Dogberry Patch

I finished listening to the 3nd of the 3 CDs in the audio-book Total Money Makeover a week ago and have not had a chance to write it up. Ramsey provides the details for the last 4 “Baby Steps” to getting control of your finances.

Step 4 has you beginning to fund your retirement. This step has you set aside 15 percent of household income to invest into Roth IRAs and pre-tax retirement accounts. If your employer has a retirement program set up that matches your contribution you should put in at least as much as they will match. The matching is a 100% return on your money. Then you need to fund your Roth IRA and your spouse’s Roth IRA if you are married. I do not remember if he gave any suggestions on what to do if you max out your Roth IRAs and have no other tax-advantaged savings plans available. It is something I have to look into for myself.

Now that you have no debt, have an emergency fund of at least 3 months salary set aside, and are putting away 15% of your income towards retirement, you can begin step 5, saving for your kids’ college education. If you don’t have kids, you can skip this step and go straight to step 6. From his comments it is obvious that Ramsey feels that Americans have gone overboard on college spending. He makes a point that a college degree only proves you have successfully passed certain tests. It will not ensure a job, ensure success, nor ensure wealth. As a matter of fact he calls student loans a ‘cancer’ and makes some valid points that where you went to school matters very little for most professions.

He discusses setting up Educational Savings Accounts. I looked into different tax-advantaged options available for putting money aside for kids college expenses. My hesitation with these plans is that they put control of a large sum of money into very young hands who can do with the money anything they want – with severe tax penalties. I don’t remember any discussion about how much ‘college money’ is enough but If you find out what tuition, room, and board cost for 4 years at the state college would cost now, that gives you a good starting place.

Once you have college money set aside you can work on paying off your home mortgage early. I understand that Ramsey does not like debt of any kind and many people have extended themselves too far by buying larger homes than they should, but I am not yet sold that paying off a modest, low APR home loan should even be on the list. He dispels some myths, especially the idea that a tax write-off in any form would make an investment worthwhile.

But it does not make sense to me that a person should keep paying rent until they can set aside enough money to pay cash for a home. I would rather save up for the downpayment and then leveridge my rent payments into equity.

Ramsey says that it will take most people 2+ years to complete steps 1 & 2 then another 5 years to complete step 6. This will bring you to the final “Baby Step”, Step 7, which is to build wealth and be generous with it. You will be investing in mutual funds and real estate. He says you have reached that ‘pinnacle point’ when your money makes more money than you do. You are officially wealthy when the income from your investments brings in more money each month than you can earn.

What I liked from what I heard is that unlike most self-help books this one is not designed for those hoping to “get rich quick” instead it will help you to get financially healthy. Ramsey talks a lot about what he calls “gazelle intensity,” which is about getting motivated and excited to get out of debt. The gazelle reference comes from Proverbs 6:5, where the intensity of getting out of debt is compared to a gazelle escaping from a hunter.

As soon as my reserve of the books comes is available I will fill in any details I missed from the audio book.

I finished listening to the 2nd of 3 CDs in the audio-book Total Money Makeover today. On this CD Dave Ramsey gives an overview of the first couple steps in his “Baby Steps” program which is designed to getting your finances under control. He begins by emphasizing the necessity of creating and living by a written budget.

The problem I have is that he really gives no details on how to set up a budget or how to follow one. He definitely tells you that you must have one, he just forgets to tell you how to do it – or at least in this book. I suppose he has another book that teaches this pre-step.

Once the budget is put into action, Ramsey says we need to start taking the “Baby Steps” required to get our finances in order.

The first (or was the budget the first?) step to getting financially fit is to start building an emergency fund of at least $1,000 as quickly as you can. This means paying minimum payments on credit cards and nothing into your retirement plan until this first $1,000 has been set aside. The primary reason this is so important is that otherwise any emergency that comes while paying off your accumulated debt would force you to break stride and most probably put the emergency expense on a credit card.

The second step is to pay off all debt (except the home) as quickly as possible using a process he calls the “debt snowball.” Rather than paying off high interest rate debts first, Ramsey suggests paying debts with the smallest balance first. You pay the minimums on all the other debts and keep them current. Every other dollar you can possibly scrounge is used to pay off your smallest-balance debt. When that debt is gone, you move to the next debt on your list, so that the amount you are able to pay “snowballs” as debts disappear.

“All the money from old debts and all the money you can find anywhere goes on the smallest debt until it is gone,” advises Ramsey. “Every time the Snowball rolls over, it picks up more snow and gets larger, until by the time you get to the bottom, you have an avalanche.”

Ramsey then began discussing step #3, building your emergency fund up to at least three months of living expenses. Paying off your credit cards and loans is about getting yourself out of debt now, building your emergency fund is about staying out of debt forever.

“You start the emergency fund with $1,000, but a fully-funded emergency fund will usually range from $5,000 to $25,000. The typical family that can make it on $3,000 per month might have a $10,000 emergency fund as a minimum. What would it feel like to have no payments but the house, and $10,000 in savings for when it rains?

And it will rain… The emergency fund, Ramsey says, is not to be used to pay for things like Christmas (“Christmas is NOT an emergency!”) and clothing. You should have budgeted for these predictable items in advance. (He just doesn’t go into how this might be done.)

Well, I have one more CD to listen to on this audio-book. So far it seems that the information given is from the 10,000 foot level – great view but no detail. I want to have someone answer the nuts and bolt questions. Hopefully this product is not simply an infomercial for his other products.

I just checked out the audio-book Total Money Makeover by Dave Ramsey from the local library. I have never heard Dave Ramsey on the radio but have heard of him from friends and relatives. As a matter of fact I understand my wee grandson likes to blurt out something along the lines of “I am Debt Free” every so often.

As I have been listening to the audio-book and am impressed so far. Of course on the first CD he has not really got into the system yet. He is preparing the listener for the system by telling us how ‘fat and unhealthy’ we are financially and that the world has trained us to be credit stupid. Is he too simplistic? I may have an opinion on that later. But I do believe he is correct that most of us in America are no different than a tantrum-throwing 2-year-old who hollers “I want, I want” – the only difference is there are no parents out there to tell us NO! Instead there are credit companies who happily lend us money.

So far he starts out by debunking a number of credit myths. Here are some of them:

Myth: Lending money to family and friends is a blessing.
Truth: Lending money to family changes the relationship. You now have a master/servant relationship and until the money is paid back there will not be the same.

Myth: By cosigning a loan, I am helping a friend or relative.
Truth: Be ready to repay the loan. The bank wants a cosigner for a reason – they don’t expect the friend or relative to pay.

Myth: Aren’t there positive uses of a credit card? Like rebates and airline miles?
Truth: There is NO positive side to credit card use. You will spend more if you use credit cards cause it hurts to pay cash. So even by paying the bills in full, you are not beating the system! And most families end up not paying in full.

A study by Dun & Bradstreet showed that the credit-card user spends 12 to 18 percent more when using credit instead of cash. It hurts when you spend cash, and therefore you spend less. The big question is, what do millionaires do? They don’t get rich with free hats, brownie points, air miles, and the use of someone else’s money. What do broke people do? They use credit cards.

Myth: Debt is a tool and should be used to help create prosperity.
Truth: Debt isn’t used by wealthy people nearly as much as we are led to believe. (That is how they became wealthy.) If you’re in debt, then you’re a slave, in the sense that you do not have the freedom to use your money as you see fit.

Myth: Debt consolidation saves interest, and you have one smaller payment.
Truth: Debt consolidation is dangerous because you treat only the symptom. You think you’ve done something about the debt problem but the debt is still there, as are the habits that caused it – you just extended it! Many times the payment is lower because the term to pay back the loan is longer – not because the interest is lower.

Myth: Make sure your teenager gets a credit card so he or she will learn to be responsible with money.
Truth: Getting a credit card for your teenager is an excellent way to teach him or her to be financially irresponsible. That’s why teens are now the number-one target of credit card companies.

I will let you know what I learn as I proceed through disk 2.