This is the twelfth 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 thirteenth chapter, finishing on page 218.

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!

This is the eleventh 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 twelfth chapter, finishing on page 218. The final entry, covering the thirteenth chapter, will appear on Saturday.

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.

This is the tenth 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 eleventh chapter, finishing on page 202. The next entry, covering the twelfth chapter, will appear on Wednesday.

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.

This is the ninth 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 tenth chapter, finishing on page 182. The next entry, covering the eleventh chapter, will appear on Saturday.

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.

This is the eighth 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 ninth chapter, finishing on page 167. The next entry, covering the tenth chapter, will appear on Wednesday.

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.

This is the seventh 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 eighth chapter, finishing on page 150. The next entry, covering the ninth chapter, will appear on Saturday.

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.

This is the sixth 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 seventh chapter, finishing on page 132. The next entry, covering the eighth chapter, will appear on Wednesday.

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.

This is the fifth 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 sixth chapter, finishing on page 108. The next entry, covering the seventh chapter, will appear on Saturday.

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.