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!

• Still Think Credit Card Companies Aren’t Evil? Read This.
• Are You Building Your Credit, Or Just Going Into Debt?
• How To Do A 401(k) Loan: Pros And Cons Of Borrowing From A Retirement Plan
• Will A Short Sale Hurt Your Credit, And Will You Even Qualify For One?

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 Financial Peace University™ – Program Review
• Dave Ramsey’s Financial Peace University: Week 13 – The Great Misunderstanding
• Dave Ramsey’s Financial Peace University: Week 12 – Real Estate and Mortgages
• Dave Ramsey’s Financial Peace University: Week 11 – Working In Your Strengths

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

• Dave Ramsey’s 7 Baby Steps Review: Get Out Of Debt, Build Wealth And Give.
• Dave Ramsey’s Baby Step Series At The M-Network
• Financial Peace University: Is It Worth The Price Of Admission?
• Why Dave Ramsey’s 7 Baby Steps Really Work

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 Comments On My Post About His New House, His Debt Philosophy And Giving
• Finding Contentment Even In Tough Situations
• Overcoming Financial Stress
• What Is God’s Plan For A Christian’s Personal Finances?

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!

More Pictures Of Dave Ramsey’s House

All photos copyright coolsprings.com

All photos copyright coolsprings.com

All photos copyright coolsprings.com

• Will A Short Sale Hurt Your Credit, And Will You Even Qualify For One?
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• 10 Things To Consider When Buying Or Building A New Home

If you’ve been around the past three years, you’ve probably heard the name Dave Ramsey. The recession has popularized his teachings about saving, eliminating debt, and sound investing.

Perhaps you’ve been curious about Dave’s Baby Steps, and whether or not you should give them a go. For those of you who aren’t familiar, here they are listed below:

Dave Ramsey’s 7 Baby Steps

1. Save up $1,000 to start an emergency fund.
2. Pay off all non-mortgage debt using the debt snowball.
3. Save up 3 to 6 months of expenses to complete your emergency fund.
4. Invest 15% of household income into Roth IRAs and pre-tax retirement accounts.
5. Work on college funding for children.
6. Pay off your mortgage early.
7. Build wealth and give!

I remember first watching Dave on Hulu.com and being very skeptical of those people who were screaming “We’re DEBT FREE!” After all, could people really beat debt – something that our economy lives and breathes? And what was all this talk about paying off your home early? Isn’t a 30-year mortgage normal?

The more I listened to his show, the more I began to understand where my financial plan was falling short. I was investing in volatile single stocks and thought I could get ahead in life by “smart” day-trading. I was a seeker. I was someone looking for the missing piece of the financial puzzle I’d been trying to solve for years.

After reading Dave’s New York Times bestseller, The Total Money Makeover, everything changed. The book was the piece of the puzzle I was missing.

It has been a little over a year since I’ve started Dave’s Total Money Makeover, and I’ve learned a lot about why the process works in real life. I’m currently on Baby Step 3, and will be finished building the 6-month’s worth of expenses emergency fund within a few months.

Top Three Reasons Why Dave’s  Baby Steps Plan Works

1. Dave’s plan forces you to get “gazelle intense” when it comes to paying off debt. As one who likes to save, starting with only $1,000 in the bank while we were paying off our debt pushed me to pay off debt faster. After all, I wanted to get to Baby Step 3 where we could save up lots of money in an emergency fund. I’ve seen people get stagnant with with their debt elimination strategy because they have investments or other cash that puts them at ease. Too much money in the bank while you have debt can encourage you to hold onto debt longer, thus paying more interest. Dave’s plan pushes you to get that debt out of your life.
2. Dave’s plan encourages behavior modification. This is a big one. Many financial gurus claim that the key to wealth is getting the better interest rate, chasing your FICO score, or learning the “secrets” of financial freedom. Dave, on the other hand, explains that we are responsible to produce a good income through hard work and diligence. He claims that the strongest wealth-building tool we have is our income. As we were paying off our debt, our income quadrupled because we sought higher paying jobs in order to complete Baby Step 2. If we want to win, we must make serious sacrifices and live like no one else so later, we can live like no one else.
3. Dave’s plan frees you to focus on one step at a time. In a culture where multitasking is often encouraged, Dave has a different strategy: focused intensity. Baby Steps 1-3 are completed consecutively. Baby Steps 4-7 are completed concurrently in a prioritized order. All extra money after budgeted expenses goes to whatever step you are currently on. Focusing on one step at a time allows you to dedicate your energies toward learning all you can about the main task at hand. No distractions, no worrying about other steps. As you get closer to completing each step, you’ll have a burst of intensity to get that step done and out of the way!

Real Financial Peace Can Be Found

I finally understand what Dave means when he talks about financial peace. Being out of debt helps you breathe easier. Having a solid emergency fund frees your mind of worry and stress. You’ll never know what a blessing it is to have finances under control until you begin to work your way through Dave’s plan.

I challenge you to adopt Dave’s Baby Steps as a part of your long-term financial strategy. You can start by reading Peter’s fantastic review of Dave’s Baby Steps or the Financial Peace University class.   Then, go out and grab yourself a copy of The Total Money Makeover. Soon, you’ll be on your way to building financial wealth like you can’t imagine.

Have you worked through the Baby Steps Plan? Taken the Financial Peace University class?  Considering starting?  Tell us about it in the comments.

• Dave Ramsey’s 7 Baby Steps Review: Is This A Debt Management Plan You Should Try?
• Dave Ramsey’s 7 Baby Steps Review: Get Out Of Debt, Build Wealth And Give.
• Dave Ramsey’s Baby Step Series At The M-Network
• You Vs. Debt Video Course And Accountability Program Can Help You To Get Out Of Debt

Ever since last September our (or arguably before then) our economy has been in a downturn.  Big companies, small lenders and consumers all engaged in irresponsible behaviors that resulted in the failure of  businesses, and necessitated the bailouts of many others.  People are being laid off left and right,  and things are extremely tight!  So what’s a person to do when times are so hard?  Give up and wait for things to get better?  Wait for the government to give them a job?

How about this:

• Don’t participate in all the doom and gloom.
• Don’t wait for the government to create a program to pull you out of the muck and the mire.
• Don’t participate in the recession.

Instead, create your own mini economic boom!

• Have some hope and be ready to accept your own future that’s bigger and brighter than anything you can imagine.
• Realize that things aren’t necessarily as bad as they’re made out to be because you’re in charge of your own destiny.
• Create your own economic plan, set up a budget, and start saving an emergency fund in case you’re hit with a setback.
• Be ready to seize opportunities as they arise – even in hard times opportunities to succeed abound!
• Get an extra job or create your own side income.
• Have hope!

Have hope.  When you have hope, it’s just a matter of time before things turn themselves around.   Decide that you’re not going to participate in the recession, and that you’re going to have the best year you’ve ever had! Remember, God loves you, and you are important to him – so you will have the things you need:

Indeed, the very hairs of your head are all numbered. Do not fear; you are more valuable than many sparrows. Luke 12:7

Dave Ramsey is hosting an event in April called “Town Hall For Hope“.  The event, which will be streamed live to thousands of churches and other locations across the country will be a time to get together, talk about the economy, strategize and figure out ways to improve your situation.  From the site:

Connect with families across the nation for a truly radical message: HOPE.

Tired of hearing the fear, doom and gloom that’s filling the airwaves? Join Dave Ramsey for a nationwide town hall meeting and discover what’s happening with the economy, how we got here, and where we’re going.  Plus, Dave will answer your questions live throughout the event!

Join with me in attending the Town Hall For Hope event on April 23rd at a location near  you, and have hope! Click the banner below to go to the website.

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When we were taking Dave Ramsey’s personal finance course, “Financial Peace University” last year, one of the things he stresses in his course is the need to have someone in your life who can keep you accountable for your financial goals.   For single people it might be a close friend, a mentor or a parent.  For those of us who are married, it’s usually going to be our spouse.

photo credit: Sami Keinänen

I hadn’t really thought about how important it was to have someone there to help keep you in line, until after we had taken the class. Since then I’ve seen time and again how much my wife (and accountability partner) actually does keep me in line.

Keeping Each Other Accountable

For example, this year the bug has bitten me to get that new 50″ Plasma TV.  We love watching TV and movies at our house, and I have been able to rationalize getting a new big screen TV as being something “we need”.   After all – the digital transition is happening this year!  Never mind the fact that we already have a TV in almost every room, and the fact that our basement entertainment room already has a nice big 37″ LCD in it!

My wife has reminded me how we really don’t need to get the TV, and how we should just put it off so that we  can focus on our other goals.

On the other hand my wife likes to buy souvenirs of all sorts when we’re on vacation. Whether it’s the little replica of the leaning tower of Pisa, or the $75 piece of Venetian glass, she likes to buy things to commemorate our trips and remember them through the years. I am there to help keep her accountable though, and to make sure that we stay within our allocated souvenir budget. If she starts buying too much or wants to get something that’s too expensive, I’ll step in and remind her that we’re spending on a budget.

Two Is Better Than One

Here’s a verse that speaks to how important it is to have someone who will be there for you, and help keep you accountable:

Two are better than one because they have a good return for their labor. For if either of them falls, the one will lift up his companion. But woe to the one who falls when there is not another to lift him up. Ecclesiastes 4:9-10

When either of us fails and is ready to give in to the temptation, the other is there to lift the other up and give good advice.  If I were on my own I know I would have failed many times, and probably would have 3 50″ TVs scattered throughout the house.  Instead we’ve been spending our money  much more wisely, and building towards our future because we are keeping each other accountable.

Tips For Better Accountability

There are a few things you need to do in order to make sure that you will have a successful relationship with your accountability partner.

1. Set Up A Plan, And Give Your Accountability Partner A Copy:  Write out a budget for your household, set goals for saving, investing and/or debt reduction.   Go over your plan with your accountability partner, and get their input and advice.  If they make good suggestions for changes to the budget, make them!
2. Set Up Regular Meeting Times To Talk:   Have a regular budget meeting if you’re talking with a spouse, or a lunch date if your accountability partner isn’t your spouse.  Talk to them about how you’re doing with your budget, temptations you may be having in the financial area, and even go over a set of accountability questions to make sure you’re doing ok.  Keep track of your spending and purchases, and allow them to go over them with you, pointing out places where you might be able to cut things out.
3. Allow Your Accountability Partner To Be Brutally Honest:  If the person keeping you accountable sees things that are concerning in your budget, allow them the latitude to be completely and bluntly honest with you.  If they are able to really be open with you, you’ll stand a much better chance of getting good advice.

Are you working with an accountability partner in the area of your finances?  Has it helped you on your path towards financial success? Let us know about it in the comments!

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We’ve all been following Pete’s series on Dave Ramsey’s baby steps program with the utmost interest. As someone that has never struggled with debt, the need for the program has never presented itself to me. However I discovered his radio show in college, and really like the call-ins from listeners with financial problems. The show was successful in inspiring me to proceed through life with a debt-averse attitude.

But between listening to Dave on the radio and listening to financial planners and my finance professors, a general consensus emerged that Dave may not be doing what is best for someone looking to get their financial house in order.

Examples? Okey dokey. Let’s start with the simpler things and work our way up.

Examples Were Dave Ramsey Is Wrong

Say you’re in step 2, making that debt snowball. You’ve got $1,000 credit card balance at 12% and a $1,500 credit card with a 15% rate.  Since Dave wants you to start with the smallest debt, he is asking you to pay off the credit card paying at a lower interest rate! If you wanted to save a little on interest payments,  start with the $1,500 credit card charging you 15%, otherwise Dave is just telling you to throw money away. You’ve heard that one before I’m sure; Pete even covered it.

But now say you’ve got a $2,000 balance on a HELOC at 6%, and a $10,000 car loan at 5.5%. Well by your rules and mine it makes sense to pay down the HELOC. Wrong again. HELOC interest is tax deductible, plus the minimum payments are often very small. Use the HELOC to pay off the car, and now you have $12,000 in tax deductible debt and the advantage of smaller payments in case money gets tight. As a bonus, sell the car and get a “beater,” using the proceeds to pay down debt.

Interest rates are fine and all, but Dave isn’t just about abolishing debt, he wants you to invest too. Dave tells you to invest 15% of your income, and that you can expect a 10-12% return. As a 20-something just starting out in my career, this may be appropriate. But as a 30-something, if you’re just starting to invest for retirement, 15% will not be enough. If you’re clearing your debt at age 40, you’d be lucky to get decent retirement before you hit the ¾ century mark. Why? Because the median family income in this country is $50,233. Less than 16% of families make more than $100,000 a year so your chances are slim. If you’re 30 and making $50,233 a year and invest 15% of your income, you will not have enough to retire on in 35 years.

Another problem with Dave’s investment advice is risk tolerance. Dave suggests you diversify your investments into four categories:

• Growth
• Growth & Income
• Aggressive Growth
• International

Every one of these categories is more risky than the S&P 500. This makes for a larger potential payoff, but you need only to look at sub-prime loans to see how the risk/reward relationship works. A proper balance should include bonds, value stocks, and index funds. As you get nearer to retirement, you will want to move closer into bonds. Their fixed income will reduce your potential return, but increase your chances of preserving what you’ve made. As someone who understands the risks of investing better than most, I would laugh at someone who thought they were diversified with a any portfolio balance of just the 4 categories above.

And what about that 10-12% return I spoke about earlier? If there is a mutual fund out there that has averaged 12% for 30 years please point me to it; because I haven’t found it. A common error made by Dave Ramsey and anyone else out there that talks about investments is the fees in mutual funds. Vanguard, the prince of cheap funds, has expense ratios of about 0.15% for it’s index funds. But Ramsey’s recommendations aren’t index funds, they are managed money funds. Managed money funds range from 0.5% to 2% or more in fees! So even if you find that wonderful 12% returning mutual fund, take a look at how much of your 12% is eaten by fees. A much more realistic expectation is 8-10% in true returns.

Dave Ramsey Can Still Help You Get Out Of Debt

Okay, so I’ve established that there are some mathematical flaws in the Dave Ramsey plan. Wow, I’m probably the first person to do that, ever. But I’m not here to tell you Dave’s plan is a failure. I actually believe that no one out there can help you get your finances in order better than Dave Ramsey. Yes after wasting all your time above, I’m now telling you how great he is. Money is 75% mental, and Dave knows that better than anyone else. He designed a plan that helps you get your mind in order first. No one can motivate you better, no one has the powerful support structure, and no one has as many success stories as Dave Ramsey. If you are looking to get debt free, Dave is the way to go.

The caveat to this comes after Baby Step 3. When you’re on Baby Step 4 and setting up your investments, make sure you do due diligence. Read, research, regurgitate. That is to say absorb investment books and read finance blogs, then conduct your own research about investments, finally go and talk to an investment councilor. As Dave says, “find someone with the heart of a teacher”, but also find someone who is not paid on commission.

This is a guest post from Philip over at http://www.weakonomics.com. Please check out his blog where he writes about personal finance in an edgy, yet entertaining way. You can subscribe to his RSS feed here. I may not agree with everything he’s writing here, but I think it’s important to get more than one viewpoint.

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Here is an in depth look at Dave Ramsey’s Baby Steps plan for getting out of debt, building wealth and giving.   The plan really is a pretty simple one, some might say it’s common sense,  but it brings home a lot of concepts that a lot of us don’t normally think about.

I thought it might be helpful to go over the baby steps and see how they can help you.

Baby Step 0: Getting Started, Making A Decision To Change

Before getting started on the Baby Steps plan you may not have ever thought about working on your finances before. You just kind of let your money happen to you.  To get started on this plan you have to make a conscious decision to care about where your money is going, and to live responsibly and within a budget.  For many of us, this will be a quite the shift.

For some people they won’t want to make a change until they’ve hit rock bottom, facing a foreclosure or bankruptcy.  Hopefully you’re getting started before reaching that point.  Whatever point you’re at, just remember that you’re not alone, and you’re making this change to make your family’s lives better.  It won’t be easy, but nothing worth having ever is!

Commit yourself to living within a budget, and to creating no more consumer debt!  As long as you’re creating new debt, none of this plan will work!  Once you’ve made the decision to make a change, cut up the credit cards, get on the same page with your significant other (if you have one), and move on to step 1!

Baby Step 1: Save A $1,000 Baby Emergency Fund

Baby step one is where you start building up an emergency fund for your family to cover any incidental and emergency expenses that might come up while you’re paying off all the debt you’ve created.

Some people don’t feel secure with only $1,000, and depending upon your circumstances, you may need slightly more.    But $1,000 is a good starting point, and for most families will be more than adequate to cover the little expenses that come up for every family.

Get “gazelle intense” about saving that first $1,000.  Most people will get it saved in the first 1-2 months of the plan.

Baby Step 2: Pay Off All Debt Using The Debt Snowball

In baby step 2 the family starts their debt reduction portion of the plan.   This is often the hardest part of the plan for most families, especially if a large amount of debt has been created.

To get rid of the debts Ramsey has put together what he calls the “Debt Snowball”.  In this plan you setup a debt repayment plan where you pay your necessities first (food, clothing, shelter, transportation), and then you pay the minimums on all of your debts.  Once the minimums are paid, you pay as much extra as you can on the smallest debt.  You continue doing that every month until the smallest debt is paid off.  Once that debt is paid you “snowball” all the extra money created by paying that debt off into the next smallest debt.   You continue doing that until all of your debts are paid off.

Some people can get the debt paid off within a few months, where others can take a few years.  In either case it will sometimes be helpful to get part time jobs, sell stuff and do other things to temporarily create extra income to help pay off the debts.     Once the debts are paid off you can quit those part time jobs because you’re debt free except the house!

Baby Step 3: 3-6 Months of Expenses In Savings

In baby step 3 you continue building that emergency fund that you started in baby step 1.  Starting from the baby emergency fund of $1,000 you build your reserves until you have 3-6 months of expenses saved in an easily accessible savings account.    Depending upon your family’s expenses, the amount you’re saving up will be different, and some people will prefer to build up more than 6 months of expenses depending on their desired level of risk, and what they feel comfortable with.

Remember, you’re saving up this money to help eliminate much of the risk that comes from the “little murphies” or life’s unexpected events that just seem to pop up.  Things like car troubles, medical expenses and job losses.  When you have the emergency fund buffer, it makes these life events seem more like bumps in the road instead of horrible car wrecks.

Baby Step 4: Invest 15% Of Income in Roth IRAs And Other Pre-Tax Investments

After you’ve saved up your 3-6 months of expenses it’s time to get cracking on investing and saving for your retirement.    Dave Ramsey suggests saving at least 15% towards retirement, and saving it in a Roth IRA or other pre-tax investment.  The order he suggests saving for retirement is this:

• Company 401k or other plan up to the match
• Roth IRA for you and your spouse
• Back to the 401k or other plan

Some people debate on whether 15% is enough to invest, or what types of investments are the best.  For me I believe the key is just to get started investing, and do it now!

Baby Step 5: College Funding For Children

After saving 15% of your income for your retirement, it’s time to save for your child’s education!  Some people think that this step should come before step 4, but Ramsey stresses the point that your child will have other options to help fund their education if they need to including scholarships, grants, working part time and other things.  If you don’t fund your retirement, however, you’ll never be able to get that money back!  Fund retirement first, and then your children’s college.

Some good places to save for your kid’s education include:

• Education Savings Account (ESA):
• 529 Plan

Other options exist as well, but the above options are the best.

Baby Step 6: Pay Off Your Home Early

Once the children’s college is paid for, it’s time to start making extra payments on your house! There are a lot of good reasons to pay off the house, including:

• Less Risk:  With no house payment and a fully funded emergency fund, there aren’t many things that can happen (like a job loss) that can threaten your well being.
• Peace Of Mind:  With no house payment you’ll be free to do a lot of things with your time and money that you might not have been able to otherwise.
• Interest Savings:  By paying off the house early you’ll save thousands in interest.  The earlier in the life that you pay the mortgage off, the better you’ll do!
• Less Stress:  With no worries about losing a house, paying off debt, or small expenses coming up, you can live  a more stress free life!

Paying off your house will free you up to do so many things with your time and money!  It’s like getting a raise since you’ll have all that extra money every month.  With that extra money you can save, give and live like no one else!

Baby Step 7: Build Wealth And Give

The last step of the baby steps is the one that gets me the most excited – building wealth and giving!

When you are debt free and you have no large payments like a mortgage, it frees you up to begin building wealth, and it allows you the freedom to help others with the blessings that you’ve received.

As a Christian I feel called to give to others, and getting to baby step 7 is something I look forward to because it will allow my wife and I the ability to help others out even more than we are now!  We are stewards of everything that God has given us, and God wants us to give because giving to others makes us less selfish people, and better in every aspect of our lives.  Less selfish people are more successful in relationships, business and in life in general.  Plus, we are happiest when we are serving and giving!

Conclusion

Thanks for taking the time to look at Dave Ramsey’s 7 baby steps with me, it has truly been a lot of fun for me.

I really do believe that his plan is a good one, and can help others as it has helped my wife and I.   If you’re looking at your checkbook and accounts and you have a mountain of debt – don’t delay! Get started on getting out of debt today!  Step one is only a decision away!

Live like no one else today so that tomorrow you can live like no one else!

• Dave Ramsey’s 7 Baby Steps Review: Is This A Debt Management Plan You Should Try?
• Dave Ramsey’s Baby Step Series At The M-Network
• Financial Peace University: Is It Worth The Price Of Admission?
• Why Dave Ramsey’s 7 Baby Steps Really Work