Updated on 07.01.09

The Total Money Makeover: Money Myths – The (Non)Secrets of the Rich

Trent Hamm

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.

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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.

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  1. J says:

    “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).”

    No, having a credit card means you can blow $2000 (or more) on something unnecessary. If you blow $200, it’s gone (and you can’t spend another $200).

    I thought Dave did a pretty thorough discussion of using a debit card, in addition to talking about the psychology of spending cash versus spending on debit. With the cash, you have a physical manifestation of the money you are spending — you are physically handing it to someone. With a credit (or debit) card, you don’t have that same feeling.

    Of course, some people may feel very differently about this than others. I personally know that I get a very different feeling spending physical cash rather than when using a debit card. My wife does not.

    We employ a hybrid system at home, using cash for some budget items and debit card for others. We have tried a few iterations of moving some things to cash and debit (and vice versa) with varying success levels. The one thing that cash has going for is is a built-in tracking mechanism: you look in the envelope for something like takeout, and you know exactly how much money you can spend on takeout. No computer, Quicken, online checking account or smartphone required.

  2. Jade says:

    I totally understand why term life insurance is the way to go, but I’m still going to hold onto my whole life policy. What people never seem to mention when they encourage getting a term policy when you have kids in your late 20’s or early 30’s is a medical exam. My grandmother got me a whole life policy when I was 15, before I was old enough to need a medical exam, because she knew I’d have to pay a higher premium, if I could get life insurance at all, if I had a medical exam done.

    Now, I may cash the policy in when I’m in my 60’s, but in the meantime it’s the only life insurance I can get to help my parents and/or future kids if I die before then. If I later had kids, I’d look into a term policy to provide some extra protection while they’re growing up, but I’d also be glad for my whole life policy if I couldn’t get that term coverage.

    And I’d also be sure to give my kids a whole life policy and lock in a low, healthy person rate, before they were old enough to need a medical exam. Never know what health issues they might have come up later in life, making it impossible to get term life insurance for their kids, at least the whole life could provide some coverage.

  3. Des says:

    I used to think they same way about credit cards vs. cash. Every time I had cash it would end up in the vending machine at work. So, of course, I assumed that switching to paying with cash would cause me to spend more. I WAS SO WRONG! Here’s what happened:

    My hubby and I decided to give cash a try. We each got our own spending money, knowing we would receive no more until the next payday (every two weeks). I spent it like I always had…and ran out 5 days in. Those next 9 days of not having ANY money were very hard. I was so used to being able to just put what I wanted on a card and pay it off the next payday (we never carry a balance). But it was seeing the money physically leave, and the experience of running out and being forced to wait for what I wanted that re-shaped my spending habits. We were already pretty good (no debt, etc.) but we didn’t realize how far we had to go until we gave cash a try. It it not an exaggeration to say it was life changing. It may not seem like cash is any different than credit cards, but it REALLY IS!

    If you’ve tried it and it didn’t work for you, more power to you. But don’t knock it till you’ve given it a real shot (as in, more than just a couple months).

  4. Derek says:

    It’s much harder for me to keep track of cash than debit/credit cards. I think the envelope system is a bit silly so when I think I’ll need cash, I grab some from the ATM and spend it willy nilly, not writing down what went where. My bank keeps track of all that for me when I use a debit card.

    I think Dave’s book is excellent for newbie personal finance stuff but when you’ve got things under control, you need to re-evaluate his feelings on things (especially religion, imo) and do what works best for you.

  5. A.M.B.A. says:

    Using a debit card, for me, is very similar to the feeling of using a credit card. It’s not “real” money. I need to see the money pile decrease to keep me on track. I usually only use the debit card to get my monthly cash allotment from the ATM and every monthly reoccurring bill is on auto pay. For me, cash is king.


  6. kitty says:

    I certainly don’t spend any more on credit that I do on cash for the simple reason that I think whether I want to spend the MONEY before I get my credit card out of my pocket. I think much less about cash. Given that I am not in debt and have a sizeable net worth is proof enough that I don’t ovespend.

    I’ve travelled to places that take credit cards as well as places that don’t take them. I spend more in cash-only countries on little things – maybe because each indidual thing I buy is cheaper there, I don’t know. I do know that even in credit card countries I don’t make any decisions based on whether I can charge it or not: I’ll choose a restaurant that doesn’t take credit cards over the one that does every time if the former has better prices, is frequented by local and has acceptable food. I tend to spend all of the cash I get out of ATMs, but I am very mindful of the bill I’ll get when I get back home every time I think about taking my card out of my wallet.

    But… IMHO – this is all personal. Some people spend more with cards, other don’t. Statistics talks about averages not about individuals and people who carry balances affect these averages a lot.

    As to Ramsey – I’ve been doing fine without him until now, and as I have no debt and don’t see him as any kind of financial expert, I don’t intend to read him.

  7. Sandy E. says:

    I was reading this book a few nites ago, and Dave doesn’t have a credit card, and travels around the world, and gets by with his debit card and cash. With the latter, he is guaranteed to never get back into debt again. Someone asked him, “yeah, but if I carry cash, I’ll get robbed.” His answer to that was that a robber doesn’t know you are carrying a lot of cash and target you because of that. For all he knows, you could be carrying charge cards that are maxed out. This actually made me feel more relaxed about carrying cash, and after reading that book, I took my one credit card (that I pay off every month) out of my wallet, and in so doing, it felt like I took off a ball and chain. Why? Because I finally realized that with it, I was spending more money than I would if I dealt just with the greenbacks. (For others, it’s the opposite, so you have to know yourself). With cash, when you spend your allotment for the month for your various categories, it’s gone. Not with credit cards. You can go over, but when you do, it hurts you for the next month because now you have to pay it off, hopefully, and when you do, it cuts into your discretionary spending for the following month, and that part I didn’t like. And to tell you the truth, I’ve reached the point where I’m tired of even making a credit card payment period. That’s a bill that, like him, I can eliminate altogether. It’s liberating. So I’m going to try only cash and a debit card for awhile and see how that goes.

  8. Studenomist says:

    Just a comment on the whole credit card/cash/debit deal: With a credit card most young people don’t feel guilty about spending money because it’s not their money. With a debit card you feel guilty but a little less because it’s still a swipe. With cash you feel really guilty about spending money because you have to hand over something really tangible.

  9. I agree with the above posters – I’ve spent the past year or so with debit over cash, and have definitely spent much more than I used to when I used cash only. I hate parting with cash, but when it’s a debt card, I can just sign my name and deal with it later.

  10. Rosa says:

    I kind of like spending cash, so I spend less if I have less on me. Credit cards kind of scare me and make me evaluate my purchases more. People’s psychological relationships to money vary pretty widely – but i’d guess the people in tons of debt are the ones who worry less about using the card than using cash.

  11. I’m gradually switching more of my spending to cash/debit card. Since I was 18, I put most of my purchases on credit card and paid the bill off each month.

    After listening to Dave in the past few months I’ve begun to switch my spending to cash / debit card. I feel the “pain” of spending money more when I pay w/cash and it’s helped me reduce expenditures a little bit.

    -Gen Y Investor

  12. kat says:

    I found out the hard way that my bank will not decline your debit card, I deposited a paycheck that bounced, but the bank let my debit card purchases go through they tried to charge me overdraft fees, but I was able to get them waived by a bank manager. It was a big hassle, and I was told by the manager that honoring the debit amount even if there were not enough funds was bank policy.

  13. The cash/credit is all a mental game so this drives me crazy! Using a credit card has sooo many benefits (30+ day float on your money, points/cash back, chargeback ability, trackable etc) and using cash has… just about zero benefits. I love having a credit card, and I pay it off in full every month! More people need to start thinking of credit as “debit” instead of as an unlimited gift card!

  14. almost there says:

    I think Dave is wrong about LI other than term. I have a universal policy that is paid up. Also have term. The Universal cost me a little less than 61K for a 330K policy worth almost 339K DB now. Crediting rate per year 7.4%, and if I pass the wife can keep the principle for 30 years and live off 5.4% interest or take the lump sum DB or a combination of payouts/certain years. No commissions on the sale of policy for a member owned non-profit insurance company. And if I have 12 months left to live as judged by a Dr. I can cash it in for the current DB. Or, use it for long term care coverage. I may also take a loan out against the cash value of the policy at 1/2% over the crediting rate, and still get credited as if I had not taken out the loan. If I cash it in today my cash surrender value is worth 30% more that my purchase price. Now, compare that with my IRA. I have been investing in an IRA in growth mutual funds at the big investment houses for the past 26 years which have a negative return when one does not even count dividends reinvested. Dave’s book was published before the market meltdown of 2008 and his figures for appreciation of stock long term are skewed. The stock market has only returned an average of what, 6% since the depression? I think that all insurance policies are different and one must judge them by themselves and not make blanket statements about them. Yeah, years ago I bought a universal policy with another company until I realized that the agent made $50 per year/per policy forever! I wised up cashed it in taking a beating on surrender fees and went the A.L. Williams way, buy term and invest the difference. Bottom line is that my Univ. Life policy is beating my market returns handsomely.

  15. James says:

    Dave’s philosophy on cash only makes perfect sense. It’s the psychology of parting with cash versus swiping a credit card. I think it’s probably even easier to spend money with a debit card than to actually, physically hand over cash.

    The one area that I don’t think Dave gives enough attention to is people who already curbed their spending habits and want to take advantage of rewards that credit cards give. My american express card gives me 5% cash back on gas, groceries and some other items (which make up most of my budget) and 1% on everything else. In September, I’ll be getting something like $300 cash back for buying things that I already would have bought. The question is whether I would have spent $300 less on gas and groceries if I’d been paying with cash. Good question, but I don’t think Dave just dismisses it out of hand because he’s so convinced that credit cards are evil, which is pretty accurate. The one other argument I heard him make to a caller on his show was that all it takes is one late payment and/or having to pay the crazy interest because you can’t pay the balance at some point, and all those “rewards” are wiped out.

    I’m curious what others think about this. Is it better to just avoid the whole credit card realm and stick to cash, or take advantage of the rewards they offer?

  16. Brigitte says:

    I accept that switching to a mostly-cash system helped me get out of the habit of just paying by card and not knowing what I had in the bank. One problem with that logic, though is that I almost always knew what I had in the bank!

    After just a few months of going cash-only for anything other than bills, I quickly learned that I don’t keep track of cash well at all. Put the receipt in on special place, but that never worked because sometimes I didn’t have that wallet on me. Enter the information daily before you forget… yeah right, if I could do that maybe I could take my birth control on time every day, too. I don’t live a 9-5 M-F job with a routine–everything changes every single day, let alone every week.

    I went back to using a debit card for almost everything and am much happier with it. Every few days I reconcile with my bank account to make sure I’ve entered everything correctly (or at all!). I use cash for gas only, because many of the stations around here give cash discounts. I have a line item in my computer account registry for money that is set aside for dining out, groceries, etc. I simply deduct the $7 I spent on lunch from that $50 I have budgeted, now I show $7 at the mexican cafe and $43 “set aside for dining out”. And I CAN’T just borrow from my gas or my grocery budget to eat out and then end up without any gas money, the way I was when I had envelopes of cash in my wallet.

    Tracking every penny is much easier and much more accurate with a card. If you keep that mindset of living paycheck-to-paycheck, it’s not that difficult to use the card instead of cash.

  17. Brigitte says:

    I should also state that having cash on hand makes me see money I can spend and find ways to spend it. Having it in the bank where I can’t see it means I stop and think about how much I have when I’ve already found something I want to buy. And if I haven’t reconciled my accounts in a few days and I’m not sure where I stand on my budget, I spend none or a lot less because I “just want to be sure.” I KNOW the money is there, I have a $300 buffer in my account. But I look and see I have $4 left to eat out for the next 7 days; I see I have $10 total in my account. I don’t think about that $300 most of the time, until I need a new tire RIGHT NOW and then I go ooh, I have that! without the stress of transferring funds (it’s just my “immediate emergency” fund–and I’ve only dipped into it once in over a year!)

  18. Sandy E. says:

    @kat — re your debit card: see if your bank will let you sign up for overdraft protection linked to a savings account. I have this for my debit card, and it’s free. They will even let me link it up to my charge card, should the funds in my savings account be too low, so two back-up sources, but I passed on the latter.

    I read somewhere that a person can call their bank and ask that their account be set to zero so that the card will be declined if they don’t have the funds.

    I have my reservations about debit cards, but with it linked to my savings account as a back-up, at least I’m assured I won’t get hit with their fees. But mostly, I’ll be dealing with cash, specifically for groceries, restaurants, gas, play money, and a miscellaneous category which covers P.O. expenses or toiletry items/cleaning supplies from other than a grocery store. So when I get paid every month, I take out the cash budgeted for those categories, and everything else is automated.

  19. Saver says:

    > people with enough of a bankroll to need
    > diversification into precious metals probably
    > aren’t reading The Simple Dollar

    Don’t underestimate the diversity of your audience. I don’t know what kind of bankroll you think needs diversification into pm, but I’ve got around $1.6M and I’m sure there are people here who own way more.

  20. Sandy E. says:

    @James — you seem pretty disciplined, so it probably works for you, but subconsciously, for myself, I knew that I was spending more with the thought of “earning rewards.” In other words, if I hesitated about making a purchase, then I would talk myself into it because of those rewards. As a result, I was spending more than I otherwise would, so I won’t use my charge card, with one big exception. I go to Hawaii 3-4x a year to visit friends and relatives, and yes, will pay for my round-trip tickets w/my reward card. But for the rest of the time, then no. I just know for a fact that I was spending more because of the rewards, but if you know for a fact you don’t, then you’ll be okay. You said you were buying things with the credit card that you would have bought anyway. (That’s me with airline tickets, but not anything else). Funny thing about finances is that if a person doesn’t get out of denial, and come clean, then they’ll always have a problem with money.

  21. Saver says:

    And yes, some of it is in gold bullion, as a form of insurance against times of high uncertainty.

  22. KC says:

    I gotta go with Dave on the cash issue. It hurts a lot more to count out 10 $20 bills than it does to swipe the plastic once. I have my spending under control, but recently I had my credit card canceled because of a fraud alert and they were mailing me a new one. In the mean time I needed some groceries….bad. So I took out $200 from the ATM – which is about twice what I’d normally spend at a grocery store. I didn’t take a calculator, I just sort of added things up in my head as I went along. I was so paranoid I’d spend more than $200 (when I usually only spend $100 anyway) that I only bought absolute necessities and ended up spending about $60. So the upshot was I learned I do really spend less with cash…and I buy about $40 worth of junk food each week :)

  23. J says:

    @James — IIRC Dave does address the “rewards” stuff as being pretty much small potatoes compared with bigger picture stuff. Also, there is a lot of research out there that people who pay with a credit card do spend more money (something on the order of 10-15% more), so the points or kickbacks you might get from a card are offset by your extra spending.

    We swore off the credit card balance long ago, but we do keep one credit card. We use it for occasional large purchases (airline tickets, for example), and I travel for business once or twice a year, which usually runs about $2K for a one week trip (airfare, hotel, meals, rental car, taking people out to dinner/drinks adds up). I don’t feel like fronting my employer a $2K loan, and keeping it all on one card makes sure I file my expense report correctly — there’s no personal spending mixed in with the work spending — and the reimbursement comes in at most two weeks.

    Of course, a lot of this stuff is based on how well you can control yourself. The plain truth is that most people have a credit card balance in the thousands of dollars, and that’s the audience Dave is targeting. Most people also have no emergency fund, no written budget and so on. I’m not saying we are all Lake Wobegone kids here, but I’m betting that people who are interested in a blog devoted to personal finance and who are willing to comment extensively likely have some system going.

  24. Jamie says:

    Not every debt elimination program is a scam. The Money Merge Account by United First Financial works better than you can do on your own.

  25. J says:

    @Sandy E — be very, very, very cautious with overdraft protection. Ask your bank to explain in minute detail and in very small words exactly what happens when you encounter an overdraft — what you think happens (money magically comes out of your saving account) may not be what actually happens, and there may be some fees involved, as well — on the order of the fee you would have paid if you had overdrafted, and the amount may actually be a short term loan made out to you. You should also ask if this overdraft protection will be 100% reliable in avoiding overdraft fees from another institution.

    I’m not saying that your bank is this shady, but it’s certainly a gray area where what you think will happen and what your bank will actually do can be two quite different things.

    And, of course, ideally you should not overdraw on your account in the first place :)

  26. J says:

    Googling “united first financial dave ramsey” sure brings up a lot of interesting hits. I recall listening to a few calls on the podcast and boy does he not like them at all.

  27. Tyler says:

    A thought on why people put off financial planning:

    I agree this all has to do with the fact that most people see financial planning as important but not urgent and believe that it is because they don’t have long term goals. If they took the time to make some long term goals for themselves, I think they would see just how URGENT financial planning really is. But then again, maybe they don’t set long-term goals because they also see this as important but not urgent? Vicious cycle? Maybe it all just breaks down to personal drive. Some people are born doers. Some aren’t.

  28. Rosa says:

    What J said – check the terms with your bank. My very, very, very frugal boyfriend got an overdraft fee on his debit card a year or so ago, he made a fuss and got it reversed -but was told the bank (TCF) had a policy of never declining the card “to avoid embarrassment” for the customer (yeah, sure, the overdraft fee they get is almost $40).

    So we shopped around – and what we found was that the banks/credit unions that would decline a debit transaction for lack of funds all had pretty strict limitations on the cards (like my credit union, with a $200/day limit on the debit card.) We ended up sticking with TCF for the spending money account, and just being more careful with it.-

  29. Ow, the cash says:

    Following along with KC above, there is less mental connection between a plastic card — whether debit or credit — and the physical money being spent. On the other hand, if you have to count out those bills, as KC said above, you feel it more and the impact is felt more.

    Also, instead of getting the card statement at the end of the month and realizing that you spent a ton, you have the empty wallet giving you real time feedback before you spend all of the money in your account.

    So, I would tend to agree with Dave on this one too.

    Also, Dave is not confusing the risks, as you suggest. He is merely saying that the one risk is greater than the other. I.e., a person is more likely to overspend using a card than to be robbed on the street. How many people do you know who have been physically robbed of their wallet; how many do you know who have mismanaged spending with a card.

  30. Ow, the cash says:

    Oops, I just noticed that many people made a similar point above. My bad for the repetition.

    On a similar point though, I think the same problem arises in using automatic bill pay to pay bills. It is too easy to just let the bill be paid and not inspect it for accuracy and/or question the need for the service. By contrast, writing that check once a month, at least for me, makes the amount seem more real.

  31. Frugal in Europe says:

    “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).”

    I disagree here. The risk of a lack of self control is higher for credit cards than in the case when you carry cash. I can’t remember where I read it, but some scientists have proven this. Also you tend to spend less when you carry larger bills.

  32. deRuiter says:

    You can often negotiate a better deal with cash. If it’s a store, the store doesn’t have to pay the credit card company fee, so they can give you a modest discount without losing anything. Secondly the sight of say, ten $20. bills is a powerful one. It makes people a lot more willing to negotiate than the thought of a check or a card. If the price on something is $220. you walk up with $200. in cash and say, “This is what I’ve got, can we make a deal?” and often you will get the item for your price. Individuals often don’t TAKE credit cards, and they prefer cash over a check. A lot of success in life depends on finding the system which works for YOU, and SELF DISCIPLINE. Around here most gas companies give a 10 cent a gallon discount on gas for paying cash, a much better deal than ff miles.

  33. BK says:

    This may not be the right forum to discuss this, since it’s geared mainly toward middle-income folks, but I want to point out that life insurance is used for many other purposes than simply replacing income or covering debts when you pass away. For most young families with minor children, their budgets are pretty lean and the largest concern in the event that one spouse dies is paying off mortgage and replacing lost income at least until kids are out of the house (plus maybe covering college costs). So, you get a 20- or 30-year level term policy to cover the mortgage and perhaps another 15- or 20-year level term policy to cover family expenses through college. (As one reader pointed out, though, your ability to qualify for life insurance is contingent on your health.)

    However, permanent insurance (nowadays, generally universal or variable life) policies are used for other purposes, e.g. covering estate taxes upon death, tax-free wealth transfer, and after-tax tax-deferred investment. Also, many permanent policies offer riders to allow the policy holder to access the death benefit while living for long term care expenses or medical expenses in the case of a terminal illness. Often, these riders are a fraction of the cost of a standalone long-term care policy or critical illness policy and allow you to cover two needs with one policy. Also, in terms of being able to use a permanent policy as an investment vehicle, we’re not talking about paying the minimum premium each month and expecting the cash value to build up and not be eaten by insurance and admin costs as the policyholder ages. We’re talking about getting a policy with the smallest death benefit you can get for the amount of money you want to invest each month. This prevents your investment from being eaten by insurance costs & fees and allows the majority of your monthly premium to be added to the cash value of the policy. So, your insurance agent would have to work backwards, starting from your monthly contribution to figure out the smallest death benefit possible. The IRS stipulates a max premium that can be paid into each policy before you lose the tax benefits of the policy, i.e. before the policy is considered a modified endowment contract. By tax benefits, I mean that contributions to a life insurance policy are after-tax going in, grow tax-deferred, and can be withdrawn later tax-free via withdrawals and “loans”. However, with this strategy, the “loans” are never paid back, but are simply subtracted from the by-now-inflated death benefit when the policyholder dies. Generally, this strategy is only used with high-income investors who want to be able to contribute more than the $6000 per year to a Roth IRA or simply don’t qualify for a Roth IRA (due to income limits), which is an investment vehicle that falls into the same tax “category” as life insurance cash values. Of course, this investment strategy would not be appropriate for someone who has health issues that drive up the internal cost of the insurance policy. And, only certain of the newer policies are even designed to allow this type of investment strategy without prematurely terminating.

    I love Dave Ramsey, but the blanket statements that people like he and Suze Orman make about life insurance are simply incorrect. In fact, I once watched a Suze Orman special episode on life insurance and she actually made a quick disclaimer saying (essentially) “as long as you’re not using the insurance for estate planning, supplemental retirement income and other advanced strategies…you should ALWAYS choose term insurance”. Of course, the first part of the disclaimer was stated very quickly and quietly and the second part was nearly shouted (in that overly peppy yet firm way that only Suze is able to pull off without sounding like the ultimate mother hen).

  34. littlepitcher says:

    My debit card is used for Internet purchases only. I carry a little cash–just enough for minor purchases at unexpected garage sales.

    Dave Ramsey’s take on gold left out one caveat–the commercials for gold sales disappear as soon as gold drops low enough to be a good buy. These commercials are selling at the highest price point.

  35. Trent Hamm Trent says:

    That’s the thing, though. The only situations where non-term policies might arguably be useful is when the huge costs of those policies exceed your income tax – meaning you’re in the highest tax bracket.

    And if you’re in the highest tax bracket… why are you investing in insurance? If I was bringing home enough to exceed the limits of a Roth IRA, I would be investing in human enterprise and real estate and philanthropy, not in an insurance fund that eats all my cash.

    To me, the group of people who might actually benefit from life insurance types other than term is a group so small that the confusion one adds to the 98% of people NOT in that group by even suggesting them at all isn’t worth it.

  36. Stacey says:

    You should have listened a little more closely to what Dave was saying about cash vs. debit card. First, he does explain that there is a psychological reaction to spending cash that is not present when using any kind of plastic. Overall, it is harder to spend cash on larger purchases with cash than putting it on a card which allows you to pay without feeling an immediate impact. Second, and where many people mess up, is that when people use their debit card, many don’t track the expenditure. A debit card and a credit card look absolutely the same, so it almost seems that the mentality is that the money just comes from “somewhere”, so when they slide that debit card, they don’t think of the money actually coming out of their bank account. This is especially dangerous for smaller purchases which don’t really register in your consciousness, but over time can add up and lead to massive overdraft charges! With cash, once you run out, you’re out. If you spend that cash unwisely, then that’s your fault, but at least it is a finite amount that cannot result in additional fees from misuse.

  37. Kirk Kinder says:

    Two points: One, the only parties who benefit from whole life are the salesman and the insurance company.

    Two, I think Dave’s point about cash is flawed. He believes that people are never responsible enough to manage credit properly. He thinks that if you had problems using credit cards in the past then you will always have problems. This is similar to the addict belief that you can never have a drink, hit, or fix again cause you go off the wagon. I think many people mismanage credit because they are uneducated. Once they learn to budget and prioritize spending then it doesn’t matter if they use cash or credit. Sure, there may be true spending addicts, but they are few and far between. The real issue with credit problems is the lack of education.

  38. Beth says:

    Cash v. credit card? NEITHER. Much of the time I carry my keychain with a zip fob on it that holds my drivers license and insurance cards. No money. No credit card. No check book. I take money when I’m going to the store and need to pay. Otherwise, I don’t need money and I don’t make impulsive purchases and I don’t get robbed for my cash.

  39. Sandy says:

    I don’t know if any Europeans are reading this so correct me if I’m wrong. We lived in 3 Eurozone countries, and in doing our banking, the banks that we banked at there only offered debit cards…crdit cards as we know them in the US don’t really exist. We had the choice with our card in France, for example, of having the money come out automatically, or all at one time at the end of the month. NOT An OPTION to carry a balance for months or years at a time.
    Somehow in this country, we give credit to anyone who is breathing, and wonder why so many are in a hole financially. I think if there were more restrictions like theer are in Europe, fewer people would be in trouble on this side of the pond.
    It’s been a few years since we lived there, so if any Europeans have a comment, I’d be interested in reading it.

  40. Johanna says:

    @Beth: Leaving your money/cards at home is a great way to avoid impulse spending. (I did a similar thing myself when I lived on the same block as a Borders bookstore – What worried me was not buying books, but buying snacks and drinks from the cafe. If I left my wallet at home, it became easier for me to just go home for a snack or a drink than to go home, get my wallet, come back, and go to the cafe.)

    But if you’re worried about getting robbed, do consider Dave’s point that a potential robber who singles you out as a target doesn’t know whether you’re carrying a lot of cash or none. And if a robber *does* select you as a target, is he really going to just accept your answer that you don’t have any money? Or is he going to make the experience more traumatic for you?

    I’ve heard it suggested to international travellers that they carry a “decoy” wallet, containing a small amount of the local currency, and expired ID, and a few old membership cards (and carry the rest of their money and documents in a travel belt under their clothes). The decoy is, apparently, almost always enough to satisfy a robber and keep him from searching you for other valuables. For people, even in their own countries, who are really worried about getting robbed, the decoy wallet could give them some peace of mind.

    Finally, I realize this is just my own experience and therefore anecdotal, but: I’ve spent some time in some fairly gritty areas, even walking alone after dark, and I’ve never gotten robbed on the street. The only time I’ve ever had money stolen from me, it was stolen from my apartment. Ironically, I’d left it there so that it would not be stolen from me on the street.

  41. Sandy E. says:

    Here’s what I’ve learned about insurance: A whole life policy is way more expensive than a term policy for the same coverage. My 30 yr. old brother, who lives in Virginia, who doesn’t smoke, could buy a $250,000 term policy for about $230 a year, where a whole-life $250,000 policy will cost him $1,000 a year. And so what a person should do, and a good rule of thumb, then is buy term and invest the difference. In other words, buy enough term insurance to cover your family’s needs, and then invest the difference between the premiums you pay for the term policy, and the premiums you would have paid had you purchased a whole-life policy instead. You’re not out any fees, and salesman commissions, and you can generate greater investment returns on your own. Insurance is not about saving and you should never use insurance that way (i.e. whole life) because you can do better on your own, outside a whole life policy.

  42. Tom says:

    When I take cash out of the bank, according to my budget, it is already spent. Because of that, I feel no guilt when spending cash at stores for any number of purposes because, in a sense, it is already gone. For this reason, I *rarely* carry cash and almost exclusively rely on credit (which I pay off fully every month).

  43. Jon says:

    I’m going to jump on the contrarian point of view with Frugal Bon Vivant and say that I almost always use my credit card instead of carrying cash, for all of the reasons mentioned.
    Agreed, if someone is having problems controlling their spending, and has credit card debt already, then they should quit using them. I’ve never carried a balance on my cards, except to work the arbitrage in a 0% interest situation.
    Also, in a true emergency situation, such as having a car break down on a long trip, how do you know how much cash you should have been carrying? Whip out the plastic, and you’re back on the road again. Pull some money out of your emergency fund to pay it off after you get home.
    The contention that using a credit card makes you spend more money may be true, on average, but when your philosophy is to only buy the things you need, rather than want, I don’t believe credit card use changes your spending habits.

  44. et says:

    I had to learn to track my expenses fairly carefully when, as a single parent, I had a job that paid me every two weeks (not the 1st & 15th, literally every other Friday) – when meant that sometimes my first check of the month came AFTER rent (or other routine payments) was due, so I had to have money available on the first. So although I now have a monthly paycheck, I have a pretty good handle on where my $ goes.

    That said, I also have been switching to debit cards or charge cards (where the full amount is due when the statement comes in) while I pay off 2 credit card balances. I don’t carry a lot of cash but have a set amount weekly I keep on hand for incidental expenses/small purchases.

    My grandfather was an insurance agent for 50 years and even he advised family members against universal life insurance. We buy life insurance as insurance (to cover immediate expenses upon one’s death), not as an investment vehicle.

  45. On the laziness thing–very good point here. All societies have societal norms, and a very big one of ours is convenience. Our entire culture feeds this with the likes of drive thru service, swipe and go payment (credit/debit cards), microwave ovens, real time service, etc. Each of these feed our desire, and ultimately, our DEMAND for convenience.

    Translation: we like and expect everything to be easy! That doesn’t prepare us for self sacrifice, even if the sacrifice will be of long term benefit to us.

    Unless we’re very deliberate about it, we won’t overcome this. Most of us don’t even realize how we got this way!

    Good points on cash value life insurance. It’s not the best insurance, and it’s an even worse investment. But agents play on fear by saying “if you don’t lock your premiums in now while you’re young, you’ll pay more when you’re older. You DO LOVE your family enough to provide for them don’t you?” All fear mongering, just as you said in regard to other things.

  46. honestb says:

    Ultimately, I think the rule with cash is never carry more than you could stand to lose – but acknowledge that losing it is really pretty unlikely. While I don’t habitually carry anything close to $200 around, the thought doesn’t bother me, since my emergency fund could replace that readily.

  47. Rick says:

    I think one of the big points Dave is trying to make is that spending cash is harder to that just swiping a card. It’s hard to let go of three $20 bills than it is to see $60 on the debit machine. I think that once someone can control their spending, the Debit card is the better solution. You have to keep in mind that dave’s book is aimed at those with real spending problems, at least that’s what I got from it.

  48. Kevin M says:

    Personally, I’d rather lose a credit card than $200 cash. There’s no 800 number you can call to get that $200 back…it’s gone baby gone.

    IMO, that is a more common scenario than getting mugged. Does Dave skip over that point entirely? I can’t remember from when I read the book.

  49. Marianne says:

    If a thief steals your debit card and cleans out your bank account, you may not be ultimately liable for the damages, but your bank may give themselves up to two weeks to put the money back in(I’m with BofA and this is their policy as stated on their website). I’m way more worried about debit card theft than CC theft!

  50. Marsha says:

    Grrr, this whole “credit cards are inherently bad” argument DR has created drives me nuts. The danger is not in the cards, and there is no inherent safety in cash – it’s all about what’s in the spender’s (or saver’s) mind.

    I mostly use a debit card, but I write down all my expenditures and subtract them from my montly budget figure. That “hurts” as much as physically counting dollar bills.

  51. Sandy E. says:

    After giving it a lot of thought, I’ve decided that since I prefer using cash, I’ll take out all the cash I need at the beginning of the month, and in so doing, then I can retire my debit card. I just have too many reservations about them. I don’t like the way gas stations and other businesses can put a block on them, meaning charge you more temporarily, and I don’t want to have to keep track of my purchases with them, which winds up being as difficult as charge purchases. And I’m not worried about being robbed! And then against Dave’s teachings, I’ll put my one credit card back in my wallet, with the understanding to myself that I can only use it if my car breaks down or to purchase airline tickets. The second I use it for any other purchase, then I’ll have to eat humble pie and admit that he was right.

  52. Brent says:

    Gold/Precious metals are a good safety net. If you have fears of devalue during crisis. Its a very real possibility and does not have to be complete to be beneficial. Precious metals hold onto their value well and usually increase in value during times of panic. I’m not saying that you should be paranoid, but having accessible enough to get by for a short while in something that doesn’t devalue during crisis is very helpful even for a simple dollar reader.
    Plastic is also not anything you don’t let it be. I am actually far worse with cash than a card. It all depends on how you assign that value. Cash is just paper. It is not real value any more than the swipe of the card is. The difference is the “trade this much for this much” mentality. But make no mistake the balance sheet is the same.

  53. J says:

    @Marsha — you have to realize you are “weird” (and I mean that in the kindest possible way). Most “normal” people keep a credit card balance that is somewhere around $8000. They also usually have a car loan or lease. Not to mention school loans, rent/mortgage and possibly home equity loans, and possibly boat loans. They are stuck in a position where they can tread water but so much of their monthly income goes to debt service that they can’t build wealth. These people also have probably $0 in an emergency fund and aren’t contributing meaningfully to retirement or college funds.

    Wow, that sounds really negative. Here’s how these people look to you: They have a new car all the time. They have new clothes. They have a big TV and audio system. They have a Wii, XBox 360 and a Playstation. They take a family trip to Disney in the summer and skiing in the winter. They have a boat that they take out on weekends, and maybe have a lake house. Their children are beautiful and have new clothes all the time.

    Of course, it’s a facade. Their income barely keeps up with the debt service. If something expensive breaks, they put it on a card. If they want a new TV, they put it on a card. When their car is 3 years old, they lease a new one. Retirement and college for the kids are “something they need to get to”.

    The problem is that eventually the debt payments outstrip the income entirely, or the HELOC runs out, or someone loses their job. Then the excrement hits the fan.

    That is one of the audiences Dave is writing to, and yes, for those people, the credit card is genuinely bad. Dave’s other audiences include poor people, but a lot of the people who call his show have a decent income — they are just drowning in debt. And as he says, the first way to get out of a hole is to stop digging. Giving up that magic piece of plastic that lets you buy new video games for the kids and a new outfit for you is a significant lifestyle change.

  54. I think that you just have to be honest with yourself about your ability to handle cash or credit. If you know you can’t handle credit, then cash is probably a better option.

    I know that I can handle credit just fine, and so whenever possible I charge purchases to my credit cards, which I pay off each month. I certainly don’t think that’s a good idea for everyone, though.

    I’ve been doing this for 12 years, though, and have yet to carry a balance on any credit card.

  55. J (#41) You’re describing a lot of people of course, bu the problems with credit aren’t always related to bad money habits. A lot of people carry small credit card balances that become big balances in the event of a prolonged period of unemployment, or a medical disaster. It’s often lower income people who have few resources to liquidate in the event of emergency. So they borrow for food and rent.

    In that case, credit becomes a short term blessing/long term curse.

    Anyway, just a different perspective here.

  56. Pam says:

    I am familiar with DR’s concept of cash/debit card/credit card having attended his Financial Peace class earlier this year. His ideas and recommendations in this area are particularly important for those who need to learn discipline and control in their spending. His ideas are also excellent for those just beginning to earn and spend their own money. If they can learn these concepts early, they could save themselves a lot of hardship later.
    Still, the same things don’t work for everyone and the cash idea didn’t work for me. Although it may be unusual, I’ll spend more with cash, than with a credit card. I understand that it probably a psychological thing since I was raised in a frugal home and have lived frugally most of my life. I’ve never not paid a credit card balance off at the end of the month and usually have funds left over at the end of the month for adding to savings. But, when I tried the cash approach it was much more difficult. I’m sure if I stuck with it I could have adapted, but since my way (credit card) works well for me, I think I’ll continue with it. In closing, let me go on record in saying that I have utilized many of DR’s ideas and am reaping the benefits, so I highly recommend giving his ideas a try to anyone who needs to learn some self-control in finanical areas. Best wishes to everyone.

  57. J says:

    @Kevin — Oh yes, of course there are those who get the medical bills, unemployment, etc who get to the bottom of the very big hole and don’t have the ability to dig out of the hole that the people with better incomes have. Definitely. Some of their stories are heartbreaking because you can tell they are working their tails off to make ends meet, but they’ve been through a horrible divorce, illness, prolonged job loss or other awful situation and they just can’t get ahead — they can’t sell the vacation home and the boat and take the kids out of private school and cut out the Disney vacation.

    I guess what I’m getting at is that the people who are saying “Ramsey’s approach that credit cards are evil is just wrong because I can handle my credit” don’t understand Ramsey’s audience. It’s like telling a recovering alcoholic to have a drink because you can handle it.

    For inspiration, though, the Friday editions of the Ramsey podcast are “Debt Free Fridays” where people call in that are entirely debt free (or who only have the mortgage). People of all walks of life call in, from people making 40K to making 400K and tell how long it took to pay it off and what their challenges were along the way.

  58. Kate says:

    Trent said Having a large amount of cash on you is a security risk, no two ways about it. It is, and not just from the risk of theft. It’s not that hard to just flat LOSE money, to have a bill or coin drop as you are jostled or juggling packages and purse, etc.

    I’ve never lost much, but I have occasionally lost a dollar bill and not been able to grab it before it blew away. On the flip side of this, I’ll never forget the time I walked into the local convenience store at 3 am for a pint of milk and found a hundred dollar bill on the floor. I told the clerk I’d found money (did NOT specify the amount) and left my number in case anyone called; no one ever did. The timing was great for us, but I’ve occasionally wondered how badly the original owner needed that hundred.

    Debit cards get a BIG yes vote over cash from me as well!

  59. Jonathan says:

    Like some have mentioned, I think a big part of the debit card/credit card/cash debate is understanding on how you react to those situations and make the best choice. Everyone has different weaknesses with credit or cash, so you need to take an honest assessment of yourself and decide what’s the best choice. You find credit a huge weakness and that cash keeps you “honest”. Some find cash burning a hole in their pocket and need to use credit to control themselves.

    That said, I do love using credit cards. Getting 1% cash back (or more) on expenses isn’t just “small potatoes” – it adds up over time for zero work. If you have the discipline to pay it off each month, it’s worth it.

    I mentioned this before, but my personal trick is to go into ING after I make a charge and transfer the cost from my checking into a separate “credit cards” savings account. Then when the bill comes due, I transfer the balance of the credit cards account back into checking. It helps me see how much is getting charged each month and my checking account is reflective of how much I actually have available.

  60. gina says:

    I am definitely one of those people who spend more when using a card than when using cash. my brain just doesn’t seem to equate swiping a card with spending money. and half the time i don’t even register the amount of the transaction. when i use cash and have to count it out and see how much i have left, it becomes very real to me. i don’t carry around lots of cash. i carry around what i expect to need for the day. yes this requires planning ahead, which is something i need a lot of help with anyway.

  61. Just A Guy says:

    When it comes to life insurance, for 98% of the people and time, term is the only type that makes sense.

    However, many posters have a lack of true understanding about permanent ONLY as it relates to someone with estate tax issues and other complicated manners. Then, permanent policies with certain types of trusts are the way to go.

    An unrelated point, insurance companies and agents make money when you buy term too.

  62. britfaye says:

    I just want to say that if people kept track of their spending in a checkbook register (you know, the little book your bank gives you) they would be less likely to overdraft at all.
    I keep mine to the penny and have only overdrawn my account once in 10 years (I forgot to write down a check).
    Overdraft protection is there in case of a mistake but if people were more responsible for their own spending they would have a lot less to worry about.
    I am a bank manager (yes, i know i am the enemy) and I have to deal with overdraft fees on a daily basis. I have never been asked to refund a fee by a person who keeps an up to date checkbook register.

  63. Battra92 says:

    I don’t know, I pay for just about everything with my credit card and pay it off at the end of the month. The credit card company sends me nice rewards checks every few months that I use on other items I want or I just toss it into savings.

  64. Kate says:

    “A debit card allows you to only access the cash you actually have – the stuff sitting in your checking account.”
    Very wrong and it is the way that many people who are living close to the wire (i.e. students/young professionals who are scraping by) can get into real financial trouble: Banks’ ‘courtesy’ loans at soaring rates irk consumers

  65. Bill in NC says:

    With debit cards the issuer often gives themselves weeks to investigate any alleged misuse, as another poster noted.

    So if someone steals your debit card and drains the account you could be waiting a long time to get back that money.

    Better have a contingency plan for that possibility if you carry a debit card.

  66. TJ says:

    Dave Ramsey is dead wrong about life insurance. Sure, term insurance is great. But he simply does not understand permanent life insurance. His advice is, in my opinion, criminal.

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