Book Review: Dave Ramsey’s The Total Money Makeover
Tuesday, 26th February 2008 (by J.D.)This article is about Basics, Books, Debt, Gurus
Dave Ramsey changed my life.
In the fall of 2004, I had over $35,000 in consumer debt. I was making a solid middle-class salary, but I lived paycheck-to-paycheck. My money habits were terrible. When I looked into the future, all I saw were years of toil to pay for the things I’d already purchased.
Then a friend loaned me a copy of The Total Money Makeover, a book by some guy I’d never heard of named Dave Ramsey. I had nothing to lose — I read the book and then followed his plan. I was amazed to find that I had eliminated most of my smaller debts in just six months. Over the next 2-1/2 years, I paid off the big debts, too.
Live like no one else
Ramsey’s method is not easy. It’s not a get rich quick scheme. It requires sacrifice, hard work, and focus. In fact, printed on the bottom of every page of The Total Money Makeover is the book’s motto:
Ramsey explains: “If you will make the sacrifices now that most people aren’t willing to make, later on you will be able to live as those folks will never be able to live.” The book is peppered with inspirational testimonials from real people who have taken this philosophy to heart, sacrificing the present for the sake of their future. To me, this is awesome stuff.
At the core of The Total Money Makeover are Ramsey’s seven “baby steps” to financial freedom. By following these in order — and not moving on to the next until the current step is complete — readers gradually progress from debt to wealth. They get rich slowly. Here’s Ramsey’s plan:
Step one: Save $1,000 cash as a starter emergency fund
Before you do anything else, says Ramsey, you must save a $1,000 emergency fund. This money is to be used only for emergencies: car repairs, medical bills, etc. At first I thought I could skip this step. It only took a couple of setbacks for me to realize the wisdom of setting this money aside. If you have a cash cushion, life’s mishaps won’t force you deeper into debt. You’re able to recover more quickly.
Step two: Start the debt snowball
Once you’ve built some savings, it’s time to tackle your debt. You do this with the debt snowball. Here’s how it works:
- List your non-mortgage debts from lowest balance to highest balance.
- Pay the minimum payment on all debts except the one with the smallest balance.
- Throw every penny you can find at the smallest debt.
- When that debt is gone, do not alter the monthly amount used to pay debts, but pay all you can toward the debt with the next-lowest balance.
This is the most controversial part of Ramsey’s plan. Critics note that it makes more sense to pay off high-interest debt first. Even Ramsey admits that the debt snowball isn’t mathematically optimal. That’s not what it’s about. “The reason we list smallest to largest is to have some quick wins,” Ramsey writes. It’s about behavior modification over math.
Step three: Finish the emergency fund
Your $1,000 emergency fund was only a start — after you’ve eliminated your non-mortgage debt, it’s time for some serious saving. Ramsey’s advice is fairly standard on this point: accumulate three to six months of living expenses. For most people, that’s $5,000 to $10,000.
The easiest way to do this is to simply take the money you were applying to your debt snowball and convert it into a savings snowball. If you were paying $500 each month toward debt, now throw that money into a high-yield savings account.
(This is the step I’m on now. I have a couple thousand dollars saved. My goal is to set aside $10,000 by the end of 2008. Because I’ll soon be writing full-time, I’m actually hoping to save $20,000, but that may be a bit of a stretch.)
Step four: Invest 15% of your income in retirement
While you’re completing the first three steps (especially the first two), Ramsey recommends suspending all investment activity, even if you have a 401(k) with an employer match. He saves investing for last, once good habits have been established. It’s true that you’ll give up a few years of compound returns in your retirement accounts, but that’s okay in the long run, he says. By following the first three steps, you will have developed smart money habits and a strong saving ethic, so that it won’t take much effort to catch up.
Now that you’ve paid off your debt and saved for emergencies, Ramsey says to invest 15% of your income into mutual funds. He recommends diversifying evenly among several broad categories of funds. Invest anywhere you have an employer match first, and then put money into a Roth IRA. Put the rest of the 15% wherever it makes the most sense.
Step five: Save for college
Once you’ve begun saving for your retirement, you can turn your attention toward your children. Ramsey writes, “Saving for college ensures that a legacy of debt is not handed down your family tree.” Use an Education Savings Account or a 529 plan to save for your children’s college education.
Ramsey also emphasizes that kids can work their way through college in an effort to minimize the loans they need to take out. My favorite piece of advice, however, is to seek scholarships. One of my best friends is a financial aid counselor at a major university. He says that it’s mind-boggling how much scholarship money goes unclaimed every year. The students who know this are able to fund most of their education through scholarships.
Step six: Pay off your home mortgage
Once you’ve taken care of everything else, it’s time for a final, giant step. Ramsey advocates prepaying your mortgage. He’s aware of the objections, but he believes it’s a smart step, anyhow. (For more on this subject, see my recent article on prepaying your mortgage.)
Step seven: Build wealth
If you’ve done all these things — eliminated debt, built emergency savings, invested 15% of your income, and paid off your mortgage — you can begin to build some serious wealth, says Ramsey. By following the first few baby steps, you’re far ahead of most Americans. But with the final step, you can enjoy the fruits of your labors. Invest. Give. Have fun. If you want to buy a boat and you’ve completed the “baby steps”, then buy a boat. Just don’t go into debt to do it.
Minor reservations
Though I agree with most of Ramsey’s philosophy, some of his advice rubs me the wrong way. For example, Ramsey advises readers to avoid debt altogether — no credit cards, even after you’ve paid off your mortgage. I used to subscribe to this line of thought, but now I recognize that credit cards can be a useful tool, if you have the discipline to pay them off every month.
Also, Ramsey writes that “separate checking accounts mean one of two things, either ignorance or problems”. This is ludicrous. Couples should choose a method that works for them, whether that’s joint or separate accounts. Don’t believe there’s only one way to manage household finances.
Highly recommended
When I first read the testimonials in The Total Money Makeover, they reminded me of late-night infomercials. “After years of making only $48,000 a year, with hard work we paid off $78,000 of debt in twelve months.” Yeah, right. But now, three years later, I could write one of those testimonials myself. (Heck — this entire review is one big testimonial.)
Ramsey’s advice strikes cynics as simplistic. But his steps work because they are simple, and because they provide tangible results. Your $1,000 emergency fund isn’t just cheap insurance against Real Life; it’s a visible reminder that you have succeeded, that you can save, that you can be smart with money. The debt snowball is built around quick wins, which give you the confidence to continue.
The Total Money Makeover is not for everyone. If you don’t have a problem with money, there’s nothing here for you. If you have a handle on your personal finances, you’re better off reading The Random Walk Guide to Investing [my review] or The Bogleheads’ Guide to Investing. But if you’re one of the millions who struggles with debt, who can’t seem to escape living paycheck-to-paycheck, then The Total Money Makeover is a must-read. Your local public library probably has a copy or two. Go borrow it today.
I like Dave Ramsey’s work and program. I think you are right to disagree on the credit card issue.
I think the best way to think about Dave is this. He needs to sell books, advertising time on his radio show, etc. So he has to take it to the most extreme level as possible. This helps sell. Also when people see extreme, they may get started on the path and only go 1/2 or 3/4 of the way. If he wasn’t at the extreme, that 1/2 way might not cut it to help people get out of debt.
Just a thought.
This book changed my life as well…
While I realize why some folks criticize him, I still ‘roll w/ Dave’. He keeps things simple and he helps folks who don’t want to spend hours worrying about their finances do well.
Great review, as usual.
One thing I do disagree w/ Dave about is the use of percentages. I don’t think that 15% in retirement is enough, in many cases. But, I understand why he can’t get too specific, considering his huge audience.
Rock on,
NCN
Hi J.D.,
Your story sort of reminds me of the inspirational story by Bob Proctor. It was in the 1960’s and Bob Proctor was a fire fighter in Toronto earning $2,000 per year and was $3,000 in debt.
Things weren’t looking up. His brother gave him the book, Think & Grow Rich. Bob studied this book and within 1 year he skyrocketed his income to over $100,000 and then later went on to become a millionaire.
If I was still in debt when I read the book, I’d wager it’ll have a big affect on me just as it did to NCN and you. Dave’s the one to go to if you want to knock down debt medium-to-hardcore style. If you follow the debt snowball plan to the latter, I can’t imagine anyone having issue paying off their debt.
He’s definitely not the one to go to for wealth building advice, as that’s pretty lacking in this particular book (but it’s a debt tackling book after all).
His credit card stance drives me nuts, and is always a hot topic amongst PF enthusiast. I got in debt trouble via credit cards too, but even w/o credit I’d most likely be in the rut. Like many financial instrument, it’s a tool for you to use. You can either abuse it or use it wisely. If having plastic encourages you to spend, avoid it. If you can master the card and reap the (many) benefits, then it’s all peachy.
One part of the book that rubbed me the wrong way was his suggestions of military service in order to pay for college or avoid higher-education debt. While I have no trouble with military service, it’s a pretty important decision and shouldn’t be mentioned lightly in a sentence or two.
The high-price financial courses/packages pitched in the book are also a turn-off. If you’ve read his other works before, you can probably skip out on Total Money Makeover (unless you need additional encouragement).
The “Law of Attraction” is bogus Secret new age baloney, and cannot hold a candle to Ramsey’s TMM precription.
I never had the debt problems many folks have had, but I still find Dave Ramsey’s show inspiring. Hearing folks create success through hard work and sacrifice makes me look that much closer at my personal finances and question what else I could do without.
Perhaps I should read this book … I’ve gathered a Christian perspective from other reviews, though, and that’s not something I’m into …
But, here’s my question: All of these books make it seem so simple and yet it’s not. For instance, we had the $1000 emergency savings and had to blow $400 of that last Sunday in vet bills because our dog succumbed to cancer. So now I”m feeling overwhelmed to build that back up, which only sets us back in other areas. I feel like by charging that amount I would have at least saved myself anxiety.
Why must all gurus be bald, middle-aged men with glasses and a fu-man-chu? Am I the only one that notices this?
But seriously, I think it’s great how many people Dave has encouraged. Even if his advice can’t be optimal for each specific individual, think how many people are striving to no longer live in fear of their finances.
My ex-wife and I paid off 70k in two years on an income less than that using TMMO.
I do disagree with Dave a bit though in that credit cards can be tools those miles are hard to resist. Like Dave says I never heard a millionaire say they got that way using airline miles.
I will say this though I will follow Dave’s rules most likely for the rest of my life. Because of Dave’s principles I now actually have money to invest wholeheartedly in my retirement and not just meeting the employer match.
Its not that hard “Common sense for your dollars and cents”
Shawn wrote: Perhaps I should read this book … I’ve gathered a Christian perspective from other reviews, though, and that’s not something I’m into …
There is most certainly a Christian perspective. Ramsey quotes Bible verses frequently. This bothered me at first, too, but my recommendation is to read it anyhow, but just gloss over any proselytizing. He’s not really out to convert anyone, but to back up his arguments with scripture. (Last summer, I wrote about how to read a personal finance book so that you can filter the unimportant.)
Also, Ramsey recognizes that dipping into your emergency fund can be a mental blow. But his argument — which I agree with — is that it’s a bigger mental blow to go further into debt when problems arise.
Looking back, it looks like I edited out a paragraph about his advice for “logjams”. If you’re having trouble saving the $1,000 or getting started on your emergency fund, Ramsey recommends drastic action. Sell something (preferably something that costs money to keep, like a car). Take another job. Do something to bring in some extra money in order to break the logjam. Once things begin flowing, you’ll be okay.
As a beneficiary of Dave’s methods (I paid off over $90K in debt over 3 1/2 years and have $18K in an emergency fund) I am persuaded to come to his defense on the credit card issue.
Dave teaches behavior modification. Do you know why every quick mart and fast food restaurant takes plastic now? Marketing studies show that people spend 10-15% more when they use plastic instead of cash. It is that behavior that made restaurants and other places see the potential for more profit - even with the added cost of installing the ACH machines and paying Visa 2% of the total bill. On average then, even if you pay your bill each month, unless you are extremely disciplined, it is likely you will spend more with plastic.
Additionally, consider your spouse’s feelings about using a credit card. My wife is adamantly opposed to having a credit card, because she never wants to risk going back to the debt-ridden life we had. I am not going to sacrifice my wife’s peace-of-mind so that I can earn frequent flyer miles or get that snow globe I always wanted.
If you are debt-free, have an adequate emergency fund and are saving adequately for retirement and college education, you have zero need for Dave Ramsey’s book. If, though, you are in the vast majority of people who don’t fit that demographic, don’t be critical and whine that Dave is “too extreme”. He makes it perfectly clear that his method is not “so easy” as one writer above said. He says it is hard, it requires changes in your behavior, and it will not happen overnight. If you want to change your family’s lifestyle to where you don’t fight about money, and you can assure that your children’s children will always have financial peace of mind, it is well worth the struggle.
I have to admit this guy makes my skin crawl. Why? I heavily disagree with a number of his steps.
If I were to do it I would modify them as follows.
1. Save $500. The orginal $1000 is too much if you are drowning in credit debt.
2. I actually agree with his point about building motivation.
3. It depends. In my case according to Dave I should have around $20,000 in a high interest savings account. What a waste! I would invest in company match retirement accounts to get some free money and keep a secured line of credit as the emergancy fund. Talk about over insuring yourself against problems. In some cases some cash is a good idea, but each case is different.
4. At least 15% if not more. Depends on what you want in retirement and if you are going to retire early.
5. Invest a little, but keep most of the cash for step 6. Think about how much easier it will be to help your kids if you don’t have the mortgage when they go to university!
6. Agreed.
7. Should really say “Good job, your now on your own two feet. Decide for yourself what to do next.”
Tim
Stephen, my own feeling about credit cards is this:
A person trying to get out of debt should not have them. There’s no need. In fact, they’re an impediment to the goal. Even once you’re out of debt, it’s not wrong to refuse to use them. However, if you really have taken control of your finances, then credit cards can be a valuable tool. But only if this is the case.
I was very nervous last summer when I got a personal credit card again for the first time in ten years. I didn’t know if I could handle it. I suspected I could, but I was worried. Turns out I’ve been fine.
But I wouldn’t have been fine three years ago.
The high interest savings account is an emergency fund that is meant to be liquid. Retirement accounts are not liquid - they don’t make good emergency funds. Nor do lines of credit, as those are what get most people in debt in the first place.
JD, do you think 3-6 months of expenses or 3-6 months of net income is a better choice as an emergency fund?
I rolled my eyes over all the Biblical mumbo-jumbo, but it was otherwise a good book and will help a lot of people who don’t know where to start.
Shawn,
Ditto on Ramsey’s perspective, but I fast-forward or grit my teeth through those moments on the podcast and keep going.
As for the difficulty of keep-on-keepin’-on, I think this is where Ramsey has it exactly right, and a little wrong.
It’s a dollars-and-cents problem for sure, but it’s primarily a mental problem. We save in our emergency fund, something unexpected happens, and we empty it and have to start all over again. But we do that in one fell swoop, and don’t have to worry about the credit card bill that hangs over the next four months. Instead, we get a clean slate every month.
I don’t know how to explain it more clearly than this, unfortunately: we focus on the short term of the long term. The long term is paying off a certain debt. The short term is the amount we pay that month to get us there. We re-calculate our budget month to month. If we’re uncomfortable with how low our savings is at the moment, we back a little off the debt and sink more into the savings, so the next month we can feel better about putting more into debt.
Paying off debt as aggressively as Ramsey recommends is exhausting, no doubt. Sometimes inserting a little flexibility into his step-by-step plan is exactly what you need to get over those humps AND stay on track.
The 3-6 months emergency fund is pretty much a staple with any personal finance program. Money magazine, Kiplinger’s, Dave Ramsey… all mention it. You can disagree, but don’t bash Ramsey for it. It’s pretty common.
It needs to be 3-6 months of expenses. Let me set up a quick example:
Income: $2000
Expenses: $1999
Net Income: $1
Emergency fund needed to cover 3 months of expenses: $5,997
“Emergency fund” needed to cover 3 months of net income: $3.
If you lost your job, that $3 is not going to help.
@Justin: I think whatever makes you most comfortable is better. Obviously, the more you have saved, the better you’ll weather a storm. But it is possible to set aside too much for emergencies. I think each person needs to decide what’s comfortable for him. For me, I want $10,000 saved. I *really* want $20,000, though, because this writing thing is a huge leap of faith. I figure $20,000 would buy me almost a year.
No Debt plan - what I meant was 3-6 months of expenses (meaning enough to pay the bills - in your example $5,997) or 3-6 months of income (meaning what we get paid per month minus taxes, FICA, etc. - $6,000 in your example.)
I forgot to add that much of the value in TMM comes in teaching people to sit down and do a budget with their spouse - giving every dollar a name.
Personally, I respect Ramsey for not pretending that his religious convictions have nothing to do with his finances. Though the Bible isn’t a handbook for personal finance, I appreciate that his beliefs impact his total life perspective.
I have to disagree on something. David Ramsey’s plan is even good to read and follow for those who AREN’T in debt. I recently did his online course when he offered it free to veterans. Lots of good advice on all areas of dealing with money, buying and credit.
He does a good job of pushing you to change your mindset about “I want it now” and putting everything on credit and living beyond your means….for those of us not in debt, it would give us a bigger financial cushion if we thought this way and were prepared with an emergency fund that would cover us should we lose our job.
Devoting 15% of your salary to retirement accounts would be great but it just isn’t realistic to anybody in the lower or lower middle class (say under $40,000). I am a frugal home ownwer and 15% is just not something that is realistic based on my lower middle class salary. Sure if I was earning $50,000 or more a year I could contribute 15% to a retirement account. I think 7% would be reasonable. Remember the savings rate in America is around o%.
I discovered Dave Ramsey about four years ago. At the time, I thought I was swimming in debt because I owed $2,000 on credit cards. Before Dave, I figured that it would take me about a year to pay it off. After I started listening to Dave, I realized that I needed to take a hard look at my lifestyle. I wasn’t making a lot of money but my basic expenses weren’t that high either. Most of my money was going to eating out, buying books, clothes, DVD’s and other luxuries. I cut my lifestyle down to nothing and paid of the debt in a few months. After the debt was paid off, I quit following the debt snowball. I stayed out of debt for a couple of years but then I slowly started to accumulate debt again. About six months ago, I decided to get out of debt again. I know this time that it is going to take longer than a few months and I am ready for the long haul.
I really like Dave’s position that the choices you make will lead you to where you end up. This may seem like something an elementary school teacher would say to her students but I think that a lot of adults need to hear this advice as well. Of all the finance “gurus” out there, I agree with Dave’s positions the most. I disagree with this stance on credit cards but pretty much agree with everything else he says.
Question: Is the 15% figure 15% of after-tax income or pre-tax income? Thanks.
I think JD nailed it when he said “Obviously, the more you have saved, the better you’ll weather a storm.” when it comes to emergancy funds.
That’s where I’m sitting. If I cash out every assest I had I can pay for over 8 years of expenses. Hence $20,000 in cash to me is a waste.
Tim
While I would say that Dave Ramsey changed my life, too, I agree with your few criticisms whole-heartedly. I’ve listened to him (less regularly these days) for years and subscribed to his TMM website before. Dave is best when he sticks to money matters and stays out of marriage counseling (beyond occasionally pointing out that someone may need professional marriage counseling). Leave it for the professionals, Dave.
Also, as an atheist, I’ve learned to “tune out” when he gets on an evangelical rant like the oft-repeated “it’s god’s money” jag.
But on balance, he’s brilliant, his philosophy brilliantly simple.
Ramsey’s plan talks about eliminating all non-mortgage debts. What about student loans? Student loans are generally lower than mortgage rates, so I’ve never known where paying off your own student debt fits into the plan (before saving for children’s education? Before investing?).
My only concern is what about college loan debt? I have paid off all credit card debt, have $5000 in a savings account, but have $40,000 in very low interest (~2%) student loans that have been put on the back burner while I save for a house. Does Dave Ramsey’s book suggest I pay off the college loan at the expense of saving for a house? That seems wrong, but perhaps I am missing something. Great review of a book, J.D.!!!
Here’s one reason why Ramsey hates credit cards:
http://finance.yahoo.com/banking-budgeting/article/104466/Card-Sharks
*HT- Joe Sangl
This book helped my husband and I turn around our finances last year. We are now members of Dave’s MTMMO site and I find the boards very inspiring and the budget tools helpful.
Our library did not have this book, so I filled out a form to request that they get it … and they did. I read it for free and then we later took Financial Peace University. Excellent investment!
@Shawn
I’m sorry to hear about your puppy. I had the same reaction as you the first time I had to hit the emergency fund. The perspective I finally came to is to look at the entire system as a whole. I’m using the leftover money from my paycheck toward improving my financial health, and I have a game plan to make that happen. Once I accept that, it doesn’t matter if that particular money goes into an emergency fund or pays off a debt: it’s being put to good use.
@Phil A.
Don’t forget that, according to Dave’s plan, you’re not attempting to save that 15% until all your debt is gone, save perhaps a mortgage. The only bills you should have at that point are your rent and your utilities. 15% can still feel like going up the down escalator, but if you’ve followed the steps, at least the escalator has stopped moving.
Dave’s ideas for budgeting have been mentioned earlier, but this was the most important part of the program for me. Creating a cash budget where I set aside the money in advance is the single most important financial skill I’ve picked up in the past few years. Every other budget I’d made in the past was a series of goals, goals I usually fell short of. If you’re limiting access to your finances to cash, you make it impossible to overspend. While I can charge or debit card twenty bucks I didn’t plan on, I can’t spend a twenty dollar bill I don’t have.
After a few years of working this way, I no longer limit myself to a cash only system, but I still primarily spend with cash instead of plastic. It’s made a world of difference.
I am a Dave follower. I am a FPU teacher. I have found through countless couples, that the use of credit cards lands them back in my class in about three years. If you want to follow a path to get out of debt and STAY out of debt this is the path that is GUARANTEED to work this is the way. If you change this in any form, it is not a guaranteed method. This book and his methods work. That is what most of the population need, not tweaking, not “I have a Bigger Better Deal”.
If this is not right for you, okay - great. Just don’t throw rocks at a plan that has helped millions of people to become debt free and stay debt free.
BTW - concerning the couples who return to the class; after they swear off credit cards and payments for the second time, they don’t return. Either they have finally gotten it, or they are too ashamed to return.
We, too, are part of Dave’s TMMO website forums, and they and the budgeting tools are extremely helpful. I have to say that I agree pretty much with everything DR says, even the no debt at all thing. I’m still on step #2, so maybe I’ll change my mind after being debt-free for several years. But I’ve been stung by credit card companies before, and I don’t like the idea of opening myself up to them again. Even for airline miles.
Ironically, I wrote about baby step #2 today…
http://www.simplemom.net/?p=13
Perhaps if I actually read the book I would find that this was addressed, but in everything I’ve read about Ramsey’s plans, I haven’t seen it: he talks about paying down a mortgage as one of the steps, but I have never heard anything about saving up for a downpayment for those who have not yet taken the plunge into home ownership. I assume he’d be strongly against 0% down mortgages (not that anyone can really get those anymore), so that has to fit in somewhere, but where? After the emergency fund, I hope, but before retirement investing? Concurrent with retirement investing (and if so, how are the two weighted/prioritized)?
Okay, all I know of Dave Ramsey is what I’ve read here. That said, I ended up doing the debt snowball in 93-96 because I realized that IF I paid off the lowest debt - which was a little more than my annual bonus - I could stop paying minimum balance on my credit cards.
Yes, the motivation of having fewer debts was a big deal. But also the motivation of being able to pay more on other debts. As the credit cards had lower balances AND higher interest rates than my student loans and car loan, well, those were naturally what got paid off next.
As an aside, I never went totally “cardfree” - I had an AmEx for work, and I kept my personal AmEx too. But then, a green AmEx isn’t meant to carry a balance.
@Jen
I believe Dave’s advice for homebuying would be: save 20% for a down payment and take out a 15-year mortgage. (I don’t listen to his show yet, so I don’t know if this is exactly what he says.) In the book, he talks about people who actually save up to pay cash for their homes!
@Dave Follower
You’re absolutely right. By avoiding credit cards, you guarantee yourself that you won’t fall back into trouble again. I don’t see anyone throwing rocks at this advice, though — I think that some people, like me, are saying that wise credit use is possible, but a person has to be financially literate for this to happen.
Wise use of credit cards? Uh huh.
http://www.daveramsey.com/the_truth_about/credit_card_debt_3478.html.cfm
You play with fire you will get burned. Life happens. “I will only use this in a emergency.” “I will always pay my bill on time.” I have heard them all. It may take a couple of years, but the credit card will nail you for more money than you intend to spend.
The reason I am so adamant about credit cards, is I have seen families destroyed. I have never met anyone who “Got rich slowly” by using credit cards. Remember credit = debt. You can become wealthy faster with no debt or little access to debt. It’s a lot harder to go down to the bank and ask for a loan than to pull out a piece of plastic.
Jen : I believe that what JD said is accurate. If you’re out of debt, you can save a lot in a little bit of time. 20% down would keep you out of PMI.
I had read a lot of personal finance books and was already on the good path for years before I picked up Ramsey’s manifesto, but the writer and message still had the power to hit me hard.
Dave doesn’t fool around and has a way of not letting you lie to yourself either. I realized after his read, even though I knew a lot and had some strong habits and knowledge, I was still lying to myself — mainly because I still had revolving credit card debit. I still had ways of talking myself into making purchases I couldn’t pay off, citing ‘business need’ as a reason to overspend. No more.
It is true once you make a decision to do things different, you are challenged, as a commenter above was with a vet bill (and J.D. was with the car breakdown). Same thing happened to us last month with the vet, only try $750 instead of $400. That almost wiped out our emergency fund. And yes, I was tempted to use the credit card … but that’s the point Dave makes. Can you change your behavior when challenged? Although hard, every time you stand up to it, you win.
Thanks, J.D.! I finally read Total Money Makeover a few months ago, and I love the quote you mention: If you will live like no one else, later you can live like no one else.
I try to keep this quote in mind as I struggle with friends and family who just don’t understand why I’m working two jobs, why I can’t go out for drinks/dinner as regularly as I used to, and why I can’t just drop $100 on a new pair of shoes (on credit, of course).
I truly want to get to a place where I CAN “live like no one else”, but I realize that due to my past, shall we say, indiscretions with money, that means sacrifice on the level that Dave Ramsey discusses in his book.
For those of you who may be hesitating to read this book because you think it may be overly religious—I also hesitated, but found the book to be balanced and readable. Definitely recommended!
Dave Ramsey believer here… while I don’t agree with every single thing the guy says, overall he has some great ideas. After following his beans and rice plan we were able to pay off $11,000 in student loan debt and put about $20,000 in the bank, in less than 7 months. Our income is higher than average, about $100,000… but we are also a family of eight. We went to the cash only plan and I was able to cut most areas of our budget in half.
I listen to the Dave Ramsey podcast available on iTunes, for advice but also to listen to the horror stories to keep me scared of slacking off on baby step #2.
For mortgages I’ve heard Dave recommend that IF you can’t save and pay in cash you should get a 15 year mortgage and the monthly payment should not exceed 25% of your monthly take-home (after tax) pay. I don’t recall about a down payment, but I would assume 20% would be safe, to avoid PMI.
I think DR plan is fantastic! I just think once you get out of debt. The hardest part is to STAY OUT
@Dave Follower said: Wise use of credit cards? Uh huh. You play with fire you will get burned.
I don’t think anyone here will disagree with you that credit cards are dangerous. They are. But some people are able to use fire constructively without getting burned. Also, nobody’s arguing that credit cards are a path to wealth, slowly or otherwise. What I’m saying is that credit cards can be a tool for those who have developed financial literacy and responsibility.
Here’s how I use a credit card. I don’t spend money I do not have. When I make a credit purchase, I deduct the money from my bank account from within Quicken. I pay the balance in full every month.
I listen to Dave several days a week on my way home from work and I have one concern: his constant assertion that, “the only way to financial peace is to walk daily with the prince of peace, Christ, Jesus.” (that is a direct quote, I’ve heard it enough on his program that I literally can recall it word for word) I think his financial advice (for the most part) is very sound and he definitely helps a lot of people conquer “debt addiction.” I just really, really wish that he wouldn’t insist on making it about Jesus.
I respect that his beliefs are his–and I wish he’d keep them that way. As an atheist, I also believe that people are quite capable of living in a financially sound manner without the influence of Jesus–or any religion for that matter. I am currently debt free after paying off about $6,000 in credit card debt and I continue to follow a strict plan of saving and accumulating wealth.
The only time Ramsey turns me off is when he injects religion into what is a wholly non-religious discussion.
I got my first credit card in college over ten years ago and I have never, in those ten+ years, carried a balance. However, a few months ago I decided to go cash-only for most purchases. Why? Because I realized that using a credit card made it too easy to make unnecessary purchases. I was subconsciously spending more when I used credit. Since going cash-only, my discretionary purchases have been cut in half! That more than makes up for the piddling 1-2% rewards I’m missing out on.
As a compromise, I use the credit card to pay bills that I would be paying no matter what anyway. My cell phone bill, my internet service–they go on the card. I still get some rewards that way, but I save money by paying for groceries, clothes, books, and similar discretionary purchases in cash.
So, yes, it is possible to use credit cards “responsibly” and stay within your means, but still end up losing money in the deal.
I have to add my praise for Ramsey and TMM. Husband and I paid off $55,500 in unsecured debt in 12 and a half months using the baby steps above.
Yes the plan is simple and most everyone already knows the advice he suggests but something in his presentation and his ability to get people focused on their debt makes a difference. I have 3 friends who are now working the TMM plan.
As for credit cards, I don’t think they are evil and husband and I just put $1500 on a 0% Home Depot credit card for one of our rental properties, but I agree with the no credit card rule. I found that my relationship with money is much different now that I pay with dollars already in my/our checking account vs. future dollars. Just today, husband called and said he was low on money and we had a 5 minute meeting about our finances. For me, I didn’t pay that much attention, and nor did my husband, to our bank accounts/present finances when I/we could just whip out the credit card and move on.
Questions re: student loan debt. All unsecured debt is paid off during Baby Step #2. And that is what we did, half of ‘our’ debt was my husband’s MBA student loan ($27,000) and it was fixed at 3 1/2%. Yes the interest rate was super low but the TMM plan, as many say, is not really about math its about emotional financial health and changing the way you live. The goal is to live a debt free life, think about that, and that is life changing.
Rob brings up a good point. Where do student loans fit into the equation? I have 40K in loans and I never know whether or not I should invest any excess money I earn or pay off my student loan.
@JD and @Justin - I guess I wasn’t very clear. I figured Ramsey would recommend saving up at least a decent downpayment, what I can’t figure out is how that would fit in with the steps listed here. I’m just about done with his step 3 (finish emergency fund), though I’m not following his plan and have been simultaneously also putting money towards retirement (step 4) and saving for a down payment (which doesn’t seem to be a step). I don’t have kids, so step 5 isn’t an issue. Then I look at step 6, paying off the mortgage, and I’m back to wondering where the down payment savings fit in. Would he recommend doing that before directing money towards retirement? Renting until one has reached the magical 15% mark? It seems like a very big step is missing, especially since a 15 year mortgage is going to require a bigger down payment to keep the monthly payments affordable.
I also wanted to chime in that as a Christian I’m quite proud of the fact that Dave does not choose to hide his faith when it would obviously be monetarily expedient for him to do so considering how many are turned off by his Christian views. ie
“The only time Ramsey turns me off is when he injects religion into what is a wholly non-religious discussion.”
To Dave, and myself included, obviously how we manage our money and family finances IS a ‘religious discussion’. You can’t only be Christian in some aspects of your life. I can’t speak for him but I would say this is how he evangelizes.
The point I think you’re missing, Sean, is that while that particular belief structure works for him, it is neither necessary nor required to follow most of the strictly financial advice that he gives.
I am not saying that he has to hide his views; but please read again my quote above “the ONLY way to financial peace…” That is simply not true, and rings of serious intolerance. As an atheist, I’m excluded–but apparently so are Muslims, Hindus, Buddhists, Jews, and any other religious group who does not “walk daily with the prince of peace.” He’s flat out saying that if you don’t agree with his religion, his financial advice is not for you. I’m sorry, but that is intolerant, religious bigotry.
I will have to check out that book. Thanks for the info!
What a coincidence–I just finished TMM last week (checked out from the library). I understood the steps but was disappointed that much of the book was “success stories” but no one explained HOW you get the $$ to take ANY of the steps.
I’m very deep in CC debt and frankly my take-home pay from my full-time job barely covers the minimums on my credit cards–which means I have to pay the rest of my bills using the cards, which makes the balances larger…
So where do I find suggestions and tips for getting enough $$ to even pay my bills each month? I’m not sure that a part-time job paying $6.50/hr is going to get me anywhere–what if it puts me into the next tax bracket?
The more I read and hear about all these books and testimonials, I can’t help but think what is wrong with everyone. Why would you buy something you can’t pay for, and end up paying 2-3x the original amount b/c of credit card interest. That $100 jacket in the end costs you $185 by the time you finish paying it off. Or better yet, realize you can’t afford it and don’t buy it. No one should feel sorry for the people that shoot themselves in the foot because they buy stupid stuff when they shouldn’t. I mean come on, its not that hard. You work, see how much you make, and only spend what you have. Anyone who doesn’t have the discipline and COMMON SENSE to do that needs some serious psychological help. There’s nothing hard about it, nothing complex, its common sense. Its crazy to me that people are in debt and everyone should look at those people as such, crazy. (besides house debt, that is understandable).
Brian, I don’t subscribe to Dave’s beliefs, either, but I know that they’re important to him and to most of his listeners. I don’t think he should censor himself when it comes to religion, just as I don’t think you should censor yourself in your comments. Instead, I think it’s important for the listener/reader to filter what Ramsey (or anyone) says, taking the bits that work and leaving behind those that don’t.
This is easier to do when reading a book — if you don’t like the philosophy being espoused, you can jump til the end of a section. On the radio, it’s not possible to fast-forward through the religious stuff. To me, that’s a price one has to pay to listen to Ramsey. For some, it’s not a price at all.
I’m about to leave for several hours. Please don’t turn this thread into a religious flamewar while I’m away.
J.D.,
Had to spend some, but I’m at about $4K again. Dave Ramsey has changed my life too.
I disagree with him, like you, on the credit card issue. I think paying cash for your home is out of reach for the average American… which requires a mortgage… which requires credit.
Credit is a tool. One easily abused, as we know all too well.
I am looking to get a secured card, and use it to re-establish my credit. My method is to use the card to pay off a few regular expenses every month, then pay off the card. I’ve heard others suggest this method.
If followed, it seems like a good idea.
As to Ramsey’s comment on separate checking accounts… I suspect this is his traditional mindset toward marriage. One primary breadwinner, one bank account… and deviating from that represents some sort of issue… purely conjecture on my part.
I think it gets into the religious area that you don’t go into here.
But Ramsey changed my life. Back to that… I’m not rich, or even what I’d call wealthy. However, I no longer live paycheck-to-paycheck. That has done WONDERS for getting rid of stress, and how well I sleep at night. It’s also made me think a *lot* longer before I make a purchase.
It motivates me to continue down this path. Like you, I think $10-20K is a good goal to work for. I’m starting with $5K.
Cheers.
P.S. Where does a guy get a good chai latte and talk to his favorite PF blogger, these days?
@bakednudel
I thought that the book was pretty clear about where to find the money: sell things and work more. There’s a several page section on “breaking logjams” in which Dave advocates taking a second job (even a part-time job) and selling things, especially things that are costing you money (like a car).
Also, many of the testimonials feature people who describe how they worked 80 hours a week for six months to get out of debt. This is a recurring theme: to do this takes hard work. My own experience echoes this.
@commonsense
Yes, smart money management is common sense. But many people were raised in families without this common sense. They were raised poor. They’re bombarded by ads. I’m not making excuses for anyone — it does, ultimately, come down to personal responsibility — I’m just trying to explain why people might not make smart choices.
I’m a smart guy, yet I did dumb things with money for twenty years. Smart money management is more about mind than it is about math. I can do the math. What I couldn’t do was control my emotions. You’re right — it’s psychological. But that doesn’t make it any less of a problem.
That’s why I’m glad to have read Dave. He understands that it’s a mental thing, and he’s not afraid to help people get turned around.
Your response just makes me want to beat my head on a desk.
Of course as a person of faith I believe my faith is the ONLY way to peace in ALL aspects of my life. And that if what I believe I know to be true than WHY would I ever tell someone to look elsewhere? And I am sure Muslims, Buddhist et al feel the same way. Sorry buddy but atheism IS a religion and you are no less an INTOLERANT BIGOT than I.
Just wanted to say I’ve read his book (borrowed from the library even) and I’ve just finished step one of a modified version of his plan.
I’ve saved up $2,000 for emergencies (my car is old and I wasn’t sure $1k would cover it if it broke down), and am into Step Two of attacking my debt, but I changed the rules here. Instead of a snowball I’m going by how much I want to get rid of certain balances. The first up is my credit card. It’s certainly not the smallest (or biggest) debt I have, but it’s been a monkey on my back for so long I’ll feel much better getting rid of it than all of the smaller debts combined, so I’m going after it first.
I say this just to give another perspective of the psychological aspect of Dave’s plan. A debt snowball is a great way for the psychological win, but so is getting rid of the debts that harass you the most. It’s all about what gives you the biggest mental/emotional boost to keep going.
I’d also just like to say before I started reading GRS I’d thought I was doing well on my financial plan, but it turns out ignorance is bliss. I’m far and away better at personal finance and wealth building since coming here. So thanks JD! Keep up the good work!
if you really want to learn some useful stuff, read the book “spiritual warfare” by jed mckenna.
As per JD’s kind request, and my own desire to not get into a religious flame war; especially given my own feelings that discussion of religion has absolutely nothing to do with finances, I will say this:
1) I never referred to you as an intolerant bigot, please do not refer to me that way. You are the one who has become frustrated to the point of wanting to beat your head on the desk despite my reasonable tone and respectful discourse.
2) Atheism is in no way a religion, despite what your church may have you believe.
I agree with many of Dave’s financial principles–I do not agree that it is required for one to share his religious beliefs to benefit from them and I personally feel that it’s unfortunate that he chooses to alienate certain people simply because he cannot recognize that fact.
Thanks, I will look again in the “logjams” section.
I’d like to hear more about how a Credit Card is a “valuable tool”? If you are following a plan like Ramsey’s, you would have no debts and 10-30K in the bank for emergencies, and you would have greatly increased cash flow. Under this scenario, how is borrowing or floating a purchase on a Credit Card somehow better or smarter than just paying cash (or using a debit card)?
I’ve been doing a lot of reading lately, the best of which recently was “Maxed Out”, and I have come to whole heartedly believe that the entire Credit industry is corrupt and immoral. Even if you are a “responsible debtor” and pay off your card(s) every month, you are still supporting the Credit Card companies - they still get their 3% from the vendors. I’m sure they make money from the banks to support the Debit Card system, but the banks are part of the problem, so I don’t care if they send moeny to each other.
@ joel,
of course all the credit industry is corrupt, but society as a whole is corrupt, and as a result the world is corrupt in one way or another. its what you are living in, its what everyone is living in.
@Joel,
It can be a valuable tool for times when you need to make a large purchase–such as a new home theater system or appliance. Carrying large sums of cash is not advisable and many banks place daily spending limits on debit cards.
Responsible credit card use also builds credit. One of the areas that DR and I disagree on is that of the car payment. I feel that a car is a large enough purchase to warrant *some* debt–but keep it within reason (the number of times people call his show with $35k income and a $22k car note astounds me, honestly). While DR proclaims that the FICO score is the “I Love Debt” score (and in many ways, it is) there’s no denying that having a good FICO score can make many things (like selection of mortgage lenders) significantly easier.
many people make money off of other people’s stupidity. that’s why credit companies are so profitable. they don’t make money off the people who have commonsense and pay their balance in full each month. they make their money off people who pay minimums and who don’t realize the money they are wasting by paying interest.
the only reason a credit score is imoprtant is when you want to make a large purchase (usually only a home i would hope). other than that it’s a stupid made up number that society wrongly values.
credit cards can indeed be a valuable tool. find one that pays you back, use it for things you need (not want), pay it all off before you’re charged interest, collect the check at the end of the year
rocketed my credit score up to over 800, too. you can bet i will have no trouble financing a home at a good rate when the time comes.
debt for many of us is inevitable. student expenses, home purchases, even cars are not things you can pay cash up front if you’re working your way up from nothing. there is ok debt to have, and there is debt you pay off asap if you have to take it out in the first place. knowing the difference is what puts you ahead.
I can attest to the “join the military to get out of debt.” I did just that but I really think I lucked out. I went when there was a draw down - and no war. I also had a husband on the outside that called the military while I was in boot camp because they failed to fill out my college repayment forms correctly and he threatened them. I got out 2.5 years later and had only $2800 worth of college loans left. It really helped me not worry about those loans ($15,000 paid by the army).
But you have to be careful in the military. There is a huge mindset to spend money because there isn’t much else to do. Almost all buy a new car. I stored mine in my mother’s garage and rode a bike on base. I also didn’t have an apartment. I saved money like nobody’s business. Most, however, don’t.
A responsible person who pays off their balance without fail thus not paying interest can actually make a decent bonus by using a reward-model credit card. Over a period after I bought my house, I spent around $8,000 on furniture, appliances, etc. I paid zero interest because I paid the balance immediately and ended up with a $100 Visa gift card to use.
I’m not saying this plan is for everyone. In fact, if you’re the person who needs / has used DR’s plans in the past because you’ve had trouble with credit cards, I wouldn’t recommend it. But, for those out there who are able to be responsible with it, that “free” $100 can be very nice!
Re student loans:
After listening to hours of DR on his radio program and struggling with this question, this is what I think his full approach is:
– if they are relatively small, just lump them into Baby Step 2. I’ll leave you to decide how small is small enough, DR doesn’t really. My own thoughts would be if the student loan amount doesn’t exceed your full emergency fund and has a low interest rate.
– if they are the size of a small mortgage (for example, my lovely $190K in student loans), then you would proceed as follows:
–Complete Baby step 2 for all other debts
–Then complete your full emergency fund, etc. to the point where you would pay off the mortgage early
–Then, BEFORE paying off the mortgage early, snowball the student loan
–Then, pay off your mortgage early
I don’t find DR’s evangelical Christian comments to be oppressive when I listen to him on iTunes. That’s his audience. He’s right on when it comes to taking responsibility and doing what it takes to get out of trouble. I’m well-versed at stealing what makes sense to me and ignoring the rest.
As for the flap about credit cards — they are only stupid if you use them as revolving credit.
Otherwise, they’re simply free convenience tools:
– I can buy stuff for cheaper over the internet because I have a credit card.
– Travel plans are a breeze with a cc.
– DH and I can take advantage of a couple weeks of float to buy things for the rental property that we will pay for with the next month’s rent.
– We get instant info downloaded to our financial software about where and how the money was spent.
– We get a few $100s back as a cash rebate.
We haven’t carried a credit card balance in many years. That would be a sign of financial distress for us, same as reducing the rate we’re saving for our retirements would be. I won’t say it won’t happen, but it would be a canary in the coal mine!
I agree with DR, that if you have a problem dealing with a credit card, don’t use one (and if you’ve had credit problems from spending too much on consumer goods, you might have a problem. Don’t kid yourself.)
I am out of CC debt but have a mortgage and a small car payment. I often have to pay for airfare, hotel, or creative materials for work, which I expense and am reimbursed for (direct deposit) within two weeks. I use a miles CC for those purchases, and pay off the balance when the reimbursement comes through. Some of these purchases ($2K airfare for overseas trip) could not be covered by my debit card. Of course I could refuse to cover these and my company would pay directly, but the reimbursements are fast so I’d rather get the miles!
I did a kitchen remodel recently, and used the CC in a similar way. I had saved the money for the remodel in a money market fund. When I made purchases (e.g. appliances, flooring), I used my miles CC, then paid it off out of the money market fund.
Over the past two years I have racked up enough miles for a RT ticket to Mexico this year, with plenty left over to book a domestic RT ticket to see my family. The card also means I get a $50 companion coupon for flights, which I’m using next month. I love to travel, and all of my family members live elsewhere, so these miles and perks make a difference for me.
So far this system is working well. But I spent years paying off credit cards and student loans that I had been irresponsible with; then I had to wait seven years for my credit score to reflect my wake-up call and subsequent efforts. I have excellent credit now, but I know credit cards can be dangerous. I treat them accordingly.
@Brian - When I say “cash”, I mean anything that funciotns like cash - Why not write a check? If you can’t write a check, and you can’t use a debit card, and you choose not to carry cash, then get the price and get a cashiers check or a money order. The convenience of credit is simply not worth the risk of credit.
Same goes for the car thing - why would you want to finance a depreciating asset when you can pay cash? And if you are trying to live a no-debt lifestyle, then a FICO score is meaningless.
As for a home, if you have a sizable down payment, a solid income, and no other debts, a bank will happily sell you a mortgage.
@commonsense - I think you agree with me on the FICO score thing, but we disagree on the CC companies. They make money even if you pay off your balance every month - they just don’t make it from you. Vendors typically pay 3% for the right to accept credit cards. And the banks pay for the right to put the VISA/MasterCard logo on their plastic.
Also, while the whole system may be corrupt, I can still make individual choices that limit my involvement.
@leigh - This is the fallacy that many smart and responsible people fall prey to: they think they can beat the Credit Card companies at their own game. But the old axiom applies: never bet against the house.
And debt is NOT inevitable! That is exactly what THEY want you to believe! They have so thoroughly indoctrinated us to this idea that we just fork money over to them for our entire lives, justifying all by saying “that’s just how it is”.
When you are “working your way up from nothing” is exactly when you should NOT become indebted! It is the worst possible time to owe money to other people. And yes, you CAN buy a car with cash (it just won’t be the fancy new SUV you want).
I’m sorry, I have not read anything to convince me that any debt is “good”.
@Joel,
You are clearly a hard-line supporter of Ramsey’s philosophy; and there’s certainly nothing wrong with that. If your primary goal is to live a completely debt free lifestyle, then I wish you luck in your endeavor–it’s an admirable goal to be sure! And you are certainly welcome to make your own choices when it comes to your involvement in what you believe is a corrupt industry.
The “risk” of credit is not the risk of credit, it’s the risk that you won’t pay the bill as you agreed with yourself that you would. The usage of credit cards that I’ve described is less “debt” than it is a short-term deferral of payment. I consider myself lucky that I have the discipline to use a credit card, redeem my rewards points, and not pay a single cent in interest on that card. I realize that not everyone has that level of discipline, which is why I stated that it’s not a plan for everyone.
Cara’s situation is also a perfectly reasonable use of debt.
Debt is not a “bad” thing–people’s inability to handle debt responsibly is a bad thing.
You asked the question, so please try to be respectful in your responses to our answers. Not all of us have the goal to live a lifestyle in which we avoid debt in all its possible forms.
@Brian -
But it is not “free”! You opened yourself up to at least $8,000 of risk by charging the stuff you bought. You state yourself this only works if you keep it paid off, but what if you had a serious emergency that ate up all your reserves? You’d be $8K in debt. That possibility just doesn’t seem worth earning $100.
@db -
I think DR would say the student loan always belong in Baby Step 2. What you are referring to is how he treats 2nd Mortgages.
@TosaJen -
Those are all valid points, and except for the rebate, they can all be accomplished with a Debit Card.
Obviously, this is a passionate issue. We Americans just hate the idea of not having a Credit Card. Is it possible that some of us (like Cara above) can occasionally not get burnt? Apparently so - but the society as a whole is suffering, and likely to suffer for a long time to come because of these attitudes we have.
Remember that DR is dealing with hundreds and thousands of people a year. He doesn’t preach a “system” other than get out of debt and stay that way, and I for one am going to follow.
@brian -
I don’t mean to sound disrespectful, I am just passionate. I feel that we have been sold by a bunch of Snake-oil salesmen to the point of endangering our entire society. I will try to tone it down a notch.
You are absolutely right that discipline and personal responsibility are the keys, and I applaud you and the other like you for it. I just hope that you don’t some day find yourselves on the losing end of the deal.
@Joel,
Ah ha! But you see, if you’ve completed baby step 3, you have at least 3-6 months of funds set aside in an emergency fund for just such a case. The $8,000 for new furniture didn’t come out of this emergency fund–because as DR himself points out, this money is only for emergency use.
Let’s for sake of argument say one has a $10,000 emergency fund, $10,000 in personal savings, and makes $8,000 in purchases.
In scenario A, the $8,000 gets put on a credit card and is paid immediately from the personal savings. The personal savings now has a balance of $2,000, and a $100 reward has been paid the spender.
In scenario B, the $8,000 is put on cashier’s check (since almost no one on earth would accept a personal check for this amount and most debit cards will not allow expenditures this high). The personal savings now has a balance of $2,000 minus an additional $8 or so for a cashier’s check.
Now, this same person has a $6,000 emergency. That $6,000 comes out of their emergency fund. In either scenario above, this is still the case.
This is this discipline I’m talking about–recognizing that to use a credit card intelligently doesn’t mean making payments, it means the money is already spent either way. For me, making $8,000 in purchases was had the same exact affect on my accounts as it would have had I used a cashier’s check because the money put on the credit card was already spent–and already set aside from my account to pay the credit card bill to avoid any interest. I earned $100 for my discipline. Does everyone have it? No. Is it easy to know if you do have it? Yes. If you don’t have it–don’t do what I’m talking about here.
But, as with most things, “what might not work for some works for others.”
@Brian -
I’ll concede that your math puts you to the good by $108 (out of $20,000). But I can’t let go of the feeling that it is a shell game that most people would ultimately not win.
And you are wise to say this is not for everyone. I think that most people who try this sort of thing, in the long run, do not have the discipline to succeed. It sounds like you do, but I feel you are greatly in the minority.
Peace.
@Joel,
We are definitely in agreement that I’m in the minority; but I believe this kind of discipline is a mindset that anyone can achieve if they get passionate about it.
What helps me is that I generally don’t even wait for my statement to arrive. Every day, I see if any of my purchases (which I log) have cleared my card and if they have, I immediately use online banking to transfer money from my account to the card to reduce the balance to $0.
@Joel:
on the rewards card, it’s a fairly safe game to play. *if and only if* you purchase things you have the means to pay for at the end of the month.
“When you are “working your way up from nothing” is exactly when you should NOT become indebted! It is the worst possible time to owe money to other people.”
disagree. my education is worth several hundred thousand dollars. i have had much of it dismissed due to fellowships and such, but still could not come up with $16,000 to pay out of pocket while in school. it sucks to have student loans, but it was that or pass up the six-figures of free tuition and not go to college. same with my husband, though to a much cheaper extent. i’d say that was a decent trade off for future income and job security. if you’re advocating not going to school unless you can pay out of pocket, you aren’t going to garner much of an audience.
“And yes, you CAN buy a car with cash (it just won’t be the fancy new SUV you want).”
we have only taken out a loan on one car of the several we have owned. in fact, most of our cars were purchased for under $1000. but many good cars are in the $5-10k range. and if you’re in sudden need of a car, i do not believe the average person has that laying around.
“I’m sorry, I have not read anything to convince me that any debt is “good”.”
never said debt was good. i said it can sometimes be ok, as in, acceptable for the circumstances.
Dave Follower (#35) Wise use of credit cards? Uh huh. You play with fire you will get burned. - Cooking with gas is using fire. Electrical stoves are also dangerous. Knives can be deadly too; I use knives most days to chop food. Most people can learn safer ways to use knives and fire in the kitchen. (Yes, some people only eat raw food. I’m not one of them.)
The problem is not that credit (credit cards, mortgages, car loans, etc) can be dangerous. Most things are dangerous when misused. The problem is that we do not TEACH how to use credit wisely. If American culture woke up about what is and is not smart uses of credit, payday lenders would go out of business due to acute customer lack.
Anne (#44) I realized that using a credit card made it too easy to make unnecessary purchases. Good for you on noticing that! I find cash makes me spend more…frustrating, since I want to stop using the debit card. (Reducing debit charges makes me more likely to balance my checkbook. Also there is much less protection from fraud / mistakes than my charge card.)
Jen (#48) Could it be that Dave Ramsey assumes people have mortgages to start with, and that’s part of why they’re “stuck” in debt? I mean, a big part of me getting out of debt was a) moving to a cheaper apartment and b) selling the furniture I didn’t need. It’s harder to sell a house than to give notice at an apartment.
All that said, yeah, a down payment plan is good to have.
I was going to say something good, but I see that it will be overlooked in all the other amazing comments here.
Anyway, from what I can tell Dave Ramsey’s plan is an excellent way of getting out of debt, I’d say that it’s an almost foolproof method of doing so. It’s probably also the most successful way for most people.
It’s not the only way of getting out of debt though, and it’s certainly not the only good way of managing money, that depends a lot on the individual.
Finally, the Dave Ramsey thing is simple. Simple, and easy, are not the same thing. Best of luck everyone.
@Joel — I’m far more comfortable handing out my credit card #, where no one is touching my actual money, than my debit card #, which is directly linked to real money. It’s much easier to fix the mischief of identity theft done via credit card than done via debit card, where we lose a bunch of our cashflow, even if only for a few days. I consider debit cards rather risky, and we rarely use them. Your experiences may be different.
I’m surprised that everyone is arguing about the evilness or lack thereof of credit cards, but not one commenter has disagreed with Dave’s advice to ignore your 401(k) until you are halfway through the baby steps. Credit card reward points/rebates are a trivial optimization compared to the lost opportunities when you don’t invest in your 401(k). Neither an employer match nor the yearly contribution limits can be regained when you finally turn your attention to them.
Joel (#62) I think I can speak to this, as I have a Ramsey-style emergency fund. I also have a credit card and charge card.
I also realize that my reasons for having them are only my reasons, and that others may value these things differently than I. (AKA what I consider a feature, you might consider a bug, and vice versa.)
I regard my charge card (green AmEx) and credit card (credit union Visa) as useful tools because:
Compared to a debit card:
1) I have time to find billing mistakes, and correct them with a phone call or file a formal dispute, without mistakes affecting my bank account.
2) If I formally dispute a purchase, I don’t have to pay until it’s figured out.
3) If a hotel or car rental puts a “hold” on the card, it doesn’t freeze part of my checking account.
4) If the card is stolen, fraudulent charges don’t affect my bank account. No checks bouncing while I’m figuring things out. And by law, the amount of charges I’m responsible for are a stolen charge or credit card is limited.
5) When charging things for work ($750 conference registration, say) I often get the reimbursement from the boss before my bill arrives.
6) Emotional: I like having something between creditors and my bank account. This is completely a “safe feeling” for me.
Compared to cash:
1) I spend less with with the card. Cash has no inherent records. The charge card details every dime in glorious detail (did I mention detail?)
2) Stolen cash is usually gone. Stolen card the damages are limited.
3) Can do mail order without COD, which is a hassle (must arrange to be home on proper day for mail delivery or get to the post office when it’s open).
4) Can make secured hotel/plane/etc reservations and purchases.
Compared to checks:
1) If a purchase is defective and the seller isn’t taking it back, I can file a formal dispute and not have to pay until it’s resolved. Not that it’s always in my favor, but it’s an option not open to those who pay by check.
2) Carrying a checkbook means carrying blank checks. No way do I carry a checkbook!
3) Can do internet mail order.
4) Can make secured hotel/plane/etc reservations and purchases.
Compared to my emergency fund, since that was mentioned:
1) The emergency fund is shared among a Vanguard bond fund with check writing privileges and a Vanguard money-market fund with check writing privileges. While these are convenient and fast, I don’t carry the checkbooks! They are in the lockbox at the bank.
Since I /do/ carry the charge card, it’s often used to pay for car repairs, Urgent Care visits, etc.
Finally, for the curious:
I prefer the charge card to the credit card because:
1) Can’t carry a balance (feature). The idea of not paying the entire bill in full each month does not even enter my head. This helps keep me on budget.
2) Annual fee. I feel a fee is a more honest way to recoup the costs involved in administering the card than to advertise FREE, NO FEE CARD with the interest rate in little, little tiny tiny print. This, of course, is entirely my opinion, and a no-fee reward-program credit card can be a net gain if used correctly.
I also carry a credit card because:
Accepted in more places.
1) From the same credit union we use for most banking.
2) No fee if I pay it off every month, so it doesn’t cost me to have it. Haven’t paid interest yet, in part because we rarely use it.
And my apologies if this is WAY more than you asked for!
@Brian- In scenario B, the $8,000 is put on cashier’s check (since almost no one on earth would accept a personal check for this amount and most debit cards will not allow expenditures this high
I have to agree w/Brian
When you are living a cash only lifestyle, how does one get expensive furniture or pay for vacations when a debit card usually have a low limit?
@JenK,
Thanks for that great write-up! I considered getting an AmEx green card; but I realized that the $95 annual fee was far more interest than I would ever pay so long as I’m diligent. As to the honesty factor–sure, it’s more honest; but the card companies are making 1.5-3% on all your purchases anyway, so if you do a decent amount of business with them, you’re already contributing to their business.
@TosaJen (#83) - you managed to sum up in 6-7 lines what took me over 60. Will you marry me?
@JenK: Jen & Jen would just be tooooo confusing.
Re: Debt Snowball-
If you pay off your high interest debts first but track all your debts VERY carefully as you repay them, you WILL see results in your overall debt level even if you are not knocking individual accounts off the list.
Question about Baby Step #2, which I’m currently on . . . would that include a loan against my own 401(k)? I took one out in an emergency a little over a year ago, and I have about $700 left to pay off, which is being deducted from my paychecks at about $40 per pay period.
I have no other debt at this point (yay!), and normally I’d say that paying off this last one would be my current financial priority, EXCEPT that it’s being steadily taken care of without my having to think about it, AND it’s such a relatively small amount, AND the interest on the loan goes straight back into my own 401(k), so it’s not like I’m losing money.
So my thought is that it’s better for me to start increasing my emergency fund (per Baby Step #3) now, while this last loan is gradually taking care of itself . . . agree or disagree? (Note: I have good financial habits at this point and my overall spending is well in control.) Thanks!
@Brian (#86) - I’m glad you appreciated it
I do value the “pay off every month” above the honesty factor myself. 
Funny story: Last time we bought a car (with cash we had dutifully saved up) I asked if we could just buy the car using AmEx to get the points. The dealership refused to pay the card fee on that big a purchase, and I really can’t blame them.
@Rob and @Kevin,
I don’t think anyone else responded about student loans, and I don’t have time to read all the comments anyway.
Student loans are definitely part of the Debt Snowball, even huge loans like those incurred by doctors and lawyers. The interest rate is irrelevant. You’re still making payments, possibly large payments, to pay off some debt, and by paying that off completely, you free up a lot of money. Again the key here is changing behaviour and developing good personal finance habits.
@Jen: Finish the emergency fund. After that’s finished, simultaneously start investing at least up to the 15% level of take-home pay and saving for your down-payment. In this scenario, you are just replacing the “pay off your mortgage” step with “save for down payment” (since you don’t have a mortgage).
Make sense?
Actually, my wife and I plan to do the same thing. Though we have a mortgage currently, we are not in the house we ultimately want to be in, so we will not put that money on the mortgage for this house. Rather, we will save (in a high-yield MMA or the like) to put a down payment on a new home that will better suit our needs.
Religion - On Ramsey’s preachy style. I’m not religious, I’d describe myself as agnostic but enjoy the philosophy of Taoism, and I simply ignored Ramsey’s preaching when I was reading TMM. When I listen to him on the radio or catch his Fox TV program I switch to something else if I find the level of preaching too high for me. I agree with others that stated that Ramsey’s individual morality/spirituality/philosophy (whatever you want to call it) is the basis of his teaching. As a result he can’t, and I agree, shouldn’t hide his spirituality. I also agree with others that the TMM baby steps could easily be thought/discussed/implemented without reference to religion.
TMM, especially Baby Step #2 - the debt snowball, really worked for us because we got so focused on our debt. Spending a year and 2 weeks focused on paying off our debt, not incurring new debt, budgeting, etc. (all part of #2) changed the way we live and I think that is the key to the TMM. Now we didn’t follow the plan exactly as we continued to contribute to our 401k plans and we also continued to put money into our emergency fund (baby step #3). But, we would have reduced our 401k and e/r fund contributions if we could not get our debt ($55.500) paid off in a year.
About the student loans and first-time home buying: My husband and I recently met with a budget coach who was a Dave Ramsey certified counselor (or however you say it). We are currently renting and our only debt is $35k in low interest student loans (we’re in our mid-20s). Our counselor recommended that we pay off our student loans (step #2 - we already have the $1000 emergency fund), then move on to the 3-6 months of expenses, then save for retirement, then save for our children’s education, THEN save the 20% down payment for our house.
We like Dave Ramsey, but we don’t think this plan works for us completely. We don’t want to overextend ourselves on a house, but we do think it’s more important than saving for our kids’ college. We also would like to save for a house WHILE paying off our student loans. Every year, our rent goes up, and we will have less to devote to our loan payments. As kids come into the picture, we have concerns about raising them in an apartment complex. We are concentrating on our loans right now, but in a few years we’ll reevaluate and probably jump into the home ownership stage of life before we get up to 15% on retirement (we’re at 4% right now), kids’ college, or finishing paying off our student loans. We’ll see.
Just FYI, here’s a short little video explaining Dave’s method of buying cars only with cash up front.
@JenK #85
I ditto just about everything you said, especially “compared to debit card/cash/checks.” I keep a credit card. It did take me a while to learn to use it ‘responsibly’. I only use it for certain things such as when I had to rent a car or if I’m buying something online. Like Jen, I’m particular about who I give access to my money to.
I do follow the Ramsey plan…to a point. He doesn’t place much value on credit score because of his belief in no debt and paying cash for everything. Until I get to the place where my emergency fund is fully funded and I have developed wealth, I will be sure to maintain my high credit score. I Got out of debt in December and my car died in January. I don’t like car shopping and want to do it as infrequently as I have to. Dave’s plan would suggest getting a beat up car that cost a few thousand that you can pay cash for until you can trade up. Nothing wrong with that plan. It’s just not what I want to do. My plan: I bought a car that I will pay for by the end of the year that I feel will last me for the next 10 years (the lenght of time I kept my other car). I was able to get a great interest rate on my loan and I plan to do what I did to help pay off my other debt…wait for one of those credit cards to send me one of their “transfer your balances and get 0% interest for one year”. Yes, thanks to Discover and Chase, for the last 3 years I’ve been able to give myself 0% interest loans. Since I was not paying any interest on the loans, I also slowly added to my emergency fund.
Admittedly, I could not have done that several years ago without abusing it. My mindset, understanding, and goals are different now so I’m not worried about my credit card use.
Dave Ramsey, religious references and all, is one of the top financial gurus I do read, listen to and follow.
i liked Ramsey’s book as well as his approach to eradicating debt, however, I could have done without the heavy religious references.
I looked up religion on some online dictionaries and they say that it is basically a set of beliefs. Pretty much everything that Dave Ramsey says on his program are his beliefs from finances to the Bible. It’s his program and has his name on it.
A few quick notes from reading TMMO and listening to Dave Ramsey for about a year and a half:
Joint checking account: These are necessary to put both people on the same page. You can’t create real goals and coordinate financial plans without clear, clean information. Also, if you are married, most states are community property states and your separate checking accounts really don’t separate your assets anyway. Why not just stay together on the checking account?
Mortgages: I wish I had taken Dave’s advice on my mortgage and bought a house where the payment was 25% of take home on a 15 year mortgage. I want to pay off my 30 year mortgage in a lot fewer years than 30 (hopefully 12), but it is difficult with the amount of house we have.
Student Loans: On Friday, my wife and I will pay off the rest of our student loans. While you may think that student loans are good debt because they increase your earnings, if you think of them as bad debt, you may choose to go to the $3,000 a year tuition school instead of the $18,000 a year school (1994-1997, so today’s prices would be higher) for a total of over $80,000 combined. While either way there would have been some living expenses to deal with as well, we could have had our school loans paid off in 1999 instead of 2008 if we had been thinking of school loans as being as bad as they ended up being for us.
Since getting on the TMMO plan, we have paid off over $100,000 in about two years. In the previous eleven years, we paid off about $35,000. This will be the first time in our lives that we will be living with no debt (outside of our mortgage) and it will be truly awesome.
One time the FICO score can matter is if you invest in real estate — for instance if you buy a property to rent out. I don’t know what Ramsey’s take on this is, but a savvy buyer who puts in the time to understand the business can do well.
I give Dave Ramsey credit for this - he has found a way to market himself and his ‘money makeover’ plan successfully to a wide range of people. The guy comes across as being very genuine and likable, it works great for him. He gets praised a lot because he gets a lot of publicity and has a lot of outlets for his plans, but the reality is his plan has some areas that are obsolete.
Here are my suggestions on order of attack when getting your finances together.
1. Start with an emergency fund (needs to be at least a month’s salary), but place into a money market account.
2. Pay off high interest ‘bad’ debt (credit cards).
3. Get the max company match you can get from your employer. Between your 401K’s and Roth IRA, plan on investing at least $5K per year.
4. Invest 10% of your salary or more into an early retirement account. Invest in index and mutual funds.
5. Pay off long-term ‘good debt’ (mortgage, school loans).
I have been married for 20 years and we have never had a joint account, or even considered one. I have endured people’s horrified responses to this for the whole 20 yrs and NEVER understood it. We use trust and transparency in the place of a joint account. Even without those, how long before you would know that the rent hasn’t been paid and so what difference would the name/s on the check make?
My spouse and I aren’t the same nationality, and we have separate passports. We don’t have the same blood type either, so we don’t use the same tube if one of us gives or receives blood. Still the marriage has held.
We have no debt, substantial retirement w/matching through our respective employers, 50K in a CD plus a little piece of land owned outright. Oh yeah, and we’re not Christian either. (Which tracks with all the statistics about who gets divorced more than anybody.)
The biggest issue I have with DR is how he says you can pull 8% out of you investments when you retire. I have not found one study to indicate that much and the most popular one states a 4% rate of withdrawal to avoid out living your money.
Plus I am not comfortable with using a 12% return on my investments, that is high.
I do like most of what he has to say… I don’t agree with everything, but at least it is one more voice out there telling people to get out of debt.
I liked the book (read a library copy), and his show can be fun to listen to too. But ultimately you do have to pick a plan that you can stick with and do the work that works for you.
Like you need a 106th comment! But Ramsey has been important to me. I don’t agree with all statements though.
-Canceling your cards can whack your FICO
-Debt consolidation isn’t bad if it saves money
-Your initial Emergency fund, IMHO should be about equal to your highest Ninja Bill over the last 2-years
-Travel on a debit card is horrible for your account. Hotels will put a $500 hold on the acount to make sure that you don’t take off on them. This hold is an arbitrary amount taken off at an arbitrary time and led to me bouncing checks. Have one card for travel. Luckily I have a business travel card.
Great to read your beautiful post,
I had gain & in facts practise some of the tips given ,
Its so kind to share your knowledge ,
Good Luck ,
Tracy Ho
wisdomgettingloaded
In response to RacerX. I now have a credit card that I use for business travel because I don’t want to wait to be reimbursed by my company. However, I did a lot of travel last year using only my debit card and never had a problem with a hotel or a rental company putting a ‘hold’ on my funds. I was told a couple of times by my secretary that the rental car company did require a $300 ‘hold’ but it never came about and I followed up by reviewing my checking account and check card ‘holds’.
My husband, on the other hand, got dinged with a bunch of overdraft fees when he rented a tool with his debit card and the rental company put a ‘hold’ on about $500. Thankfully, Wachovia refunded the multiple $35 overdraft fees on his account.
Also, I canceled both my BOA and CITI credit cards and a Home Depot credit card last year and my FICO score remained above 800. The BOA card dated back to 1998.
Wow, I never expected this discussion to still be going today; that’s very cool! A couple of things that haven’t been addressed yet:
@Brian (#76): The problem with your scenario is that you’re assuming the emergency is a one-time expense. I’m a computer programmer, which means I’m well acquainted with layoffs. The three to six months of expenses is not there just to cushion a one-time catastrophe, it’s to save you if you lose your source of income. If you’re carrying debt when this happens, you’re going to burn through your savings more quickly.
@Steve (#84): You’re dead on when you take issue with Dave’s advice to stop saving for retirement while you work the snowball. He’s said on the radio program a number of times that advice is only good if you intend to do the 80-hour a week, beans & rice version of the program. If you’re not up for jumping in whole hog and killing the debt super-fast, then delaying your retirement spending is indeed bad advice.
@Faculties (#101): Dave loves real estate; it’s how he made his fortune. From his Wikipedia article:
“At the age of 26, through his brokerage firm, Ramsey Investments, Inc., he had built a rental real estate portfolio worth more than $4 million. He became one of Tennessee’s youngest brokers to be admitted to the Graduate Realtors Institute. Ramsey’s debt-fueled success soon came to an end as the Tax Reform Act of 1986 began to negatively impact the real estate business. One of Ramsey’s largest investors was sold to a larger bank, who began to take a harder look at Ramsey’s borrowing habits. The bank demanded he pay $1.2 million worth of short-term notes within 90 days, forcing him to file bankruptcy.”
Dave encourages people to get into investment real estate, but advises them to do it on a cash only basis, and only if you have no debt.
@Everyone arguing cash vs. credit cards: Dave frequently cites a study that says people spend more per purchase with plastic than they do with cash. I was hesitant to mention this without having seen the study myself. Fortunately, I found a page where someone else felt the same and had done the legwork:
http://poorerthanyou.com/2007/10/12/do-we-spend-more-when-we-use-swipe-plastic/
I thought I’d chime in on a few comments I have read:
1. Credit as a “tool”: Dave is writing and speaking to millions of Americans who are addicted to credit. They have bought shoes, groceries, vacations, and movie tickets on plastic and paid 2-3 times what they cost in interest. He is teaching them to end that habit and never go back by destroying the credit cards. This is sound advice, and is the exact same advice that any decent counselor would give someone coming off an addiction. Let’s take the case of a salesperson who is a recovering alcoholic. There is no question that going drinking with his clients will give him an entry point into selling potential business, while refraining from alcohol may put him at a disadvantage to they other salesmen who takes the same client partying. No counselor on the planet would argue that in this case alcohol is a good “tool” for him to use to increase business. A good counselor would tell him to flee from scenarios that would lead him back into the temptation of drinking. If you have overspent on credit cards in the past, you are fooling yourself if you think you can’t be caught in that trap again. Telling someone who just fought through the pain of paying off years of wasteful spending (an addiction) to keep credit cards - only use them wisely - is exactly like telling someone who is 6 months removed from alcholism to drink responsibly. NO! DON’T DRINK AGAIN! IT’S DANGEROUS!
2. How to handle large purchases without a credit card: Sure, banks put limits on debit cards in order to protect the consumer. However, both banks I use will temporarily or permanently increase the daily approval amount with a simple phone call or letter. I have purchased thousands of dollars of merchandise - including large ticket items with my debit card and never had a problem.
3. Someone made a comment about it being impractical in our society to not have debt. I would agree if your concept of making it in society involves getting what you want, when you want it. I just bought a 2006 Honda Accord and paid $21K for it. The car I was driving was a 1994 Honda Accord with 207K miles, cracked leather, non-working door locks, rust spots on the hood, and embarrassing noises from the broken antenna whenever I turn the car off. I drove that car from when I started getting out of debt in October 2003 to February 2008 when I had 1)paid off my debt except the house, 2)established an $18K emergency fund, 3)set up 15% savings for retirement and 4) contribute $150/month for each of my 3 children into a college fund and 5)saved $21K CASH to pay for the $21K car. As for my 1994 Honda: I sold it for $1,500. If I can drive it, so could you. Don’t whine that you “need” to go into debt to buy a $10-20K car. Buy a $1,500 car and be embarrassed for a few months (or years) while you save money to buy a more expensive car.
4. Questions on student loans and downpayments on the house: Dave’s approach is that all debt except your house is eliminated AND 3-6 month emergency fund is established before saving for a house or retirement. Student loans would be eliminated first. The thing he stresses, though, is that intense focus is required. A disbursed beam of light from a flashlight can shine light on something, but a highly concentrated beam of light like a laser can cut through metal. His point is that every dollar you can scrape together should be used to eliminate consumer debt as rapidly as humanly possible - extra jobs, yard sales, Ebay, etc. can speed that process along. Then you’ll have much more money to quickly save for a house or retirement or whatever else you want to buy.
Dave wrote: [Ramsey] frequently cites a study that says people spend more per purchase with plastic than they do with cash. I was hesitant to mention this without having seen the study myself.
Yes, this meshes with what I’ve heard, too. I believe it’s probably true. This is one reason I do not use my credit card for things like comic books and videogames. I use it just for utilities, gasoline, and other expenses I would make anyhow.
Thanks for linking to that article, by the way. It’s great. It’s been a while since I linked to Stephanie’s site, and this will give me a chance to do so again…
@Dave,
We share the same profession, so I completely understand where you’re coming from. My point is that in my scenarios listed–debt is only used as a system to temporarily (often, in my case, for a few hours) to earn a reward. In either scenario, the money is already spent so it has no impact.
Regardless of how it’s spent, the money is spent in my scenarios–and you’re no better off one way than the other.
Using debt properly is not a bad thing–the bad thing is irresponsibly CARRYING debt.
@ baked nudel: I, too, had some trouble figuring out where the extra money to pay down the debts was supposed to come from. The book should go into more detail about taking on a second or part-time job. As I remember, only one testimonial mentioned that the husband delivered pizzas in the evening. Also, although I enjoyed the book overall and have incorporated some of its principles into my personal debt-repayment plan, I don’t think there were enough testimonials for people who don’t have any big-ticket items to sell. For instance, I own my car outright, and there is no public transportation in my city that would get me to my job every day. I rent a small apartment and obviously own no rental property or boats or anything of that nature mentioned in the book. I have been selling some of my CDs and DVDs and while that adds to my “snowflaking,” it doesn’t allow me to make huge payments on my credit card.
Stephen - I think the alcoholic analogy only goes so far. I also think that people can drink too much or drive drunk without being alcoholics. Sometimes the problem isn’t addiction, it’s irresponsibility.
If someone really feels that they can’t handle credit, that is their choice. But I’ve had too many friends saying “I can’t handle credit” when they mean “I am too lazy to track my spending and too irresponsible to set limits on myself.” And guess what? They STILL overspend. They STILL end up living paycheck to paycheck with no buffer when they get laid off. They’re just self-righteous about not using credit cards. I don’t exactly see the benefit here.
Just adding on the the testimonials: while I’m okay with cash, Ramsey convinced me to become much better with it. Reading TTMM helped me pay off a $14,000 outstanding college loan, create a budget, and begin building savings for the future.
His advocacy of personal responsibility is refreshing, smart, and what drew me to his theories in the first place. I understand why people might react strongly to his beliefs and/or money advice, but really - there are no bells and whistles here. It’s hard work and behavioral change. Grouped with The Tightwad Gazette and Your Money or Your Life, it’s the holy trinity of personal finance.
@stephen:
“Don’t whine that you “need” to go into debt to buy a $10-20K car. Buy a $1,500 car and be embarrassed for a few months (or years) while you save money to buy a more expensive car.”
umm, i’m pretty sure this was directed at me. and i’ll just say that i am currently driving a car made in 1989 that we purchased for $600 cash last year and stuck some money in it for parts. so get off your high horse already.
i seriously don’t understand why people don’t see this is not my situation i’m talking about. i’m talking about the vast majority of people who don’t know diddly about cars and would probably end up buying a car that had 1000 miles worth of engine life left if all they had to spend was $600.
JenK Says:
“I think the alcoholic analogy only goes so far. I also think that people can drink too much or drive drunk without being alcoholics. Sometimes the problem isn’t addiction, it’s irresponsibility.”
I agree that irresponsible behavior does not necessarily indicate an addiction. However, $20K in credit card debt and only being able to make the minimum payment is an addiction. Each person must decide for themselves whether they are addicted (isn’t that the first step?), but some people need help admitting they have a problem. Telling someone in this situation that “credit cards can be a good financial tool” because you can conveniently book a vacation or earn awards points is not doing them a favor. Telling them to get out of debt and develop a responsible financial plan is doing them a favor, and that is what Dave Ramsey does in this book.
leigh Says: “umm, i’m pretty sure this was directed at me. and i’ll just say that i am currently driving a car made in 1989 that we purchased for $600 cash last year and stuck some money in it for parts. so get off your high horse already.”
I did not mean to imply it was you who were whining, so I apologize for that. I, too, was referring to the majority of people who are irresponsible with credit. I have friends who have traded in their car at the first sign of trouble and bought expensive new cars on credit, because “they needed a reliable car”. NO, NO, NO!!! What they need is an emergency fund, so they can repair their car when needed, instead of resorting to consumer debt every time their peace of mind is threatened. Fear drives us to do stupid stuff, and having cash on hand to handle emergencies reduces fear. I can only speak from my own experience, having made many stupid financial mistakes in the past.
Steve - a 4% withdrawal rate is a “safe” withdrawal rate where you are unlikely to eat into the principal. If you don’t care about preserving the principal, you can draw much more assuming an average life expectancy.
@stephen at al: I must have missed the part where the anti-credit-card folks were qualifying their statements to say that the “no credit card” dictum was only for those who were in a deep hole and digging out, per DR. It sure sounded like most of the arguments were: “I don’t care who you are! Noone should have credit cards! There are NO good reasons to use credit cards.” That’s what I was responding to. As a person with pretty good financial control, I find credit cards a valuable tool for managing my money.
Now, ask me whether keeping chocolate in my house is a good idea, and I’ll have a very different answer for you! Your compulsions may vary!
The debt snowball is a good tactic, just don’t feel like you have to be locked into either Ramsey’s “lowest-balance first” approach or the alternative “highest-interest-rate first” approach. A hybrid solution may be better:
Pay off some of your low-balance debts first, for the psychological boost. Then, after you have some “quick wins” (to quote Ramsey) under your belt, switch to attacking the highest-interest debts. Best of both worlds!
Haven’t yet seen this mentioned: using a credit card is a benefit for us. A safety benefit. My husband works in a bad neighborhood. (He’s trying to make a difference through public service, so leaving the job isn’t going to happen.) It would be downright stupid for him to be carrying cash around on his person–even just enough for a grocery order or a tank of gas. Plus, having to run home for money first every time he needed to do an errand would be ridiculous.
I posted a review of Financial Peace by Dave Ramsey yesterday. I haven’t read total money makeover, but the steps between the two appear to be the same. I thought it was a great book and am following it to try and organize my own finances.
@stephen, re #117, when I was $20K in debt and could only make minimum payments, I’m afraid that stopping credit card use did nothing to solve the problem. I tried it and I was still treading water.
BUT: Moving to a cheaper apartment that was cheaper to heat, selling unneeded furniture, eating out less, buying less stuff (no room) and getting ORGANIZED enough to not lose bills, balance my checkbook regularly, track every dime I spent, and so on - THAT let me make more than minimum payments. Making more than minimum payments let me get out of debt and build an emergency fund.
Sure, credit cards may be toxic for some. But it is SOOOOO not a substitute for spending less, you know?
@TosaJen in #119, wow, you’re great
For that matter, I guess I missed where JD said in the review that Dave Ramsey’s book is only applicable to people who have huge credit card debt. Here I was thinking that building an emergency fund, saving for retirement, paying off the house, etc was actually useful for EVERYONE …. 
Re #123, maybe I am just jaded and old.
Not using credit can remove temptation to easily borrow from a faceless corp (instead of momma or sweetie or buddy). It can help to focus one’s mind on “only spend what I earn”, or on the immediate checking account. But I still see it as the lazy way out because it’s what I tried instead of doing the REAL work I needed to do of learning to be grown-up and manage money responsibly.
#94, I too am in the same boat, paying a mortgage one a home i know I wont live in forever. BUT, my mortgage is 6%, and my current interest rate for my savings is 3.5%, so when I throw an extra 1,000 or so against the mortgage principal, I am gaining 2.5% (the 6% i would have paid in interest for the extra $1000 that would have sat in my 3.5% savings account. Now, when i sell my home for 200k, and only owe 80k on it, I can take a huge piece of that 120k and put towards a new home, without touching my savings.
I’m new to your site, but since I keep seeing Dave Ramsey pop-up, I decided to go to the library today to check this book out. The main branch of my library (the one closest to my house) has two copies, both checked out and one with a 6 person waiting list! The other only had a 1 person waiting list, so now I’m the 2nd in line to get it. Now I have to read it, since it’s proving difficult to get!
I really like this book. Sadly, I gave my wife’s copy of it away to the library, thinking it was just another “get rich by thinking about it” book.
ugh. The mistakes we make. . .
pennywise-poundfoolish.typepad.com
[...] Get Rich Slowly reviews The Total Money Makeover. [...]
On the credit card issue, think about this. Why is it such big business? Because the vast majority of people can’t “master the card” and banks are banking on it.
Sure, some people can master it for a period of time, I did for several years, but then emergencies hit (and they WILL hit). The card is too tempting, and boom, debt problems. Like any system, there are ways to work it, but as with gambling, the odds always favor the house.
Let me first say that I have loved reading this forum and will try to get the TMMO book as soon as possible and read it. My problem is a bit different and I am hoping for some advice from all who can help. My husband was an executive in a Fortune 500 company and recently abandoned me with 2 small children (5 and 3) in favor of drugs (we are not divorced. I am hoping he will hit rock bottom some day and get help and be back again with us). Needless to say, I found out too late that he had spent nearly 130K (in credit card loans, cash advances, our entire savings, our children’s education fund and loans against his car and 401K). I suspect the amount may be more than what I am aware of.
Luckily I was just an authorized user on all his credit cards and my name is not on the home loan either. The first thing I did was to dis-associate myself from all his credit cards and joint accounts. I tried moving some money into an account (not under my name) for the kids and have invested in short term CDs. All I have left is a about 10K in my savings account. I had to leave the house with our belongings and kids since I could not find a job (I have not worked in 7 years) for 3 months (although I kept paying the mortgage out of savings) and could not afford to dip into my savings anymore. I know the house will end up in foreclosure. We are currently living with relatives.
My question is: I am almost 42 years old, and am afraid that I dont have much time to build up any sort of reasonable wealth for my retirement (since I am responsible for putting my kids through college as well). I know I must find a job first and my starting salary wont be much, given the 7 year break I’ve had from work, even though I am highly qualified with post graduate degrees. I want to buy a house for my children to grow up in. I dont see much need for a credit card but I have 2 just in my own name that I spend on (no more than 50 dollars each) and immediately pay the balance. I really don’t know where to start, how much to save and where to invest. I am ashamed to say, I trusted my husband so much with the finances that I never bothered to question him or learn anything about smart financial planning. Can you suggest what I should be doing, if lets say I bring in 45K a year (pre-tax) as my starting salary? And how I can save the most so I dont waste money on rent but save for a down payment? Please pardon me if I sound stupid…I guess depression and helplessness make people sound like me sometimes.
Thank you in advance.
Dear Worried,
I am very sorry to hear you are going through this terrible ordeal. It may not mean much now, but the first thing that comes to mind is that you are fortunate things are not much worse. What I mean is that because you are not liable for the mortgage or his credit cards, you have a leg up on other people in your situation. It is also good that you have some savings: $10K is nothing to sneeze at.
First, let’s look at the short term:
1) You may look into welfare, WIC, and other social programs to assist you during the transition. This is hard for many people: pride really gets in the way. But remember that your household paid plenty of good taxes in previous years to fund these programs, so you are just as entitled to them as anyone.
2) Next, take ANY job you can find to get you started. Again, pride is the enemy: you wrote that you “couldn’t find a job”, but I guarantee that between 7-11, Wal-Mart, McDonald’s, etc., someone will hire you. Usually when someone says this, what they mean is they couldn’t find a job they wanted or that made enough money. But remember, some is better than none! Unfortunately, in your situation what you want is essentially irrelevant: what you need is all that matters, and that is income. And who knows, a job like this may be a spring board to great things. You could move into management or find a corporate position with the company.
3) Never pay a dime of something with his name on it again (future reconciliations not included). No more mortgage payments out of your money: I know you already said you moved out, but he will quickly become desperate and unpredictable, and you will be his lifeline. You may even seriously consider a restraining order until he has himself back under control.
4) Conserve cash. Don’t think about accumulation or investing right now: those are not your priorities. You need to use your money to take care of you and the kids. You need to conserve every dollar to that goal and that goal alone. Shop at Goodwill, clip coupons, buy generic. If you can move in with family, I would recommend that while you get your life back in order. Even if it means moving, it may be a good thing to get away. It sounds like the only real thing keeping you there is the past.
So now let’s look at the long term.
1) Do not rush into debt! Rent may feel like a waste, but don’t feel obligated to buy a house as soon as possible. The last thing you need is an anchor of debt around your neck dragging you further into the abyss. Renting is better than owing.
2) Ramsey would tell you that it is a myth that parents are obligated to pay for their children. I completely understand his logic, but as a parent I also understand the intense drive to provide as much as possible for our kids. If you read his book, you’ll see that he has a place in his program (The Baby Steps) for saving for college. This comes after being debt free (except for the house), having an emergency fund, and saving for retirement. Yes: after saving for retirement! Your first obligation is to ensure your own future, then you can try to help with theirs.
2) Retirement. With an interest rate of 8%, you need approximately $500K invested to pull out $40K per year to live on. The current Roth IRA contribution is $5K per year, which at 12% growth would take 22 years to reach $500K. That means that if you started next year, at 43, you’d still be able to retire at 65. If you double that to $10K per year (401K matching funds could help), you would hit the 500K in 17 years, but at the original 22 years you would have over a million! Welcome to the miracle of compound interest.
Now, I know that sounds like a lot, especially while trying to raise two small children, but if you make 45K, here is how it breaks down: as a single mother of 2, your taxes are going to be relatively low, so let’s say you take home 36K (20% taxes). That is $3,000 per month take home pay.
- less $750 for home and utilities (25%)
= 2,250
- less $400 for groceries
= 1,850
- less other necessities like insurance, gas, etc., say another 25% (&750)
= 1,100
To save $5K per year, you need to set aside $417 per month. Obviously, 10K would be 834. Ramsey says 15%, which would be $540 per month. For now we’ll stick with that.
= $560.
After all that you still have almost $600 per month for everything else, some of which could be down payment or education savings, but more likely will be used for things like soccer camp and new shoes.
What you do NOT see above is leeway for DEBT: things such as a car payment, credit card bills, or other such “temptations” will seriously thwart your effort. There will not be a lot of eating out, going to the movies, or vacations. The only way you can save at an adequate rate is if you have every dollar of your own at your disposal.
You are in a tough situation, but it can be done, especially since you are beginning from a position of relative strength. My typical disclaimer is this: the overall program is simple, but certainly not easy. This will take a lot of forethought and planning backed up by tremendous discipline and self control. By all means, go to the library and check out TTMM, and ask lots of questions. This place is full of good advice. Most of all, have faith and patience.
Peace,
Joel
@worried sick
I am so sorry that you and your children have to go through this. I agree with Joel in that it can get a lot worse than this, though. I think that if you can follow his advice, and also not let yourself get overwhelmed with what is going on (a big deal and something that’s paralysed me for years) then you will be on solid footing.
regarding college for your kids, I don’t think that you should worry too much about that. School will make them more marketable (depending upon the degree) but the best thing that you can do for your kids is to teach them the value of a working hard and working smart (there’s a difference!), to look out for their family and themselves, and to learn to take unexpected opportunities.
I am sure that you, your husband and your kids will come through this tough time in fine shape, as long as you take it one day at a time and set yourself up for success from here on out.
Good luck
Zach
[...] the book as your first snowflake!). I think that Get Rich Slowly has a nice synopsis of the book here if you want to get the basic idea before investing your time reading the whole [...]
Dave Ramsey has been a great source of inspiration for both my wife and I. We love him and what he does for people. However, everything practical you could get from him is through his book, Total Money Makeover. All his other books, programs, seminars, classes and website subscriptions are a waste of time and money - that is unless you like being told the same things over and over again. Also, if you’re not religious, don’t bother with Financial Peace University, not only because of the repetitiveness but because it concludes with a nice sentimental and a very evangelical sermon. I didn’t expect to attend church when I signed up for that one.
I’ve been trying to do TMMO for over a year now. Both of us getting laid off and living off savings and UI was an eye-opener for us. We are now pretty much die-hard TMMOs. Our difference is that we’re building our emergency fund while paying off debt simply because we had a tiny bit left once we found jobs again (and none too soon!). So we’re adding $250 a month to the fund and putting $50 towards debt along with the minimums. Not what Dave says, but it’s our mindset. By the time we get the fund funded, we’ll have one credit card paid off and we can start really throwing some money at the debt. I look to be debt free except for the mortgage in March 2010.
We ahve found that when our co-workers find out we’re doing ‘Dave,’ they get interested and want to know more. In this economy, we’re learning how we got into this fix in the first place.
As for the saving for the down payment/cash to buy a house, his book has step 3 1/2: after funding the emergency fund fully, and if not a homeowner, he says use snowball $ to save for house. At this point, snowball $ should be nice chunk of change and saving 20%plus would take no more than a couple years at worst. And this is the market to be doing that in for sure. Then baby step 4 is actually paying off the house…
Once you are debt free, 15% of income is really a drop in the bucket. We plan on saving through Roth’s, 401ks and when we’ve maxxed contributions, throw what’s left into a high yield savings account. We want to retire in 13 years, I feel confident we’re on track.
Dave is not for everyone. It wasn’t for us last year, either. But living the life of worry and fear wasn’t for us either, so now we’re gung ho. It took a crisis to open our eyes. I hope it doesn’t do that for everyone else, no matter how you reduce your debt.
Hi Kym,
I think you have hit on something very important: for most people, there has to be some event or “ah-ha!” moment to make them willing to commit to such a plan. I know we certainly had ours. I am fond of saying “I didn’t hit rock bottom, but I could reach down and touch it!”
There were three things I wanted to comment on from your post.
First, I think it is great that you can look so far ahead. Knowing and accepting that you will be working at this for years in advance is a very positive step. Keep the Intensity!
Second, just to be clear, you mentioned that paying off the house is step 4, but step 4 is saving for retirement:
1) $1,000 baby emergency fund
2) Debt Snowball
3) Fully funded emergency fund
4) Saving for Retirement
5) Saving for College
6) Paying off the mortgage early
7) Investing and Wealth Building
Just in case there are any readers who are not familiar with Ramsey’s plan of attack.
Third, I definitely appreciate the idea of funding the emergency fund earlier. The question always comes up about what you would do in cases of extreme emergency during the Debt Snowball. The answer is you stop the Snowball and use those funds for the emergency. You can always return to paying debts later. By delaying your debt repayment (in order to save now), you are paying more in interest and also delaying the realization of your income’s true power. I’m not saying it won’t work, and it sounds like it may be the best emotional decision for you, I’m just playing devil’s advocate.
Great stuff - congratulations on turning the corner.
Peace,
Joel
The ‘get out of debt’ advertising bait is just the tip of the iceberg of his overall product/philosophy.
The foundation of Dave’s product philosophy is anti-usury. If you go a little beyond Dave’s show, Dave reminds us how the US and Christian culture used to include the distain of usury practices. It’s why Dave wants us to get out of debt and *stay* out of debt…thus, there is no such thing as “good debt”.
This anti-usury belief is one of the reasons that Dave doesn’t prioritize high-interest debts over the debt balance. He doesn’t want us to just get out of debt via the best mathematical formula. He wants us to get in the habit of NOT owing money to anyone. Thus, you start out with a list of organizations you owe to…and one by one, you eliminate those organizations…and the fastest way to see that list shrink is to pay off smallest to largest (albeit his method, usually is the fastest and least expensive way to get out of debt because it includes emotional, life, and account fluxuating/penalty variables).
At one point all the major religions were anti-usury. Today, only Islam has the courage to continue to preach that belief. I believe that Dave is trying to resurrect that belief both in the Christian culture and in the US culture.
Now I perfectly understand that Dave might not fit the description of the ‘perfect’ Christion…but (1) other than Christ, who does; (2) resurrecting this belief in the Christian/US/world culture is far too important to be intolerant of Dave. No matter how you slice Dave, he simply is not that bad of a Christian…besides you aren’t really supposed to be judging him.
The Dave Ramsey show is really part of a serious movement to create strong empowered people…mostly Christian…that can have enormous impact on this modern world. Dave speaks of not only getting out of debt, not only of becoming wealthy, but how important it is to pass on this wealth and wisdom to children. Generational wealth in benevolent families/organizations used to be a Christian goal…to offset the generational wealth in non-benevolent families/organizations. That is why Dave has written several children books that establish an anti-usury/Christian belief about managing money at a young age.
dave ramsey, Where do you begin? I had read almost every book on finance. I used detailed spreadsheets, planned, and really thought I was doing things right. Then I picked up dave’s book. As I read it I thought this isn’t rocket science. I know alot of this stuff, just not like this… A light came on. It has made a huge difference in my life. In just 6 months I have paid off 20000.00 of debt and am much less stressed, because I now have a plan that really works. If you need the peace- read ramsey!
We followed Dave Ramsey’s principles long before we new of Dave no debebt emrgecysavings to get us through at least one year or one midsized disaster, and a modest retirement savings in a 401k; but where do we go from here where do we invest in todays financal turmoil?
There are a couple people who asked where the extra money to pay off debt was supposed to come from…uhh…it’s called cutting expenses.
Here is my story:
My finace and I are both early in our careers and make 50k each a year (me 27k her 23k). I got Dave’s book from my Mom who listens to him on the radio. From December 07′ to December 08′ we’ve done the following:
1) Paid of $6,000 in credit card debt
2) Saved $5,000 (2.5k Savings, 2.5k Stocks/Mutual Funds)
3) Started 401ks (each over $1k now)
4) Both our credit scores broke the 800 “barrier”
Now our money works for us instead of the other way around.
Take what you can from this clown and leave the rest. Seems to me Dave does not like people that do not believe his way. I can tell by his tone toward a Jewish guy that called about his daughters Bat Mitzvah. Dave was all businesslike wiht no sense of humor . He did not even wish the guy to have a great Bat Mitzvah for his family. Disgusting really. I listen to him during work because it gets me thru the day .. but it is very repetitive. Still waiting to him , to say just once HAPPY HANUKA . I am an atheist and I will never give 10 percent money to a church . I would give to other charities but not a church.
You know, Dave apparently has made a lot of difference to a lot of people on here.
So he includes his worldview in his teachings….and the atheists and the Christians and all the others who write on here pretty much agree with most of what he teaches about finances. You ALL live out of your religious or non-religious world view.
So, say you are an atheist or a Christian or an agnostic or…whatever…but don’t criticize Dave for including his Jesus talk. Some of you who talk from an atheist view want no criticism for that, so give him the same respect in return.
In other words, its okay to recognize the difference, without giving negative criticism to his beliefs. If you called on his show, he would NOT criticize ANY of you for having agnostic or atheistic views…he would seek to help you with your debt problems!!! The truth of his financial steps works because it is truth, not because his listeners are Christians of not.
Hey, no need to criticize his Christian world view being reflected in his writings. If you had written this book from your atheistic views or agnostic views, and you stuff worked, people are going to focus on the information that works rather than giving judgements about the non-religious nature of the author.
Save the anti-church, anti-God, anti-Christian discussions for a place where they belong…a discussion board about religion. I don’t believe the topic of this discussion board is Dave Ramsey’s religious beliefs…I think it is about the concepts of getting out of debt and building financial freedom and wealth.
Please note, tithing to a church and believing in Jesus Christ are not part of his Baby Steps. These principles are universally applicable to financial freedom.
Stay on the subject.
Just a note from a pastor who has read excellent financial comments on here from the Christians and the atheists and everyone in between. Good discussion.
Dave’s plan changed my life. I went from having $14,400+ in student loan debt in January 2008 to being debt free, having a six-month cash cushion, and funding my Roth IRA (maxed out) for the first time ever!
I disagee with Dave on a few points. But I don’t need to agree with everything he says. He’s a great guy, and his program is awesome and effective.
I didn’t even buy his book. I learned about him when I browsed his book in Borders. I then Googled his name and found his website and radio show archive. The rest is history…
BTW. I’m not a Christian (no religious affiliation actually), but I’m pretty opened minded.