Bible Money Matters » Dave Ramsey

Being “Normal” Costs An Average of $600,000 Over a Lifetime: Here’s Why We Are Fighting Back

Melissa — Tue, 22 May 2012 14:55:05 +0000

Dave Ramsey is fond of saying that you don’t want to be normal because “normal” is broke. Now, CreditLoan has graphic proof of that in the infographic, “A Lifetime of Debt: The Financial Journey of the Average American.” Comprised of information from several sources, this infographic, which is laid out like the Life board game, shows Americans’ journey into debt. Would you believe that it begins in high school?

Debt Often Begins In High School

By high school, the average American has a department store credit card. While many teens want to be independent and show that they are grown up, is incurring debt the way to do this? I would prefer that my kids show they are grown up by avoiding credit until the end of their college career, but that doesn’t happen typically. In fact, according to the infographic, 84% of college students have credit cards, and the average undergraduate carries a balance of $3,200. Only 2% of college students do NOT have a credit history.

I don’t know about you, but I didn’t earn much money in college. I did have credit cards, and I was “normal” and carried a balance. All I could afford was the minimum payment, which was often just enough to pay the interest for the month. Let the enslavement begin.

Student Loan Debt

The infographic explains that the average undergraduate graduates with $20,000 in student loan debt; if they go on to graduate school, they amass $17,000 more for a total of $37,000 in student loan debt.

Unfortunately, once again I was completely normal. My mom was a widow who had never worked outside the home until my dad died, so she didn’t have any money to pay for my college education. I got the first two years of college free by attending a community college’s honors program, but I amassed $20,000 in student loan debt for my last two years of undergraduate work. I took two years off after that and worked and paid down as much debt as I could before going to graduate school, which is the only reason why I left grad school with “only” a combined total of $22,000 in student loans between undergrad and grad school instead of the “normal” amount of $37,000.

Sadly, I am still paying down my student loan debt, in part because my husband and I thought we could afford our lifestyle when we should have been paying down debt. However, the student loan is my next target on my debt snowball, so I expect it to be gone by this fall. Yeah for giving up a lifetime of normalcy!

Home Loans And Auto Loans

According to the infographic, after students graduate college and move on to adulthood, they continue to amass debt. The average home loan is $240,000 and after 30 years of making payments, the homeowner will have paid a total of $580,000 over the life of the loan. (Suddenly the monthly payment doesn’t seem so affordable. I wonder how many new homeowners take the time to compute exactly how much they will pay over the life of the loan. I am guessing that most blissful believe they are paying down $240,000.)

Most “normal” Americans own two or more cars and take out a car loan of $30,738 for 6 years. Their average interest rate is 7 to 9%. (This infographic was created in 2009, so I am guessing the interest rate should be lower now, but on a loan of more than $30k, you are still paying quite a bit of interest.)

A Lifetime Of Debt And Interest

The most staggering fact of all—over a lifetime, a “normal” American pays out $600,000 in interest for all of these loans they take out over a lifetime.

Paying cash and paying for only what you can afford is considered weird, but it is no wonder “weird” people get ahead in life—they have an extra $600,000 to use or invest that they are not paying out in interest.

Until last year, I was living a very “normal” life. However, last October we swore off credit cards and have paid down nearly $10,000 in debt in 7 months. We are on our way to being “weird” and couldn’t be happier.

How about you? Have you thought about being weird and swearing off debt?

Paying Down Debt With Gazelle Intensity? How Much Of An Emergency Fund Do You Need?

Melissa — Wed, 18 Apr 2012 12:57:21 +0000

I am a big fan of Dave Ramsey, and as my husband and I pay down our debt, we follow a hybrid approach to his debt snowball method. Followers of Dave Ramsey know that another part of his debt reduction plan is to first save $1,000 in an emergency fund before beginning aggressive debt reduction. Yet is this good advice for everyone? Should some families have a larger emergency fund? What is the right amount for your family to set aside in an emergency fund?

Peter has stated that while he and his wife paid off debt, they had a $2,000 emergency fund (which they have grown considerably now that they are debt free except the mortgage). My husband and I cut it closer and only have a $500 emergency fund. As can be expected, this amount was too small, and we recently experienced a mini-financial crisis. For us, a $1,000 emergency fund is too small. We have decided to initially create a $2,000 emergency fund with our tax refund and then to divert some money to increasing the emergency fund to $5,000 while still paying down debt.

Considerations When Creating Your Emergency Fund

What is the best way to determine how much you should have in your emergency fund while reducing debt? It ultimately depends on your own comfort level for risk and several other factors:

How much debt do you have to pay off? If you have less than $8,000 to $10,000 in debt, chances are you can pay it off fairly quickly, so you may be able to get by with a smaller emergency fund. If you have a much larger amount and know it may take you longer than a year to become debt free, you should probably set aside a large amount because emergencies over the course of several years are likely to occur.

How stable is your job? In this economy, it sometimes feels like no job is truly stable and secure, but if you have a job with fluctuating income, you’ll need a larger emergency fund to see you through those periods of low income. I am a freelancer and make ½ to 2/3rds of our family’s income depending on my work for the month. I have been a freelancer for 14 months and have been fortunate to see my work increase every month until last month when I lost several clients who lost their own source of income. This was a wake up call that we need a cushion for those times when my income ebbs.

Do you own a home? If you own a home, you will likely face unexpected repairs, sometimes costly ones. Is $1,000 in an emergency fund enough to cover a sudden roof repair if you want to avoid debt? The answer is no. While you wouldn’t need the entire amount set aside, you should have several thousand dollars set aside for unexpected housing repairs.

How old is your car? A car that is only two or three years old is less likely to need expensive repairs than a car that is seven or more years old. If you have an older car, you need to have enough set aside for unexpected emergencies.

How many kids do you have? The larger your family, typically the larger your expenses and the more you should have set aside. We have 3 kids, and while they are healthy, unexpected expenses can still come up such as the three cavities the dentist recently said my son has.

Do you have insurance? If you do, how good is your insurance? If you don’t have insurance, the first thing you should do is get insurance because one accident or injury could lead you to bankruptcy. Even if you have to just have major medical or have to cover your children through state funded care, insurance is essential. However, many people do have insurance, but the coverage is poor. How much do you have to pay annually out of pocket? What is your maximum deductible? All of these answers will help you determine how big your emergency fund has to be.

How much to save in an emergency fund when paying down debt is a personal decision. We have taken risks with a very low emergency fund of $500, and we were caught off guard when several reimbursements were very slow in coming, resulting in a significant budget shortfall. That situation combined with my income actually decreasing for a month led us to the decision to increase our emergency fund. This might not be the right strategy for everyone. Use the list above to determine how likely you are to face an emergency and how much money you should set aside.

How much do you have saved in your emergency fund? Do you feel like it’s enough?

Which Method Is Best To Pay Off Debt: Lowest Balance To Highest Or Highest Interest To Lowest

Melissa — Mon, 02 Apr 2012 14:41:32 +0000

There is frequently a debate between financial gurus as to what method of debt repayment is best.

Lowest Balance to Highest Balance

Of course, Dave Ramsey advocates the debt snowball method where you list your debts with the lowest balance to the highest balance with no concern for what the interest rates are. Then, you pay the minimum payment on every debt except the one with the lowest balance. The one with the lowest balance is the one on which you apply as much money as you can. Once that one is paid off, you take the payment that used to be applied to the debt you just paid off to your next debt with the next lowest balance. As this cycle continues, the amount you apply on the next card in line increases as you pay off your debts one by one, which is how your debt snowball becomes larger and more formidable.

Critics argue that Dave Ramsey’s approach is not cost effective—you pay more in interest by following the debt snowball method. Dave Ramsey argues that personal finance is not only about math, it is about psychology as well, and the psychological boost of seeing at least one of your debts disappear quickly helps greatly in debt repayment. There is real motivation from seeing immediate results.

Highest Interest Rate to Lowest Interest Rate

On the other hand, financial gurus argue that the most effective way to pay off debt is by paying the debt with the highest interest rate first, no matter how large or small that debt is. By paying off the debt with the highest interest rate, you are freeing yourself of a debt that takes more and more of your hard earned money simply for interest, rather than principal.

Recently, the April edition of Kiplinger’s included an essay by Robert Frick, senior editor at Kiplinger’s. He argues that we should pay off our cards based on the highest interest rate, but we don’t because “our brains aren’t adept at quickly calculating” the financial implications of paying the debt with the lowest balance first. He explains, “Think of $10,000 in credit card debt with an interest rate at the national average of 14.9%. You want to pay off that debt aggressively, so you figure you’ll pay 4% of the balance,or $400, on the card each month. Quick, how long will it take to pay it off? You may think, Twenty-five monthly payments would be $10,000 then add in some interest. The debt will disappear in a couple of years. In fact, you’ll be paying for 31 months and will rack up more than $2,400 in interest.”

Pick a Plan and Stick with It

Both parties make compelling points, but the argument reminds me a lot of weight loss. One person may advocate a low-carb diet while another may advocate a structured diet plan like Weight Watchers. Actually, if you stick to your weight loss plan, either plan will give you results because the bottom line is that you are consuming less than you previously did because you are following a plan.

Don’t struggle with which debt repayment plan is better—paying off the lowest debt first or paying off the highest interest rate first. The important decision here is to decide to pay off debt and make a plan for how you will tackle that debt.

My husband and I are taking a hybrid approach. We are paying down our debt first by category. Our priority is to first pay off all credit card debt before moving on to student loan debt, even though my student loan has a lower overall balance than one of our credit cards. We have been paying down the credit cards based on Dave Ramsey’s suggestion of paying down the lowest cards first. Doing this gave us an immediate shot of energy when we paid off the credit card with the lowest balance in the first month of becoming gazelle intense. Yet, following this method, we are saving the largest credit card, which is also the credit card with the highest interest rate, for last. Are we paying more in interest? Yes, but I stay motivated by seeing debt disappear.

When paying down debt, determine which strategy works best for you and then stick with the plan. Don’t concern yourself with how much interest you are paying, unless that motivates you to pay down debt more quickly. Instead, just focus on how you can pay down the debt, in the order that works for you, as fast as possible.

5 Things You Should Not Do If You Have Debt

Melissa — Mon, 26 Mar 2012 13:57:15 +0000

If you have a significant amount of debt, there is no easy way around the fact that you must change your behavior to eradicate the debt. However, sometimes what people know and do are two different things.

While you may disagree, here is a list of five things you should NOT do if you have a significant amount of debt:

1. Go back to college and fund your education with student loans.

Within the last few years, many Americans have found themselves out of work and in debt. Often, the solution is to go back to college and survive on student loans. This is generally a bad idea. Many of these people then graduate college with another degree or an advanced degree, and they still can’t find a job. Now, instead of their original debt, they also have several thousands to tens of thousands of dollars of additional student loan debt. If you are going to go this route, make sure to choose an in demand field such as nursing.

2. Keep using your credit cards.

If you have credit card debt, there is only one sure way to pay it all off—stop using the cards and make your monthly payments (plus extra if you can) every month. With no additional work on your part, you will be out of debt at some point in time. However, if you keep using your credit cards, what typically happens is that you tend to pay off only what you charged the previous month, if that. My husband and I tried to convince ourselves that we could still have the convenience of using our credit cards while simultaneously trying to pay them off; instead, we slowly started accruing a bigger balance. It has now been 5 month since we have used them, and we have paid off 35% of our balance, but we didn’t have any success until we stopped using them completely.

3. Pay aggressively on your debt without having an emergency fund.

Paying aggressively (or being gazelle intense, as Dave Ramsey says) is a great way to eliminate your debt quickly. However, make sure to first save a small emergency fund of at least $1,000 to $2,000 so you are prepared for unexpected expenses. We got gazelle intense and then had several unplanned expenses this month. We only had $500 in our emergency fund since all of our extra money was applied to debts. Since we had no extra money, we had to be creative with selling things around the home and working even harder to make up the difference. Once we recover from this month’s unexpected expenses, we plan to slow down on debt repayment long enough to build our emergency fund a bit.

4. Make major improvements on your home.

While it is good to maintain your home and make improvements to increase its value, nothing more than required maintenance and repairs should be done while you are trying to get out of debt. There will be time to remodel your kitchen or add on a deck after you are debt-free.

5. Take a vacation.

Vacations are both fun and useful. You get to have time to relax, travel to new destinations and spend time with the family. However, if you have debt beyond the mortgage to pay off, you really shouldn’t take a vacation to the Caribbean or Disney or any other destination you may be considering. That isn’t to say that you shouldn’t take time off and spend time with your family. Perhaps instead of traveling, while you are paying down debt you can have a staycation and stay home and visit the local attractions in your home town. You still get to relax and have fun, but you save a few hundred dollars or more by not traveling.

Getting out of debt requires discipline and perseverance as well as an attitude change. It may not be fun to give up things that you enjoy such as a vacation or things that you think will improve your life such as another college degree or an improvement on your house, but foregoing these things now means you can be out of debt more quickly. Then, and only then, you can live like no one else, as Dave Ramsey says. Isn’t it worth a bit of sacrifice now?

Paying Down Debt Should Be Like Interval Training

Melissa — Mon, 27 Feb 2012 15:11:14 +0000

My husband and I have debt. A lot of debt. The majority of it is from student loan debt my husband accrued obtaining his Ph.D. I have a small amount of student loan debt left, and we have some consumer debt as a result of simple overspending and not having much income last year. We are followers of Dave Ramsey, and we became gazelle intense in October, 2011, as soon as my husband secured a post-doc research position. With gazelle intensity, even with our relatively low income, we have managed to pay down a little over $8,000 in four months. However, we are now on the verge of gazelle intensity burnout.

While we have made good progress, we still have more than five times the amount we have already paid down yet to go. It is hard to maintain gazelle intensity when you know you will be paying down debt for several years. Gazelle intensity at this level is akin to a runner sprinting through the first five miles of a marathon and becoming overwhelmed with the 21 remaining miles. Sprinting through a marathon is simply not possible.

Interval Training: Best for the Body, Best for Debt Repayment

If you are looking to improve your physical fitness level, experts tell you not to do the same exercise routine every day. You become complacent and your body does too. Your body learns how to not work as hard. Interval training is an excellent way to push yourself and still allow enough time in between extreme bouts to recover. The physical challenge followed by the rest period is what gets you into the best shape. So it should be when paying down debt.

Dave Ramsey doesn’t address gazelle intensity burnout. He advocates pushing as hard as you can until the debt is gone. While I like the theory, I don’t think it is reasonable when one has a significant amount of debt to pay off. Instead, treat gazelle intensity like interval training. Push as hard as you can for as long as you can, and then take some time to recover and rest. Then push as hard as you can again.

We are currently in the rest period as we are saving for a conference my husband must attend out of state in March. We are still paying extra on our debt, but now it is $50 extra a week instead of $300. After the conference is over, we will go back to gazelle intensity.

Advantages to Gazelle Intensity Interval Training

You have time to rebuild your passion. Your personal passion to get out of debt is what drives you to live like no one else and sell things and work an extra job to generate more income to use as debt repayment. While I was nearing burnout, now that we are in the rest period, I am itching to become gazelle intense again and watch our debt balances go down. My passion is returning now that I am rested, so to speak.

You avoid burnout. So many people commit to paying down their debt, but lose their passion and focus and remain stagnant, using credit cards throughout the month and paying down what was charged the previous month but nothing more. If you take a rest period from gazelle intensity and remain committed to not accruing more debt, you are still making progress toward your goal to be debt free, though not as quickly.

Gazelle intensity becomes a manageable way of life. Dave Ramsey says over and over again to eat beans and rice, rice and beans because they are low cost foods. My family likes both beans and rice, but if I fed that to them at every single meal, I would face a revolt. While we eat beans a lot, at least once a week we have something fun like homemade pizza. Having an occasional break from gazelle intensity, even in the realm of food, makes gazelle intensity more manageable.

If you have debt, first commit to not accruing new debt. Then, push as hard as you can in the beginning to pay down as much debt as you can as quickly as possible. Take a rest if you need to, and appreciate the fact that every time you have a gazelle intense period, you make the next rest period more fruitful because you will have less interest to pay overall thanks to the previous bout of intensity. Just like interval training, your finances will be in better shape if you alternate gazelle intensity with rest.

2 Years Without Credit Cards: Do I Regret It?

John Frainee — Fri, 11 Nov 2011 15:30:09 +0000

Wow. It’s been two years since we had our credit cards, and we’re still alive. We made it two years without borrowing! But was that the best financial decision?

My Credit History

I remember my very first credit card. It was a Chase card. Oh, how I thought I was special when I received it in the mail. I was ready to enter into the realm of fiscal responsibility, become an adult, and pay off my credit card in full every month.

And I did. I always paid my credit card on time, every time.

In preparation for marriage, my soon-to-be wife and I sat down with a Wells Fargo representative and was sold on the idea of getting another credit card. This time, it was for “overdraft protection” so that anything we overspent in our checking account would be transferred to our credit card. This was intended to save us overdraft fees, of course. Or was it?

That’s about the time I read Dave Ramsey’s 7 Baby Steps.

A New Beginning – Without Credit Cards

Everything changed. All of the sudden I saw money in a whole new light, and started understanding the dangers of credit.

Although I had never gone into any credit card debt (besides what I owed each month), I identified two ways having credit cards was holding me back:

I didn’t have an emergency fund. I thought that if we got into a bind, we would always have our credit cards to rely on. This might have plunged us into a sea of credit card debt.
I didn’t strive for a better job. Because of the false sense of financial security my credit cards gave me, I didn’t see the value in getting a higher paying job.

So in a Dave Ramsey style ceremony, I cut up the credit cards with the largest pair of scissors I could find – with my wife’s approval, by the way.

That day was a turning point. We set our course on something we felt was better. But was it the best decision?

20-20 Hindsight Tells All

Looking back, we find that we don’t regret our decision to destroy our credit cards! It pushed us to follow a financial plan that kept our household financially secure.

The pressure of not having a safety net pushed me to find a different job: one that nearly quadrupled my income. We paid off our student loan debt, and built a fully funded emergency fund! We also were able to save some money toward an account designated for my wife’s continuing college education.

Sure, we might have achieved some of these goals without sacrificing the cards, but I’m pretty sure not all of them – and not as quickly as we have.

What About Credit Card Rewards?

We certainly missed out on some sweet credit card rewards. But later we learned about a financial institution that had a cash back debit card. We signed up, and are enjoying over $550 in perks every year.

What About Building Our Credit?

Our goal is to have a zero FICO score. Weird, isn’t it? Let me ask you this: if you don’t plan on borrowing in the future, why would you want a good credit score?

Although we may pay a little more for on our insurance premiums, it’s well worth not having the risk of going into debt.

We do plan on getting another home in the future, but plan on a mortgage with a company that can look at other factors besides credit score.

Are You Ready To Cut Up Your Cards?

You might not be ready to cut up your credit cards like we were. But let me tell you, two years of being credit card free has been nothing short of wonderful.

Meet me in the comments and let me know your thoughts! It’s okay to disagree!

Financial Peace University: Is It Worth The Price Of Admission?

Peter Anderson — Fri, 29 Apr 2011 11:23:05 +0000

Over the years I’ve written quite a bit about Dave Ramsey here on this site. For those that don’t know Dave Ramsey is a nationally syndicated radio talk show host, author and financial guru. I’ve written about his 7 Baby Steps plan for getting out of debt, as well as his 13 week financial class called Financial Peace University. I’ve also read and recommend his book Financial Peace Revisited as it was included in the Financial Peace University packet when we took the class.

As you can probably tell, I’m a big Dave Ramsey fan. I’ve taken his classes, helped facilitate the class as a leader. I think his methods are great for helping people to get on a solid financial footing, and to get rid of debt.

With all that said, today I wanted to talk about something that I’ve heard quite a few people talk about in the last few months – the pricing of Dave Ramsey’s programs. I’ve heard some people say that his programs cost too much, and that he’s making his fortune off of the mis-fortune of others. I’ve heard this even more since it was revealed that Dave Ramsey had built a huge new multi-million dollar house for his family. Others say that his programs are priced reasonably, and are well worth the cost for what you get. Today I thought I’d examine just what his program costs, and whether or not it’s a good value.

What Is The Cost Of Financial Peace University?

The main Dave Ramsey offering that I’ve heard people talk about and complain that it’s too expensive is Ramsey’s Financial Peace University. How much does it cost? From Ramsey’s site as of 4/2011

Class Cost: Lifetime Membership – Memberships include all class materials and usually cost around $100 per family. You can purchase your membership from Dave’s online store or from the class coordinator.

So the class costs $100 per family. $100 is exactly what we paid when we took the class 2-3 years ago. So apparently it hasn’t gone up in price. One thing that should be noted is that the $100 covers a lifetime membership to the class, so if you decide you want to take the class a second or third time – you won’t have to pay the $100 cost again. I’ve been through the class now twice, and I found it helpful to attend more than once. Sometimes the first time through you may have some confusion about certain topics, and want to go over them again. Taking the class a second time can help you with that.

Financial Peace University also has a home study program as well, which will cost more because it also includes the DVDs of the lectures, which aren’t included in the regular class package. The cost for that package is currently $169.

Note: I’ve been told that you can also attend the first class of Financial Peace University at no cost to decide if it’s something you might want to do. Something to consider for those on the fence.

What Do You Get For Your Money?

When you sign up for the Financial Peace University class and pay your $100, what exactly are you getting? You get the class itself and a membership kit:

13 weeks of class (lifetime membership)
The book Financial Peace Revisited
The Financial Peace University workbook
Audio CDs of the 13 weeks of lectures, in a nice faux leather folder.
CD with some sample video content
CD to share with a friend
Cash envelope system for envelope budgeting
Debit card sleeve (to remind you to think twice about spending)

To me that’s actually a pretty good value. You’re getting all that books and materials as well as the class for only $100. For the 13 weeks of class alone that would be around $7.70 per class. That’s pretty darn affordable I think. (Check out my FPU Kit unboxing post for more pictures of the materials)

You also get some intangibles when taking the class, one of which is a sense of peace knowing that you’re in better control of your money. Having a budget and a plan can really give you a sense of power that many didn’t have before.

Where Could You Find $100 In Your Budget?

The question a lot of people bring up when talking about the class is – “If I can’t afford to pay my bills, how can I afford to pay for the class?”.

In some instances I know that some churches that offer the class will help people to pay for the class with full or partial scholarships. Even Ramsey suggests, however, that it is a good idea for people to pay their own way. They’ve found that people who pay their own way tend to have more success in the program, in part because they have something invested in it. If they don’t pay, since it’s not their own money they don’t feel as bad dropping out after 2 weeks if they don’t like it. Pay the cost, and they’re more willing to stick it out and do the hard work. We saw this very clearly in our own class, one of the few people who got a scholarship ended up dropping out after the 3rd week.

So where can you find $100 in the budget?

Cancel cable TV, and you’ll save hundreds over the course of the year.
Get a lower tier cell phone plan.
Create some freelance income, or get a part-time job.
Eat out less for a month or two.
Sell some stuff on Craigslist.
Sell some plasma.

The point is, there are a ton of ways that you can come up with an extra $100, you just have to be creative!

So Is It Worth It? Is FPU A Good Value?

So is Financial Peace University a good value, and will you be glad you spent the money? In my opinion it is an extremely good value for what you’re getting – a roadmap to a solid financial footing. It really isn’t that hard to find an extra $100 in your budget if you put your mind to it, and the returns you’ll get through the program will more than pay for it.

If you don’t like Dave Ramsey or his methods, you may want to look elsewhere because there are other programs out there that may cost a bit less – like Crown Financial’s Money Map program. But for my money, and from my experience, Dave’s program is effective, engaging and fun, and it just works.

What are your thoughts? Are you convinced that the program is a good value? Do you still think it costs too much, or do you have other issues with Ramsey and his program?

Read a week by week review of the Financial Peace University program here: Financial Peace University Review

Dave Ramsey’s 7 Baby Steps Review: Is This A Debt Management Plan You Should Try?

Peter Anderson — Thu, 10 Feb 2011 16:42:21 +0000

I‘ve been writing about personal finance for just over 3 years now. During that time I’ve written about Dave Ramsey and his “Financial Peace University” class, but I realized that I’ve never written a general review of his 7 baby steps plan to getting your finances in order and on track. So today I’ll be writing a post about his baby steps plan and what I think of it.

NOTE: This article is only a general overview of the 7 basic principles of Ramsey’s Baby Steps, and is not intended to replace his full look at the 7 steps or his FPU course in part or in full. I am not affiliated with Dave Ramsey or the Lampo Group in any way. You can find Ramsey’s free online discussion of the 7 Baby Steps here.

Who Is Dave Ramsey?

So first of all, who is Dave Ramsey, and what are the 7 Baby Steps? Dave Ramsey is a personal money management expert, radio talk show host and TV personality who over the years has helped thousands of people become debt free and change their financial lives. He gives no-nonsense advice to folks who have gotten in over their heads, and helps them to find their way out, in a responsible way. If you’re afraid of hard work, you may want to look elsewhere for your advice.

In addition to his best selling books and radio and TV shows Ramsey also teaches “Financial Peace University” at huge live events, and the 7 Baby Steps are an offshoot of the FPU class.

So what are the 7 Baby Steps?

Dave Ramsey’s 7 Baby Steps

On his website Dave Ramsey lists what his 7 Baby Steps to financial freedom are:

Baby Step 1 – $1,000 to start an Emergency Fund

Baby Step 2 – Pay off all debt using the Debt Snowball

Baby Step 3 – 3 to 6 months of expenses in savings

Baby Step 4 – Invest 15% of household income into Roth IRAs and pre-tax retirement

Baby Step 5 - College funding for children

Baby Step 6 – Pay off home early

Baby Step 7 – Build wealth and give!

For a more in depth discussion of the baby steps, head over to Ramsey’s site. They basically involve planning ahead for emergencies, paying off debt and then planning for the future in a variety of ways. They also look at the importance of giving. Even though a lot of these points may seem like common sense to a lot of people, for some they just don’t think about doing these things if they haven’t actually been told how to do them.

Before The Baby Steps: Making A Decision To Change

Before you even decide to head down the road of using or exploring the 7 Baby Steps, I think it’s important to point out just how key it is that you sit down, talk with your significant other (if you have one), and actually make a decision that you want to change.

A lot of people talk about how to change their financial lives, but never touch on the fact that if you or your spouse isn’t ready to change, it isn’t going to happen. You have to want to change.

I know for my wife and I there wasn’t one moment where we decided that we wanted to change, it was just a gradual realization that we weren’t spending our money as wisely as we should, that we were accepting too much debt as a part of our financial plan, and that we craved the freedom of not carrying any kind of debt. We wanted to be free!

Getting to the point where you want to change might mean that you’ve hit bottom and declared bankruptcy, or it might just mean that you’re sick of not saving enough towards retirement. It’s a different point for everyone. But when you get there you’ll know.

Before The Baby Steps: Make A Decision For No More Debt

Once you’ve made a decision to change, you need to be able to begin the change immediately and make a decision as a family that you aren’t going to incur any more consumer debt. Credit cards and home equity lines of credit are off limits now. No more high interest auto loans! If you want a new TV or a new kitchen counter tops, you’re going to have to save for them. No more store credit cards to buy clothing at ridiculous interest rates!

Cut up your credit cards, and draw a line in the sand. No more debt!

photo credit: SqueakyMarmot

My wife and I used to use our credit cards in a variety of ways. We would use them to pay for vacations because we wouldn’t plan ahead and save up for them in advance. We’d use them as a safety net for our household, instead of saving up a cash emergency fund. If we needed new furniture we would just finance it at the store, and pay it off over time. Once we made a decision to change, we realized that we couldn’t do that any more. We had to make a life change. Using the 7 Baby Steps we were able to make a change in the way we looked at money, and in the process change our lives for the better. So let’s do a review of what is involved with Ramsey’s baby steps, and what I think of them (even if the previous sentence clued you in to the fact that I’m a fan!).

Baby Steps: Getting Rid Of Existing Debt

After saving a small emergency fund 0ne of the very first things you’ll be doing in the baby steps plan is working on paying off all of your debt. Dave Ramsey is a proponent of his plan for paying off debt called the “Debt Snowball“. Basically you order your debts from smallest to largest, and pay them off in that order. By doing this you can optimize the effect of getting quick victories by paying off the smaller debts faster.

Some people would say that the Debt Snowball isn’t mathematically the best way to pay off debt, that something like the Debt Avalanche (highest interest first) method would be better. Personally I’m in favor of using some sort of a hybrid debt repayment plan where you pay off some of your smaller debts first and then re-arrange your higher dollar debts to pay them off in the order of higher interest first.

Whatever you do to pay off your debt, it’s important to make a plan of some sort, make a budget and stick to it.

Baby Steps: Planning For The Future

In baby steps 3 through 7, Ramsey explores setting savings, investment and college savings goals, as well as talking about the reasons for why we should be building wealth – to be able to be free from debt burdens, and be able to give more to others. The general ideas he talks about are all sound in my opinion, even if his reasoning in the details isn’t always something I can agree with 100%.

Saving, Investing, Giving

Baby step 3 looks at saving a 3-6 month emergency fund – in other words saving up enough money to cover just about any emergency that could come up from a broken down car to a job loss. I’m a big proponent of emergency funds, and as such I think this is a great idea. At our house, however, we decided to have an even larger emergency fund with 8-12 months in savings. In this economy we just felt better having more money than Ramsey states you should have.

After you’ve set up a contingency plan for the present Ramsey suggests looking at the future. He suggests investing 15% of your income into a Roth IRA or pre-tax retirement accounts. While I can agree that saving 15-20% of income for retirement is definitely sound advice, I’m not always in agreement with Ramsey when it comes to the assumptions he makes about getting a 12% return in the stock market, or about what types of mutual funds to invest in. I think Ramsey’s advice has been shown to be a bit suspect in this area – and should be taken with a grain of salt.

Next Ramsey suggests saving up for your kid’s education – only after saving for your own retirement. I think this is sound advice as your child can pay for their education via loans or grants, but you probably won’t be able to do the same to fund your retirement. He suggest saving up in an ESA or similar account, while I think some other options like saving for college in a Roth IRA should be considered.

When it comes to homes and real estate Dave Ramsey has some pretty strict rules about what kind of mortgages he thinks you should get, what percentage of your income you should spend on a home, and how you should work to pay it off. Ramsey suggests trying to pay off your mortgage early if at all possible after saving for retirement, your kids college and other necessary expenditures. I think having a paid off home is a great idea and it’s a great hedge against uncertainty in today’s environment. While I don’t agree with his statement that you should only ever get a 15 or fewer year fixed mortgage – I do think his advice about homes and real estate is pretty sound. Of course I’m not following it completely with our 30 year mortgage, but we are making extra payments in order to pay it off early.

After doing all those other things – saving, investing, college funding, mortgages – Dave says you move on to the mythical 7th step where you just continue building wealth, and giving a large percentage of what is left over. For me I think the giving portion should be stressed as it is such an important part of this. We’re all happiest when we’re giving to other people, and building wealth for wealth’s sake is pretty pointless. I’m glad he points out that giving is so important, and I’m glad that he points out that money and wealth won’t make you happy, but having a personal relationship with Christ – and giving as he did – will.

Conclusion

Dave Ramsey’s 7 Baby Steps are a debt management process that I became familiar with while i was taking Dave Ramsey’s Financial Peace University™ course a couple of years ago. I believe the process it lays out is a sound one whereby you plan for the present through emergency funds, you pay off your debts incurred in the past, and then you set about planning for your own and your family’s future.

I do think that there are certain points of the plan where I don’t have 100% agreement with Ramsey, especially when it comes to investing assumptions and methods, as well as college savings plans, but overall when you look at his plan with a 10,000 foot view, I think the ideas behind it are sound.

I would recommend using the 7 Baby Steps if you’re looking for a good debt management course, when used in conjunction with Ramsey’s Financial Peace University™ class (which I’ve found to be well worth the minimal cost). For a full look at Ramsey’s 7 Baby Steps, head on over to his site: 7 Baby Steps

When Is Enough… Enough?

Guest Poster — Wed, 20 Oct 2010 13:37:43 +0000

First off I want to thank Peter for having me on his blog as a guest writer. I wanted to try and tackle a tough question for everyone and I am glad he gave me the opportunity.

After reading Peter’s article on Dave Ramsey’s New House I started to dive into the comments, post a few of my own, and read what everyone was saying…

If you go back and read them, or you already participated in the comment section, you will realize that the issue of whether or not Ramsey’s house is “too big” is evenly divided.

The ultimate question that we are all asking is not whether Dave’s house is too big, but how we define this idea called “enough”.

What Is Enough?

As Christians, we are taught that God is our everything. Because God is our everything he will supply all our needs (1 Timothy 6:17). And because he supplies all our needs, all we need is God.

Command those who are rich in this present world not to be arrogant nor to put their hope in wealth, which is so uncertain, but to put their hope in God, who richly provides us with everything for our enjoyment. 1 Timothy 6:17

One of our needs is for shelter, in the very general sense. Therefore, if you start there and end there, Dave’s house is a need that God provided him. And therefore it is not too big. Whatever amount of money God provided him, he was able to choose a house that could serve as a shelter for him and his family.

On the flip side, let’s play the game… “What else could he do with this money?”

In comes the classic W.W.J.D. (What Would Jesus Do?) Well, we already know what he would do. In Luke 18:22 Jesus admonishes the rich man to sell all his possessions and give the money to the poor.

If all we look at is this, then the easy conclusion is that Dave bought himself a house that could be considered a “possession”, and he should sell it, and give the money to the poor.

I think it is easy to make either argument…

Now the hard part is asking yourself, “How will YOU live YOUR life if you happened to have millions of dollars to spend on whatever you wanted?”

Would you buy the house Dave did or would you buy something closer to what the average person buys?

Many of us are envious of Dave. Some of us couldn’t care less. The important thing to think about is where do you stand on this moral issue? Where do you reach your enough?

Have you drawn your line in the sand? The line that says, “I have enough”. Once you have drawn that line you will begin to work on the things that really matter in this life. The things we are really put on this Earth for.

Jeremy Day writes about personal development, personal finance, and personal health over @ InsightWriter.com It’s all pretty personal. Come say hi when you get a chance!

Dave Ramsey’s New House: Did He Follow His Own Advice And Pay Cash?

Peter Anderson — Fri, 15 Oct 2010 16:13:08 +0000

If you’ve followed this site for a while, you’ll know that I’m a big fan of Dave Ramsey, his 7 Baby Steps To Getting Out Of Debt, as well has his 13 week class, Financial Peace University (which we helped to facilitate at hour church). Dave has several best selling books, does huge live events across the country, and has his own radio and TV shows that are enjoyed by millions.

One of the things that Dave Ramsey is known for is his admonition to not use debt via credit cards or other means, and his suggestion to pay cash for everything you buy. He even suggests that you should pay cash for a home – if you can!

I was just reading some posts today about Dave Ramsey’s new home that he recently built, and it sounds like it is quite the showplace. The home and land are valued at over $4,900,000! So the question is…

Did Dave Ramsey pay cash for his new home? Or was he a hypocrite and take out a mortgage?

UPDATE: I published this article several months ago. Within the past few days Dave Ramsey actually found this post through Twitter and commented! (see below). To read Ramsey’s comment without going through the entire thread (150 comments) and to get my take on it, head on over to the updated post: Dave Ramsey Comments On My Post About His New House, His Debt Philosophy And Giving.

All photos copyright coolsprings.com

Did Dave Ramsey Pay Cash For His New House?

After another personal finance blog linked to it I checked out this real estate website talking about Dave Ramsey’s home, the cost, and some of the features of the home.

Most people have seen Dave Ramsey’s home in Cool Springs from the distance although they may not have known it is his. The house looks like a snow capped mountain but instead of snow, the mountain top is covered by Dave Ramsey’s home. It is fairly majestic to say the least.

The land at King Richard’s Court Franklin TN 37067 was purchased for $1,552,000 by Dave Ramsey on April 2, 2008. For the tax year 2008 (before the home was constructed) annual taxes were just $4,938. For the year 2010, the land market value is $750,000 and the improvement value is $4,159,200 for a combined total market appraisal of $4,909,200.

A mortgage does not appear to have been recorded for the property. That’s our Dave!

The tax record shows 3 levels in Dave Ramsey‘s Cool Springs home, totaling 13,307 square feet of living area and 1,454 square feet of garage.

From what we hear Dave’s home office, including the sliding library wall ladder, is made of solid mahogany. The shower in the master bathroom is rumored to have 18 shower heads and is larger than the jacuzzi tub. Cathedral ceilings throughout. The local who we spoke with felt the basement was by far the most impressive. Full bar with whiskey barrels built into the walls, media room and several bedrooms make up the broad lower basement level you see from the distance, wrapping around the tip of the mountain.

So according to this real estate professional the home had no mortgage documents recorded, which means that it’s pretty likely that Ramsey paid cash for the land and home! He’s following his own advice!

It sounds like it’s quite the house too, who wouldn’t want to have a beautiful mahogany lined office like that, or a shower with 18 shower heads. He truly is now living like no one else!

Want to live near Dave Ramsey? The house next door, owned by Lee Ann Rimes, is now for sale for only $6,499,000! What a Bargain!