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.
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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
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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.
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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).
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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.
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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.
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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.
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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”
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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.
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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.
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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
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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.
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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?
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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.
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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.
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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.
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@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.
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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.
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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.
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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%.
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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.
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Question: Is the 15% figure 15% of after-tax income or pre-tax income? Thanks.
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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
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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.
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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?).
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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.!!!
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Here’s one reason why Ramsey hates credit cards:
http://finance.yahoo.com/banking-budgeting/article/104466/Card-Sharks
*HT- Joe Sangl
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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!
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@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.
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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.
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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
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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)?
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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.
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@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.
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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.
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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.
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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.
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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!
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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.
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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.
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I think DR plan is fantastic! I just think once you get out of debt. The hardest part is to STAY OUT
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@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.
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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.
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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.
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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.
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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.
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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.
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@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.
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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.
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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.
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