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Monday, July 13, 2009

Book Review: The Total Money Makeover

I have to thank my wonderful readers for introducing me to Dave Ramsey, author of the best selling book The Total Money Makeover. Meeting Dave Ramsey by listening to his radio show and reading his books (I have read a number of them) was sort of like meeting my financial twin. Who would ever imagine that my financial twin would be more fiscally conservative, Protestant, male, and bald? This promises to be a short review because someone has put a hold on this book and I cannot renew it and I'd rather someone who might need this book get their hands on it because I've been practicing "Grandma's Finance" for a long time.

This book is, in Dave Ramsey's own words "NOT sophisticated or complicated." It is not academic, nor is it a finance manual, nor does it present ideas that are earth shattering. Rather it is a presentation of a plan that will help individuals and families tackle their finances head on by getting out of debt and building wealth. Simple as that.

You might ask, what makes this book different from the many other books that outline the same concepts? I would answer that this book is both entertaining and inspiring, plus it has a great, easy to read format where ideas are set off for clarity. Unlike yours truly (that would be me), who has always been unsophisticated and risk adverse, Dave Ramsey has a story, or as he writes, "I have been there, done that. I have a PhD in D-U-M-B. So I know what it is like to be scared and scarred. I know what it is like to have my marriage hanging by a thread because of financial stress. I know what it is like to have my hopes and dreams crushed by my own stupid decisions."

As I mentioned above, Dave Ramsey is a Protestant, and a quite serious one at that. Some of the inspiration in his book does come from the Bible. Some might be afraid of his books because he is a serious Christian. I am not afraid of reading lines from Psalms (Tehillim) or Proverbs (Mishlei) because these passages only reinforce a commonsense Torah approach to personal finance, one of simplicity guided by a consistent philosophy. And if anything was quoted from the Christian Bible, it certainly isn't anything that our great sages have not said. If you listen to his radio show, I think you can appreciate his religious background more. One thing he I have never heard him advise is holding off children as a way to solve a financial problem. He considers building a family of great importance, which is not something I sense from other financial authors. His ministry is named "Financial Peace" the goals go far beyond sensible finance and into building strong marriages and families.

The real inspiration in this book I believes comes from the stories interspersed throughout the book of individuals and families that have "changed their family tree" by turning their lives around. Seeing how other people have succeeded is empowering! Additionally, Dave Ramsey has some great quotes and a good sense of humor. The following are some saying to hang your hat on:

"Winning at money is 80 percent behavior and 20 percent head knowledge."
"Ninety percent of solving a problem is realizing there is one."
"It is human nature to want it and want it now; it is also a sign of immaturity."
"We buy things we don't need with money we don't have in order to impress people we don't like."
"The secrets of the rich don't exist, because the principles aren't a secret."
"We have met the enemy and he is us."
"Don't even consider keeping up with the Joneses. THEY'RE BROKE."
"Radical change. . . is required for a money breakthrough."
"Christmas is not an emergency." (I.e. You know it is coming, so plan ahead.)
"Live like no one else today so you can live like no one else tomorrow."

The first part of the book tackles some debt myths, namely that debt is a tool used to create prosperity. As Dave [Ramsey] writes: "Debt adds considerable risk, most often doesn't bring prosperity, and isn't used by wealthy people nearly as much as we are led to believe." Another book that I recommend, which Dave references is "The Millionaire Next Door." I was raised in by unsophisticated parents who taught me to save for the next big purchase. I remember sitting through finance class dumbfounded by the idea that people would actually take out loans against their homes to invest in the stock market. I managed to run all the calculations asked of me, but in real life I've seen these calculations destroy marriages.

Dave also recommends against loaning to friends and relatives (see more notes on that below), cosigning loans (guess who is on the hook should your relative default?!), and payday loans. He debunks the myth that "ninety days [is the] same as cash" and that a person will always have a car payment (nope, "the average millionaire drives a two-year-old car with no payments") .

He doesn't like car leases (which he refers to as fleeces), new cars, 30-year mortgages, whole life insurance/cash value insurance, credit cards (most people spend more and few pay them off each and every month), debt consolidation (because it only treats the symptom) and debt-management companies (too much fraud and a great way to trash your credit in addition to treating the symptom via a 3rd party no less), buying gold, get rich quick schemes, gambling, mobile homes (OK, I doubt any of my readers have a mobile home, but you never know), prepaying funeral and college expenses (you can do better by investing, additionally see my notes below), home equity lines of credit, student loans, and bankruptcy (it might be necessary in some situations, but it isn't painless procedures where "you merrily trot off into your future to start fresh").

What does he recommend? Using cash, frugal living, getting on a written monthly budget, saving for retirement ("Ed McMahon isn't coming". . . certainly not without Techiyat HaMetim), being adequately insured and drawing up a will (auto, home, life, disability, health, long-term care for those over 60), having an emergency fund, paying off the 15-year mortgage, putting away for your children's college education, and having FUN with your money (not before you have some solid footing however).

Before delving into his plan, Dave Ramsey outlines some hurdles which cause people to resist changing their financial lives, namely:

#1: Ignorance or lack of know-how. Somehow when it comes to money, people get defensive. Dave writes: "Ignorance is not lack of intelligence; it is lack of know-how."
#2: "Keeping up with the Joneses: The Joneses Can't Do Math" and they are likely broke.

There is a story in this section that I think is worth sharing. Although the story involves Christmas, it could be about making a simcha or forgoing social expectations from what you serve or wear on yom tov, to what you do with your kids in the summer, to what you wear on your head:

"Radical change in the quest for approval, which has involved purchasing stuff with money we don't have, is required for a money breakthrough. Sara's breakthrough came with family. Her family was upper-middle-crust and had always given Christmas gifts to every member. With twenty nieces and nephews and six sets of adults to buy for, just on her side, the budget was ridiculous. Sara's announcement at Thanksgiving that this year Christmas giving was going to be done with the drawing of names, because she and Bob couldn't afford it, was earth-shattering. Some of you are grinning as if this is no big deal. It was a huge deal in Sara's family! Gift giving was a tradition! Her mother and two of her sisters-in-law were furious. Very little thanks were given that Thanksgiving, but Sara stood her ground and said, "No more.""

The Plan

Now that I've completed the (rather lengthy) introduction I will quickly outline the plan that Dave Ramsey recommends for getting out of debt and building long-term wealth which he calls Baby Steps. I am presenting the Baby Steps in brief. Plenty of questions are asked and answered in this section. If this plan is of interest, read the book!

1. Save $1,000 Fast: To inspire confidence you need to get started and focus your efforts. He recommends getting your hands on $1000, the baby emergency fund because "it is going to rain." Whatever it takes to get $1,000 of cash in your hands, do it. Have a garage sale, return stuff, work some extra shifts, cut coupons, etc. Once you've got it, hide it and keep it liquid.

[Shocking States: 49% of Americans could cover less than one month's expenses if they lost their income].

2. The Debt Snowball: Debt is the enemy and the goal is to eliminate all debt with the exception of the mortgage. Dave recommends lining up all the debts owed by amount and start paying them off from smallest to largest, while making minimum payments on all larger loans. I do have a quibble with this (see below), but he bases his method on inspiring confidence in one's abilities rather than on interest calculations which he calls "behavior modification over math." He has worked with many people and has observed that small victories lead to larger victories. The way to get the snowball rolling, of course, entails radical action and a lot of beans and rice.

3. Finish the Emergency Fund: Kick Murphy Out. "Murphy" is a play on Murphy's law. Dave writes, "an emergency fund can turn crises into inconveniences." Dave recommends a three to six month emergency fund of money needed to pay expenses if you lose your income. He mentions that women are more security oriented and that this step will improve many a marriage.

4. Maximize Retirement Investing. Here Dave recommends 15% of income be saved for retirement. First you put away in a 401(k) what your employer will match, followed by the remainder in a ROTH IRA if you quality. He has a nice (but simplistic) chart which clearly demonstrates just how much easier it is to put away small amounts when you are younger.

5. College Funding. I'm going to keep this section really brief. Dave hates student loans, as do I, and recommends figuring out how to do without. Note that saving for college follows saving for retirement. And Dave likes ESA's (Coverdells) over 529s because of the flexibility of investing.

6. Pay Off the Home Mortgage. Here he points out that the tax savings from a mortgage don't justify paying the interest and that leveraging your home isn't the way to make money. We all like to reduce our taxes, but it doesn't make sense to pay more interest in order to pay fewer taxes (a point finance and accounting professors will make which, unlike leveraging your home, is financially sound for those who want to follow Grandma's Money Rules).

7. Build wealth and have FUN. Once you have set up a strong foundation and have built some wealth through investing, there is no reason not to have some fun. It could be a new toy, being super-duper charitable, or a combination while making wealth a blessing, not a curse. Dave notes that wealth comes with responsibility and warns against "affluenza."

All in all, I HIGHLY RECOMMEND this book as a motivator for getting out of debt or just developing a philosphy toward personal finance. I would not use it as an investment manual (see note below). Many readers write me with questions and I am so thankful to my readers for introducing me to this book because I think it presents a simple and healthy view on how to approach finances including the spiritual.

I do have more Dave Ramsey posts coming up, so stay tuned.
Like I said, I love this book, but I do have a few quibbles, which in the scheme of things aren't anything major which is why I am noting them in small print:
1. I don't like carrying cash, so I have a hard time jumping on that train. That said, I do not recommend taking out a credit card until you have established consistent and frugal spending habits. And I would also say that anyone who has reached the end of the month and found themselves unable to pay their card off in full should immediately start using cash and checks. The same goes for anyone seeing their savings falling in a quarterly period.
2. I think the 15 year mortgage is fantastic, but I can't seem to jump on that train either. A 15-year mortgage would be quite a squeeze for most young people buying into my neighborhood, even if they really have it together. I do recommend budgeting extra each month, but I think the emergency fund wins out over the 15 year mortgage.
3. Dave Ramsey rules against loaning money to friends and relatives as it creates a master/servant relationship and ultimately destroys relationships. (He does not opposed gifting under certain circumstances). This is a tough one to reconcile with what we have been taught about the mitzvah of lending. However, now that I've had time to digest his thoughts and think about some real life situations I know of, I think he brings forward a good point. Certainly that halacha takes into account the changed relationships as you must be careful about not even walking by the home of the person you have lent to unecessarily so as to not badger. Personally I think there is a lot to be said for free loan societies that serve as a middle man between the giver and receiver.
4. Dave Ramsey reminds the reader that over time the stock market averages 12%. While I do believe in investing, I don't ever make my calculations based on such a high return. As such, it is hard for me (a lazy investor) to get worked up about pre-paid college plans for example. I think Dave Ramsey has solid advice, but I look to him more for solving the debt issues rather than the investing puzzle.
5. As a math person, I have a hard time buying into a debt snowball that pays off debt according to the amount due, rather than the APR. But I do understand the reason he recommend this method, but I would probably recommend a hybrid method after building some confidence.


Anonymous said...

Dave also recommends against loaning to friends and relatives (see more notes on that below), cosigning loans (guess who is on the hook should your relative default?!),
true,but worth considering the hashkafic issue regarding interest free loans to those closest to us and in needas well.
Joel Rich

tdr said...

Great book review! (but I was already a fan)

A few additional comments.

Regarding carrying cash. I also don't like to carry cash. DR also recommends using a bank card -- literally the same as cash. He does not take credit cards for purchases on his website, only bank cards. He often cites a statistic that when you use a credit card you are more inclined to spend -- 18% more. (dont know where he gets that)

Another quote of his that I like: "If you have made mistakes with money that only makes you only one thing -- HUMAN."

Another thing he stresses constantly is giving charity. The more financially stable you become, the more you can GIVE. He says it over and over. I like this.

He urges strongly against lending to family and friends since this can really change the relationship dynamic and can simply enable bad financial habits. However, he does not have the same attitude toward GIVING. if you feel your friend or relative really and truly needs and that they show by their actions that they are financially responsible, GIVE it instead of lending it.

Regarding investing: I agree with your "quibble" over the 12%. However, one point he stresses over and over is that you should understand your investments. The investment counselors he recommends on his website must have "the heart of a teacher" first and foremost.

I agree that this book can really turn things around for people, but even more, listen to the radio show. Because it is during the radio show that he answers questions like "Should I take a loan if my car died and I have absolutely no money to buy one" "Should I take a small loan to further my education so I can get a better job"

SephardiLady said...

My notes regarding this quibble are at the bottom. Lending is a large responsibility. Besides how one is required to treat the lender halachically, one should not loan to someone who will not be able to pay back.

I'm not sure that most of us have the ability to evaluate whether or not someone is worthy of a significant loan. Dave points out that friendships and family relationships have been destroyed and recommends just making a gift and keeping the friendship in tact. This, of course, is easier to do if you have a strong financial base.

Like you point out, a loan can be a help. But, it can also hurt a person because it can feed into destructive patterns. As such, my own preference is to put a 3rd party between funds I want to lend and the debtor.

Regarding co-signing, you have to remember that the reason a person needs a co-signer is because they don’t quality for the extension of credit. There is risk in co-signing and that risk should be taken seriously, although I’m thankful to my parents for co-signing an apartment lease when I was in college. Some believe that co-signing means the debtor won’t default, but stuff happens and if the debtor defaults, the co-signer (and his credit) is now on the hook.

A little story: Before my grandmother passed on, my father got notice of non-payment for a credit card that he was unaware of, and it was affecting his credit. He realized that the issues was due to co-mingling finances with his mother nearly 30 years earlier when he was a grad student. He and my grandmother became joint holders of a credit card and he had long since forgotten about that card. She continued to use the card and he never thought to remove his name and had long since forgot about it. Older people often lose their capabilities when it comes to managing money and although she had paid the bill in full each and every month, at a certain point she just stopped paying this (and other) bills. My father had no idea until he received something from the cc company and had to figure out why he was being notified. It wasn’t so easy for my father to get his name off the card, but he had to.

Generally, I don’t think co-mingling finances with friends and family is a great idea, especially for those who need strong credit because it is a requirement for a job or because of a security clearance. You simply never know when the trustworthy person is going to change or lose their facilities, as happened in this case. So many family relationships have been destroyed over money.

I think that when we do co-mingle finances, either through direct lending or co-signing, it IS worth asking if it is worth potentially ruining a friendship over $x?

JS said...

Good review. I got turned on to Dave Ramsey listening to his radio show on Sunday afternoons. It is a very inspiring show, especially the excited screams of callers shouting "I'm debt freeeeeee" and listening to how people paid off $100k in debt in 2 years with only 70k total income (for example).

I really hope frum people don't refuse to read his book or listen to his show because he is a devout Christian. If anything, I found him MORE easy to relate to because of this. His focus on family, children, God, charity, are all Jewish values as well.

While I'm already naturally frugal, he definitely inspired me to pay down my loans quicker - others had advised me to use extra cash to invest. I also agree with his mentality that personal finance is mostly a behavioral issue, not a mathematical one - and this from a math/science guy! Once you have the behavior down, then turn to the math.

I have minor quibbles with him as well. I don't think all debt is bad, but I do think debt shouldn't be a crutch and should be paid off ASAP - I will never understand the people who tell me they hold on to a mortgage to get a tax deduction (and it's been several people).

All in all an excellent book and when you hear what others do to get out of debt it can really eliminate the inertia we have as we get used to the status quo. Plus, I always found his advice on the radio show to be sensible (and given with tons of empathy), can't say the same for other financial shows out there.

SephardiLady said...

I found him MORE easy to relate to because of this. His focus on family, children, God, charity, are all Jewish values as well.

As is personal responsibility. The religious values also make me able to relate more to this book. I like having a firm financial footing, but it isn't because I just want to have more and more. I want to be able to pay every single bill on time and in full. I don't want to have to decide is person x gets paid or person y. If they performed a service, I have an obligation to pay them. Sadly, when there is weak financial footing, a lot of people and businesses get [insert word of choice] in the process. When your lifestyle is out of sync, it is easy to excuse lack of yashrut.

Thanks for your comments JS. I too like the radio show. We only get it on Sundays, but it is available through the web.

Dave said...

I would never use a debit card to purchase things online.

Both credit and debit cards have mechanisms to deal with fraud (say, for example, because the online merchant is compromised).

If someone runs up a fraudulent charge or charges on my credit card, all I have to do is dispute the charge. The charges are held until the dispute is resolved, and I don't pay anything.

If someone gains access to my debit card, and depletes my checking account, again, I can dispute the charge or charges. However, I don't get my money back until the dispute is resolved.

jb said...

You talk about Dave Ramsey a lot, and he seems pretty great. I would like to read his books, but are they mostly debt counseling, or can one get general financial advisement as well? I am young and married a little over a year. We have no debt and never spend more than we take in, but we also have no clue as to how to build wealth. Do you have any recommended reading?

SephardiLady said...

jb-Good question. Let me do some more reading and find something I like to recommend on the investing side.

Dave Ramsey's book does provide excellent direction even for non-debtors because it is a book that can provide focus. The Millionaire Next Door has interesting info. Neither are investment manuals, although Dave Ramsey does introduce the reader to basic financial language and toosl.

Homemaking guides, articles, and cook books are excellent for increasing frugality and frugality is key (the more frugal, the more left over to invest!).

Let me see what I can recommend. I'm trying to get back to some more informational posts, especially during the 3 weeks.

SephardiLady said...

P.S. Readers, feel free to recommend and maybe I will choose a book to review.

A popular book I do NOT like and do NOT recommend is Rich Dad, Poor Dad. There are many books and systems out there like his, which is why I mention it.

The only people that likely come out ahead are those selling the systems. While there is some good information on starting businesses in there, there is plenty of bad advice too.

The author seems to have no religious focus (e.g. opposition to a biblically based work ethic and wealth for the sake of wealth)and those who get in the way of the plans (e.g. the IRS), well, let's just say he doesn't treat obligations with the seriousnesses that that they deserve.

Ultimately, his advice ultimately comes down to speculating, mostly on real estate. Yes, real estate, renting or resale, can be a fine investment IF you have plenty of cash to ide you over. But leveraged assets are also liabilities (as Dave Ramsey's personal story attests to).

OK, let me know favorite investing books!

JS said...


Here's my advice, culled from books I read when I first graduated college and wanted to educate myself as well as general life experience:

1) Information is power. I strongly recommend a program like Quicken that will let you track your transactions, savings, credit cards, investment accounts, etc. It's hard to say "I'm saving enough" or "I don't spend that much" without real information.

2) Get your ducks in a row. Make sure you have an emergency fund and proper insurances (home/rental, health, life, etc).

3) Your full-time job likely isn't investing. It takes round the clock devotion to following stocks to invest wisely in individual companies and trying to time the market. Experts in the field are often more wrong than they are right. Invest in low-cost, no-load index funds. I love Vanguard's index funds. They're cheap and all you have to worry about is the percentage you put into a "total stock" index or a "total bond" index (they have many other index funds as well.

4) Always make sure you're moving in the right direction. It's easy to get complacent. It helps to discuss goals and look over your financials to see that you're on track.

5) In the same vein as #4, it never hurts to see if you can land a better job or get more money. It pays to look at job postings or to go on interviews even when you're not looking for a new job - in fact it's probably the best time to do so and it forces you to keep up your skills and your resume. When you're hard up for a job can often be the worst time to look (especially if you lost your job or it's a down economy and everyone is looking).

6) Don't over-extend yourself and don't follow the crowd. Do what makes sense for you, not for everyone else and ask people you trust if this is a good move for you.

conservative scifi said...


When my wife and I were newly starting out, we listened to Bob Brinker's money talk, who suggested the emergency fund and investing in no load mutual funds.

We followed this advice (and lived well below our incomes for several years, living in a very very inexpensive apartment in an inexpensive city). We built up savings to the point that we are now quite comfortable, can afford our day school tuitions (we do make decent salaries), and have significant, though not nearly sufficient, savings for retirement (which is still 20+ years away).

Besides living below your means, even if that requires living in a not as nice place or with your parents, my first other major recommendation is to automate your savings. Arrange for a certain amount of your paycheck to be deposited into a bank account for savings and don't touch it untill you are ready to invest it or for emergencies. Dollar cost average into mutual funds automatically, as well.

Second, every so often (quarterly, semiannually, whatever), calculate your net worth and present it to your spouse. In the early years, it should always be increasing (since most of your savings will be in the bank or money market funds) and the stock market will only make up a fraction. Eventually, when your investments are high enough, your savings rate may be below the fluctuations of the stock market.

Sephardi Lady,

The only quibble I have is that I think, in general, a 30 year loan is safer, since you can always pay it off in 15 years if you have the cash (and a loan without a prepayment penalty). Otherwise, if you have a tighter month, on a 30 year loan, you can always pay the lesser full amount and be okay, rather than not have enough to pay the 15 year level payment.

Avi said...

SL - Playing devil's advocate here: Rich Dad, Poor Dad may be a terrible system to follow, but the key insight is worth understanding (and expanding upon): if you work for someone else making a standard salary you will never be "rich" (and, when combined with living within your means, you'll probably never go broke, either. Unless you send your kids to yeshiva and buy kosher food). If you start a business or take on real estate risks, you have a chance at getting "rich" (and, in a very high percent of cases, of going broke).

Our current Orthonomic system seems to depend on rich mega-donors funding a large chunk of the cost for everyone else. If everyone follows Ramsey's sensible living program, where is the next generation of risk taking entrepreneurs going to come from?

SephardiLady said...

Avi-Thanks for your comments. I do agree with you that risk taking can result in great wealth (as well as great disaster). I do like some of the points in the Rich Dad, Poor Dad book, but I still wouldn't recommend it to the average person.

I don't believe that Dave Ramsey's sensible program eliminates the possibiliy of starting business, but how should one go into businesses? How much risk should one take? Everyone is different, but my own advice might include steady employment for one spouse, building reserves and learning under an employer before going out on your own, not spreading yourself too thin, etc.

Jendeis said...

I am so happy to see you comment on Ramsey's book. I've wanted to know your thoughts about it for a long time. :)

jb said...

Thank you to those who have offered tips. We do use Quicken, so we have a good handle on where our money goes each month. We are both students, so we only work part time, but we supplement by tutoring in the university's writing center a few hours a week.

Basically, we spent the year and two months just figuring out how to run a household, and stay within our budget, which is quite limited. Naturally, we live in a cramped apartment, cook all our food rather than buying prepackaged, and try (rather unsuccessfully...) to keep our apartment neat in the absence of cleaning help.

But now we feel ready to start sticking our toes in the waters of investing. We have our wedding money- not an insignificant amount- sitting in a savings account doing nothing, and we know it could be growing. We just don't know how to do with it, other than leave a portion in the savings as an emergency fund.

Anyway, thanks again for all the tips, and SL, I would love to see some posts on investing/books on investing. Keep up the great work!

SephardiLady said...

jb-As you will likely discover, expenses rise an incredible amount once the student days are over. My post-college emergency fund was a fraction of the emergency fund I need now that I have a family.

Unless you have a massive sum of wedding money that far exceeds a downpayment, money for a car if you don't already have something that you can continue to use for a number of years, etc. . . I'd just hold on, put money into accounts that earn as much as possible (try, continue to be frugal as can be, and think about getting settled and buying your place.

If you still want to invest, maybe just take a small amount that you won't feel bad if you do lose it.

And I will work on trying to find some basic investment books that I like. In fact, I have to return the Dave Ramsey book tomorrow, so I have a good excuse to take the kids on a library outing.

Anonymous said...

SL - hope your library is online. First of all - you probably don't have to return the book; you might be able to renew it online. You can also browse for investment books online, reserve them and pick them up at your leisure. And you probably have a network of libraries available to choose from online :)

conservative scifi said...

Here is a quote about Sir Moses Montefiore:

There were then no omnibuses or other conveyances at hand such as we have now, and if there had been, he was of too saving a disposition to make any unnecessary outlay on his own person; he used to keep a strict account of the smallest item of his expenses. It was not with the object of complaining, or of regretting his early mode of life that he gave his friends these descriptions; his object was to impress on the mind of the rising generation the necessity of working hard and spending little, in order to make their way in the world.

SephardiLady said...

tesyaa-Someone put a hold on he book and when I went to renew online, I was told that my time is up. That's fine. I managed to make the review.

Now, what to check out next?

conservative sciefi-I love these quotes. Thanks!

Miami Al said...

JB, if you are a big reader, I would recommend the following: (or the Magazine) -- very basic info, target audience is 50+, but the general advice is spot on, and will get you started toward understanding finance in 10 minutes a day
Rich Dad / Poor Dad -- It's a made up story around real estate, about someone getting loaded during the previous boom, but the concepts of assets vs. liabilities and thinking about wealth is terrific... I wouldn't follow the investment advice, I would use it to make you think
One Up On Wall Street -- Peter Lynch's book from his Magellan Days, an informative read about investment from someone successful, enjoyable and fast -- Some of the basics on investing are great
Millionaire Next Door has been recommended for those with no background, but I can't vouch.

Some general advice, open Roth IRAs now... your tax bracket is likely low (at least for where you'll be at in 50 years), and you should qualify, otherwise, do a Traditional or non-deductible IRA... you can convert any assets in an IRA to a Roth IRA in 2010 regardless of income, so at a minimum make 2009 and 2010 contributions.

If you have 401(k)s at work, max them out. If you are in your 20s and do those two things, you are investing 20k/year/person, so 40k/year between the two of you. If you can do that for a few years, even if you can't invest money during the child rearing days, you will wake up at 50 with a LOT of your retirement paid for based upon 2-5 good years in your 20s.

Re: downpayment, real estate crash aside, there is no real reason to put a large downpayment on a house. You can acceptably leverage yourself, and if it is a house you CAN be in for 10-15 years (I hate starter homes, because a market correction leaves you trapped in too small a house).

Front load retirement, it's easiest to do now, and the Roth treatment is more significant now. When you hit your peak earning years, your expenses are WAY higher.

Build up a down payment, but the minimum you need, cash is king, equity is not. You can always walk away from an upside down house (at a hit to credit of course), you can never get the cash lost in a downturn back, and if the market rises, who cares what you put down.

Emergency fund, I was untouchable at 22, being out of steady work for almost a year (months of contracting followed by months without) wiped out my savings and left me back in debt, but without the cushion, BK would have called. Finding a new job is easy when you are 22-25, harder and longer as you get older because you are more expensive and more specialized.

I would suggest setting up an Emergency Fund and two car funds. Put a $300-$400 in each car fund each month if you can, so when you NEED to buy a car, you don't have to do it all on credit. Besides, if you are used to putting $400 down for the future car, the $400 payments for the actual car don't break the budget.

Our two older cars breaking at the same time, combined with childcare expenses had our budget go up by almost $2k/month in a 3 year span... $2k/month after taxes is $35k/year in pre tax income that we'd have to be making extra to keep our lifestyle the same.

Early 20s is an easy time financially, we did Roth IRAs but nothing else, I'm kicking myself that we went out to dinner 3 nights/week instead of putting away money like we did the 18 months before we bought a house.

Basically, bank the money like you have the future expenses, then when you have them, stop the excess savings, but you'll be ahead of the game.

Ariella said...

Thanks for the review, SL.
Miami AI, I agree with your point of view. But the flip side for those who have to pay yeshiva tuition is that the parents who spent their money and had a good time get massive scholarships because they simply don't have the money to cover the costs while those who lived frugally to save money are told they can pay in full because they have thousands in savings.

Michaela said...

I want to second what Ariella said. My husband and I lived (and live) frugally. We built up savings, put money in our Roth IRA's, and always lived well below our means. We taught our children to say, "We don't need it." Then day school tuition hit. We cannot afford day school tuition on our salaries. Even if we were to pay zero taxes and live on bread and water, we could not afford full tuition. But if we were to ask for a scholarship, we would be told to spend all of our money first. I'm sorry. I cannot, will not give up my retirement money. I am surrounded by frail elderly in daily life--I cannot believe that I will be able to work forever. My husband or I could lose a job. We could get sick. A child could require hospilization. I really cannot imagine living without savings.

Oh, whatever... said...

To Michaela @ 11:07 AM:

You raise a good point in that tuition costs can be a disincentive to save. Nevertheless, I think its definitely important to save inside one's 401k, IRA, etc. I don't know what Yeshivas generally do, but at least at the college level, the amount one has in a retirement plan is not factored into the financial aid equation.

If I were to apply for a day school scholarship and an administrator would tell me to raid my 401K to pay, you can guess where I'd tell him to go. I'd be curious to hear from everyone what day schools think of savings outside of retirement plans: are they totally fair game? Do the schools expect you to impoverish yourself before considering giving you a break?

jb said...

No kids yet, and even if I were to have a baby tomorrow morning, tuition concerns would still be a few years away. But do they honestly look at all your assets to determine how much you will pay? And if we're supposed to raid our 401k's, do you honestly expect us to have anything to give you in 40-50 years when you hit us up for our grandchildrens' tuition? Sheesh!

SL- when I said we had substantial wedding money, I really meant it. We both come from very wealthy families and communities. Suffice it to say that dozens of family friends wrote us 1k checks; relatives gave us even more, one even gave us 10k! We absolutely have enough to keep some liquid in case of emergency and invest the rest (obviously we would diversify that).
I am unable to drive, so we will only ever have one car- and what we have now should work for several more years. We will not even consider buying a house until we are finished with school (2 more years)because we may need to move come graduation, and we don't want to be stuck. At this point, the biggest financial concern for us would be kids.

Miami Al said...


This couple is a few years from having kids so Day School is 7-10 years away. That is plenty of time for them to put a solid foundation together. If they are both in graduate school, they should both have large incomes when those bills arrive, that means that scholarship won't become an issue until a few years down the road.
When it comes time to go before the scholarship committee, it's time to hide assets. You can always dump the cash in the house, and while they scream about 401(k)s that they consider "over funded," if you have cash you are in a good negotiating position. If the school in 15 years wants 60k, and they are only willing to pay 45k, and the school argues "cash your your IRA," you're in a much stronger position to tell them to take a hike if you have 45k to offer another school to take your kids.
The emergency fund can be moved, at that point, to a semi-liquid investment (2 - 5 year CDs) and simply tell the school it isn't up for consideration. Any cash that you don't want them to touch, either don't disclose, or dump it into the house, they aren't going to demand that your mortgage your house for one more year of tuition (well, they will, but only the insane agree).
The rules of enforced poverty are only on the "marks..." the hard working middle class... the upper middle class have negotiating room, because the schools aren't so quick to turn away people that are paying more than the average amount.

SephardiLady said...

Ariella makes a likely, but sad, point. I can't endorse cheating on applications. I know that when cash flow won't allow for tuition we will have to look to alternatives. Like Michaela, savings provide me a level of security I need.

Ultimately, tuition is a problem when cash flow won't cover the bill. Naturally, we are at this point, hence the blog.

Ariella said...

I don't mean to suggest that anyone should lie on scholarship applications. I'm just pointing out that frugality is not rewarded by schools. This really happened: When we moved to this area, we had still not sold our first house. So we were paying mortgages and property taxes on 2 houses for quite a while. The school I was sending 2 kids to at the time offered zero reduction. They said, "You have $--,--- in savings." I answered that we don't have that money anymore because most of it was depleted as the downpayment on our new house, and we needed to draw on savings to cover the double mortgage. The logic of that made no impression on them. Just the fact that we had managed to save a sum of money proved that we did not need a scholarship even when that savings was no longer in the bank.

I know people who live way beyond their means demanding huge scholarships from schools and camps and getting them. The wife hasn't taken a job for years because she figures anything she earns will just be snapped up by the schools, so there is no net gain to the household.

Miami Al said...

BTW, when I said "hide in their house" I didn't mean literally hiding things there (though I guess with Savings Bonds and the like you could), I mean paying down the mortgage.

If you have a 500k house, with a 300k 1st mortgage and a 100k HELOC (for simple numbers, 80% LTV), if you paid 50k to pay down the HELOC, it wouldn't be "savings" and you could borrow it back after the scholarship decision.

This is more daring in today's world of reduced credit, but on paper lets you move cash in and out of your house, "hiding" it from financial aid considerations.

Those trying to maximize college financial aid used to be encouraged to leverage up the home with the maximum mortgage possible, and putting that cash, plus any other cash that needed to be "hidden" into annuities. Annuities were retirement vehicles and not considered for financial aid, and your home mortgage payment was untouchable for consideration, even if it seemed high. IOW, someone that bought their house 2 years before sending their kid to school (the look back period), instead of 20 would normally be at an advantage in terms of payments because of more "good debt" in the mortgage, hence the refinance.

In tight times, cash is king, but cash is what the committees look to extract, not equity.

SephardiLady said...

Miami Al-As far as I understand, plenty of tuition committees are more than happy to let you dip into equity.

I think the joke may be on them in the end though as property values are down, down, down.

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