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Financial Peace University – My FPU Todo List

John — Thu, 11 Mar 2010 22:41:41 +0000

Over the past few months, my wife and I have attended Dave Ramsey’s Financial Peace University study at our church (of course you’ve breathlessly awaited each post I’ve done on our experiences!). During the process, I’ve been compiling a TODO list of all the things we need to tweak in our financial plan. Now that we are finished with the course, it’s time to put more effort into the actual implementation of the items on my list (I probably should have been working on them all along, but that’s water under the bridge now).

Thus, I will share my original list here and probably do some status updates as we work through it. If you have any comments, suggestions, questions, or just anything to share about any of the items on the list, please drop a comment (after you see the length of the list, you’ll realize that I need all the help I can get!).

Without further ado, here’s the list…

Plastic surgery on some of our credit cards – we have a lot of credit cards (major credit cards, bank credit cards, retailer cards, etc) and we need to pare them down for piece of mind and ease of administration. Some we have not used in years, so it’s time for most of them to go!
A cash trial – Ramsey preaches the power of cash throughout his course. We have never tried to use exclusively cash in all our years of marriage, so I suppose it is time to give it a faithful try and see how it works for us. Note: we have actually started this one.
A workable budget spending plan – Especially with my wife not working for at least a few months, it’s time to get serious about creating a realistic and workable budget and then actually living by it and updating it each month. Note: we have actually created a rough budget but need to tweak it while my wife is off work for maternity leave/retirement.
Periodically check our credit reports – Leveraging the free credit reports from the three major reporting bureaus, it is possible to view a free report every four months.
Investigate identity theft protection – We currently have no ID theft protection coverage, so it’s time to investigate and probably purchase some.
Investigate updating our life insurance – My wife and I currently are a few years into our 20-year term policies. Since having our fourth child, however, we need to evaluate whether that is still sufficient.
401(k) tweaks – I need to evaluate modifying my contribution to my 401k plan, specifically should I shift more of those contributions to the Roth 401k portion of the plan? I’d also like to up my overall contribution percentage but that is probably not feasible right now.
Convert to a Roth IRA? – Is 2010 the year to convert my old rollover IRA to a Roth IRA? I’ll find out.
Investigate increasing my college savings contribution – self-explanatory.
Evaluate my current job – Is 2010 the year to change to a different job or even a different company. I’ll find out.
Decide what to do, if anything, with our current mortgage – If my wife is no longer working, then our mortgage payment is a bit larger than I’d like it to be. But what to do about it? I need to evaluate whether it makes sense to refinance or move or stay put. This gets interesting due to the fact that we owe more money on our mortgage than zillow says our house is currently worth.
Get title insurance – We did not purchase title insurance when we bought our current house, so I need to evaluate what it would take to get some now. Obviously, if any changes are made to our mortgage or housing situation, that will affect our plan of action for this item as well.
Sell everything we don’t need – Getting rid of stuff, either by selling or donating it, is really a win-win! I love to end up with less clutter and putting a little extra money in your pocket is just icing on the cake.

So the easy part is done (creating the list), now it’s time to get to work on the hard part! As I mentioned, if you have any suggestions or comments or advice, please share – I’d appreciate the help.

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Financial Peace University – Wrapup

John — Tue, 09 Mar 2010 10:48:10 +0000

Well, I am embarrassed that I am just now getting around to completing my Financial Peace University posts as the class has been finished for months! (productivity goes way down with a newborn around the house – especially when that newborn is your fourth!) Anyway, here I am so let’s get into it.

Did I learn anything?

I did, in fact, learn quite a bit over the past few months. Of course, I gained some new personal finance information. More importantly than that, though, I took away some new knowledge about myself and my wife. It was a great experience to participate in the class with her (this was the first time we’ve ever done any financial-type studies together). Not only did I learn about the way she thinks a bit, but the experience also sparked a number of practical conversations about our finances.

When we first were married, we used to “dream” about our futures and how they would unfold. As you get busy with jobs and then kids, the fantastic tends to be replaced by the concerns of daily life. Dreaming about and discussing what we wanted life to look like in 5 years, etc, was very valuable. Now, we’ve only scratched the surface on that and have a lot more to do, but I’m hoping that this was the match that rekindled it for us.

Weaning ourselves from credit cards

The biggest change that we’ve made as a result of this class was that we are trying to no longer use credit cards. For the past two months, we have been using a combination of cash and debit cards instead of credit. Whereas in the past, we put absolutely everything on our credit cards, now we put it on our debit card instead. Well, we do use actual cash for dining out – now that’s really easy to manage: if we don’t have any cash, then we don’t eat out. Practically, there isn’t much difference to using a debit card instead of a credit card, but we are still spending our money instead of exposing ourselves to credit limits and late charges. Dave Ramsey is adamant that using a debit card instead of a credit card makes a difference but the jury is still out on whether this makes a material difference for us specifically.

We have our TODO list

I created a list of items to look into that arose from taking this course and as I look back over that list, I’m struck by how large it is. I thought that we were doing things pretty well (personal finance-wise at least); either I wasn’t or there is just so much to take care of that it’s hard to completely nail everything. Either way, the class was quite beneficial in enabling me to create this list and I hope to be in a better place financially and personally as a result of working through the list. I was going to share the list here to create a record of it and to spark some discussion and suggestions, but I think I’ll have to save that for another post (check back soon).

You, yes you, should take this course

I found this course extremely enjoyable. Now, if you’re a normal person, maybe that’s not an endorsement you take seriously (you know, since I write a PF blog and read about these topics for fun in my spare time). So, to allay your concerns, allow me to mention that my wife enjoyed the classes as well (truthfully, she did!). She found Dave to be a very engaging speaker. It was fun to go to class and watch him on the DVDs.

The topics that are covered in FPU are myriad and varied. Whether you are struggling with getting out of debt, worried about creditors, trying to get started on the right track, or trying to get things in order as retirement looms, this class has information that you will find valuable.

That being said, Dave’s basic philosophy is based on simplicity. In a nutshell, save and invest your money instead of giving it away to banks and credit card companies. There is nothing too terribly complex about the advice. If you think that you are too sophisticated for this advice, you might not enjoy the class with its simple approach (of course, if that describes you, I’d argue that maybe you really, really need to hear some of the lessons!)

So, don’t be afraid; even if you’re not the “nerd” in your relationship, I’d venture that you’ll get a kick out of Dave. Go for the entertainment and you’ll probably learn a tremendous amount of finances and how to really win with money. Truthfully, if you can find a session going on near you, I highly recommend that you attend. If you are married or engaged, I’d highly recommend both or you attending the class together. Of course, you can take an online version of FPU, but you just can’t recreate the valuable discussion alone (I hope not, at least) and undoubtedly some of your classmates will serve as inspiration for you!

There you have it – I enjoyed FPU, was glad that I did it, was thrilled to complete it with my wife, and you should find a class and participate as soon as you can!

Check out my previous FPU posts:

Financial Peace University Lesson 4 – Dumping Debt Beaking the Chains of Debt I mentioned in the previous...
Financial Peace University – My FPU Todo List Over the past few months, my wife and I have...
Financial Peace University Lesson 8 – That’s Not Good Enough! How to Buy Only Big, Big Bargains This week’s lesson...

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Financial Peace University Lesson 13 – The Great Misunderstanding

John — Fri, 15 Jan 2010 13:22:02 +0000

Unleashing the Power of Generous Giving

This class marks our final FPU lesson and introduced the final baby step. I appreciated that this lesson was included as the final class in FPU. I felt it was, in a way, the culmination of all the earlier lessons but not in a wrapup/summary kind of way. Instead, this lesson answered the question, “Why?” Why should you be responsible with your finances? Why should you get out of debt? Why should you attempt to build wealth? Is it not simply to have loads of money to greedily hoard for yourself? Or is it to gain enough to feel like you are self-sufficient and do not need to rely on God? Thankfully, no. So why do we do all of this…

Baby Step 7 – Build wealth and give

Dave started off this final lesson with this quote found in the workbook:

You can do everything we teach and you will prosper, but if you don’t understand this lesson, you will never have financial peace.

The “Great Misunderstanding,” as Ramsey calls it, is the incorrect view that the best way to have more money is to hold tightly onto what you already have. Dave used the visual aid of tightly grasping some cash – yes, you probably won’t lose any out of your hand, but it also won’t be possible for more to get into your hand. In contrast, when your hand is open and money is able to flow out of it to others, it is also easy for more to flow into your hand as well.

We are asset managers for God

Remember that we are not owners of anything in this world, we are simply stewards, or asset managers, for the real owner – God. If you have read the Bible, you will see that we are repeatedly told to give …why are we told that so often? Ramsey presents a number of reasons for this, some of which are:

Giving makes us more spiritually mature, more Christ-like
Giving makes us less selfish – less selfish people are more likely to prosper in relationships and wealth
Giving is a reminder that we are not the owners – you’re not even giving away your own money
Giving is praise and worship
Giving is offensive spiritual warfare

Remember, neither God nor the church need your money. What they need are “sold-out believers” and giving will just a by-product of living out that sold-out faith.

How to Give

You’ve probably heard of what has become a fairly controversial topic in Christian circles – the “tithe.” You’ve probably heard arguments such as should Christians tithe? Must they tithe? How should they tithe? Where should they tithe? Ramsey addressed these topics in the following way. First, the tithe is a tenth (that’s literally what “tithe” means) of your “increase.” The Bible states that you are to give of your “first fruits” – so not what’s left over at the end of the month. Furthermore, in the Old Testament, God tells the Israelites to bring the tithe into the storehouse of the temple. This money in the storehouse was used to take care of widows, orphans, and the Levites serving in the temple. Our modern day analogue is your local church which is still tasked with taking care of widows (including military spouses, single parents, etc), orphans, and your church staff. The Bible also mentions “offerings” separately from the tithe. These are given above the tithe and are given from your surplus.

So, if I interpreted Ramsey correctly, he suggests that Christians should give 10% of their gross salary to their local church and any offerings above that to other Godly organizations.

Remember this about giving…

Dave then spent a few minutes reminding us about some truths from the Bible. He started off by telling us that the tithe was not initiated as part of the Old Testament law; it was introduced prior the law. For instance, Abraham gave a tithe to God and so did Jacob after his ladder dream. Finally, never give with the motivation of getting what you gave, or more, returned to you (sorry about that if you’re a prosperity gospel kinda person). We should give because God tells us to give. Now, God does say that we will be prospered if we do so, but that doesn’t necessarily mean financially prospered.

Wrap-up

Ramsey wrapped up this final class with these two thoughts:

Financial Peace is more than just God’s system for understanding money, becoming debt free, and building wealth.

Financial Peace is when the Great Misunderstanding is understood

So that was the 13th and final class and it was quite motivational to me. I would love to get to the point, both in attitude and resources, where I could freely give money to help those around me. How much fun would that be? Frankly, I’d love to spend my days going around meeting with church planters or missionaries or school administrators or whatever handing out checks. I’d get business cards printed up that had as my title, “Major Donor.” Wouldn’t that be so cool!!

I’ll do at least one more FPU post next week – a wrap-up type post of what I learned, what I liked and didn’t like, what steps I still need to accomplish, etc. In the meantime, with many new FPU classes starting up around now, if you have the opportunity to take part in Financial Peace, I would highly recommend it!

Check out my previous FPU posts:

Financial Peace University Lesson 8 – That’s Not Good Enough! How to Buy Only Big, Big Bargains This week’s lesson...
Financial Peace University Lesson 1 – Super Saving My wife and I attended our first Financial Peace University...
Financial Peace University Lesson 9 – Of Mice and Mutual Funds Understanding Investments This week we listened to Dave Ramsey discuss...

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Financial Peace University Lesson 12 – Real Estate and Mortgages

John — Fri, 08 Jan 2010 13:09:29 +0000

Keeping the American Dream from Becoming a Nightmare

In our second-to-last FPU lesson, Ramsey discusses his thoughts on the best ways to buy and sell a home. As you might imagine, he’s not a big fan of 0% down, interest-only, 40 year mortgages (I know, shocking!). If the concepts espoused in this lesson were followed by everyone, we might not be having nearly as problems in our real estate market right now.

Tips for selling a home

Dave started off the class by laying out some tips for selling your home. I didn’t find anything earth shattering in his list but they are good solid tips such as:

Think like a retailer -make your home into a model home with no evidence of cats, dogs, kids, nothing on the kitchen counters, take most of your clothes out of the closets, etc.
Pay attention to your home’s curb appeal – “71% of buyers buy from the curb”
Make sure your home is listed on the internet (77% search for houses on the internet) and in the Multiple Listing Service (MLS)

Buying a home

Ramsey is a big fan of home ownership for three main reasons:

Paying for your house is a forced savings plan
Owning a house is typically a hedge against inflation
Your house grows virtually tax-free

Obviously the real estate market in some places in the US has not been performing well for the past few years. But that is a short-term trend resulting from a number of factors. In the long-term, owning a house is still a good idea (besides, you need a place to live).

Baby Step 6: Pay off your home early

Tips for buying a home

Again, you have most likely heard Ramsey’s list of tips for buying a house. These are suggestions such as:

Buy at the bottom of the neighborhood’s price range
Homes prices are based mainly on three things: location, location, and location
Buy a home that can be attractive from the street and has a good basic floor plan
Do NOT buy trailers or mobile homes – they go down in value faster than a car
Do NOT buy timeshares – there is typically no secondary market to resell them (my parents actually own a timeshare…they rented the same week at a timeshare for years and the owners eventually just gave it to them. They didn’t even attempt to make my parents pay for it; in fact, they even paid the attorney fees to transfer the title!)

Mortgages

Now, we get into the crux of the lesson and I’m sure you can imagine that Ramsey’s suggestions will not mesh with all of the crazy mortgage options we’ve seen over the past decade. He starts off this portion of the lesson by reminding us to hate debt and that the best mortgage option is the 100% down plan. Seem crazy? He states that 11% of second home buyers pay cash – so someone is doing it!

Do not buy a house and take on a mortgage until you are ready to do so – that means you are out of debt and have a fully-funded emergency fund. There is nothing wrong with renting for a period of time to make sure your financial house is in order.

Ramsey recommends that you get a mortgage with a payment of no more than 25% of your take home pay on a 15-year fixed rate with at least a 10% down payment. Now, this is a very conservative plan but I’m sure it is very effective. Imagine for a moment if everyone in the US followed this advice over the past decade – I would have to think that the foreclosure rate would be drastically lower than it has been over the past few years (home prices would not have inflated so drastically, people would not have over-extended themselves, all in all, it probably would have made for a much more stable market then and now).

Why choose a 15 year mortgage? The reason is simple finances. Certainly you will pay more each month but the interest savings over the term of the loan is substantial. For instance, on a $225,000 mortgage at 6% APR, you will pay an extra $550 per month compared to a 30 year mortgage but after 10 years you will have about a $90,000 lower principal!

Ramsey recommends that you avoid these “horrible” mortgage options:

Adjustable rate mortgages – these transfer the interest rate risk from the lender to you
Interest-only mortgages – if I have to explain to you why Ramsey hates these, you really haven’t been listening!
Reverse mortgages – you are putting a paid for home at risk and the fees are typically large
Accelerated or Bi-Weekly plans – these are not bad ideas in themselves, but don’t pay a fee to set this up as you can easily do it yourself.

Yet another myth

Ramsey warns to not fall for the mortgage tax-advantage myth as a reason to not pay off your mortgage. Think about this, if you are in the 25% tax bracket and pay $10,000 in mortgage interest in a year, you will save about $2,500 in taxes. Someone might tell you that it’s a bad idea to pay off your mortgage because then you won’t save that money in taxes. Is it really a good thing to spend $10,000 to save $2,500? That math just doesn’t make sense. This math makes a lot more sense and is a “win” for everyone (except maybe your bank): pay off your mortgage, then give $10,000 to your church or another charity and you’ll still get the $2,500 tax reduction (besides, would you rather give $10,000 to a bank or a charity?).

Patience is a virtue, so is self-restraint

Take your time, find a good house and get a good deal on it. Make sure that you can afford to drop a sizable down payment and get a 15-year mortgage. This is how Ramsey recommends that you buy a house and protect yourself from being in the unfortunate situation in which so many people currently find themselves. “Real estate is a wonderful thing to buy, but move slowly. Don’t buy until you are financially ready.”

Check out my previous FPU posts:

Financial Peace University Lesson 9 – Of Mice and Mutual Funds Understanding Investments This week we listened to Dave Ramsey discuss...
Financial Peace University Lesson 4 – Dumping Debt Beaking the Chains of Debt I mentioned in the previous...
Financial Peace University Lesson 13 – The Great Misunderstanding Unleashing the Power of Generous Giving This class marks our...

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Financial Peace University Lesson 11 – Working in Your Strengths

John — Tue, 29 Dec 2009 20:03:44 +0000

Just in case you were wondering if I really had FPU class the week of Christmas, we did actually finish a few weeks ago. I started off running each post about a week after the lesson, but I’ll admit that over time I’ve drifted a bit farther behind than that! Anyway, Two more lessons to debrief after this one…

Careers and Extra Jobs

This week’s lesson centered around your career and here it is in a nutshell: You should really enjoy your work (at least for the most part) because you spend so much of your life doing it. Check out these statistics from Ramsey: the average job lasts on 2.1 years in length. That means that a worker could have as many as 20 jobs in their lifetime! He also stated that 98.3% of employees work for small businesses (defined as those having less than 100 employees). The backbone of our economy is truly the entrepreneur!

Some more myths

Apparently Dave Ramsey really loves debunking myths as this is the third lesson (I think) where he discussed commonly repeated myths. So, let’s indulge him…

Myth: As you grow you change

Truth: You might grow, but you won’t outgrow your personality

Myth: You will learn and grow most in the areas where you are weakest

Truth: You grow in your strengths. You grow the most in areas you already know and love. Think of your passions – those are the areas that you care about the most and find interest in and therefore those are the easiest to drive you to grow even more.

Remember that money is never ultimately enough of a motivator for doing a job indefinitely. If you hate your job, eventually that salary, no matter how large, will not be enough to get you out of bed and out the door each morning. Therefore, Ramsey recommends that you seek a career that blends your skills, abilities, personality traits, values, dreams, and passions. I’m sure you’ve been around people that really enjoy their job – it’s hard to tell if they are working or playing; that’s when you know you are in the right career.

The DISC Personality Profile

Ramsey then spent a few minutes explaining the DISC profile and touching on the characteristics of each type. There is too much information to even get into here but I do agree that going through a personality profile, be it DISC or Myers-Briggs or whatever, is a helpful exercise. I’ll at least tell you what the four profiles DISC are:

Dominant
Influencing
Stable
Compliant

Job Hunting

Dave spent the remainder of the session presenting some tips on job hunting. I won’t recount all of them here but I will hit on some of the ones I found most useful. First of all, remember that a company is not looking for you, rather they have a problem and they need someone to solve it. Therefore, approach your job search from that perspective – that you are here to solve their problem.

When you are getting ready to contact a company, approach it the way you would when starting up a new relationship with a person (maybe even like you are trying to get a date with someone). Dave recommends contacting your potential employers at least three times – first to send an introduction letter, then to send a resume and cover letter, and finally a phone follow-up. He reminds us that interviews and job offers come from networking and persistence.

When interviewing, treat it like you are the product and you want to present that product as the best one available. And after an interview, tell them that you will follow-up with them on a certain date (and then make sure you do it!). He also recommends sending a handwritten thank-you note to your interviewers.

What about extra jobs?

As opposed to raising your income for the long-term through a new job or career change, it is typically much easier to raise it in the short-term by finding an extra job (or two). It will typically take a significant sacrifice on your part to work an extra job – but if you need to do it and you really want to win with your money, then you must be willing to make that sacrifice.

I found his next tip a very good one – he recommends that you have a detailed plan for your extra job(s). In other words, create a plan for how much you will work, how much you will earn, and how long you will be doing it. That way, you can see the finish line and know that though you are sacrificing, it is only for a certain period of time. And finally, do not give up!

A final word of caution from Ramsey

Although we spent the entire class discussing careers and jobs and the like, he ended class by reminding us to not allow our career to be the all encompassing source of our satisfaction and self-worth. This is a very important tip but sadly it is one that is often forgotten in our culture.

Wrap-up

I didn’t find a ton of new information in this class as I’ve heard most of the job hunting tips and done numerous personality profiles. To be fair, I was able to pull out a few tips that I will use the next time I need them. That being said, this was a very inspirational class. You know, Dave is right, we spent too much of our short-time here on earth working. Therefore, you should really strive to enjoy your work. That might mean changing your attitude about your current job or finding a new job that you fit into better. Dave mentioned during class that if you work for him and you don’t enjoy your job, then he’ll fire you. It’s not good for them to have you working there and it’s not good for you to be working there either.

Now, don’t do anything rash, but if you are unsatisfied in your current position, I urge you to take some time and reflect on why that is. It might be just a matter of you changing your approach to your job or finding another role at your current employer. Or you may need to change to a different company or to an entirely different career to find that satisfaction and enjoyment. And I know this is a really bad time to be considering looking for another job (see a few sentences up: “don’t do anything rash”) but you owe it to yourself to at least consider your options if you’re not in the best position for yourself at the present time.

Check out my previous FPU posts:

Financial Peace University Lesson 10 – From Fruition to Tuition Planning for Retirement and College This week Ramsey introduced Baby...
Financial Peace University Lesson 7 – Clause and Effect The Role of Insurance in your Financial Plan This week’s...
Financial Peace University Lesson 3 – Cash Flow Planning The Nuts and Bolts of Budgeting You have to be...

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Financial Peace University Lesson 10 – From Fruition to Tuition

John — Fri, 18 Dec 2009 13:43:18 +0000

Planning for Retirement and College

This week Ramsey introduced Baby Step 4 (and #5 but more on that later) to us

Baby Step 4: Invest 15% of your household income into Roth IRAs and pre-tax retirement plans.

After you have paid off all your debt, except maybe your mortgage, and fully funded a 3-6 month emergency fund, it is not time to start thinking about and planning for your future.

Always save for long-term goals in tax-advantaged plans

Ramsey recommends that you should do all of your retirement savings using tax-favored money. Such tax-favored plans include the IRA, 401(k), 403(b), 457, and SEPP.

Dave really likes Roth IRAs which are funded with after-tax money but grow completely tax-free. There are many choices of investments in Roth IRAs, you can effectively invest more money than a standard IRA because you are using after-tax money, and if you do everything that Ramsey teaches (or at least most of it) you will probably end up in a higher tax bracket in retirement so having a Roth IRA is great at that point in time. Furthermore, you can use your Roth IRA as a last resort fall-back if you are in a very dire situation as you can make tax-free and penalty-free withdrawals at any time up to the amount of your contributions.

Remember that there are income limits to using Roth IRAs so check with the IRS or your tax adviser for the current limits. For those that don’t qualify for a standard Roth IRA, you might want to check with your employer to see if they provide a Roth 401k option. It works generally the same as a Roth IRA but there are no income limits and is subject to the higher yearly 401k contribution limits instead of the Roth IRA limits.

Ramsey’s suggestions for funding your retirement

Fund your 401k (or similar) up to the maximum employer match amount (if applicable)
Above that amount, fund Roth IRAs.
After maxing out your Roth IRA contribution, complete the 15% of your income by funding your 401k again.

One big no-no

I know it sounds like a great idea, but Dave recommends that you should never borrow money from your retirement plan. Sure, you will be paying yourself back the interest, but that rate will be much lower than you might earn over time in a diversified, long-term portfolio. The most important consideration, however, is if you happen to lose your job, you must pay all the money back in a short period of time or else the IRS treats it as an early withdrawal and you will pay taxes and penalties on the money you borrowed. And how are you going to pay that money back within the time limit when you no longer have a job?

Baby Step 5: Save for your children’s college using tax-favored plans

Once you get baby step 4 setup, you are ready to start saving for your children’s college education (of course, if you don’t have kids or they are grown and finished with college, you can skip this step).

Start with the ESA

Ramsey recommends using the Education Savings Account (sometimes referred to as the “Education IRA”). You can save $2,000 per year, per child into an ESA and this money grows and can be used for education expenses tax-free. Similarly to the Roth IRA, there are income limits for using the ESA that you should check into.

Next step is the 529

If you want to do more saving that the ESA allows or you don’t meet the income requirements, he recommends using a 529 plan. He recommends, however, that you use the type of 529 that leaves you in control of the mutual funds in which you are invested. He warns to never invest into a plan that freezes your options or automatically changes the investments as your child ages.

Caution

Dave wrapped up this week’s lesson by laying out a few “nevers” to follow (or avoid, as it were) while saving for college:

Never save for college using insurance products
Never save for college using savings bonds – the rates of return are too low.
Never save for college using prepaid college tuition plans – the college tuition rate of inflation is 7%, so you will effectively earn that rate on your investment when you could be earning more in a diversified portfolio of mutual funds.

Wrap-up

This lesson was very interesting to my wife and me – this is where we’re at right now. We are trying to ratchet up our retirement savings such that we can retire one day and also trying to save up to fund at least some of our kids’ college education. For retirement, we are actually pretty close to investing 15% (14.8%) if you include my company match…interestingly Dave didn’t really mention in the lesson whether he includes the company match in that 15% figure.

If you only do one of these steps, opt for retirement savings

One final thing to remember – while both steps are important, saving for retirement is more important. If you can only do one, do the retirement saving. Think about it – you can get a scholarship or work-study or, as a last resort, a student loan to go to college. There are no scholarships for retirement, however. It is certainly a noble pursuit to scrimp and save to put your children through college. I just hope that they get a good job so they can afford to take care of you because you were lax in your retirement planning. At the very least, you want to be able to invest your time and energy in your grandkids; you don’t want to be forced to divert that time because you have to work full-time at Wal-Mart when you are 75 years old!

Check out my previous FPU posts:

Financial Peace University Lesson 7 – Clause and Effect The Role of Insurance in your Financial Plan This week’s...
Financial Peace University Lesson 3 – Cash Flow Planning The Nuts and Bolts of Budgeting You have to be...
Financial Peace University Lesson 1 – Super Saving My wife and I attended our first Financial Peace University...

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Financial Peace University Lesson 9 – Of Mice and Mutual Funds

John — Fri, 11 Dec 2009 12:52:54 +0000

Understanding Investments

This week we listened to Dave Ramsey discuss various types of long-term investments. For long-term wealth building, putting your money in a standard bank account is just not going to cut it. You need to use some other vehicle that will outpace inflation and enable you to end up with more money than you start with. If you don’t need access to your money for at least five years, then that money can be invested instead of just saved.

Keep it simple, stupid!

Besides the statement directly above, Ramsey provided a few more rules for investing:

Never invest purely for tax savings
Never invest using borrowed money (that certainly should not shock anyone!)

Diversification is the most important tip

Diversification means to “spread around” and it lowers your overall risk. Ramsey presented an interesting example in the workbook. Imagine two different investors. The first puts $10,000 into a investment that earns 7% interest for 25 years. The second puts $2,000 dollars into five different investments and earns the following returns over the 25 years: loses all $2,000, 0% (under mattress), 5%, 10%, 15%. Maybe surprisingly, at the end of 25 years the second investor will have almost $59,000 more!!

A (very) basic primer on investments

Remember that all investments carry different degrees of risk and that as risk increases so does the potential rate of return. Liquidity is the ease with which you can access your money (cash is very liquid while equity in a house is not very liquid at all). Conversely to risk, as there is more liquidity, there is typically less potential return. Finally, remember that there are two types of risk to consider for an investment – the investment risk itself (if I buy that Enron stock, is there a chance it will go down in value?) and inflation risk as it eats away at your money over time.

Different types of investments

Ramsey spent the remainder of the class touching on a few of the various types of investments out there. I will just highlight some of those he mentioned.

Single Stocks – This is small piece of a company that you own. You gain a return when the value of the company increases or when they pay you some of their profit (dividend). These are extremely risky and should be kept to less than 10% of your net worth. Ramsey does not own any individual stocks.
Bonds - This is debt that you lend to a company. Your return is the interest rate that the company pays you and the fluctuation in the price of the bond. Ramsey does not own any individual bonds either.
Mutual Funds – An investment where many people put money into a pool to buy a bunch of different stocks providing diversification. The pool is is usually managed by a professional portfolio manager. Mutual funds are a good long-term investment and Ramsey does own shares of a number of funds.
Rental Real Estate – This is a good investment (Ramsey does own paid-for rental real estate) but he suggests that you have a lot of cash before getting involved with real estate investing. His recommendation is to buy slowly with cash only. Also, a reminder from him is that your money is made at the purchase – so be patient and only buy big bargains.

Bad Investments

Ramsey does not recommend the following investment vehicles (in fact, he warns to stay far away from them):

Gold
Commodities & Futures
Day Trading
Viaticals

Dave’s suggested mutual fund portfolio

Ramsey suggested creating a diversified long-term portfolio by purchasing different mutual funds in the following proportions:

25% Large-cap mutual funds (growth & income)
25% Mid-cap mutual funds (growth)
25% Small-cap mutual funds (aggressive growth)
25% International mutual funds

“Cap” means the capitalization of a company which means how big the company is. So, a large-cap mutual fund owns companies like IBM and/or GE. By purchasing a few different mutual funds to create a similar portfolio, you are able to reduce your risk (relatively). To recap: putting all your money into some shares in a single company is very risky, purchasing a mutual fund is much less risky, and purchasing a diversified set of multiple mutual funds is even less risky. Again, the term “risky” is all relative as we have seen over the past year as all types of funds decreased in value. So, remember that investing in stocks and mutual funds is a long-term endeavor!

A good tip or two

Ramsey concluded the class by giving out the following two tips:

If you don’t understand the workings of an investment well enough to be able to teach it to someone else, then you don’t understand it well enough to buy it!
Build wealth slowly – Don’t look for short-cuts; remember who wins in the tortoise and the hare story (hint – it’s the turtle).

One other point out of our discussion

Right at the end of class during our discussion, someone asked the following question – “When was this video made?” I couldn’t really hear what he asked and his comments after the question (everyone was starting to pack up and leave) during class, so I asked my wife. His point was to insinuate that Ramsey would have changed the video after what happened in the US stock market since late 2008. I remarked to her, “So he kinda missed the entire point of the lesson then?”

Here’s a reminder from me (not Dave Ramsey though he might say the same thing): You don’t change long-term strategy based on transient short-term events. Ramsey tried to explain this during class when he took a number of events that caused a significant market drop and showed that in almost every case the market had recovered within a year of the triggering event. Remember, the market does go up and it does go down too; thus it is possible that your investments will also go down (not just up). That is why it is important to view investing as a long-term process. If you need that money in the near-term, the market is not a good place to put it (Remember the five-year rule).

Check out my previous FPU posts:

http://www.borrowfromnone.com/2009/12/financial-peace-university-lesson-8-thats-not-good-enough/

Financial Peace University Lesson 7 – Clause and Effect The Role of Insurance in your Financial Plan This week’s...
Financial Peace University Lesson 6 – Buyer Beware Caveat Emptor (Let the Buyer Beware) The main purpose of...
Financial Peace University Lesson 8 – That’s Not Good Enough! How to Buy Only Big, Big Bargains This week’s lesson...

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Financial Peace University Lesson 8 – That’s Not Good Enough!

John — Fri, 04 Dec 2009 09:12:44 +0000

How to Buy Only Big, Big Bargains

This week’s lesson centered around making purchases, especially bigger ones, and getting really good deals on those purchases. The main way to accomplish this, and what Dave spent most of the lesson discussing, was through negotiation.

Negotiate everything

First he pointed out the difference between the US and most other cultures of the world. In the US for some reason, most people are very reluctant to ask for bargains. Of course this is quite the opposite in numerous other countries where haggling takes place over just about every purchase.

So, the first thing you need to do is change your mindset – it is ok to haggle and get a good deal. Negotiate everything and don’t be afraid to ask for a good deal. What’s the worst thing that could happen – they say “no?” If that happens, you’re no worse off than if you hadn’t asked at all, so who cares? If you ask, you might get a great deal, if you don’t ask, you definitely will not get that deal.

Dave’s Seven Basic Rules of Negotiating

Always tell the truth
Use the power of cash – it is emotional, visual, and has immediacy. Ramsey likes to tell stories of how when he is looking for a really good deal, he walks into stores with hundred dollar bills. He claims that he can usually get a really good deal when he starts peeling off and counting those $100 bills in front of the salesperson. He also seems to have a ton of fun doing it – I think I need to try this for our next significant purchase.
Use your “walk-away power” – it is critically important that you keep an emotional distance from the item. If the salesperson knows that you have already bought the item emotionally, then there is no need to negotiate with you, is there?
Shut up – ask questions, gather information, and just listen. If you let the other person do most of the talking, you might just be surprised what you end up hearing!
“That’s not good enough.” – This is Ramsey’s favorite phrase during a negotiation. He suggests saying it and seeing what happens.
Good guy, bad guy – when someone is using this technique on you, the way to neutralize it is to get to the bad guy and directly negotiate with him/her.
Use the “If I” take away technique – in other negotiating classes I’ve taken this was referred to as “nibbling.” When you are closing in on a deal, use this technique to take a few final nibbles and get a deal with which you are really happy. An example might be, “If I purchase this widget at that price, I need you to throw in free widget washing for a year.”

Have patience

Having patience is a usually necessary for getting a great deal. As mentioned, maintaining that walk away power is very important. So, maintain it, and use it when you need to.

Remember, it’s your money, no one can force you to buy a product at a price with which you are not happy. When I was negotiating one of our cars a few years back, I remember telling myself this over and over. You get into a car dealership and they try to make you feel bad about not giving them their price and all this and that…so remember this tip.

Give it a try

As I mentioned previously, you don’t really have anything to lose by asking for a better deal. I admit that I don’t negotiate often. Usually, I’ll sit through a session like this and get all fired up about negotiating. I’ll then go out and try it and almost always have success…but over time I just stop trying it.

The last major thing I negotiated took place a few years ago when we needed to get a liner put into our chimney. The quote I had was $2400. So, I exercised some patience and waited about 5 months until March, which is typically a time that chimney companies don’t have a lot of work. I simply called up the company and asked them if they’d be willing to do the work for $2000 if I paid cash. The receptionist put me on hold for about two minutes, and came back and said, “sure, when would you like us to come to do the work?” It was a pretty simple thing to do to save $400!

My advice to you is to try negotiating some stuff – get over your fear and your concern that you are ripping the other party off. If you are being honest with them, there’s no need to feel guilt or shame over it. Remember that no one can force you to buy a product and, on the flip side, you can’t force anyone to sell you something. If they are not comfortable with your offer, they can always say “no.” So try it – you just might be pleasantly surprised by the result!

Check out my previous FPU posts:

Financial Peace University Lesson 6 – Buyer Beware Caveat Emptor (Let the Buyer Beware) The main purpose of...
Financial Peace University Lesson 5 – Credit Sharks in Suits Understanding Credit Bureaus & Collection Practices Dave starts out this...
Financial Peace University Lesson 1 – Super Saving My wife and I attended our first Financial Peace University...

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Financial Peace University Lesson 7 – Clause and Effect

John — Fri, 13 Nov 2009 12:15:03 +0000

The Role of Insurance in your Financial Plan

This week’s lesson was about insurance – all kinds of insurance. Ramsey introduced the various types of insurance that he recommends for each person and also briefly touched on the types of insurance coverages to avoid.

The purpose of insurance is to transfer risk

Insurance is an essential financial planning tool as some types of losses can financially devastate you. For instance, if your house burns down or you are permanently disabled, these are events that can be catastrophic to your financial well being. The point of insurance then is to transfer these huge risks away from you and onto someone else. Ramsey states, “I want them to catch the catastrophes.” You can survive bills of a few thousand dollars if you have an emergency fund and good financial habits….the issue is the very rare but very large problems that your emergency fund won’t even come close to covering.

Types of Insurance that Ramsey Recommends

Homeowner’s or Renter’s Insurance
Auto Insurance
Health Insurance
Disability Insurance
Long-Term Care Insurance
Identity Theft Protection
Life Insurance

Ramsey spent the majority of the lesson giving some information and tips on each insurance type.

Homeowner’s and Auto Insurance

The best way to lower your insurance premiums is to raise your deductible. If you have a full emergency fund, then raising your deductible from $250 to $500 or even $1000 should save you a significant amount on your premiums.

He also recommends carrying adequate liability coverage (at least $500,000) or carrying an umbrella personal liability policy to protect your assets (if you have significant assets to protect, that is).

Health Insurance

Again, the key to reducing your premiums is to increase your deductible, coinsurance, or maximum out of pocket expense – but never decrease your maximum lifetime benefits. Another option that Ramsey recommends is an Health Savings Account (”a really, really, really good idea”). This is a tax-sheltered savings account that you never pay taxes on (going in or coming out) if you use it for medical expenses. It is paired with a high-deductible insurance policy. Depending on your situation (especially if you are healthy), you can save a lot of money using one of these policies.

Disability Insurance

Disability insurance replaces your income if you are unable to work. The best type of disability insurance to buy (though it is usually more expensive) is occupational or “own-occ” insurance. This means your insurance payments will kick in if you can not perform the job you were educated to do. He recommends you purchase coverage for 65% of your current income. Remember, your income is your biggest asset so it is a really good idea to protect it!

Long-Term Care Insurance

LTC insurance pays for nursing home, assisted living facilities, of in-home care if you need it. Ramsey states that 69% of people over the age of 65 will require long-term care at some point. He recommends that everyone purchases LTC insurance on their 60th birthday (but not before).

Identity Theft Protection

The average victim of identity theft spends 600 hours cleaning up the mess (”you now have a new hobby”) so he recommends enrolling in a protection plan. The plan you choose should include restoration services instead of just providing credit report monitoring. (See the right sidebar for a link to save on LifeLock’s plan)

Life Insurance

Dave is a big proponent of life insurance – but not of cash value life insurance. In fact, he spent the biggest part of the class explaining why cash value life insurance is a bad idea. The most common life insurance myth, he states, is that you have a permanent need for life insurance. Imagine this scenario: twenty years from now your children are grown up and out of the house, you are completely debt free including your 15 year mortgage, and your investments have grown to a considerable sum – you are now self-insured. In this scenario, why do you need a big life insurance policy if you die?

Not only does he think that there is no permanent need for life insurance, he also points out that these life insurance policies are not a good way to invest. The biggest reason is the myriad fees that are tacked onto them. These high fees act to drastically reduce your long-term return. If you are eligible, a Roth IRA is a much, much better way to invest your money.

To be fair, I have heard other arguments for purchasing permanent life insurance such as for estate planning reasons and as another tax-advantaged way to save money – but these are both for high net-worth people. Ramsey did not touch on these reasons, possibly because they only apply to a small segment of the population.

Dave’s recommendations for purchasing life insurance:

Buy low-cost level term insurance – term is for a specified period of time and is substantially cheaper.
Insure your spouse – even if he/she is a stay-at-home spouse.
Stay away from fancy options such as accidental death, return of premium, waiver of premium.
Children only need enough for burial expenses – usually can be purchased inexpensively as a rider on your policy.
Purchase coverage of about 10 times your income

Insurance coverages to avoid

Credit life and disability - to pay off your loan if you die, they are generally extremely expensive compared to life insurance
Credit card protection
Cancer and hospital indemnity – health insurance should cover this
Accidental death – stick to standard life insurance
Any insurance with cash value, investments, or refund
Pre-paid burial policies – pre-plan your burial and save up for it if you want, but don’t pay for it until it is time to pay for it.
Mortgage life insurance – If you can’t get normal life insurance, then this might make sense; in general, though, it is decreasing term insurance that is about 10x too expensive.
Any kind of duplicate coverage – for instance, having two health insurance policies will not ensure you have full coverage, in fact, you will end up with no coverage as the two companies fight over who is the “primary” insurer.

So, that was the lesson. There was a lot of detail in this lesson, and a lot of railing against permanent life insurance! Of course, it is not possible to provide enough detail on each individual type of insurance I mentioned in this post to be able to make an informed purchasing decision. But take the list of recommended insurances as a starting point to evaluate your current coverages and see where you may need to do a little more risk transference. Just remember to do some more indepth research before modifying or purchasing any policies.

Check out my previous FPU posts:

Financial Peace University Lesson 6 – Buyer Beware Caveat Emptor (Let the Buyer Beware) The main purpose of...
Financial Peace University Lesson 3 – Cash Flow Planning The Nuts and Bolts of Budgeting You have to be...
Financial Peace University Lesson 2 – Relating With Money Nerds and Free Spirits Unite! My wife and I did...

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Financial Peace University Lesson 6 – Buyer Beware

John — Fri, 06 Nov 2009 15:23:29 +0000

Caveat Emptor (Let the Buyer Beware)

The main purpose of this lesson was to expose us to one of the “enemies” of our financial peace – the enemy that is making poor purchasing decisions.

There is an incredible amount of marketing that we all are exposed to each and every day. Of course, the main purpose of all of this marketing is to separate us from our money (more specifically it is for specific companies to get some of that money but it’s the same thing from our point of view). This does not mean all companies are evil or something like that – they are trying to make a profit and they have to sell products and/or services to do that – but we need to be aware of how we are marketed to in order to ensure that we don’t fall prey to bad purchasing decisions.

Think of all the ways you are marketed to in any given day. There is personal selling, product positioning (there is a tremendous amount of effort that goes into where the items are placed at groceries stores, for instance), TV, radio, and internet ads, and so on and so forth (warning – editorial opinion upcoming: Remember all those debates about how TV is bad for kids to watch and influences them to act poorly and do stupid things. And then the people on the other side of the debate say, “no, that’s silly, TV doesn’t influence people.” Well, I think the fact that companies spend billions of dollars each year on TV ads pretty much proves that TV does influence people – either that or all those companies are stupid). Another method that you see often is the use of financing as a marketing tool. You often see the carrot of “90 days same as cash” used to entice you to buy something that you can’t really afford right now. An eye-opening statistic from Ramsey: 88% of 90 days same as cash contracts convert to payments!! (and remember, if they do convert, most make you pay back all the interest that accrued during those 90 days!)

Ramsey then did an interesting thing at this point in the lesson; he went through a number of different product tag-lines, stuff like “melts in your mouth and not in your hand,” and basically everyone in the audience as well as our class knew the products that every catchphrase was trumpeting – this marketing stuff works!

Developing power over purchase

In the most marketed-to culture in history, how do you resist all the temptations and only make appropriate purchasing decisions? To help us do so, Ramsey detailed five steps to follow before making any significant purchase. First, what is a significant purchase? Well, it is whatever you say it is. He recommends that anything over $300 qualifies as a significant purchase, but this will obviously be different depending on your unique circumstances – maybe higher, maybe lower.

You must develop “power over purchase” by following these steps:

Wait overnight before purchasing – maybe in the morning that gadget you “needed” won’t seem like so much of a need anymore.
Consider your buying motives – Ramsey states that no amount of stuff will provide true contentment or fulfillment.
Never buy anything you do not understand – I guess this doesn’t really apply to a DVD player since most people won’t understand that – but are you sure you really (really) understand how that cash value life insurance plan works?
Consider the “opportunity cost” of your money – If you do something with some of your money that obviously precludes you from doing something else with that same money. Ramsey told this illuminating story about a friend who wanted to purchase a new car but couldn’t force himself take the money out of his mutual fund to buy it. A number of years later he saw another guy driving that same car he had wanted. The man driving the car had just purchased it used for about $5000 while the mutual fund that Ramsey’s friend still owned was worth more than $300,000. That car had a $295,000 opportunity cost associated with it!
Seeking the counsel of your spouse (or financial accountability partner) – self explanatory (or at least it should be…if it’s not, you have some other things to work on as well!).

Following these five steps will not guarantee that you will never make a poor purchase (you’re buying stuff all the time and nobody’s perfect) but it will go a long way towards helping you to make good purchasing decisions as often as possible.

Check out my previous FPU posts:

Financial Peace University Lesson 5 – Credit Sharks in Suits Understanding Credit Bureaus & Collection Practices Dave starts out this...
Financial Peace University Lesson 2 – Relating With Money Nerds and Free Spirits Unite! My wife and I did...
Financial Peace University Lesson 4 – Dumping Debt Beaking the Chains of Debt I mentioned in the previous...

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Financial Peace University Lesson 5 – Credit Sharks in Suits

John — Fri, 30 Oct 2009 12:45:52 +0000

Understanding Credit Bureaus & Collection Practices

Dave starts out this lesson by exposing one more myth, similar to what he did during the previous lesson:

Myth: You need to take out a credit card or car loan to “build up your credit score.”

Truth: the FICO score is an “I love debt” score and is NOT a measure of winning financially. I admit that in the past I’ve taken pride in having a “high” FICO score. It is interesting to really look at how it is calculated, though. According to Ramsey, if you want a higher FICO score, you should go into debt and stay in debt for a long time. The more credit cards you have (assuming you don’t have big balances on all of them) and the longer you have had them will generally translate into a higher FICO score. He also explained that you could inherit a bunch of money tomorrow or get a huge raise and if you don’t change any of your debt, then your score will not change at all. So, I agree, this is not a measure of how well you are doing financially…it is basically worthless for that purpose. (He also mentioned that he currently does not have a FICO score at all…and I’m pretty sure that he is doing ok financially!)

Understanding Credit Bureaus

The first portion of this lesson revolves around your credit report. Some interesting notes from Ramsey:

Information remains on your credit report for seven years after the last activity, except for a Chapter 7 bankruptcy, which remains on there for 10 years.
Beware of credit clean-up scams – it is not legal to remove accurate information from your report.
In a survey done by the National Association of State Public Interest Research Groups, 79% of credit reports of the people surveyed contained mistakes.

It is recommended that you check your credit report annually to make sure there are no issues. Of course, this can now be done free using annualcreditreport.com. Through that website, you can get a copy of your credit report from each of the three credit bureaus once a year (FREE - you don’t even have to sign up for credit monitoring or any of the other junk – if you do, you’re most likely at a similarly-named site). So, you can check your credit report every four months if you cycle through the different credit bureaus.

Correcting Credit Report Inaccuracies

According to the 1977 Federal Fair Credit Reporting Act, a credit bureau is required to remove all inaccuracies within 30 days of you notifying them of the mistake. To do this, send a letter for each inaccuracy via certified mail to the bureaus with your credit report attached and the account number circled. The bureau will then request clarification from the company that reported the information in question. Often, that company will not respond and the credit bureau will remove the offending information. If the company responds to the bureau and claims that the information is accurate, then you will have to work with that company to clear up the discrepancy. Most times, the letter to the credit bureau will be sufficient. If they do not remove the inaccuracy within 30 days, however, you can then request that they remove the entire account from your report. Finally, if you are having problems with them, then you might need to complain to the Federal Trade Commission and your state’s Consumer Affairs Division.

Dealing with Collectors

During the remainder of this lesson, Dave discussed collection practices and how to interact with debt collectors. Here are some of the highlights of his teaching:

The collector’s job is to get your money – not to be your buddy or to help your overall situation
Typically, they attempt to induce strong emotional reactions from you
It is illegal for a collector to harass you and they can only call you between 8 AM and 9 PM (unless they have your permission to do so).
You are able to demand that they stop calling you at work
It is even possible for you to demand that they stop all contact with you (except notification that they are suing you). Dave does not recommend this, however, as all negotiations then stop and there is no hope of a positive resolution. In fact, this makes it more likely that you will end up being sued by them.
Except for student loan debt or the IRS, it is not possible for a creditor to garnish your wages or take money from your bank account unless they sue you and win the court case; a threat to do so is just a bluff.
Of course, it is possible for them to sue you. If they do, they will win (remember you do owe them money) and then they have the right to garnish your wages after a 30 day waiting period.

The purpose of all of this is ensure your life is bearable while you are trying to deal with your creditors. It is not to try to avoid paying back your debts. If you borrow money or owe someone money, the honorable thing to do is to pay what you owe.

Luckily, so far I have not had to deal with debt collectors and I have not found any significant errors on my credit reports (though when I had student loans, so many of them show up on the report that it is hard to keep track of whether they are all accurate or not) so this lesson was not as interesting as some of the others. If you are dealing with collectors, however, Ramsey’s advice is to stay in contact with them once every two weeks and send them more information than they send you. Send them your budget, send them the plan that you are using to work your way out of debt, show them how much money you have to pay debts after your necessities and try to work something out. As long as you keep communicating with them and paying them, even if it is less than they want, they will probably work with you instead of suing you. A lawsuit is expensive and getting some of your money, even if it is slowly, is better than getting none (or spending more on court costs that you actually owe!).

Resources

Request a copy of your credit report:

annualcreditreport.com or call 877.FACT.ACT

To reduce direct mail advertising and telemarketing calls:

www.optoutprescreen.com or call 888.567.8688
www.donotcall.gov or call 888.381.1222

(So I recently visited both the opt out site and the do not call site. The do not call site is pretty straightforward but for the opt out site it is so obvious that someone forced them to put that site together. They are not happy about you coming there to opt out of the marketing.)

Check out my previous FPU posts:

Financial Peace University Lesson 11 – Working in Your Strengths Just in case you were wondering if I really had...
Financial Peace University Lesson 8 – That’s Not Good Enough! How to Buy Only Big, Big Bargains This week’s lesson...
Financial Peace University Lesson 10 – From Fruition to Tuition Planning for Retirement and College This week Ramsey introduced Baby...

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Financial Peace University Lesson 4 – Dumping Debt

John — Fri, 23 Oct 2009 14:27:07 +0000

Beaking the Chains of Debt

I mentioned in the previous FPU post that Dave Ramsey is very big on creating and using a cash flow plan each month. I now have to say this week that he stresses even more the importance of getting out of and staying out of debt. I would probably say that this is the most important facet of his financial peace plan.

If you tell a lie often enough, loud enough, and long enough, it becomes accepted as truth

Ramsey spends the majority of this session presenting and debunking various myths about money and debt – some that I found very interesting. I’m not going to go through every myth in this post – I’ll just hit some I found more intriguing (I have to leave something for you when you actually take the course, right?).

Myth: Playing the lottery and other forms of gambling will make me rich.

Truth: Playing the lottery is a tax on the poor and on people who can’t do math. Ramsey asked this question, “Why is the lottery line not filled with rich people?” and also presented this telling statistic: People with no high-school diploma spend on average $173/month on the lottery while people with a college degree spend an average of $49/month. Do you know how much money $173 will grow to over time if you invested that money each month instead of wasting it on lottery tickets?

Myth: Car payments are a way of life and you’ll always have one

Truth: Staying away from car payments by driving reliable used cars is what the typical millionaire does. I admit that I totally bought into this myth; I simply did not see a way that you could drive a decent car without having payments every month. We used to pay $800/month on our two cars. You know, you can do a lot with $800 if you don’t have to give it away each month. We’re saving a lot more money these days since we accelerated and paid off our car loans. In fact, Ramsey states that the average car payment is $464/month and if you invested this amount at a 12% interest rate starting when you are 30, when you reach age 70 you will have $5.5 Million. Wow, I hope getting a nice, new car every few years is worth $5 M to you!

Myth: Leasing your car is what sophisticated financial people do. You should always lease things that go down in value.

Truth: The car lease is the most expensive way to finance and operate a vehicle. I remember reading reading an article in Consumer Reports about this exact topic. In fact, I found these statistics that Ramsey offered very enlightening: If you buy a new car with cash, the dealership makes an average profit of $82. If you finance that new car through them, the dealership makes an average profit of $775. If you lease that new car, the dealership makes an average profit of $1300!

Myth: I’ll take out a 30-year mortgage and pay extra. I promise!

Truth: Life happens! Something else will always seem more important, so almost no one pays extra every month. Never take more than a 15-year fixed-rate mortgage and your payment should be less that 25% of your take home pay. It is true that using a 15-year mortgage will save you tons of interest! In fact, on a $225,000 mortgage at 6% interest, you will save more than $143,000 in interest with a 15-year mortgage compared to a 30-year mortgage.

This is a hard one to do though. When we bought our current house, we didn’t buy one anywhere near what we were qualified for, but we are barely below the 25% of our take home pay and that is on a 30-year mortgage! Interestingly, this advice is the opposite of what Crown Financial Ministries will tell you to do. They suggest paying extra on a fixed 30-year mortgage to make sure you can still afford the payments even if something changes in your financial situation (of course, that’s probably why Ramsey tells you to keep the payment below 25% of your take-home pay).

Myth: It is wise to take out an adjustable-rate or balloon mortgage if “I know I’ll be moving.”

Truth: You will be moving when they foreclose! Remember, an adjustable rate mortgage transfers the interest rate risk from the bank to you. They are good for the bank, not for you. (Disclosure: we currently have a seven-year adjustable rate mortgage).

Myth: You need a credit card to rent a car or to make purchases online or by phone.

Truth: A debit card will do all of that, except for a few major rental companies (check in advance). Remember that you get the same level of protection as a credit card when you swipe your debit card like you would for a credit card (not when you enter your PIN number).

Myth: “I pay my credit card off every month with no annual fee. I get brownie points, air miles, and a free hat.”

Truth: A Dun and Bradstreet study found that when you use plastic instead of cash you spend 12-18% more because spending cash hurts. So what if you get 1% back! I am currently struggling with this actually. We typically use credit cards for most of our purchases but I am really re-evaluating this strategy as we go through this class. I hope to start moving to cash or debit card for some purchases next month as a trial to see if we spend less and if we can do a better job tracking it as we move through the month.

Myth: I’ll make sure my teenager gets a credit card so he/she can learn to be responsible with money.

Truth: Teens a huge target of credit card companies today. This is chilling: more young adults filed bankruptcy last year than graduated from college.

Myth: Debt is a tool and should be used to create prosperity.

Truth: The borrower is slave to the lender. In a survey, the Forbes 400 were asked, “What is the most important key to building wealth?” 75% responded that becoming and staying debt free was the number one key. Think of it this way, your largest wealth building tool is your income so don’t waste it on interest payments each month. Now think about this: How much money could you save, invest, blow, and give away if you had no debt payments each month?

Steps Out of Debt

Getting out of debt is hard and you have to be focused and serious about it to get it done. “You can wander into debt but you can’t just wander out.”

Dave presents the following five steps to getting out of debt:

Stop borrowing!
You must save money
Prayer really works
Sell something. (His famous line: “Sell so much that the kids think they’re next!”
Take a part-time job or overtime (temporarily)

The Debt Snowball

A key component of Dave Ramsey’s FPU plan is the debt snowball. You’ve probably heard about it and seen countless debates over whether paying off your debt this way make sense or not. I’ll admit that in most cases, this is not the most “interest-efficient” way to pay off your debts but as Ramsey himself states, this is about behavior modification not about math (”besides, if you could do math you wouldn’t be in debt to begin with.”). The debt snowball relies on seeing that you are actually making progress and that tangible progress motivating you to stick with it and make more and more progress.

Here is the debt snowball process:

List all of your debts from smallest remaining balance to largest.
Pay the minimum amount on each debt except for the first one. Put all the extra money you can scrape together towards paying off the first one as quickly as possible.
When the first one is paid off, put all the money that you were paying on the first one towards the second one. So, the money from the first debt will be added to the minimum amount you were already paying on the second debt thus increasing the payment.
Repeat this process for each subsequent debt. As you can see, the amount of money being paid on each debt gets larger and larger as you pay off the smaller ones – hence the “snowball” concept.

This debt stuff is important!

I feel that this is one of the most important lessons in FPU. Most people just assume that car payments, mortgages, home equity loans, credit cards, and so on, are just a way of life but it doesn’t have to be that way! We strove for a few years to pay off our cars early and get rid of my wife’s student loans. At one point, we were paying $800 on our cars and $2000 on student loans – that adds up to a lot of money each month! Now, we’re saving that money. Instead of giving away $2800 each month, we’re giving it ourselves. That’s a great feeling.

My parents never made a ton of money through their working careers. They rarely use credit cards, paid off their mortgage years ago, and live fairly simply though. As a result, they can basically do whatever they want in retirement without even touching the principle of their savings. They’re not just sitting around listening to the radio all day either. Their indulgences are going out to eat a lot, getting a new car every couple years (and they lease!), and taking a three-week vacation to Florida each year.

Get out of debt – keep the money for yourself! If you want to give it away, it’s a lot more fun to choose whom to give your money to instead of being forced to give it to your bank. And I’m sure your church or some missionaries or some people who are struggling need that money a lot more than your bank does!

Check out the previous FPU posts:

http://www.borrowfromnone.com/2009/10/financial-peace-university-lesson-3-%E2%80%93-cash-flow-planning/

Financial Peace University Lesson 3 – Cash Flow Planning The Nuts and Bolts of Budgeting You have to be...
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Financial Peace University Lesson 3 – Cash Flow Planning

John — Thu, 15 Oct 2009 19:58:58 +0000

The Nuts and Bolts of Budgeting

You have to be proactive

Just in case you didn’t already know, Dave Ramsey is big on budgets (very, very big on them). He earnestly preaches the need for a budget. Why? Because money is active – so you need to tell your money what to do instead of sitting around at the end of the month wondering what your money did. You might remember that I just reviewed a book, The Automatic Millionaire by David Bach, in which the author gives the opposite advice – don’t do a budget as they never work and are not necessary. I found it interesting that Ramsey actually said on the DVD that those people who tell you never to do a budget are just trying to sell books.

So Dave wants each of us to do a budget and not only that, but he wants us to do a new budget every month. Why, you ask? (What are you, my two-year old?) Well, because every month is different so don’t build a single “One-size-fits-none” budget that does not reflect reality. You will have different expenses each month, so you need to do a slightly different budget each month.

Why do most people hate the word “budget?”

Ramsey offers some reasons why people hate budgets starting with a budget having a “straight-jacket” feel to it. Couple that with the fact that most people have never had a realistic budget that actually worked and this explains a lot of the angst surrounding budgets.

In fact, budgets (or “cash-flow plans” if you want to remove the B-word from your lexicon), do not work when you leave things out or over-complicate them. That’s where I struggle actually. I do not want a budget with 413 individual categories where I have to spend 45 minutes after each trip to Wal-Mart divvying up the purchases into the appropriate categories. There must be a middle ground where we can find a workable plan that does take most of the month to actually work!

Finding that plan is worth the effort

During the lesson, Dave listed a number of reasons why we all should do a cash-flow plan. Some of the highlights are that a written cash flow plans (if agreed and actually lived on):

Removes money fights from your marriage
Removes guilt, shame, and fear that may be a part of purchases (”do I have enough money in my checking account to buy these groceries?”)
Will show areas of overspending
Will cause your money to go farther (”managed money goes farther”)

Create a zero-based plan and use the envelope system

So what exactly is this zero-based cash-flow plan that Ramsey recommends? It is simply a plan where you spend every single dollar that you earn on paper before the month begins. In other words, you sit down before the month begins (or stand up, I don’t think that matters, I’d probably “lounge” if I had the choice) and write down where all your money will go that month taking into account bills, payments, and all the things on which you need to spend money for that particular month. It is a zero-based budget because when you add up all the planned expenditures you just wrote down and subtract your income, you get zero (get it?).

To implement this, Ramsey recommends using the envelope system where you put the cash you are going to spend that month in an envelope and then…wait for it…spend it. But, here’s the rub, when there is no more money in the envelope, you have to stop buying stuff. Seems simple enough. Personally, I have not completely committed to this system yet. I’ve toyed with it a bit and I want to roll it out in a more formalized approach next month (with our first actual zero-based cash flow plan!) to a few categories and see how it works for us. Keep in mind that Dave is not recommending this for everything – he doesn’t suggest you walk into the bank with your wad of cash to pay your mortgage each month (”hold on, lemme find my pennies…”) but there are some spending categories that work well with this system (for instance, the ones you are prone to overspend).

Ramsey also cautions that you are not going to be very good at budgeting the first few months – he claims it takes about 3 months to get most of the kinks worked out. So, create the first monthly cash flow plan and when things come up, have an emergency budget meeting with your spouse or mentor or whatever, and change the plan. Repeat as needed while striving to reduce the number of emergency budget meetings in future months.

This is where the rubber meets the road

You should have heard the sighs (I’m pretty sure I heard a gasp or two) as Ramsey introduced all the forms that needed to be filled out for homework this week. I do admit that there were quite a bit to do (and I also must admit I didn’t do them all). The most important form, obviously, is the actual Monthly Cash Flow Plan. You can download this form from Dave’s website here or just use a spreadsheet or whatever. Two other important forms were the Lump Sum Payment Planning form where you keep track of all the large, non-monthly expenses (think insurance, taxes, pool membership, etc) and the Irregular Income Planning form for those who do not get the same check every 2 weeks or whatever.

All in the all, Ramsey wants us to fill out the following forms:

Consumer Equity Sheet (Net worth)
Income Sources
Lump Sum Payment Planning
Monthly Cash Flow Plan (3 pages)
Allocated Spending Plan (basically the cash flow plan broken out week by week)
Irregular Income Planning
Breakdown of Savings
Financial Snapshot

If that sounds like a lot…that’s because it is.

So, we’re working on our budget and I’m kinda excited to do it for a few reasons. Certainly I want to get a better handle on where our money is going on a monthly basis. I also think that having a budget will reduce my stress surrounding purchases. I tend to not want to spend money on, well, pretty much anything. So I like the idea that I can look at the budget and it says $X in category Y, so it’s ok for me to spend that money…so less stress.

This was quite a session with a lot of forms and homework – I’m telling myself that not all lessons will be like this so no need to worry about it (I don’t know if that’s true or not but it seems to work for me).

Check out the previous FPU posts:

Financial Peace University Lesson 2 – Relating With Money Nerds and Free Spirits Unite! My wife and I did...
Financial Peace University Lesson 1 – Super Saving My wife and I attended our first Financial Peace University...
Dave Ramsey’s Financial Peace University My wife and I are participating in Dave Ramsey’s Financial...

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Financial Peace University Lesson 2 – Relating With Money

John — Thu, 08 Oct 2009 10:23:18 +0000

Nerds and Free Spirits Unite!

My wife and I did not attend this class with the rest of our mates. Instead we were on vacation in Disney World during the class (don’t worry, except for food and souvenirs, we had already paid for the vacation). We did, however, sit down and listen to the CD together. Though we did not get to engage in the class-wide discussion, we did take part in a little one-on-one discussion.

What you do with your money shows what you really care about

Dave starts off this week’s lesson with the following quote that I find quite apropos:

The flow of money in a family represents the value system under which that family operates.

It is such a true statement. The places that you spend your money are a great indication of what you find important. Are you giving money to help others? Are you saving? Or do you not have enough money to do that because you are buying every fancy electronic gadget that comes out.

Shocking news flash: men and women are different

Sorry, I got a little distracted by that quote, the main point of this lesson is to expose some of the differences between you and your significant other in relation to money issues. To promote understanding between the two of you, Ramsey spends part of the class discussing the differences between men and women.

For instance, here’s one generalization: men view emergency fund savings as “boring and not sophisticated enough” while women view it as “the most important key to our financial plan.” I found this interesting actually as I recalled a conversation I had with a friend in late summer 2008. The topic was about how he felt it was not necessary to keep your emergency fund in liquid savings due to the much better return that could be had in the stock market. A few months later (you remember October of last year?) his wife wore an exasperated look on her face one morning during carpool pickup when she was asking me if I had any insight into what was going on with the stock market and what would happen next.

On top of the gender differences, he also roughly groups people into two camps: nerds and free spirits. Then he spends a few minutes humorously discussing characteristics of the these types. The point, again, is to remind us that people are different; not everyone thinks exactly like you do (thank goodness) and that’s ok. Understanding this fact will make it easier for people to relate to each other and get down to the business of getting their finances on track.

Some marriage specifics

Ramsey then mentioned that the number one cause of divorces in America is money problems. While being at odds about your finances is a terrible source of stress for a family, being on the same page can actually bring an incredible level of unity to a marriage. This is exactly what I am hoping to accomplish with my wife through this class.

His advice for couples is that both of you do the financial decision making. It is not for one person to decide and force the other to comply. Instead, the decisions must be mutual. Of course, the nerdy, number-crunching, spreadsheet-loving one (that’s me in my family…but if you’ve read any of my other posts, you probably already know that) should prepare the budget and other financial documents. But that does not mean you are making the decisions, you are simply preparing the documents. The next, and more important, step is to come together to discuss the budget, make changes until you are both satisfied, and then agree to follow the plan. This can not be over-stated – it is critically important that both partners are involved in the actual decision making.

What about the singles?

Ramsey also suggests that a single person take the time to prepare a budget and follow-through on it. Obviously, that person does not have a spouse to meet with, discuss, and agree to the budget. If that is your situation, Dave strongly recommends developing an accountability relationship with a friend or mentor to help you along the process. This relationship should be with someone who is honest and caring enough to tell you when you are about to do something stupid with your money. You make all the decisions, but it is beneficial to have someone around to bounce ideas off of and to make sure you are following a good path.

Kids should be on commission, not welfare

This session concluded with Ramsey’s views on children and money. He started off this section by reminding parents that it is their responsibility to teach their children about money, not the school’s. He recommends paying the commissions instead of allowance – if they work, they get paid, if not, tough. When they grow up and are out in the workforce, they won’t be given allowance (hopefully not, at least) so they shouldn’t start thinking that is how money works now.

My wife and I have actually gone back and forth on this topic over the years. I do think the commissions idea makes sense and I think we will be instituting some form of it in the near future with our young children.

Wrapup

As I mentioned, we did not participate in the dicussion with our class so I don’t have any awesome insights to share with you. What we decided is that even though she did not think of herself as a “free spirit,” according to Ramsey’s definition, she is (and compared to nerdy me, she certainly is!). In our next post, we’ll be back with our class and will start into the nitty gritty of putting together the budget…check back then!

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Financial Peace University Lesson 1 – Super Saving

John — Fri, 18 Sep 2009 10:32:21 +0000

My wife and I attended our first Financial Peace University class Wednesday evening with a bunch of people from our church (check out the introductory post for this series) I was really excited to see the large turnout. We listened to Dave Ramsey speak for about an hour (via DVD of course) and then had some brief discussion. The majority of this week’s discussion was everyone introducing themselves and telling the group why they were attending the class.

I was quite happy to see that there is a great deal of diversity in the class. The attendees range from an 18 year-old guy, to some young married couples, to some couples with young kids, to some couples with college-aged kids, to those already retired. There was also significant diversity in the answers to why each person was attending. Some people just wanted to do a check up on their finances, others wanted to get out of debt, some wanted to prepare for having children or sending them to college, and others wanted to get on track in preparation for retirement. I said that I was here because learning about and discussing personal finances is one of my passions but I was most excited by the opportunity to take part in a PF class with my wife (she said she was there because I signed her up) I’m optimistic that all this diversity will lead to some interesting and useful discussion over the course of the, um….course.

Baby Step 1 – $1000 in an emergency fund

In the DVD, Ramsey highlighted a number of topics that he will expound upon in later lessons. For instance, he introduced his “baby steps” concept where he believes making small, focused changes will eventually lead you down the path to where you want to be.

He mainly focused on baby steps 1 and 3 this week. Baby step 1 is to, as quickly as possible, put $1000 in an emergency fund. If you are making less than $20,000 per year, then he suggested you change that number to $500. He underscored that this is not an investment, rather it is insurance, so put the money in a safe, liquid fund like a money market. Then, DO NOT TOUCH IT. It is there to provide peace of mind if anything unexpected happens (and he drove home the point that something unexpected WILL happen, so get ready).

When is a car crisis not just a car crisis?

I found it most interesting when he discussed what happens if you are not prepared for unexpected expenses. For instance, say your car breaks down and you have a large repair bill. If you are prepared, you just pay the bill without incurring debt and move on – car crisis solved. If you are not financially prepared, however, then not only do you have a car crisis, but now you also have a financial crisis. Imagine the stress on you if every time you have a crisis (car, health,whatever), it triggers an associated financial crisis. Actually, since most people in the US do experience that phenomenon with each crisis, maybe we should imagine how much less stressful it would be to just take some cash out of your emergency fund and pay the bill….financial crisis averted.

Wealth building

Ramsey also gave an introduction to wealth building. His two main points were that you must be disciplined about building wealth and you must remember that it is a marathon, not a sprint. He also suggested that you automate your saving and investing and showed the power of compound interest with the famous example of 2 brothers investing. One invests $2k from age 19 to 26 (a total of $16,000) and then stops. The other doesn’t start until age 27 (I guess they’re twins) but then puts the same $2k every year until age 65 ($78,000 total). Even though he has invested much more money, the late-starting brother still ends up with roughly $700,000 LESS (assuming 12% interest) at retirement.

My take on the first lesson

In summary, Dave is a very good speaker. Did you ever have the experience where you’re at church for Bible study and in the next room that class is watching a DVD of Beth Moore teaching? Sure, your class is interesting and all, but it never quite seems as fun as those women watching Beth (your main clue is the periodic uproarious laughter). Well, Dave is very funny and, during the first lesson at least, is able to really hold your attention and make the lesson quite entertaining and enjoyable.

I’m on-board with his saving first mantra, I already have an emergency fund, and there wasn’t much time for discussion this week, so I didn’t learn anything terribly intriguing. Still, I am very much looking forward to the next class (though I am distressed to say that I will miss class next week. My wife and I will listen to the CDs provided with the kit and I hope to post on the lesson and some of our personal discussion).

So, are you intrigued? Does preparing for and avoiding stressful, debt-inducing, financial crises pique your interest? Check back for more highlights next week or check out a class for yourself either at a local church or organization or sign up at Ramsey’s website to take an online version of the class.

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Dave Ramsey’s Financial Peace University

John — Thu, 17 Sep 2009 03:07:45 +0000

My wife and I are participating in Dave Ramsey’s Financial Peace University at our church starting tonight. I am sooo excited (I know, that probably sounds pretty weird, oh well) I’m very excited because my wife and I are actually taking the class together. I have read a bunch of personal finance books and blogs, talked to various financial advisors, discussed these topics ad nauseum with friends (just ask my friends), and even completed the Crown Financial class previously. I have done all of these things by myself, however. So, I am pumped about my wife and I going through this process together.

Financial Peace University in a nutshell

Here’s Dave Ramsey’s FPU in its simplest terms: debt is bad. Now, obviously there is a lot more to the class (I sure hope there is as there are a total of 13 lessons!), but that is the crux of his message. Here are some statistics he presents:

Only 32% of Americans could cover a $5000 emergency without going into debt.
A Parenting Magazine poll indicates that 49% of Americans could not cover even one month’s worth of expenses if they missed a paycheck.
The US savings rate for 2006 was -1% – the lowest since the Great Depression.
Total US consumer debt was $2.7 trillion in April 2006, the highest level ever.

Well, that’s not looking so good but contrast the thoughts aroused by those statistics with this teaser Dave presents in his workbook:

Imagine having absolutely no debt – no car payments, no credit card payments, not even a house payment. How would it feel to actually get to keep your money instead of mailing it out to a dozen creditors month after month?

Ahhhh, doesn’t that sound nice? If so, check back each week as we progress through the class (or better yet, find a class in your area to attend yourself). I will be doing a post, a debrief if you will, on each lesson. I’ll go over the main topics covered that week, mention some interesting points raised during the discussion, and touch on what I found to be most profound. Well, this was the intro post…I’ll start with our first debrief tomorrow.

Ramsey wraps up the introduction like so:

It’s time to change your behavior, take control of your money, and finally take your place on the road to Financial Peace!

Woohoo!! I’m pumped! Let’s go! (ok, calming down now…)

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