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.""
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.