Wednesday, February 27, 2008

Live like no one else, so you can live like no one else.

I have been meaning to post about Dave Ramsey's baby steps for a couple of weeks now but I obviously never got around to it. Luckily I found another blog that posted everything I wanted to say but they did a much better job than i would have done. Dave got the baby step idea from the movie What About Bob starring Bill Murray. In the movie Bob plays a mental patient who has several paralyzing phobias who is seeking treatment from a famous psychiatrist, Dr. Leo Marvin. The solution for Bob to get over his paralyzing phobias is to take "baby steps." When getting a hold of our finances, sometimes it helps for us to take baby steps too.

I also preface this whole thing by saying that we never at any time neglect giving back to God. Perhaps I can cover this issue in another post. I say this because the writer emphasizes working really hard to get out of debt so you can enjoy life and be financially free. That is a great position to be in but not at the cost of becoming greedy and not being a cheerful giver like God calls us to be. Okay... hopefully you understand what I am saying. Nuff of me...

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:

If you will live like no one else, later you can live like no one else.
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 and give
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.

Saturday, February 9, 2008

It passed!

In case you haven't heard yet, the Senate passed the Economic Stimulus Plan this week. All George Bush has to do is sign it and it will be official. The checks should be sent out sometime in May.

Saturday, February 2, 2008

Economic Stimulus Plan

Have you heard that Uncle Sam may be sending you a check in the mail soon? The Senate is set to vote this coming week on an economic stimulus plan that would give most Americans a tax rebate. U.S. leaders are hoping that the plan will do exactly what it is says... stimulate the economy. Those who are single would get $600. Those married filing jointly would get $1200. Those with children would get an additional $300 per child under the plan. Woohoo!!! Having triplets is going to pay off after all. The plan may change between now and next week and they may vote it down, but all I have to say is bring it on. We could definitely use an extra $2,100.

Question: Assuming the Senate passes the Plan, what are you going to do with your rebate?

Tuesday, January 22, 2008

Debt: No big deal

Something I learned when going through Financial Peace is that we typically look at finances the wrong way. The way our grandparents handled their money (only paid cash, lived on less than you make) is long gone. The average American today, before they make a large purchase, will ask themselves if they can afford the monthly payment. For example: New car costs $25K but spread over 4-5 years might cost $350 per month. They pay no attention to the fact that they are about to go $25K in debt and will actually end up paying more than that amount because of interest. This kind of thinking typically leads to people getting trapped in the "rat race" and with debt up to their eyeballs.

I know the concept of debt has always been around (Proverbs 22:7 The borrower is SLAVE to the lender), but it seems to have gotten out of hand in the last 50 years. I am pretty sure too that Master Card, VISA, American Excess, etc. have had something to do with it. I think eventually all this debt is going to catch up with us. In fact, it probably already is. Bankruptcy is at the highest level it ever has been and I doubt it will be getting better anytime soon. The national debt is at a whopping 5 trillion dollars. Obviously people don't mind being in debt or it just doesn't bother them enough to do anything about it.

As I type this I am reminded of our mortgage and how I can't wait for the day that it is paid off. Does it drive anyone else crazy to know that you owe such a large amount of money? It does me. If Proverbs is true, then why would any of us want to be a slave to money any longer than we have to be? Maybe it's time we started taking our grandparents advice again and change the way we look at money. Let me know if I am preaching to the choir or if you have a different view on debt. I am interested to know if debt drives you crazy as much as it does me.

Saturday, January 19, 2008

The Bible and Money

Here goes nothing. This blog was inspired over five years ago when Anna and I were first introduced to Dave Ramsey. Anna's mom and dad thought it would be a good idea for us to go through Dave's Financial Peace University (FPU) class at church before we got married. They graciously paid for it and the rest is history. For those of you who have never heard of Dave you can check him out here. It would be an understatement to say that those 12 weeks of FPU have been a lifesaver for us.

I am a big believer in Dave's way (really the Bible's) of handling finances. I was really surprised to find out when going through Financial Peace University exactly how much the Bible talks about this issue. Did you know that the Bible mentions the issue of money over 800 times? Eight hundred times!!!! If the Bible talks about money that many times then it seems to me that God must think that it is an important issue. It possibly has never been more important than now since money fights and money problems are the #1 cause of divorce in America today. It doesn't have to be that way. God has already told us what to do with our money, but why is it so hard for us to actually do it?

Please don't get the impression that because this blog is about finances that I am an expert in the field. That is hardly the case at all. In fact, please feel free to voice your opinion if you disagree with me at all. I will try to share with you some of the things that I have learned in the past five years that have been helpful for our family. I hope to delve into issues relating to debt, credit cards, budgets, mortgages, retirement, kids college funds, etc. I know I probably just lost about half of my readers already, but this blog is for all the other geeks out there who enjoy keeping up with their finances.