.

I see this in my own marriage. I’m far better with specific objectives with my children. I thrive on having a series of tasks to do or a game to play or something like that. My wife, on the other hand, seems to thrive more on nurturing. She holds them and is patient when they’re hurt, where I’m much more likely to look for how to solve the problem. When Joe bumps his knee, my wife is more likely to hold him while I go searching for a Band-Aid.

The emergency fund is definitely in her court, not mine. I see the value of it and I contribute to it, but it’s clearly more a part of her elemental nature.

Why Do All This?
If the future is so unpredictable, why waste our lives right now putting so much effort into scrimping and saving and planning for that future? On page 146:

What used to be a huge, life-altering event will become a mere inconvenience. When you are debt-free and aggressively investing to become wealthy, taking a few months off from investing will put a new engine in a car. When I say the emergency fund is Murphy-repellent, that is only partially correct. The reality is that Murphy doesn’t visit as much, but when he does we hardly notice his presence.

A big emergency fund means that the bad events in that unpredictable future don’t wipe away all of the good things you have in your life.

Without an emergency fund, a job loss means panic. It means scrambling madly for work – any work. It means you might lose your home or your car. It’s scary.

With an emergency fund, you can roll with the punches. You can patiently dig for the right job. You can even give your dreams of freelancing a shot right now – after all, you’ve got time.

Without an emergency fund, a dead car means panic. It means you have to throw yourself further in debt, with even more monthly payments than before.

With an emergency fund, you just make the call and fix the problem. No big debts. No monthly payments. Just smooth sailing.

You’re left with unexpected events – but only the good kind.

Do you have any other thoughts on this chapter of The Total Money Makeover? Please share them in the comments – and feel free to respond to any of my impressions as well. After all, a good book club is all about discussion!

On Saturday, we’ll tackle the ninth chapter – Maximize Retirement Investing.

The post The Total Money Makeover: Finish the Emergency Fund appeared first on The Simple Dollar.

You’ve got a big pile of debts in front of you. They’re scary. The totals of all of the debts takes your breath away when you think about it. You don’t know where to start. You need a plan.

Dave Ramsey calls his plan the “debt snowball,” and it’s based on psychology, not math. If you’re going for pure math, the best way to pay off your debts would be to start with the one with the highest interest rate, since that will save you the most interest per dollar that you pay back.

Dave’s plan is different – he encourages people to pay back their debts from smallest balance to largest balance. The smallest balance debt gives you a “win” as early as possible in your debt repayment – which is a huge psychological boost.

Do I buy it? I played with the numbers a while back and my conclusion was that the difference between the plans – unless you’re talking about enormous debt loads with huge disparities in interest rate – doesn’t save you enough to not try the debt snowball method.

Identify the Enemy
On page 109, Dave makes a worthwhile point about figuring out what you’re working against:

The bottom line is that it is easy to become wealthy if you don’t have any payments. You may get sick of hearing it, but the key to winning any battle is to identify the enemy. The reason I am so passionate about getting rid of debt is that I have seen how many people make huge strides toward being a millionaire in the short time after they get rid of their payments.

I agree with this to a large extent, but I don’t think Ramsey really spells it out fully here or even later in the passage. If your goal is financial freedom, the enemy is unnecessary spending, not the debt. Debt is merely a symptom of that problem.

Let’s say you spend $100 more a month than you bring in without anything in the bank. This behavior means that you’re building up debt. Make a handful of spending changes and now you’re spending $100 less than you bring in. Put that extra $100 towards the debt and it goes away. Then you can start saving that $100 (and probably more, since you don’t have those debt payments to cover) towards a big goal.

It all comes back to getting your spending under control. If you can’t get your spending under control on a consistent basis, all of the debt planning in the world won’t do a thing.

Debt Repayment Is Hard
Ramsey argues that repaying your debts is hard on page 111:

This is the toughest of all the Baby Steps to your Total Money Makeover. It is so hard, but it is so worth it. This step requires the most effort, the most sacrifice, and is where all your broke friends and relatives will make fun of you (or join you).

Is it that hard? I think it’s hard in the sense that when you’re standing there at the starting line of a marathon, the finish line looks impossibly far away. Then you start running and you’re caught up in the race. You get into a rhythm, you’re gliding along, and before you know it, the finish line is there.

Lao-Tzu was absolutely right. “A journey of a thousand miles begins with a single step.”

That first step is the hardest part.

It definitely was the hardest part for me. I knew for a long time that “someday” I’d have to fix my debt problems, but that “someday” was always put off into the future.

Then, finally, I was forced into taking that first step. The fear of not taking a step grew greater than the fear of getting started.

But once I took that first step, the second one was easier, the third one was easier, and before you know it, I’m well along the path and it’s like a slow train coming around the bend, clickety clack.

Math Versus Behavior
The idea of psychology versus numbers comes to a head on page 111:

We have discussed that personal finance is 80 percent behavior and 20 percent head knowledge. The Debt Snowball is designed the way it is because we are more concerned with modifying behavior than correct mathematics. [...] Being a certified nerd, I always used to start with making the math work. I have learned that the math does need to work, but sometimes motivation is more important than math. This is one of these times.

As I mentioned earlier, I ran the math myself, comparing the “optimum” strategy (which means you repay your debts in order of interest rate, highest to lowest) to the “debt snowball” strategy (which means you repay your debts in order of balance, lowest to highest). What I found is that the math difference isn’t that big of a deal if you’re really hitting those debts with a strong force.

At the same time, it’s easy to see situations where the psychological difference is enormous. Let’s say that your smallest debt is your lowest interest debt and your highest interest debt is much bigger. If you throw the kitchen sink at the smaller debt, it goes poof pretty quickly – and that feels good. If you throw the kitchen sink at the bigger debt, it takes a long time for that debt to go poof. It’s a real slog – a painful one.

Some people get irritated if they think they’re doing things in a way that’s even slightly suboptimal and are also self-motivated enough to push through. Frankly, there aren’t too many of those people – those that are out there are probably not considering the “debt snowball.”

So, I think Dave’s plan works quite well.

How It Works In Detail
He lays out the plan in a single paragraph on page 114:

The Debt Snowball method requires you to list all your debts in order of smallest playoff balance to largest. List all your debts except your home; we will get to it in another step. List all of your debts – even loans from Mom and Dad or medical debts that have zero interest. I don’t care if there is interest or not. I don’t care if some have 24 percent interest and others 4 percent. List the debts smallest to largest!

This is a very good first step, but I don’t think it’s quite the final step.

Once you have that list, it’s worthwhile to call up each of your creditors and negotiate a bit. The big move is to ask for a lower rate on each of your credit cards. Some people get paranoid with this, asking things like “What if they cancel my card?” Well, what if they do? If you’re committed to reducing your debt, that shouldn’t be a real problem.

Another step you should take is stopping by your local credit union and seeing what they can do to help you consolidate some of those debts. You might be able to drastically reduce some of the interest rates via a personal loan or some other vehicle. Don’t get involved with a “debt reduction” company – use your local credit union.

Once you’ve tried those things, your list will be different – and easier. Cross off those debts that you consolidated – they’re done! At that point, rewrite your list, again with the debt with the lowest balance on top.

Then comes the hard work – paying them off.

The Big Payoff
Dave explains why it’s a snowball on page 117:

After you list the debts smallest to largest, pay the minimum payment to stay current on all the debts except the smallest. Every dollar you can find from anywhere in your budget goes toward the smallest debt until it is paid. Once the smallest is paid, the payment from that debt, plus any extra “found” money, is added to the next smallest debt. (Trust me, once you get going, you will find money.) Then, when debt number two is paid off, you take the money that you used to pay on number one and number two and you pay it, plus any found money, on number three.

It’s like a snowball rolling down the hill. Your extra payments on that first debt are small, but it’s rolling along. Eventually, it’s paid off, and your extra payment picks up the minimum payment of the first debt. The snowball gets bigger as it rolls. Your next debt is done, and the snowball gets even bigger, picking up another minimum payment.

The part I found interesting here is this one: Trust me, once you get going, you will find money.

This is absolutely true, but it’s something people can scarcely believe when they first start. Once the debt starts slipping away, you start to really get into it. I know I certainly did. Watching the debt getting smaller and smaller is really exciting, and you want next month to be even more awesome. So you start looking for ways to save. You start looking for things to do differently.

And you find them.

After all, you wouldn’t be in debt trouble to begin with if you were spending your money in an optimal fashion.

There’s Not Enough Money To Get Started!
There usually is if you do things the right way. On page 124, after a story about a logjam on a river:

When the dynamite blew, logs and pieces of logs would fly into the air. After working so hard to cut the trees, some of them were a total loss. They had to blow up some of the timber to get the rest of the crop to market. That’s the sacrifice the situation required. Sometimes that is what you have to do with the stopped-up budget. You have to dynamite it. You have to get radical to get the money flowing again.

Radical usually gets people uncomfortable. I know this from experience – people don’t mind frugal tips as long as they’re easy, but I start getting flamed if I suggest something personally challenging. Cancel the cable? You’ll pry the remote from my cold, dead hands. Sell your car? Get a rope.

Here’s the thing, though. When you sit down and rationally consider getting rid of something you consider beyond question, quite often you find that it’s not really a bad move at all to get rid of it. Getting rid of cable is completely unthinkable to many people until they think about it. What are they getting from the cable that isn’t fulfilled by other avenues, like Hulu.com or over-the-air television or a $1 DVD rental once a week?

What about selling a car? I can’t stand the loss of freedom! What freedom? How often do you use the car in a way that isn’t served by the metro or a short walk or a bit more careful planning? Is it really worth the insurance cost to keep it around?

Look at something big. Ditch your house and move into an apartment. Rent out a room. Give up all beverages but water. Sell your television. The impact of a truly big move will be like a tidal wave over your debt – or any other big financial goals you have.

Do you have any other thoughts on this chapter of The Total Money Makeover? Please share them in the comments – and feel free to respond to any of my impressions as well. After all, a good book club is all about discussion!

On Wednesday, we’ll tackle the eighth chapter – Finish the Emergency Fund.

The post The Total Money Makeover: The Debt Snowball appeared first on The Simple Dollar.

One thing that Ramsey excels at is urgency. His entire persona, from his written words in the book to the things he says on the radio, practically demand urgency. “You have to do this now.”

He’s right, though. If you’ve found yourself in a personal finance situation where everything falls apart if you lose your job tomorrow, fixing the problem is urgent. You’re being utterly held hostage by your job and by Lady Luck. Too many people find themselves in this situation and view it as normal.

If you lost your job tomorrow and had the engine fall out of your car the day after that, could you survive for three months without work and still hit all of your bills and get that car on the road? If the answer’s no, it is urgent. You’ve got to change something.

Baby Steps?
Dave lays out the importance of baby steps for pretty much any major life initiative, on page 93:

They way you eat an elephant is one bite at a time. Find something to do and do that with vigor until it is complete; then and only then do you move to the next step. If you try to do everything at once, you will fail. If you woke up this morning and realized you needed to lose 100 pounds, build your cardiovascular system, and tone your muscles, what would you do? If on the first day of your new plan you quit eating, run three miles, and lift all the weight you can lift with every muscle group, you will collapse. If you don’t collapse the first day, wait forty-eight hours for the muscle groups to lock up and the cardio to go crazy, and you will be bingeing on food shortly thereafter.

I’ve written about this phenomenon on my personal blog, where I sometimes write about the challenges I face getting in shape. It’s absolutely true: you’re far better off taking steps that are too small than steps that are too big, because those giant steps are the ones that are likely to make you trip and fall.

This basic idea applies to anything you want to do in life. Want to be a writer? If you get up and start in on a schedule of pumping out 4,000 words a day, you’re going to burn out quickly. Instead, just practice the craft and write short things. My writing practice, to tell the truth, is often on Twitter – can I get across an interesting idea in 140 characters? Doing so improves me as a writer.

Want to be a golfer? If you start playing 72 holes a day, you’re going to get sick of it fast (and probably tear something). Instead, just focus on smaller tasks – go to the driving range for two buckets. Build your skills slowly and don’t burn out.

It’s true over and over again: baby steps work. I think the big reason people don’t do this is that they want results now and then they way overdo it, undoing any good they might have done.

The Power of Clear, Written Goals
Written goals are vital at every stage and in every aspect in life. From page 98:

Brian Tracy, motivational speaker, says, “What does it take to succeed on a big scale? A tremendous God-given talent? Inherited wealth? A decade of postgraduate education? Connections? Fortunately for most of us, what it takes is something very simple and accessible: clear, written goals.” According to Brian Tracy, a study of Harvard graduates found that after two years, the 3 percent who had written goals achieved more financially than the other 97 percent combined!

Writing down your goals makes them real – and makes them powerful.

I’m going to admit something here, something fairly goofy. I usually have somewhere between five and ten personal goals going at any one time. Each of them are very action-specific: “I am going to run a 5K by the end of the year.” “I’m going to write a truly great book.” … and so on.

Each day, I write down each of those goals, pen on paper. Seriously. Doing this every day hammers those goals into my mind and I see those goals in every action I do. Three of my goals are health-related right now and I can’t help but see them when I make a decision about what to eat or what to drink. I look in the fridge, the goals float through my mind, and I choose a spinach salad for lunch instead of a grease-filed choice.

It works. Without this, I wouldn’t have made The Simple Dollar work. I wouldn’t have written a book last year, and I wouldn’t have been well into writing another book this year. I wouldn’t be able to read two challenging books a week. I wouldn’t be a good father – or at least not as involved as I am.

Get Current
There’s a big baby step before you dive in on the $1,000. On page 101:

Before we get to Baby Step One, you will have to do one other thing. You will have to be current with all your creditors. If you are behind on payments, the first goal will be to become current. If you are far behind, do necessities first, which are basic food, shelter, utilities, clothing, and transportation.

If you’re behind on your bills, you have to get caught up before doing anything else. Doing anything else puts the cart completely before the horse.

Many people think it’s “impossible” to get current once they reach a certain disastrous level. That’s usually not true, but you’ve got to be proactive. Call up the people you owe that you’re late with and start negotiating. They’re going to listen because it’s in their best interest to listen – if they don’t, they’re not going to get anything out of the money they owe you if you run away or declare bankruptcy.

No situation is impossible, particularly if you’re willing to step up to the plate and try to take things on head first.

Baby Step One: Save $1,000 Cash As a Starter Emergency Fund
Why $1,000? Why not dive into paying off debts? Dave makes a good case for emergency funds on page 102:

It is going to rain. You need a rainy-day fund. You need an umbrella. Money magazine says that 78% of us will have a major negative event in a given ten-year period of time. The job is downsized, rightsized, reorganized, or you just plain get fired. There’s an unexpected pregnancy [...] Car blows up. Transmission goes out. You bury a loved one. Grown kids move home again. Life happens, so be ready. [...] Now, obviously, $1,000 isn’t going to catch all these big things, but it will catch the little ones until the emergency fund is fully funded.

One of the most frequent things I hear from readers is that they don’t see any reason to not use their credit card as an emergency fund. “I have tons of credit left, so that’s my emergency fund,” they’ll say.

Here’s the problem with that: credit is not cash. Your credit line is completely at the mercy of the credit card company. Sometimes they slash credit limits. Sometimes they outright cancel cards. These things often happen right at the moment when you’re in trouble and most “need” that limit.

On the other hand, cash is constant. A big company can’t take your savings away from you on a numerical whim. If everything goes bad, your credit cards can go poof – but if you’ve saved up an emergency fund, it’s there for you.

What Isn’t an Emergency?
Another “problem” is that people substitute irregular bills for emergencies. On page 104:

Most of America uses credit cards to catch all of life’s “emergencies.” Some of these so-called emergencies are events like Christmas. Christmas is not an emergency; it doesn’t sneak up on you. [...] Your car will need repairs, and your kids will outgrow their clothes. These are not emergencies; they are items that belong in your budget. If you don’t budget for them, they will feel like emergencies.

An expense that you know is coming isn’t an emergency. You know that your car will need maintenance, so an oil change or a minor repair isn’t an emergency. You know your father’s birthday is coming up, so a gift isn’t an emergency.

The real problem here is information management. I think many people wind up treating expected things as emergencies because they simply lose track of that information. They forget that their father’s birthday is coming up, so they don’t put aside cash for it. They forget that their car needs regular maintenance.

What’s the solution to that? Dave points to a budget, but I don’t think that’s really enough for many people. I suggest using a calendar – if an irregular bill is coming up, write it on the calendar. Even better, write a reminder a few weeks ahead of it on the calendar, too. This way, you can see that irregular expense coming and can plan for it instead of going “OH NO!” on the day of the event and just throwing plastic at it.

Get It Fast
On page 105:

Twist and wring out the budget, work extra hours, sell something, or have a garage sale, but quickly get your $1,000. Most of you should hit this step in less than a month. If it looks as though it’s going to take longer, do something radical. Deliver pizzas, work part time, or sell something else. Get crazy. You are way too close to the edge of falling over a major money cliff here.

You’ve got to get hardcore, in other words. I think this works well for a short-term burst – like getting that $1,000 – but it’s not sustainable because to do it you have to upset the apple cart on a lot of behaviors and routines in your life – and that runs completely contrary to the idea of taking little steps.

For me, selling things worked well for this step. I had a big, fat DVD collection full of movies that I rarely watched, so I sold most of them off. I had a ton of video games that I either didn’t enjoy or had already defeated, so I sold them all off. I had a lot of CDs that I knew I’d never listen to again – off they went!

Those moves not only gave me that emergency fund, but it also kicked out some of the debt that was floating around. Even better, it freed up a lot of room in our tiny apartment – eliminating a bunch of non-decorative stuff that just caught dust did wonders for things!

On Saturday, we’ll tackle the seventh chapter – The Debt Snowball.

The post The Total Money Makeover: Save $1,000 Fast appeared first on The Simple Dollar.

The first five chapters of The Total Money Makeover don’t actually address Ramsey’s plan at all. Instead, it’s mostly an argument against culture, mostly the idea that the easy availability of debt in our modern life is a serious problem.

I agree with Ramsey in that regard, but I usually find that the root of it is deeper: a lack of personal finance education mixed with a prevalence of awful messages about ourselves delivered by the media. Think about it: did you learn anything about personal finance in school? Also, think about the ads you see – don’t they portray the people in those ads as being somehow better than you?

Together, that’s some awful medicine. Dave, in his own way, takes on both of those factors in this chapter.

Ignorance Isn’t a Four Letter Word
We live in a culture that rewards intelligence and knowledge, and often ignorance is seriously derided when it shouldn’t be. Dave spells it out pretty well on page 78:

In a culture that worships knowledge, to say ignorance about money is an issue makes some people defensive. Don’t be defensive. Ignorance is not a lack of intelligence; it is a lack of know-how.

The idea that ignorance is not a lack of knowledge is vital. Intelligence is the ability to take the knowledge that you have and put it together in interesting ways. Intelligence shines when you read two articles on only vaguely related subjects and are able to put together a completely new idea from those two articles. Intelligence does not mean that you’ve got tons of knowledge in your head. In fact, I’d often make the opposite observation – many of the most intelligent people I know continually respect how little they know and how much they do not know.

I’ll use myself for an example. I don’t know much about world history. I don’t know much about physics. I don’t know much about high-level athletic training. I don’t know much about fixing cars. I don’t know much about plumbing. I don’t know much about complex mathematics. There are countless other areas that I’m willing to admit ignorance in.

Ignorance can be overcome, though. If I so chose, I could spend some time educating myself on plumbing with a good do-it-yourself book or two and some time around the pipes. I could learn more about physics by reading up on the subject and perhaps taking some coursework on it. I could learn more about working on cars by simply trying it. Hard work overcomes ignorance every time.

It’s not shameful to admit you do not know everything – no one does. In fact, I’d argue the opposite – pretending you know everything when you do not is dangerous and harmful to yourself and to others. This same exact logic applies to personal finance – it’s fine to admit that you’re ignorant about money. What’s dangerous is when you choose not to admit it – or you delude yourself into thinking that you truly aren’t ignorant about it.

Overcoming Ignorance About Money (or Anything Else)
Dave’s recipe for overcoming ignorance matches up well with my own feelings on the topic. On page 79:

Overcoming ignorance is easy. First, with no shame, admit that you are not a financial expert because you were never taught. Second, finish this book. Third, go on a lifetime quest to learn more about money. You don’t need to apply to Harvard to get an MBA with a specialization in finance; you don’t have to watch the financial channel instead of a great movie. You do need to read something about money at least once a year. Your actions should show that you care about money by learning something about it.

This really is a strong formula for overcoming general ignorance on a subject. It will not make you a world-beating expert, but it will give you the background you need to actually make that topic work in your everyday life.

Let’s translate it a bit. Pick a topic you’d like to not be ignorant on, then do as follows.

First, with no shame, admit that you are not an expert on that topic because you were never taught or were taught poorly. Second, read a general book on the topic. Third, go on a quest to learn more about the topic. You don’t need to apply to Harvard to get an advanced degree in the topic; you don’t have to watch documentaries or read piles of dry books instead of watching a great movie or reading a fun book. You do need to read something about the topic at least once a year. Your actions should show that you care about the topic by learning something about it.

Sounds like a recipe for getting up to speed to me!

What’s Expected of Us
On pages 81-82:

Peer pressure, cultural expectations, “reasonable standard of living” – I don’t care how you say it, we all need to be accepted by our crowd and our families. The need for approval and respect drives us to do some really insane things. One of the paradoxically dumb things we do is to destroy our finances by buying garbage we can’t afford to try to make ourselves appear wealthy to others.

I fell into this trap big time before my financial turnaround. I constantly tried to buy things to impress others. I’d pay for a huge group to go out to eat. I’d buy gadgets I didn’t even really want simply because it was impressive to have an amazing item. I had to always have the “latest” of everything.

Now? I realized that people didn’t like me because I had the latest things or because I bought dinner. They liked me because I was me. Sure, there were a few hangers-on who didn’t want to hang out with me any more because I wasn’t engaged in whatever activity they were obsessed with, but what was that friendship, really, if that happens?

In fact, it became easier to relate to people once I realized this. I was no longer worried about saying the right thing, having the right thing, or keeping up appearances. People wanted to be around because I was me – and that’s all I needed.

Who cares what the Joneses have? I can either be me, or I can be me with a car I don’t really want and a debt burden making me sad.

What’s Your Jaguar?
I really liked the tale Dave told about owning a Jaguar, starting on page 86:

I had the eye of my heart set on a Jaguar. I “needed” a Jaguar. What I needed was for people to be impressed with my success. What I needed was family raising an eyebrow of approval based on my ability to win. What I yearned for was respect. What I was so shallow to believe was that the car I drove gave me these things.

My Jaguar was food. I felt a constant desire to take people out to eat at my favorite restaurants – often very expensive ones. I’d take my parents out. I’d take my friends out. I’d seek out really expensive amazing places and tell the waiter to just give the whole bill straight to me. I’d tip really big right in front of everyone.

Doing this made me feel like I was important and that I was earning respect. What I found was that mostly I was just making the other people feel sort of awkward. They weren’t there to be shocked by my largesse – they were there because they wanted to go out for a nice evening with someone whose company they enjoyed.

Guess what? I stopped paying for meals for others. Guess what else? Whenever I ask any of my family or friends to actually go out to eat – something I don’t do too often any more – they’re still quite happy to accept and quite happy to fit the bill. In fact, they may be happier – they don’t have that vague sense of discomfort they used to get when I’d grab the bill and throw down the plastic.

The American Nightmare
If you’re jealous of what others have, put yourself in their shoes for a moment. Do you think they are actually able to afford what they have? On page 83:

They present the perfect picture of the American dream that has turned into a nightmare. Behind the perfect hair and the French manicure, there was deep desperation, a sense of futility, an unraveling marriage, and disgust with themselves.

The people that you’re jealous of often have had to make huge sacrifices to get the things you want. The fancy car? It’s often paid for with a huge pile of debt. The amazing career? That person spent a lot of sleepless nights cutting their teeth to get there – and likely has sacrificed a strong relationship with the people around them to get it. That perfect marriage? It’s likely either the result of a lot of maintenance or it’s a facade.

There is no such thing as a free lunch in life. The people that have those things that you’re jealous of have often paid dearly for those things. When you peek behind the mirror a bit, you’ll see the cost they paid – and are likely still paying – to get there. And, quite often, when you look at things as a whole, you find a balance of affairs that you don’t want yourself.

That’s why I gave up so much spending. I once thought I couldn’t imagine life without lots of trips to bookstores and game stores and coffee shops. At the same time, though, I was up at night sick with worry about my debts and leashed to a paperwork-filled career. I had those little oases of seeming happiness, but they were surrounded by lots of unhappiness. If you saw me out and about at the bookstore or at the coffee shop, you might have been jealous – look at that guy with the armload of books and the smile on his face?

But if you saw the worried guy, sitting there writing computer code at eleven at night, then not sleeping at two in the morning because he was worried about the bills… then you might get a different picture of things.

A Useful Lesson from Twelve-Step Programs
On page 91, Ramsey points out a worthwhile lesson from twelve step programs:

The Twelve Steppers have it right. They say, “Continuing to do the same thing over and over again and expecting a different result is the definition of insanity.”

If you’re trying to succeed in life – or in some specific aspect of life – and you keep failing at it or never getting anywhere, you probably need to change your approach.

Obviously, Dave is referring to money issues here. If you keep doing the same things you’re doing and you’re not getting ahead financially, you need to make some changes.

But it’s true for everything. Let’s say you’re a writer and you’ve finished a book. You’re trying to get it published but you’ve received twenty rejection letters. You need to change something. Why not give away the book in bite-sized increments? Why not chunk it down into 1,000 word segments and blog the entire book? Why not put that book aside for a while, write something new, and look at it later? The key here is that what you’re doing isn’t working, so you need to try something else. Getting a steady stream of rejection is never the road to success.

On Wednesday, we’ll tackle the sixth chapter – Save $1,000 Fast.

The post The Total Money Makeover: Two More Hurdles appeared first on The Simple Dollar.

What’s a debt snowball? From an earlier post:

A debt snowball (or similar arrangement) is simply a debt repayment plan that specifies the order in which you should pay off your debts. Typically, there is some logic in the order – in Dave Ramsey’s original debt snowball, the debts were ordered from smallest to largest, for example. You then add up the minimum payments for this snowball, add an additional amount to that total, and then treat that dollar amount as your “debt bill” for the month.

From this “debt bill,” you make the minimum payments on all of your debts, then use the remainder to make extra payment on whichever debt is on top of the list. When that one is paid off, you don’t reduce the total of your “debt bill” – instead, you just have a larger remainder to tackle whatever debt is now on top of the list. Eventually, you’ll be using the whole “debt bill” amount to tackle that final debt – and it will melt away quite quickly.

The concept of the “debt snowball” was first popularized by the radio host Dave Ramsey, and his plan is probably best described in his excellent book The Total Money Makeover.

But, as I mentioned before, there’s a big problem with the whole debt snowballing idea and that’s security.

Debt snowballing requires you to roll a large amount of your income each month into debt repayment, and if you get through the entire plan without any problems, it works like a charm. But life rarely works that way. People lose their jobs. People switch careers. People have children unexpectedly. People fall in love and get married. People get hit by trucks. Things happen, in other words, and if you’ve tied up all of your money in getting out of debt and left almost nothing liquid for yourself, those things can really derail your dreams.

So here’s my alternate plan, one I’ve been using for the last two years to handle larger debts. Instead of paying extra debt payments each month, I instead roll a certain amount each month into my emergency fund savings account. When I have enough in that emergency fund account to pay off my next debt and leave enough in the emergency fund so that I’m comfortable (six months’ worth of living expenses), I pull that cash out and pay off the debt. I’m actually pretty close to doing this right now to pay off one of our outstanding debts.

I tried other plans for a while because this plan does have flaws, but the benefits of doing it this way kept bringing me back. Here’s how both sides of the coin look.

A debt snowball savings account offers more security Instead of having your cash wrapped up in extra debt payments, it’s easily available in cash form from your savings account if you need it for an emergency. Lose your job? It’ll be much easier to survive with cash in the account than with lower debts. The same goes for almost every kind of emergency you can think of – having the cash is much better than having lower debt.

A debt snowball savings account offers more life possibilities Similarly, with the money available to you, you have much more freedom when it comes to making choices about your life. Want to switch careers or have a child? You’re not lashed to the debt snowball routine, giving you room to make these choices without sweating it.

A debt snowball savings account slows your net worth improvement Financially, this method isn’t nearly as effective as actually paying down the debts. The 3% you might earn in a savings account is far lower than the 7% or more you’d get from eliminating debts. That difference adds up to a lot of money over time.

A debt snowball savings account makes it easier to spend If you have a big wad of cash just sitting there, it’s easier to talk yourself into spending a little bit more. The debt snowball savings account requires you to have plenty of diligence and discipline; if you don’t, it won’t be very effective.

For me, the net balance is a positive for the savings account. It enabled me to switch careers and have a second child without sweating every dime. Since I have some degree of discipline (I’m far from perfect, but we are spending far less than we earn), I’m not tempted to tap into the money. The only part that itches at me is the loss in net worth growth, but I view it as almost being a form of insurance, and that slower growth is the fee I’m paying for this insurance against whatever may come.

The balance on the whole may be different for you. Give it some thought and come to your own conclusions based on your own situation. For example, if you’re single and are more concerned about financial independence than anything else, a normal debt snowball may be the highly preferred choice.

The post Should You “Debt Snowball” Directly into a Savings Account Instead of a Debt Payment? appeared first on The Simple Dollar.

1. $1,000 to start an emergency fund
2. Pay off all debt (except the home) using a debt snowball
3. 3 to 6 months of expenses in savings
4. Invest 15% of household income into Roth IRAs and pre-tax retirement
5. College funding for children
6. Pay off home early
7. Build wealth by investing

These steps were debated rather vigorously in the comments, with some people thinking that these were a great idea and others discarding them as rubbish. I thought I would give my general thoughts on them, especially as they apply to our personal situation.

First of all, in April 2006 we were at step zero on this plan. We hadn’t done any of these, a few of our bills were late, and we were feeling rather desperate. The culprit? Overspending.

Since then, we built up our $1,000 emergency fund, paid off all of our debts except our student loans and our mortgage, moved into a house, got four months’ worth of living expenses built up, started putting more than 15% into our retirement plans, and started a well-funded 529 for both of our kids. In other words, we completed steps one, three, four, and five of Dave’s plan, and largely completed step two (we still have a few student loans, but no consumer debt).

Thus, my real decision was between jumping ahead to Dave’s seventh step or going back and finishing up step two and working on step six. I think that most people would agree that steps one through five make a lot of sense – build an emergency fund, get rid of all of your high-interest debt, build a strong retirement plan, and fund college for your children. After that, it gets a little bit hairy.

For the long term, it usually makes sense to jump into investing at that point, if your only debt is your mortgage (in our case, we lumped student loans in with the mortgage because they’re fixed rate loans below 8%). With a time horizon of better than ten years, making minimum payments on your loans and investing for the long term will net you more money.

However, investing first assumes that you are not considering any significant lifestyle changes and are planning on steady income. The rules change in our case, because we are strongly leaning toward a stay-at-home option for one or the other of us. Thus, even though we have a long time horizon, our shorter-term goals (being a stay-at-home parent for a short period) have more urgency than our longer-term goals – our children are only young once, and when they’re in school, we both plan on working again. We still plan on looking for that country estate, but it’s worth it to us to push it off for a few years so we can provide a strong personal foundation for life for our children.

Because of that, focusing on debt reduction, as per Dave’s plan, makes more sense to us. It reduces our monthly bills by a significant factor (eliminating all of the student loans before one of us stays at home will reduce our bill load quite a bit) and our “investment” in debt repayment does pay 7-8% guaranteed (depending on the interest rate of the student loan).

So what about Dave? Dave Ramsey’s plan is a brilliant starting point, particularly if you’re completely unsure about what to do with your financial situation, but it is not gospel. Different situations require different plans – there is no “one size fits all” financial planning solution. If someone tries to sell you one, run away fast.

The debt turnaround that my wife and I experienced over the last year and a half opened this door for us. Without really discovering frugal living and the value and need to get out of debt, we would never be in a situation where we could realistically consider one of us making a major life change. Regardless of the decision we make here, our foundation is far, far more solid than it was eighteen months ago.

The post A Deeper Look At Dave Ramsey’s Seven Baby Steps To Financial Freedom – And How They Apply To Us appeared first on The Simple Dollar.

More Than Enough is a bit different, however. From the back cover, “In More Than Enough, he gives us the keys to building wealth while also creating a successful, united family.” This is an interesting tack to take, one that has me interested as I’m watching both my family and finances bloom.

Does the book offer any interesting and concrete advice, or is it a mere repeat of Dave’s personal finance information? Let’s find out!

Looking Deeply At More Than Enough

Right off the bat, I get a slight negative vibe from the paperback version of the book – the typeface is enormous. This means that each page has maybe a third as many words on it as other books, which means that if this book were printed like other books, it would maybe be eighty pages long. His other books did this as well, but not as obviously as More Than Enough.

The book centers around ten principles that will change your financial destiny, as touted on the cover. The ten principles are rather psychological in nature, but Dave’s style is very clear-cut and grounded, so he does a good job of tying them to life experiences. These ten principles are addressed in chapters two through eleven in the book.

1 – More Than Enough What?
This chapter basically reveals the meaning of the title – it’s not more than enough stuff, but instead more than enough of a sense of fulfillment and purpose in life. The book uses a metaphor that a life is like a mansion with many rooms and some of them are locked, and it’s only through a journey of self-examination that we are unable to lock more rooms. Thus, he ends each chapter with a “key” or two to unlock rooms. It’s an interesting metaphor, at least.

2 – The Missing Link
The first principle is values. In other words, what’s the intrinsic right and wrong inside of you? What things do you do that seem right, and which things seem less so? He goes through a series of exercises and examples, but the real key part is his simple exercise of sitting down and thinking of those right things and those wrong things. Then, spend time minmizing the wrong things and maximizing the right ones.

3 – Victory Through Vision
The second principle is vision, which directly leads to goals. What do you imagine for your future? Can you describe it in detail? Spend some time trying to do just that, imagining what you would like to see at various points in your future and your family’s future. Then, take those visions and try to describe them in terms of concrete goals. What do you have to do in order to get there?

4 – The “You” In “Unity” Is Silent
The third principle is unity. Basically, it’s making sure that the goals you define for yourself are in sync with the goals that your spouse and other family members may hold. Especially your spouse. I found that sitting down with my wife a few times to talk about goals has been incredibly valuable in regards to putting us both on the same page and authentically feeling like we are really working together in many aspects of life.

5 – Hope: Balm For The Soul
The fourth principle is hope, which is basically the outgrowth of the meeting of goals and unity. A goal lets you envision the future, and unity gives you support as you move towards the goal. Together, they give you hope that you’ll get there, a true belief that things will get better.

6 – Accountability: How To Get An A In Conduct
The fifth principle is accountability. Once you have a goal in mind, support in getting there, and hope for accomplishing it, you’re much more capable of taking on responsibility and holding yourself accountable for the financial moves that you make. I find this to be powerfully true – it’s much easier to pass the buck on small mistakes if you’re not working towards a larger goal.

7 – Intensity: Feeling The Fervor
The sixth principle is intensity, and this is something I really, really agree with. Intensity is something that happens when you have goals and unity and accountability, a triumvirate that occurred inside of me after the birth of my first son. Reading this chapter rang a real bell inside of me because it reminded me of almost going bankrupt after his birth and feeling everything start to come together after that. It was intense – I finally felt like everything was in alignment and it was a real rush.

8 – Good, Better, Best: Work, Discipline, Diligence
The seventh principle is work, discipline, and diligence. Again, this struck home for me – once that rush of intensity happened, I began to see that there was a lot of work to be done and that I needed to be diligent about it. It’s not enough just to decide not to spend money for a day – you’ve got to stick with it over the long haul.

9 – Patience Is Golden
The eighth principle is patience. Once the routine of work and discipline and diligence becomes entrenched, it can often feel like a slog. Be patient. Realize that success won’t happen in one day – it takes time to eliminate all of those debts and put yourself in a better place. Something that requires work and diligence but that also has a timeframe in years absolutely requires patience – thankfully, you have that unity and support to rely on.

10 – Looking For Love In All The Wrong Places
The ninth principle is contentment. Mostly, it’s a discovery along the path of life of the things that really matter in life, much like the “center” idea I mentioned earlier. For me, it was my family. They bring me contentment – I feel much less of a need to spend frivolous money when my son is making faces at me out of the door of his cardboard castle.

11 – The Great Misunderstanding
The tenth and final principle is giving. What’s the titular “great misunderstanding”? It’s that the road to personal finance success is all about personal gain and wealth. In fact, it’s about giving you the tools to improve the world by giving to others and helping society out. Take the fruits of your success and give some of them to others so that many may benefit from your journey.

12 – The More Than Enough Road
So what’s at the end of this road? Wisdom. The life experiences along this path make you wise, and you also now have appropriate financial tools to make healthy choices with.

Buy or Don’t Buy?

This is a tough one to recommend, so let me put it to you very clearly: if you want to read a Dave Ramsey book, skip this one and just read The Total Money Makeover. That one is clearly his best book and very much worth reading – it’s definitely the one to read if you want to get a healthy dose of the Dave Ramsey personal finance philosophy.

More Than Enough is a very different sort of book. It focuses entirely on internal issues, tying together personal character development and personal finance. The problem is that Dave’s skill is in bringing across the more tangible parts of personal finance and this book focuses largely on more intangible issues.

More Than Enough is not a bad book, and it is definitely the second one you should read by Dave after The Total Money Makeover, particularly if you have a family. Just be aware that it’s much lighter on the personal finance aspects and heavier on the character aspects, making it an interesting companion to Ramsey’s other books but perhaps not particularly strong on its own.

More Than Enough is the forty-first of fifty-two books in The Simple Dollar’s series 52 Personal Finance Books in 52 Weeks.

The post Review: More Than Enough appeared first on The Simple Dollar.

Today I’m taking a peek at Dave Ramsey, author of several personal finance books and the host of a popular radio show. His advice is very direct, simple, and easy to follow and it’s won him a ton of followers.

Dave Ramsey Resources And Links Want a plethora of stuff to read about Ramsey? This is an astounding collection of links about the man and his personal finance ideas. (@ getting finances done)

Dave Ramsey Is Bad At Math and Dave Ramsey Is Good At Psychology I actually agree with both; Dave’s plan works, but it’s not mathematically optimal. Why does it work? It has a lot of psychology hooks embedded in it. (@ five cent nickel)

Dave Ramsey’s Baby Steps A list of and discussion of Dave’s “baby steps” and how you can apply them to your own financial life. (@ it’s your money)

Dave Ramsey Retro: Extra Income… Should We Invest It? This is a perfect sample of the type of advice Dave dishes out. I wasn’t even actually aware until recently that he has an online column with extensive archives.

The Simple Dollar Retro: Review: The Total Money Makeover This book really surprised me – it laid out a very clear financial plan for getting out of debt and getting on the right path without too much filler and hubris. If you’re looking for a good basic personal finance book, this is an excellent one to start with.

The post The Simple Dollar Morning Roundup: Dave Ramsey Edition appeared first on The Simple Dollar.

My wife and I are trying to decide what to do with our “extra” income each month: pay down our home equity ($18K at 9.13%), pay down our other debt (student loans of $6K at 7.14% and $13K at 3.75%; car loan of $8K at 4.2%); or put the money into our savings account (at 5.05%).

First of all, let’s ask ourselves about tax deductibility. The only loans here likely to be tax deductible are the student loans (I’m assuming the home equity loan is a HELOC, not just a funny term for a mortgage). Also, you’ll have to pay taxes on the savings account. So, let’s figure you’re in the 28% tax bracket and re-figure the true percentages on each one:

$18K home equity loan – 9.13%
$6K student loan – 5.14% (after the tax benefit)
$8K car loan – 4.2%
savings account – 3.94% (after taxes)
$13K student loan – 2.7% (after the tax benefit)

Assuming that you are actually going to make strong contributions to your savings account, you should pay down the debts that are of a percentage higher than the savings account first. In this case, that means starting with the home equity loan, then following with the small student loan, then the car loan. At that point, you’re better off stocking up in the savings account – but the key is that you’re actually stocking up here and judging by the debt, it’s likely that you will find other uses for the money.

In that case, I recommend largely subscribing to Dave Ramsey’s “debt snowball” philosophy, except that instead of ranking the debts by the amount owed, you rank them by interest rate. That means you should do the following:

Get $1,000 in the savings account as an emergency fund. If you have children, you may want more than that, but have at least $1,000 in there for a car emergency, etc. This way, a bad situation won’t build additional debt.

Pay off the $18K home equity loan at 9.13%. That’s an imposing debt and you need to pay that one off as soon as possible. As long as you have $1,000 in the emergency fund, focus on paying this debt until it’s gone; if you have to tap the emergency fund, focus on replenishing that back to $1,000 before paying down this debt.

Pay off the $6K student loan at an adjusted 5.14%. This is the next debt to go. Again, if your emergency fund goes below $1,000, slow down the overpayments here and build that fund back up. Now that the home equity loan is gone, you should be able to make very big payments here and knock this debt off quickly.

Pay off the $8K car loan at 4.2%. Keep rolling the debt payments forward – you should pay this one off next, paying as much as you possibly can on the principal. Again, remember the emergency fund and replenish it if you use it.

Pay off the $13K student loan at 2.7%. Even though this is a very low interest loan, I’d still recommend paying it off before building more savings. This is mostly due to it being a debt, and any debt is simply a bet that your future self can take care of it. That’s not a bet that I like. There is an argument about not paying this one off immediately, but I would get myself debt free ASAP.

Then, build a 3-6 month emergency fund in that savings account. Shoot for building up six months’ worth of living expenses in that account so that, in the event of a major crisis or a job loss, you’re fine.

When you’re there, suddenly life becomes a lot less stressful.

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