This is the second of twelve parts of a “book club” reading and discussion of Dave Ramsey’s The Total Money Makeover, where this book on debt reduction is teased apart and looked at in detail. This entry covers the third chapter, finishing on page 51. The next entry, covering the fourth chapter, will appear on Wednesday.

Dave Ramsey is probably the loudest proponent out there of the “debt is bad” mantra and he makes the case for it loud and clear in this chapter. In his eyes, outside of a home mortgage (and that one should be paid off ASAP), all debt is bad.

I agree completely. The only problem comes in when this mantra is taken too far and overlooks the benefits of establishing a positive credit history. The positives of being debt free heavily outweigh the negatives of being heavily in debt, but being debt free doesn’t mean you should sacrifice a good credit history along the way. Let’s talk about this whole picture.

Not Using Debt Is Ridiculous?
The usage of debt for major purchases is definitely ingrained in the American psyche. At virtually every retailer you visit, there’s an offer to sign up for a credit card or finance the purchase you’re about to make. It seems so natural that many people assume it is natural. On page 19, Ramsey mentions this phenomenon:

[I]n the last several years, I have found that a major barrier to winning is our view of debt. Most people who have made the decision to stop borrowing money have experienced something weird: ridicule. Friends and family who are disciples of the myth that debt is good have ridiculed those on the path to freedom.

Given that financing usually means paying substantially more for the item over the long run, anyone who chides you for paying cash is actually chiding you for paying less - ludicrous, in other words.

My big issue here is how to deal with people who make comments like this. Whenever I’ve faced situations like this, I’ve found that explaining the truth doesn’t work - I’m usually met with a vacant, wide-eyed look that clearly indicates that the other person has no idea what I’m talking about.

Instead, my approach is to simply smile, nod, and do my own thing. Over the long run, my bank account will prove me right in paying cash as often as possible.

Risky Debt
On page 21, Ramsey argues that simply possessing debt is a risk, let alone paying it late:

My contention is that debt brings on enough risk to offset any advantage that could be gained through leverage of debt. Given time, a lifetime, risk will destroy the perceived returns purported by the mythsayers.

This is one of the most powerful arguments against debt, in my opinion. Most of the time, when people make the case for taking on debt, they make assumptions that involve a perfect, trouble-free life.

Sure, it’s easy to make a $400 a month payment given your current life situation, but what happens if you lose your job tomorrow? Or in a year? What if you suffer a major illness? What if your marriage falls apart? What if you get married? What if an unexpected child arrives?

Forecasting payments into the future can be smooth but the realities of our lives are quite bumpy, indeed. Lives don’t follow the smooth lines and curves of a debt repayment schedule, and saddling our lives with such lines and curves might enable us to get a car a bit earlier, but it also adds a lot of stress and worry if our life zigs when we expect it to zag.

Respect your complex, beautiful life and avoid unnecessary debt.

Relatives Shouldn’t Be Lenders
One of my biggest personal standards for money is to not lend money to family. If I decide to give someone a helping hand, it’ll be in the form of a gift, not a loan. Ramsey makes the case on page 26:

Hundreds of times I’ve seen relationships strained and sometimes destroyed. We all have, but we continue to believe the myth that a loan to a loved one is a blessing. It isn’t; it is a curse. Don’t put that burden on any relationship you care about.

Do you love your mortgage lender? How about your credit card company - do you look forward to getting together with them at Christmastime? Ever felt like inviting your car salesman to your New Years’ party?

The reason is that the lending/borrowing relationship doesn’t mix well with great interpersonal relations. If you borrow money from someone, you suddenly have a financial obligation to that person. You have to pay them back or incur some sort of retribution.

Retribution? That’s not exactly a concept that mixes well with close relationships and family events. Nor should it. No one wants to spend time with a person that’s demanding money from them. Thus, after a loan between friends or loved ones, it’s natural to expect that relationship to decay in some way.

No relationship is worth that decay. If you’ve decided that you really must help someone out, make that help into a gift, not a loan.

Look Good or Be Good?
On page 33, Dave digs into the difference between putting up appearances and actually having something to back it up:

Having been a millionaire and gone broke, I dug my way out by making a decision about looking good versus being good. Looking good is when your broke friends are impressed by what you drive, and being good is having more money than they have.

Something has always troubled me about the phrase “fake it ’till you make it.” I can understand it in some situations, where you have to put up a very polished front in order to further your career.

The problem comes when “fake it ’till you make it” becomes a life philosophy. If you find yourself leasing a BMW so that you can “fake it” and put up an appearance of being financially affluent when you’re really not, you’re entering into a trap.

Sure, you might be able to put up an appearance of “making it” with that purchase, but your income will be devoured by that car instead of being able to take advantage of other opportunities. In three years, you’ll have nothing in the bank and a car that just went off lease.

Instead, if you “fake it” a little less, buy a low end car and make it look as nice as you can, you can build up that bankroll, build some security, and eventually purchase that car.

You might be able to “fake it” now, but if you want to “make it” sooner, you’ll tone down on the fakery and keep yourself out of debt.

On Buying a New Car
On page 37, Dave makes a case against buying a new car:

A good used car is as reliable or more reliable than a new car. A new $28,000 car will lose about $17,000 of value in the first four years you own it. That is almost $100 per week in lost value.

I understand where Ramsey is coming from, but it doesn’t take into account several factors.

First, the only cars that depreciate like that were junk to begin with. If you have a car that depreciates 70% in the first four years, that car has a very poor record for long-term reliability. Reliable cars simply do not depreciate that fast.

Second, the first four years are the most worry-free for a car. During that period, they’re under warranty, meaning if something goes wrong, it doesn’t come out of your pocket. Once that warranty ends, you’re on your own. It’s during that warranty period that you can figure out whether the car is actually reliable or it’s not without a cavalcade of big bills.

Third, in a down economy, there are huge incentives to buy new. Sales, rebates, and other offers pop up all over the place, some of them impressive. There are often tax breaks for new car purchases as well, passed by Congress in a short-term effort to boost spending.

I am not saying that buying new is better than buying used. Instead, I am merely saying that it is a mistake to automatically exclude a new purchase, particularly if you can afford it.

Ramsey overstates his case here, though I understand why he does it. A forceful case on behalf of a good principle is a great tactic for convincing people of the principle. I do agree that buying used is often the best deal when buying a car, but to ignore new cars does the buyer a disservice.

Mortgages and Credit Cards
On page 39, Ramsey talks about why you don’t need to build credit to get a mortgage:

You will need to find a mortgage company that does actual underwriting. That means they are professional enough to process the details of your life instead of using only a Beacon score (lending for dummies). You can get a mortgage if you lived right.

Ramsey’s absolutely right here - you don’t need credit to get a mortgage, as long as you have a good housing history and a good record of paying your bills on time. A manual underwriter will dig these things out. An aside: if you’re in this situation, visit your local credit union first. They’re more likely to do manual underwriting.

The problem here is that a mortgage is not the only avenue through which good credit can help you. One’s credit score is used in lots of ways: determining insurance rates, aiding in many job application processes, and so on.

That’s why I think limited use of a credit card is actually a good thing. Leave the card at home most of the time. Only use it for specific purchases that you would otherwise make, like gas or groceries. Then, at the end of the month, pay off the balance in full, which should be trivial since you’re not buying more because of the card.

This accomplishes the big goal of improving your credit score without incurring debt. Having a good credit score improves your hiring chances and makes you eligible for better insurance rates, putting money directly in your pocket. Later, if you do get a home loan, you can simply trash that card if you so with.

If you’re already doing that, you might as well choose a card that helps you in other ways. For example, if you’re buying a card just to buy gas on to help your credit, get the Visa or MasterCard available from your gas station chain of choice (like BP). That way, you’ll get rebates on the gas you buy along the way - another way to save.

The trick is to simply leave the card at home. Don’t use it for any other purchases besides the ones you plan in advance, like gas purchases, and keep it somewhere safe outside of those opportunities.

Do you have any other thoughts on the third 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 fourth chapter - Money Myths: The (Non)Secrets of the Rich.

A long time ago, I wrote a brief article about creating a visual debt reminder, something that will help motivate you towards getting rid of debt. Since then, I’ve found myself using such reminders all the time for keeping my finances in order.

The Psychology of the Reminder
A reminder? If a goal is really important to us, why would we need a reminder?

It’s simple. Most of us have really busy lives, and in order to actually make those lives work, we have to adopt some serious routines. If you have only thirty minutes after you wake up and before you’re leaving for work, those thirty minutes are going to have to involve some serious routine - showering, brushing your teeth, eating a quick breakfast, doing one or two other little things, then bolting out the door.

Similarly, any person with children knows how many routines have to go into their life in order to prevent complete chaos from breaking out. There’s a meal routine, a nap routine, a bedtime routine, and so on.

Even our lives out and about are filled with routines - we shop at certain places, get gas at certain places, use the same routes to get places, and so on.

The real kicker is that breaking these routines is hard. Often, it’s not so much the individual act that’s the problem - it’s remembering that individual act and finding a place for it in that busy routine.

For example, I’m trying to find space in my daily routine to (slowly) work up to being able to run a 5K. The problem is, with a thriving writing career, two young children, a marriage that needs care and feeding, a number of other commitments, and personal interests as well, it’s hard to find space for the training.

So I’m using a reminder. I have a single bright note right on my desktop where I can’t miss it that says, “Have you worked towards the 5K today?” I look at it several times a day and, usually the first time I see it, it motivates me to get up and do something to get myself in better shape.

Ten Great Reminders
Different reminders work well for different people and different situations, though. Here are ten things you might want to use in your own situation.

1. The Progress Bar
This works great if you have a specific numerical goal in mind - for example, you have a certain dollar amount that you’re wanting to save, a certain amount of debt that you’re looking to repay, or a certain weight that you’d like to reach.

It’s simple: just bust out a piece of graph paper (like this one). Figure out what number you’re targeting and what number you’re at now. Then, break the difference between the two down into equal pieces. So, let’s say you have $17,000 in debt and want to pay it all off. You might break it into 17 pieces - $1,000 each - or 34 pieces - $500 each - or 85 pieces - $200 each. Let’s say you want to go from 214 pounds to 180 pounds. You might break that into 34 pieces - 1 pound each. You get the idea.

Then count out a line of that many squares in the middle of the paper, then draw a big box around those squares, similar to what you see on the right here. Write the starting number on the left or bottom of the bar, then the finishing number on the top or right of the bar. You can even write in the increments if you want, or just note what each square is worth.

Then put this reminder somewhere where you’ll see it all the time - on the fridge, for example. It’ll serve as a reminder of your progress - plus, it’ll be quite fun when you make some forward progress and get to fill in a square on that bar.

2. The Pointed Note
This is the technique I’m using for my 5K goal. Just write yourself a very pointed note - “What have you done today to move forward on X?” and put it somewhere where you’re going to bump into it over and over again.

This is perfect for a goal where you need to make a bit of active effort each day - like athletic training. It might be easy at first to simply forget about it during a busy day, but that note forces it into the forefront of your mind.

The key is to make the note pointed - it needs to prod you into taking action - and put it in a place where you’ll be reminded of it with ease every day - or at least each day that you’ll need the reminder.

Some ideas for this kind of reminder: a reminder to network, a reminder to engage in athletic activity, a reminder to take another discrete step on a big project.

3. The Big Picture
One of my biggest goals in life is to own a house out in the country on a few acres. I’d like a good-sized yard with plenty of room for a vegetable and herb garden and a small barn in the back somewhere to effectively function as a large shed. I might even raise a few chickens on it - who knows!

To keep this in mind, my desktop wallpaper is an image of a nice house in the country with a small barn and a windmill. Whenever I see it, I know what my big goal is.

This can work for any big goal that requires continual multi-dimensional effort to reach. It might be a country home, or it might be any number of other things - a great career, an amazing car, or a happy marriage. Find a picture that signifies exactly what you want, then put it in places where you’ll be reminded of it time and time again.

That little boost will push you, more often than not, just when you need it.

4. The Effort Tracker
As I start jogging more and more, I find that keeping careful track of my efforts and recording them somewhere is very powerful. I have a Nike+ iPod setup that makes it very easy to record my efforts, keeping track of each run in very careful detail, as well as my best mile and my overall averages.

This type of data is incredibly psychologically powerful. When I finish a jog, I can’t wait to go look at my data. Did I get a new “best mile”? Did my average go up (it usually does)? Did I manage to maintain a steady pace?

Putting this “effort tracker” front and center makes it easy to keep up with my goal. The same is true for any such tracker. Perhaps you use Quicken to monitor your money? Have it start when you start up your computer. Maybe you use a spreadsheet to keep track of your weight? Have that spreadsheet appear on startup. That way, you’re faced with all of that data and all of that forward progress - and psychologically, you want to keep it going.

5. The Public Notice
Constant peer pressure can be a very effective reminder of your goals. If everyone around you knows that you’re attempting to quit smoking, they themselves will become reminders, encouraging you to quit, complimenting you on your good choices, and so on.

Thus, one way to create some powerful reminders around you for your goal is to simply email as many people as you can and tell them in detail about your goal. Tell them what you want to achieve and ask them for their help in getting you there. Ask them to steer you straight if they see you having problems, and apologize in advance if you don’t handle their help well (since such goals can be psychologically stressing).

Once you’ve done this, everyone knows about your goal and you’ve given them all permission to be your reminders. Thus, their mere presence becomes a reminder of what you want to achieve.

You can take this another step and combine the goal tracking with your public notice. Create a blog or a Twitter account to talk about your goal in detail, mentioning your progress with specific data, then ship the URL for that blog or Twitter account to your friends so they can keep tab on your progress (and leave positive comments).

6. The Pestering Email
Another way to keep you on focus is to have an automatic email service pester you with reminders by email of your goals. I do this myself, with Google Calendar. I set various target dates in my calendar, then order the calendar to remind me by email of these goals. Sure enough, they pop right into my email inbox, reminding me quite clearly to keep up with a particular project.

For example, let’s say you want to really grow your professional network. Go into Google Calendar, schedule an entry on Friday to “send an email to an old work associate,” then add a reminder 4 days, 3 days, 2 days, one day, and one hour in advance. Then, schedule it to repeat. Each day, you’ll have a reminder telling you to send an email to a work associate - and when you follow through, you’re achieving your big goal.

For people who live out of their email inbox (as I often do), this can be a great way to keep your goal in mind - and keep moving forward on it, bit by bit.

7. The Buddy
Having a buddy who is also trying to move forward with a similar goal as yours can be a wonderful constant reminder of your own personal goal.

Let’s say you’re attempting to eliminate all of your credit card debt. You announce it to a few friends and you learn that one of your friends is actually attempting to do the same thing. Suggest to that person that you buddy up to motivate each other, share tips, and share your progress along the way.

When you hang out together, you can swap stories about how you’re moving forward. You can give each other tips on how to better accomplish that big goal. You can actually engage in the activities together - jogging in the evening, for example, or going to free events together instead of spending money.

That buddy becomes a walking, talking reminder of your goal and, in a fun way, pushes you to achieving more than you thought possible.

8. The Inspirational Picture
My family inspires me to make almost every good choice I make in my life. They inspired me to take charge of my money. They inspired me to start getting in better shape. They inspired me to take a real swing at writing for a career.

Keeping a simple photograph of my wife and children with me helps keep me motivated to continue making good choices. I have three photographs of them on my desk and I often look at them when I’m having some trouble getting motivated to write. Their faces always help.

Some people get their inspiration from motivational posters. For me, all I really need to do is look at my family and suddenly I’ve got my eye back on the prize.

9. The Repetitive Post-It
When I first made a serious effort to cut my spending, I found it was very hard to break my old routines. I would simply wheel into the bookstore without thinking about it at all and the next thing I knew, I’d be standing in line holding some books.

What really helped was repetitive reminders, which took the form of Post-It notes. I wrote on each one: “Don’t spend anything.” I put them all over. I put one on my dash and one on my rear view mirror. I put one on my computer monitor. I put one on my wallet so I’d see it when I got started in the morning.

Those constant reminders kept the big picture firmly in my head, mostly because the message was nearly inescapable. I saw it all the time and that meant it bubbled up to the top of my mind when I needed it much more often than before. Before long, that reminder was burned into my brain - and the Post-Its had done their job.

10. The Tool Disfigurement
There were times when I would still fall short and find myself on the verge of spending anyway. I’d have an item up there to buy. I’d reach for my wallet, pull out my credit card, and ….

Right there in front of me was all I really needed to see. I’d put the item back and walk out of the store.

What was there? Wrapped around my credit cards was a picture of my son. Yes, the inspirational picture had found its way directly to the tools I used to undermine that inspiration. Seeing my little boy - and reflecting for just a second on him and the good choices I needed to make as a parent - made me step back just long enough for sense to take hold of me.

If you find yourself constantly turning to a tool of some sort to continue a habit you’re trying to break - a bong, a credit card, anything like that - put an inspirational picture there. Put that picture of your kid right on that item and attach it firmly. Make it so that you have to give that reminder a look before you commit that act - and you’ll likely find yourself turning away at the last minute.

Now get out there and achieve something great.

As I’ve mentioned before on here, my family did not have a lot of money growing up. My parents were always able to make ends meet and keep dinner on the table, but there was never really a sense of getting ahead. Instead, there was always a sense of just barely enough.

That’s not to say that I had a deprived childhood, though - I didn’t. My parents - my mother in particular - found lots of little ways to get me the things I wanted or needed. We went to the library all the time. I was always allowed to get a book or two from the book order. And when there were windfalls, I would often get something very nice - a new video game, typically, or a few new books all at once.

One thing my parents often did, though, was make Christmas and my birthday into very big events. They would ask me what I wanted months in advance and encourage me to make lists. Since my birthday was in the middle of summer, by the middle of most springs, I was already puzzling over my birthday list, letting it often consume my thoughts. Similarly, I was already getting started on my Christmas list by Labor Day.

My parents did this for what seems like a very good reason. Since there weren’t a lot of resources around to give me a healthy allowance or to buy me lots of things, they would instead channel my childhood desires towards two big days. Then, they would save up their nickels and dimes and try very hard to make my birthdays and Christmases memorable.

This was really effective in my childhood years. Instead of nagging my parents for things I wanted, I’d stew on them. I’d write down a wish list, revise it, and start over again a few times. I’d pore over the Christmas catalogs like a researcher in the library of Alexandria.

What really happened, though, is that these things that I wanted consumed my thoughts for a big part of the year. I’d spend my time stewing over that list, thinking about the things I wanted, and as I grew older, I began to dream about other ways to get them. I started an aluminum can collecting project - one that actually ended quite sadly, I started doing lots of piecework for my father’s fishing business, and I tried several other small-scale entrepreneurial tasks.

But the problem signs were already in place. As soon as I earned anything, I was already plotting about buying one of those things I had wanted and stewed about for so long. I’d take the $50 from aluminum can sales and rush straight to the local department store (Jacks, a now-defunct chain) to buy a video game.

This only escalated throughout my college years, and by the time I was a young adult, I was still focused heavily on the material things I wanted. Of course, then, with a nice income and access to credit cards, it became very easy to just simply go get all of those things I wanted.

And I did.

I bought multiple DVDs and multiple CDs and a video game pretty much every week. I went out to eat all the time. I went to London and stayed in a hotel room overlooking Hyde Park.

In short, I no longer had a wish list. Instead, I just did these things as they came to mind. All that stewing about the things I wanted finally came to fruition.

How I Fixed This
So what did I do to fix this problem?

The biggest realization - for me - was that this was a never-ending road. There would always be something else to want, no matter what I purchased for myself. I would always be wanting something more.

Thus, if that’s true, isn’t all the money spent trying to sate those desires just money wasted? Even worse, wasting all that money meant that I wasn’t achieving the big things I dreamed for in my life - becoming a writer, providing a safe financial foundation for my wife and my kids, owning a nice house in the country.

What I found was that if I cut back big time on my discretionary spending, I didn’t really lose much at all. Sure, there were still many things that I wanted - and there still are - but that would be true regardless of how much I spent. Instead, now I’m actually using and enjoying the things that I buy. On the occasions when I do choose to buy something for myself, I take my time both on the purchase (researching it and choosing the best deal) and on the enjoyment of the item (reading the book, playing through the video game, and so on).

The “wants” are still there, but they no longer run the show in terms of my spending, simply because I realized that no matter how much I spent, the “wants” would still be there - a ghost I could never catch.

The Parenting Hat
So what can we do to help my children out with this issue?

Our first tactic is to simply strongly de-emphasize wants. We don’t ask for birthday lists or Christmas lists. Instead, we just listen to them and note down anything they might mention.

During the lead-up to the holidays, our gift-related conversations revolve around giving. We talk about good, reasonably-priced items that people would particularly like. Instead of focusing on what we want, we focus on what Luke or Brittany might want - and how we can make them happy for a reasonable cost.

Second, we don’t watch many commercials - and we talk about the ones we do. If my son sees a commercial for a toy or a type of junk food that makes him want the item, even though he’s three, we talk about it a bit. I usually point out how only the good side is shown - and how we already have similar things.

A great example happened a few evenings ago. My son saw a commercial for some type of Batman action figure - he wanted one, and he told me loudly. First, I suggested that he instead play with the action figures he does have (mostly leftovers from my own childhood, honestly). He said he didn’t want them - instead, he wanted Batman. So, then, I suggested if he didn’t want them any more, why don’t we give them away to kids who might want them? He didn’t like that suggestion at all, at which point I suggested that he pull out his favorites and we’d get down to business. By that point, he had completely forgotten about Batman and instead found himself excited to pull out the action figures he already had.

I really believe this is the key. Instead of focusing happiness on things he doesn’t have, I strive to focus his immediate joy on the things he already has. That way, he doesn’t have that burning desire for more things.

Where the women are strong, the men are good looking, and all the children are above average.
- Garrison Keillor, A Prairie Home Companion

Sure, that line is used for laughs on NPR on Saturday afternoons to describe the placid, fictional Lake Wobegon, but the humor points to a rather serious matter: people constantly overrate their own achievements and capabilities in relation to others.

Here’s a simple example. Let’s say I took you and ninety-nine other random readers of The Simple Dollar and gave you all a battery of tests to rate your intelligence. Where would you predict that you would rank in the end? Would you be in the top half? Would you be in the top ten?

If I were guessing, I would probably put myself somewhere in the middle of the pack. I think I’m fast at putting simple ideas together into a somewhat more interesting larger grouping (I’m good at Jeopardy!, in other words), but I’m not particularly brilliant or anything. I find myself consistently falling short of where I hope I would be in lots of areas.

If you gave me the same question ten years ago - or even five years ago - I know quite well that I would have ranked myself very high with such a question. My set of experiences, to that point, had vastly overrated my small gift of relative speed and convinced me that I had special abilities. Constant positive reinforcement of those abilities didn’t help - seeing people surprised at my speed of limited recall and limited association and having them tell me how impressive it was further inflated my perception of myself.

The same is true for most people and most features. Almost all of us have abilities or features that we consider above average - quite often, we consider the sum of these abilities and features to be above average. And why not? The world around us has shown it to be true - people give us positive feedback all the time, so we must be good, right?

A few things to take into account here.

First, people generally prefer positive interaction. Most people prescribe to the notion that if you have nothing positive to say, don’t say anything at all. They’ll look at an individual, identify whatever traits they can that they deem to at least not be a huge negative, and complement the person on those traits.

A person with average looks - perhaps a below-average figure but above-average eyes - may have heard many complements on their eyes and thus believe that their overall looks are above average - after all, people are complementing you, right?

Second, it’s a good survival strategy to believe we can handle anything. Without an underlying sense of success, people would be afraid to try anything new. New technologies wouldn’t be proposed or even introduced. New ideas wouldn’t be shared. In short, confidence is useful.

Here’s the problem, though. We often overextend our healthy level of confidence to an unsafe point. This happens in two directions - we’re overconfident in some areas where some degree of confidence is appropriate (our own skills, for example) and confident (often quietly so) in areas we have no control over whatsoever (like our continuing health).

Each of these directions has a different set of tools to help you succeed.

For overconfidence, try placing your skills in competition with others - the more direct, the better. Many people avoid competition because they fear losing or looking bad. I argue that losing is actually more valuable than winning. It teaches you that you’re not the best and shows you what you need to work on.

For example, I often use my subscriber count as a way to compare myself to other bloggers. It’s easy to see that I’m left in the dust by many other blogs - Daily Kos and TechCrunch, for example, have orders of magnitude more subscribers than I do. This is proof positive that I’m not the best writer out there. I respond not by thinking “I’m a failure,” but by thinking “I know I can do better than that” and seek ways to reach out even more.

For misplaced confidence, visualize some worst-case scenarios. What happens to you if you’re hit by a truck tomorrow morning? What happens to you if you get a serious disease? What happens if those things happen to your spouse? Your child? What if your company goes under tomorrow morning and you walk in facing a pink slip?

Those scenarios often point you in the right direction for finding appropriate ways to actually back up your personal confidence. Start an emergency fund. Create a master information document. Get a good term life insurance policy. Build good relationships with people in your career field - and in your neighborhood.

In other words, back up that confidence with something real. The better the structure behind you, the more likely it is that you really are living in your own Lake Wobegon, where things really are above average, safe, and secure.

Every other week, The Simple Dollar reviews a personal development, personal productivity, or entrepreneurship book of interest.

At first glance, Mindset by Dr. Carol Dweck seemed to be one of those pop psychology books that I usually avoid - another The Secret or The Power of Positive Thinking. Books along those lines just repeat the same ideas that are as old as the hills (or Napoleon Hill, at least) - if you think positively and visualize good outcomes, they’re more likely to happen. Great - but it’s a principle that doesn’t work without action and has been around since the dawn of time.

As I said, I originally lumped Mindset into that group of books, writing it off as more of the same on positive thinking. Then something interesting happened - two different people that I respect quite a bit recommended the book to me within a week of each other. One was a personal friend who said it really changed how he looked at his career and at his relationship with his girlfriend - which surprised me, since he’s not a person I would imagine would typically follow pop psychology talk. Perhaps even more surprising, Jonathan Fields, a blogger and writer I’ve exchanged a lot of emails with over the years, wrote a brilliant article entitled Is Gifted and Talented a Life Sentence? that really shook how I thought about parenting issues with my own kids. Interestingly, Jonathan also pointed strongly towards Mindset as a powerful source of inspiration.

When two people I respect suggest the same book completely independently within a week of each other, it’s likely a book I should make an effort to read. And I’m glad I did.

The basic idea behind Mindset is that people either have a “fixed” mentality - a self-definition that is static and doesn’t or can’t change - or a “growth” mentality, meaning that with work and effort, they can change who they are. Dweck argues strongly that people who are successful in life have the “growth” mentality and offers a ton of ideas on how to get yourself - and those around you - from the “fixed” mindset to the “growth” mindset.

This is something I’ve come to believe in my own life, even before reading this book. The people that always seem to succeed are the people that are willing to really push themselves to the limit. Often, the person with the most natural talent doesn’t win the race - and for a long time, I didn’t understand why. This book (and the surprisingly similar Outliers by Malcolm Gladwell) explains it quite well. Let’s dig in.

1. The Mindsets
How do you feel when you fail?

Some people hate it, as they view it as a clear sign to the world and to themselves that they are, in fact, a failure.

Others love it. They see a failure as an opportunity to grow, to learn about the areas where they need to work, and to become a better, stronger person.

The first attitude points to what Dweck calls the “fixed” mindset. In other words, they believe that the person they are is already defined and the outcomes produced by that person are indicative of the person they are. They can’t change - all they can do is bluff and try to make who they are appear as good as possible.

The second attitude is the “growth” mindset. People who revel in failure recognize that a failure isn’t necessarily a poor reflection on them. Rather, it’s an opportunity to see where exactly they fall short and what exactly they need to work on. It’s a reminder not of where they cannot go, but an insight as to what they need to do to get there.

Here’s another way of looking at it: can you change who you are? People with a “fixed” mindset believe they can’t change. People with a “growth” mindset believe that they can change.

2. Inside the Mindsets
The difference in mindsets is interesting, but how does that really appear in terms of how people behave?

People with the “fixed” mindset often back away from challenges. They want to avoid hard things and prefer to thrive on easy things, things they know they can achieve. They also typically don’t like to read or learn, and they certainly don’t enjoy hard or deliberate practice.

People with the “growth” mindset seek out the challenges. They seek out the hard things in life and prefer to tackle things that push them and make them work hard, even if they fail at them. They usually love to read and learn, and they love practicing and improving at specific skills.

In an email exchange with a friend about this book, he stated it very well: “People with fixed mindsets get bored a lot. People with growth mindsets would give anything for a few more hours in the day.”

3. The Truth about Ability and Accomplishment
Here, the message of Mindset overlaps heavily with Malcolm Gladwell’s Outliers: the biggest key to success isn’t talent, but focus and practice.

To put it simply, the people that rise to the top of their fields do so because they keep working at it, keep growing, roll through the failures, and practice intensely and often. Kobe Bryant and LeBron James aren’t the two best players in the NBA because of their talent - they rose to the top because of their obsessive work ethics and focus on thriving even through adversity.

Although Dweck doesn’t mention it, I keep coming back to Gladwell’s example of The Beatles. If you listen to their earliest recordings - 1960 and before - they frankly weren’t very good at all (I probably sound better than some of their 1958 “Quarrymen” recordings). By 1963, they were amazing. By 1966, they were arguably the best songwriting and performing collective in the world. What happened? They played almost nonstop for years. They’d play for hours and hours each day in Hamburg nightclubs, then they’d play on their own when they weren’t on stage. They’d mess up songs, laugh it off, and try again - over and over and over and over. Eventually, they went from being the unknown Quarrymen (sounding like a bunch of kids beating on instruments - which they were) to recording albums like Revolver.

To put it simply, effort, not talent, puts people over the top.

Even more dangerous, labels such as talented and smart and skilled give people the opposite message. Hearing things like that tells people they already have the ability and that they don’t need to grow and work for it. The best positive feedback you can give - or receive - is one that complements you on your ethic or work effort, as it nurtures a growth mentality.

4. Sports: The Mindset of a Champion
Yes, we’ve all heard the story: Michael Jordan was cut from his eighth grade basketball team. He then practiced obsessively, made it to North Carolina on scholarship, and the rest is legend.

Michael’s early signals on basketball were that he wasn’t very good at it. If he had a fixed mindset, he would have simply quit after getting cut. Instead, he took getting cut as a giant motivator - he took that lesson and his own work ethic and made hay with them.

It isn’t just an ability to practice obsessively, either. When you reach the top, it takes character to stay there, and character only happens if you subscribe to a growth mindset. You’re not perfect - no one is. What sets the winners apart is that they recognize when they mess up, they accept that they messed up, and they work to make sure it doesn’t happen again.

5. Business: Mindset and Leadership
How do the mindsets work in a modern workplace? It’s pretty simple, actually.

A growth mentality in a workplace focuses on making everyone succeed by having the project succeed. A person with a growth mentality will take on any task that needs to be done to bring on success - often, the hardest tasks are the ones that the growth mentality relishes. A boss with a growth mentality will seek to do everything he or she can to make you better, because the better you are, the better the team is.

A fixed mentality in the workplace features individuals seeking to make themselves look better at the expense of others. Gossip is a great sign of this. Projects where no one steps up to the hard tasks is another sign. A dominating boss who takes credit for everything is yet another sign. A workplace without people pushing themselves and helping others is a workplace that can’t produce amazing things.

6. Relationships: Mindsets in Love (or Not)
Ever been dumped? Some people take it well: they’re hurt, but they recognize that there were problems and that it’s time to move on. Others don’t take it as well: they slip into depression, get angry, and won’t let go of the relationship.

This same dichotomy pops up again and again in interpersonal relationships: some relationships are healthy and mutually beneficial (like a good marriage), while others are not (like bullying or a stalker). What’s the difference? In a healthy relationship, you grow while in the relationship and you grow when the relationship ends - but it takes work to maintain. An unhealthy relationship doesn’t take that effort, but it doesn’t build positive feelings and often results in negative ones.

Every interaction is a chance for growth - or a chance to merely maintain some form of the status quo. Interactions that help people grow result in good relationships over time.

7. Parents, Teachers, and Coaches: Where Do Mindsets Come From?
When you are charged with helping someone else improve or grow, you have the ability to help them have a fixed mindset (likely not successful) or a growth mindset (potential for success). Teachers, parents, and coaches all have these opportunities.

What can such a person really do, though? Dweck compares the approaches of Bobby Knight (who demanded perfection at all times, yelled a lot, and led his players to a fixed mindset where they had to act as perfect as they could whether or not that’s what was really inside of them) and John Wooden (who never raised his voice, focused almost entirely on fundamentals and character growth, didn’t worry about perfection, and strove to produce great people). Both saw great success in college basketball, but Wooden produced more people that went on to do great things in the world - the true product of a coach.

Praise your children and students for their work ethic and their hard effort. Don’t praise them for their talents or the “greatness” of their end product. If they make mistakes, don’t tell them they’re worthless - instead, guide them into what they can learn from the mistake and encourage them to try again.

8. Changing Mindsets
What if you’re in a fixed mindset, but desire to have a growth mindset instead? The first step is to ask for help from those around you and listen to what they have to say. They’re going to criticize you - and that’s where your real decision happens. Are you going to listen to what they have to say and try to grow from that? Or are you just going to discredit or pooh pooh it?

Another key tactic: realize that the world doesn’t owe you anything. You may be naturally talented. So what? The spoils don’t just fall to the people with natural talent. They fall to the people who can do the job well, on time, and with reliability. You might be the best jazz flautist in the world, but if you don’t practice your pieces and ignore what’s going on around you, no ensemble will want you around.

Dweck offers quite a few similar tactics throughout this chapter, but these two really stood out to me.

Is Mindset Worth Reading?
I actually felt that Mindset covered much the same ground that Outliers did. They both stress something I’ve found to be an absolute truth in a life that’s successful in any dimension: talent is useful, but hard work and perseverance and learning from mistakes win the day.

Here’s the real lesson that Mindset hammers home very well, with lots of little ideas and tips to help along the way: you’re going to fail at some point. How you deal with that failure is what will make you either a success or a failure in life. If you meet that failure head on, accept the failure, don’t give up, and attempt to learn from it, you’ll succeed. If you avoid the failure and try to find excuses for it, you’ll likely never succeed.

The choice is yours. And if you find that distinction to be an exciting and interesting and useful one, Mindset is an excellent read.

A few weeks ago, I received a simple request from a person I know in the community. She asked me to go to a website and sign a simple petition on behalf of a cause she’s passionate about. She explained the cause in detail and provided the URL, making it really easy for me to just click and sign the petition.

The cause was something I agreed with, so I was happy to click through and sign the petition for her.

Later, she emailed me again, asking if I would donate $20 to the cause. After some thought about it, I declined to donate.

What I found interesting, though, is that I thought about it much more than I would have with a cold call for donations. I had already been introduced to the cause, for one, and I had already “invested” in it a small amount by signing that petition. I felt involved already, even though I was really not, and this sense pushed me to continue my involvement by donating, even though it wasn’t the best rational decision.

This is a crystal-clear example of one of the oldest sales tricks in the book - the foot-in-the-door technique.

Here’s how it works. A person comes to you with a simple request that seems to be for a genuine good purpose. The tiny time investment you have to make seems worthwhile for the positive good generated by your action - signing a petition, granting a really simple request, even getting a freebie.

Then comes the hook - a much bigger request. You’re already invested in the situation, though, by your earlier request. So instead of simply shutting off the new request immediately, you listen - and you’re more open to this big request than you ever would have been.

This technique was described in detail in a classic article by Jonathan Freedman and Scott Fraser in the Journal of Personality and Social Psychology, entitled Compliance Without Pressure:
The Foot-in-the-Door Technique. In the study, a team of psychologists telephoned housewives in California and asked if the women would answer a few simple questions about the household products they used - a simple request that many complied with.

Three days later, the hammer drops. The psychologists called back, and this time, they asked if they could send a small team into the house to go through cupboards and storage places as part of a two hour investigation into how these products are used.

Guess what? Freedman and Fraser found that women were twice as likely to agree to the big request if the little request was made first. In short, by getting their foot in the door with the simple questions, Freedman and Fraser experienced twice as much success with their big requests than just cold calling.

Think about how often this very technique pops up in everyday life.

Supermarket samples You’re offered a free taste of food along with a bit of chit-chat with a store employee. You’re now a bit invested in the product and much more likely to go ahead and buy it.

Parenting My children often do this naturally. They’ll ask to go outside, then that will eventually translate into filling up the swimming pool or getting out the sprinkler.

Charitable giving Just like my example mentioned above, many charities will get you interested by having you sign a petition for what seems like a good cause. Later, they’ll try to hook you with a donation.

Sales flyers They’re having a great sale at the store! Yet, once you’re in the door, you’re already invested - so when you see another few items you need, you’re way more likely to just pick them up now, greatly reducing the value of your bargain.

Free “lunch” seminars You’re offered a free meal in exchange for listening to an investment or real estate scheme. You’re already in the room with a free meal, so you’re already invested in it.

So how do you avoid such traps? Keep two principles in mind.

First, each action is an individual choice. Just because you’ve signed a petition has no impact at all on whether you should donate to the cause. Just because you tried a free sample has no impact at all on whether you should buy the product. Slow down, think about this choice, and don’t let yourself be pushed by previous interactions.

Second, there is no such thing as a free lunch. Those investment advisors aren’t giving you lunch to be nice guys - it’s part of their sale. The grocery store isn’t giving you samples because they’re awesome - it’s part of the sale. Quite often, signing a petition won’t really help the cause - it’s just a way to get you involved in the charity.

To put it simple, be mindful, especially when something seems free or seems to be too simple. Quite often, there’s a salesman at work.

As you read this, my wife, my father, and I are planning on going to the Texas Rangers game tonight against the Toronto Blue Jays at Rangers Ballpark in Arlington, TX. I love going to major league baseball games and one of my smaller goals is to eventually visit every major league ballpark.

In order to get cheaper tickets, we bought the tickets in advance - they’re already paid for and printed out. We’re all ready to go to the game.

But let’s say it gets to be 6 PM this evening and our son is sick, or my dad gets tired and doesn’t feel like going.

It might make sense for me to want to push everyone to go to the ball game. After all, I already have the money invested in the tickets - we wouldn’t want that to go to waste.

In reality, though, it doesn’t actually make any sense to choose the less enjoyable option this evening if things turn out that way.

Think about it this way. I’ve already paid for the tickets - there’s no refund, no matter what we choose to do. So, in essence, all those tickets are really saying is “you have the ability to now go to the Rangers game for free this evening.”

The cost of those tickets is already sunk. It doesn’t matter what we do this evening - we’re not going to get the cost of those tickets back.

Believing that you must go to the game in order to somehow recover some value is the sunk cost fallacy - and it can be dangerous.

Here’s another example. Not too long ago, one of my readers preordered EA Sports Active for the Wii - he used Wii Fit a lot and wanted to go “beyond” it and do more cardio work. So, he paid $1 to reserve a copy at Target.

On the day of release, though, he found that he could get a free $10 gift card at Best Buy for buying a copy. He stopped at the Best Buy (next door to the Target) and picked up his copy there.

What about that $1 sunk cost at Target? Well, it was already sunk. All it did was give him a choice - pay $58.99 for the game at Target, or pay $59.99 for the game plus a $10 gift card at Best Buy. He chose the latter because the cost was sunk either way.

Here are three general ways that the sunk cost fallacy can hurt your happiness (without helping your wallet) or hurt your wallet directly.

First, it can convince you to make a poor choice about how to spend your time. In the example above, if I talked everyone into going to the Rangers game - and no one really wanted to go - under the idea that I had to somehow recover some of that sunk cost, all I’m really doing is making the evening worse for everyone. Instead, one should forget about the money entirely once you can’t recover it and make the best choice at the moment for everyone involved.

Second, it can saddle you with more debt than value. Think of people who are upside down in their car loans or upside down in their mortgage. They have already sunk money into those assets, but now the assets are still worth less than what is owed on them.

Third, it can lead you to poor investing decisions. People with investments in a dying company will often tell themselves that they can’t pull out now because they have too much invested in it - and then they lose everything. Just because you’ve invested $100,000 in something doesn’t mean it’s not the right choice to pull your investment out for $30,000 - it might be the choice to make if the investment is dying on the vine. That sunk cost doesn’t matter - what matters is getting the maximum return from where you’re sitting right now.

A few more thoughts about sunk costs and the sunk cost fallacy:

You should avoid sunk costs unless it’s highly certain that you’re going to actually do something. Most of the time, if you pay ahead for an event or an item, it’s so you can get a better deal - that’s why we bought Rangers tickets early, for example. However, if there’s a significant chance that you won’t go, you’re better off not sinking that cost in advance.

Think about it this way. There’s a good chance you’re going to go to a concert this Saturday, but you’re open to other things coming up. You can buy nonrefundable tickets in advance for $12 or at the door for $15. Which should you do? Buy at the door, of course. That way, if something comes up, you can follow the better path. Now, on the other hand, the concert might be by your favorite band ever and wild horses couldn’t keep you from going. If that’s the case, buy the tickets in advance. “I’ll do this if nothing better comes along” is not a good basis for sinking the cost.

Sometimes you can’t avoid a sunk cost - so just seek to minimize its impact. This is why you should make a large down payment on a car or home - or pay for it entirely in cash. A small down payment on a home - under 20% - makes the sunk cost worse because now you also have to sink money into mortgage insurance, for example. PMI payments are sunk costs. Similarly, if you buy a new car and don’t make a down payment, you often have to have insurance to cover that depreciation - again, an additional sunk cost. Make choices that avoid these sunk costs.

Sunk costs are often tricky. If you move into an apartment with a metro stop right outside the door and another metro stop right in front of your place of employment or school, it makes a lot of sense to sink your money into a bus pass. Now, imagine that you’re fired the next day. Suddenly, you’d like to have that $50 back.

Yet, I would still sink the cost, even with that risk. Why? Here, the bus pass has more than one use. You can ride the bus to more job interviews. You can use the bus pass to go get groceries. You can use the bus pass to visit friends.

What’s the take home message? Always make the best decision now. Don’t let yourself be swayed by money you’ve already spent and can’t get back. Instead, avoid that trap when you can.

My three year old son loves to go to the grocery store with Mom and Dad. He wanders around with us, listening to our discussions about which products to buy, and quite often expresses his own opinions. He’ll remind us that he loves V8 Fusion (our preferred fruit juice, since it’s 100% and also is half vegetable juice) and often dallies for a long time near the Pepperidge Farm goldfish crackers, as I noted two years ago (and depicted as well):

As we shop, we make tons and tons of little decisions along the way. Those decisions, on their own, seem inconsequential.

Should we buy the bulk can of diced tomatoes or the smaller can?
These tortillas feel softer, but they’re way more expensive - is it worth it?
The free range whole chickens are on sale! Should we stock up?

A choice one way or another here might save us a dollar or cause us to spend a dollar more. In the eyes of many people, it’s an inconsequential decision - just make it and keep going. One dollar doesn’t make a huge difference, right?

The problem is that each little buying decision you make is deeply tied to other buying decisions, whether consciously or not.

How so, you might ask?

All of our buying decisions are based on a set of principles in our head, ones that are often so well-grounded that they don’t even pop up in conscious thought.

Here’s a thought experiment to help you see what I mean. Imagine a product you would never buy in a grocery store - pork rinds, maybe, or perhaps insanely potent hot sauce. Now, what about that product would cause you to not buy it? You’re likely to pop up an immediate simple answer - I don’t like the taste or it’s unhealthy - but on other purchases, you’re quite willing to overlook that principle for other reasons.

In truth, when we make a decision to buy in the grocery store, we’re trying to reduce a big set of principles and inputs down to one split-second decision. And often we feel we’re completely justified in that decision - and we move on with life.

It is very easy to tease apart each little buying decision, tell yourself that it doesn’t really matter that much and that it’s okay to splurge, and then essentially ignore your final tally when you get to the checkout because each decision was justified in your mind. Doing that, though, is a game that will, time and time again, put your wallet in the hurt locker.

So, what can you do to overcome this problem?

The easy methods are the shopping list and the meal plan. Making a shopping list in advance of your visit to the grocery store simply serves to reduce the number of decisions you have to make. This, of course, leads you to making fewer bad decisions.

But that’s just the start. Once you’re in the store with your shopping list in hand, commit to three more things.

First, simply do not put anything in your cart that’s not on your list. Your list, if it’s thought out at all, should have everything you need for your meals for the next week. If you see something you feel like you need or deserve, jot it on the back of the list for next time.

Second, mark any items that you’re not simply searching for the cheapest version of. On our list, I like to put a little X by any item that I don’t intend to just buy the cheapest version of. For example, with diced tomatoes, the various brands and cans are identical in terms of ingredients, so we usually just get the cheapest version. This, again, reduces the number of opportunities for poor impulse decisions in the store.

Third, if you have specific brands in mind (because of coupons or because of previous buying experiences), put those on your list, too, along with the size. For example, we usually have a big stack of coupons for V8 Fusion (100% juice, half fruit and half vegetable). So, instead of just writing “fruit juice x 3,” I’ll write “46 oz. V8 Fusion x 3″ on the list. In other words, if you make the list more specific, you further reduce the number of potential impulse decisions in the store.

Using all of these techniques, you’ll end up making just a handful of in-the-moment choices in the grocery store - and with fewer potential decisions, you have fewer chances to make poor ones. The end result? A cart full of items that you actually want and a much smaller grocery bill.