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.

This is the fourth 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 fifth chapter, finishing on page 92. The next entry, covering the sixth chapter, will appear on Wednesday.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What’s Expected of Us
On pages 81-82:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

This is the third 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 fourth chapter, finishing on page 76. The next entry, covering the fourth chapter, will appear on Saturday.

You can get rich in just three weeks with my $99 tape course!

We can eliminate 70% of your debt immediately!

Gold is the only thing that will save you when the economy fails!

Do you smell the snake oil yet?

There are countless sharks in the water that want your money. One powerful technique for selling you something you don’t need is to prey on your fears. Perhaps you fear the government’s long term future (been listening to too much talk radio, haven’t you?). Perhaps you fear immediate personal financial failure. Perhaps you fear your professional failure – and what others might think of you if you’re not successful.

People will prey on those fears. They try to do it all the time. Commercials telling you that you can eliminate your debt. Pitchmen talking about how great an investment gold is. Smooth talkers telling you about their “program” for quick income at home.

Almost all of these plans do two things. They grab onto your fears and they combine it with some sort of widely-spread myth. The myth of the person who got rich quickly. The myth that debt can be whisked away through this or that loophole in the law.

Myths are dangerous things. They’re usually based on information that might have been true a hundred years ago – or are based on extremely rare cases that, again, don’t reflect how you live your life. Yet they persist because they sound good.

Denying Risk Because of Laziness
Early in the chapter, Ramsey goes on a rant about the dangers of denying risk in your life. One point he makes on page 52:

Sometimes risk denial is a kind of laziness, when we don’t want to take the energy to realize that energy is needed to win.

I think this very factor holds people back from a lot of career advancement. They look at the huge amount of energy they would need to expend to get ahead – networking, building a business, and so on – and decide that they’d rather expend their energy doing something else.

Another example: we look at the effort that it would take to keep track of our spending for a few months and get a real grip on our finances – and we decide that the status quo is just fine.

Or we think about the effort that it would take to actually build a price book and figure out which grocery store really is the cheapest for what we buy – so we shrug it off and just go shopping at the Wal-Mart Supercenter.

Laziness is the enemy of success in every area.

Denying Risk Because of the Beat Down
Dave’s rant against risk denial continues:

Other times, risk denial is a kind of surrender in which we settle for a bad solution because we are so beat down or beat up that we wave the white flag and do something stupid.

I’m reminded of those ludicrous debt elimination programs advertised on late night television. “We can eliminate 90% of your debt with our program!”

Well, this means one of two things. You’re either going to file for some sort of bankruptcy protection (which has a whole different can of worms) and pay them for the “help” or you’re going to sign up for their debt repayment plan, where you pay them money for something you could cook up yourself.

Either way, you lose. Why not just make your own debt repayment plan? It’s easy and a lot cheaper than paying outrageous monthly fees for companies to do this for you.

Denying Risk for False Security
Yes, I liked the denying risk theme. Dave goes on to say:

At still other times, risk denial can have an active component in which we search for a false security that simply doesn’t exist.

Gold investing immediately comes to mind. The local talk radio station in Des Moines carries tons of ads for buying gold as an investment, coupled with shows like Glenn Beck which talk breathlessly about the fall of the American government (I wish I were kidding).

Gold sellers prey on that fear, bringing up the old tales about how gold is the safest thing to own when governments are falling. In practice, though, that’s rarely true – gold is scarce enough that most people resort to a barter system until things straighten out, and land, skills, and resources have the real value.

Gold is that false security. It makes people believe that they’ll be safe if the government collapses. In a fearful environment, people seek out that safety.

That’s not to say gold doesn’t have a role in a diversified investment portfolio, but people with enough of a bankroll to need diversification into precious metals probably aren’t reading The Simple Dollar or listening to talk radio all day.

Cash Value Life Insurance Is Junk
This is one of those points that I absolutely love in this book. Dave lays out the case against whole life and universal life insurance on page 58:

All of the [extra payments beyond the price of term insurance] per month disappears in commissions and expenses for the first three years; after that, the return will average 2.6 percent per year for Whole Life, 4.2 percent for Universal Life, and 7.4 percent for the new-and-improved Variable Life policy that includes mutual funds. These statistics are from Consumer Reports, Consumer Federation of America, Kiplinger’s Personal Finance, and Fortune magazine, so these are the real numbers. Additionally, a recent article in National Underwriter, The Industry Mouthpiece, showed charts of returns from fourteen national companies. The returns they show average only 6.29 percent over twenty years. [...] Worse yet, with Whole Life and Universal Life, the savings you finally build up after being ripped off for years don’t go to your family upon your death; the only benefit paid to your family is the face value of a policy [...]. The truth is that you would be better off to get the [inexpensive] term policy and put the [extra payments beyond the price of term insurance] in a cookie jar!

That pretty much sums it up. If you want insurance, buy bread-and-butter term life insurance. If you want an investment, buy an investment from a brokerage with low-cost investments (like Vanguard, for one). Mix the two and you’ll find yourself eaten alive by fees and commissions.

Look, I don’t blame a well-meaning grandparent for buying whole life insurance for their grandchildren. Their heart is in the right place – they want to protect their own children when their grandchildren are young and give the grandchildren a valuable investment when they’re older.

However, I’d encourage them to split that $100 a month into two batches instead of putting it all into the insurance. Use a small part of that money for a small term policy on the child so your own children won’t have a financial burden if the unthinkable happens. The other $93 a month? Put it in an investment account.

Important/Not Urgent
One of the handful of useful ideas in Stephen Covey’s book The 7 Habits of Highly Effective People (which I reviewed a while back) is the idea that our tasks all fall into four groups – Urgent & Important, Urgent & Not Important, Important & Not Urgent, and Not Important & Not Urgent.

Covey argues that the distinction we should make is whether something is important or not (tasks in the Important & Urgent and the Important & Not Urgent groups), but in practice we usually focus on the urgency instead (Urgent & Important and Urgent & Not Important).

This has a huge impact on personal finance. Dave spells it out on page 62:

We take care of the Urgent/Important stuff, but what is Important/Not Urgent [...] is planning. You can pay the electric bill or sit in the dark, but if you don’t do a monthly spending plan, there is no apparent immediate damage.

I think this is one of the biggest reasons people put off financial planning. They are aware that it’s important, but they’re also aware that it’s not urgent.

Since so many of our lives are seemingly in constant “crisis mode” where we move from one fire to the next, we find ourselves falling easily into a situation where we just deal with what’s urgent and don’t even consider what’s important.

The end result? We find ourselves often missing out on many very important things in life because they’re not urgent. We skip playing with our kids because a client is calling us about a minor detail. We gloss over financial planning because there are fifty eight household chores that need to be done.

That lost time costs us. Every month we don’t save directly hurts our retirement. Every week we don’t contribute to our 401(k) hurts us. It comes around.

A Weird Argument for Cash
I think Dave goes off the rails on page 71 when talking about the risk of carrying cash versus carrying credit cards:

The crooks assume that your purse is like all the others filled with credit cards that are over the limit. Look, I’m not making light of crime. There’s a chance you may get robbed, because people do get robbed -whether they carry extra cash or not. And if it happens to you, the cash will be taken. But, trust me, you need to be far more worried about the danger of using credit cards than the danger of being robbed while carrying cash. Carrying cash doesn’t make you more likely to get robbed; on the contrary, the mismanagement of plastic is robbing you every month.

First of all, why not use a debit card instead of cash? A debit card allows you to only access the cash you actually have – the stuff sitting in your checking account. It also has virtually the same consumer protections as a credit card – if someone steals your debit card, just call up your bank and things are secure.

Second, having $200 in your purse (or wallet) makes it just as easy to blow $200 on something unnecessary as it is having a credit card in your purse (or wallet).

A credit card is just an excuse to exercise a lack of self control.

Having a large amount of cash on you is a security risk, no two ways about it. Dave is making the mistake of confusing one kind of risk (the risk of a lack of self control, which can take hold whether you have cash or a credit card in your pocket) with another kind (the risk of having your money stolen, which is much easier to fall prey to with cash on hand than with a credit card on hand).

Do you have any other thoughts on the fourth 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 fifth chapter – Two More Hurdles.

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.

This is the first 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 first entry covers the preface and the first two chapters, finishing on page 16. The next entry, covering the third chapter, will appear on Saturday.

Let’s get this straight right off the bat. I like what Dave Ramsey has to say when it comes to personal finance. I find much of his material makes a lot of sense and he does a great job of balancing a “coaching” attitude without going too over the top a la Larry Winget.

That being said, I don’t care much at all about his political commentary. I know that his relationship with Fox News pretty much requires a conservative bent, but his political perspectives feel very much out in right field to me with only a tenuous connection at best to his personal finance talk.

Given that, I’m going to completely ignore his politics for this discussion. If it’s not inside The Total Money Makeover, which is an excellent book on debt reduction and focus, I’m not going to talk about it.

Ahem.

So what exactly is The Total Money Makeover all about? It’s just a very straightforward plan for getting in control of your finances, particularly in terms of overcoming a heavy load of debt. Many people have “turned the corner” – meaning they’ve realized that debt is dangerous and are actually committed to spending less – but the mountain of debt they’ve incurred makes it almost impossible to move forward. That’s exactly who the book is written for.

’80% Behavior, 20% Head Knowledge’
Right off the bat, on the first page of the introduction, the basic idea is made clear:

I am positive that personal finance is 80 percent behavior and 20 percent head knowledge. Our concentration on behavior – realizing that most folks have a good idea of what to do with money but not how to do it – has led us to a different view of personal finance. Most financial people make the mistake of trying to show you the number, thinking that you just don’t get the math. I am sure that the problem with my money is the guy in the mirror.

I wholeheartedly agree with this. All of us know that it’s important to save and can see the numbers on how useful it really is. The trick is actually doing it – and that’s all psychology.

If you don’t truly make up your mind to achieve financial success, you’ll hold back. You won’t save – or you won’t save much. You’ll keep telling yourself that “later” is the right time to do it.

And then you’ll find yourself in ten years having not made any progress on your big goals in life.

The choice to start spending less than you earn is a hard one, but it’s the most important one. That choice has nothing to do with math, with running the numbers, or anything else. It’s inside your head.

If You Will Live Like No One Else, Later You Can Live Like No One Else
That phrase is found at the bottom of virtually every page in the book – it’s basically the book’s mantra. Dave’s take on it is clear: live hard now and you’ll live easy later. My take is a little bit different.

I agree with him largely on the first part: it’s incredibly important to tighten up that spending and get rid of the debt. Doing that requires learning how to spend less – and also not allowing yourself to use that extra money for anything but getting rid of debt and building a future. That requires living “different” in a way – your goals shift from the shiny new car and the shiny vacation to the removal of all of your debt.

On my block, I can certainly say I see a lot of shiny cars – my truck is the oldest vehicle on the block, by far. In the end, though, my truck works – and that’s all I can really ask of it. It gets the kids to daycare and gets me to the library, which is really all I need. As long as it keeps running, we’ll keep it. And that’s living quite different when we’re surrounded by vehicles more than ten years newer than my truck.

It’s the other part that’s tricky. I don’t view the “later you can live like no one else” as meaning I can afford that shiny new car. Instead, I take a perspective closer to Your Money or Your Life – the “live like no one else” in the future for me is complete financial independence, meaning I don’t have to work for money.

That, to me, is “living like no one else.” I won’t have to factor in money at all when it comes to choosing how to spend my time, and that’s my real dream.

A 12% Rate of Return?
One big flashing question mark comes on page xv in the preface:

Sadly, many intelligent but ignorant people seem to think that making a 12 percent rate of return on your money in a long term investment is impossible. And that if I state that there is a 12 percent rate of return available, then I have lied to you or misled you. [...] The S&P 500 is the 500 largest companies traded on the New York Stock Exchange, sometimes called “The Big Board.” So it is widely accepted to be the best average of the market. The S&P 500 has averaged 11.3 percent per year for the last seventy-plus years, as of this writing.

So, I immediately flip to the front and discover that this revision was published in 2007. Something tells me that 2008 hurt those numbers quite a bit.

Here’s the point, though: The Total Money Makeover tends towards the optimistic when it comes to investment returns. While there are certainly long-term stretches (more than ten years) where the market as a whole – or certain pieces of the market – have returned more than 12% annually, the truth is that there is no guarantee that any 10 year, 20 year, 30 year, or any year period will return any percent. Surely, 2008 taught us all that, loud and clear.

Instead of relying on that extremely optimistic forecast, I’ve come to use Warren Buffett’s more realistic (perhaps even a bit pessimistic) forecast that in the future we should expect 7% returns on average. This might be slightly on the pessimistic side, but when you’re making calculations for your future and banking on them, you’re better off being pessimistic (and having more money than you need when the day comes) than optimistic (and having to work for the rest of your life).

Calculating with 12% returns gets people really excited – and it might happen. But my perspective is that using such hugely optimistic numbers puts your future at risk. Better to finish with more than you expect than with less.

Tapes and Books Aren’t the Solution
On page 4, a certain quote really caught my eye:

So my Total Money Makeover begins with a challenge. The challenge is you. You are the problem with your money. The financial channel and some tape sets aren’t your answer; you are.

All the blogs, all the books, all the “tape sets,” all the financial products in the world won’t help if you’re not committed to sucking it up and making it work.

If you’re not willing to look at your behaviors, step up to the plate, and make some changes in your life, nothing is going to change.

This kind of talk generates three kinds of reactions. It makes some people angry – they want to believe that they can suddenly get rich without changing a thing, even though it hasn’t happened yet. It makes some people stick their fingers in their ears and sing “lalalala” – they know it’s true, but they’d rather keep the sinking ship they’re on than try to change anything. And then others embrace it and work hard for something better.

I was in the “lalalala” group for years. I knew very well what I needed to do, I just didn’t want to hear it. I knew on some level that what I was doing wasn’t working, I just didn’t want to think about it.

My epiphany threw me on a new track – the “embrace change” track. I finally woke up and realized that if I didn’t take charge of my situation, I was going to keep sinking slowly. This one choice led to tons of things – I paid off four credit cards, two vehicles, three student debts, totaling $30,000 or so in debt; I bought a house; and, finally, I switched careers, earning less but doing what I love.

All of the moves I made were simply the aftermath of that one choice to really make a change. That choice is up to you – no blog or book or podcast can make that happen (well, except for MY blog or book or podcast … just kidding).

King of Denial
The second chapter of the book focuses on denial – simply ignoring that there are problems. Like I said, I did this myself for far too long. One quote from the chapter took my breath away, though:

For your own good, for the good of your family and your future, grow a backbone. When something is wrong, stand up and say it is wrong, and don’t back down.

Powerful stuff, and exactly right. If you’re not going to take charge of things, who is?

The Pain of Change
Another interesting piece comes in on page 15:

Change is painful. Few people have the courage to seek out change. Most people won’t change until the pain of where they are exceeds the pain of change.

I strongly believe that for many people in a routine of spending more than they own, there’s a “bottoming out” effect, not too different than a junkie. At some point, the problems that have been building for a long while explode – you can’t pay the bills any more (which happened to me), you’re forced into bankruptcy, your family splits apart.

For many people, that final point is painful enough that it tips the scales. Suddenly, in comparison, the big change doesn’t seem so painful any more.

I like to think of it like the Mississippi River flood of 1993, which destroyed my hometown. It kept raining and raining and raining throughout the months of June and July, like debt building up. The river kept rising, pushing against the levees, until that fateful day when the levee broke. Chaos ensued and new patterns were rapidly discovered in countless lives.

Soon, we found that the actual path of the river had changed – in many places, it had found a new channel to flow through. The new patterns of life began to settle in place and soon things began to return to normal – but with some big changes. Levees were rebuilt stronger than ever. People prepared their homes for future flooding.

In short, life took on a new, better, safer routine. When you’re recovering from a financial meltdown and discovering new ways to live, this happens – you begin to discover new, better, safer routines.

And you begin to live like no one else.

Do you have any other thoughts on the first two chapters 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 third chapter – Debt Myths: Debt Is (Not) A Tool.