Financial Peace

I just finished reading Dave Ramsey's book Financial Peace for the 2nd time. I first read it the year after I graduated college but didn't apply much of it then. I think I was inspired to read it again now because we recently took out a fairly large personal loan to make improvements to the house/yard. The main thing I remembered from the book was the "Debt Snowball" plan for getting rid of debt quickly. I knew we needed to apply that now or else we will be paying on our school loans until I am 57 years old. Ouch!

You pretty much have to get mad about your debt in order to have the motivation to eliminate it. It's best if you come up with ways of finding a little extra money (garage sale, part-time job, eat out less, etc) to put towards paying off that debt. First, you list out all your debts in order from least to greatest balance (include the type, balance, monthly payment and interest rate). Then you put all the money you can towards the lowest balance until it's paid off, while still paying the minimum payment on your other debts (to avoid penalties). Once that 1st balance is gone, you attack the 2nd debt, paying the normal amount PLUS the amount you used to normally pay on the 1st debt. You are therefore paying extra on the 2nd debt and it will disappear quickly. Once the 2nd debt is gone, you attack the 3rd, paying it's normal payment plus the amounts you used to pay on the 1st two. So, your monthly overall debt payment total (for all debts combined) is the same, but it is allocated differently that before. Get it? Eventually you will have paid off everything ahead of schedule so you will save on interest and be finally freeeee!

One example he gives is that a $100,000 30-year mortgage at 10% will be paid off in 21.1 years just by paying one extra payment per year. That's almost 9 years early just for ONE extra payment per YEAR. Wow! And think of all that interest you'd save!

One reason you start with the smallest debts even if their interest rate is lower is because you will see progress sooner and will be encouraged to keep going. He stresses that once you get rid of you debts you can easily save up for future purchases and not ever take on debt again. You don't want to fall and live in that hole again once you've tasted freedom!

Dave goes over so many important financial things in this book! He stresses the need to save money. He says first you need to pay minimum on everything until you get $1,000 in savings. Then kill all your debt (as described above), except your home. Then save up 3-6 months of living expenses into an account that can be accessed easily (a savings account, not an IRA, for example). This is your emergency fund and needs to remain untouched unless there is an emergency (medical, for example). He says that Money magazine stated that "75% of families will have a major negative financial event in any 10-year period". This causes a lot of bankruptcies because most people are just not prepared for that possibility (they have little to no savings).

After you have your emergency savings, you should save for retirement by investing in various places, especially all pretax retirement savings plans (401k, deductible IRA, etc) you possibly can. He explains all the options and also strongly recommends mutual funds (there is a whole chapter explaining those).

Once you are saving regularly for retirement, put all the extra money you can towards finishing off your home mortgage. Get that loan paid off early!

At the back of the book he provides many financial worksheets that help you get started, get organized and stay on track with your financial goals. You really should read this book and take notes!

Here are some other things he said that stood out to me:

"The personal, philosophical and emotional problems and strengths that you have will be reflected in your use of money. It you are very disciplined, you can be a good saver of money. If you are very selfish or self-centered, you will surround yourself with expensive toys that you cannot afford."

"No farmer has ever grown a crop unless he planted some seed. Personal growth requires that you give money away.... Somehow giving reminds us that the world does not revolve around us and that no matter what our financial status is, someone always is in a much worse situation. Good things that cannot be calculated or quantified are set in motion in your life and in your finances when you give."

"If you have too many open credit card accounts, even with zero balances, the mortgage company will count it against you when qualifying for a mortgage."

"The most effective way to save is by applying discipline over a period of time, as opposed to trying to save in big splashes. There are at least 3 main reasons to save money. First, you should save until you have built an emergency fund. Second, you should save for purchases to avoid debt. Third, you should save for wealth building."

"To the husbands: The emergency fund is an investment in your marriage! Women feel more secure with that 3-6 months of expenses in the bank!"

"You should never invest in anything you do not understand thoroughly.... If you cannot explain it to someone else, you should not buy or invest in it."

"Mutual funds are never short-term investments. If you cannot leave money alone at least 5 years, then you should not invest. Ibbotson's yearbook, a reference on most mutual fund brokers' desks, advises that if you had invested on the short term, just one year, in small company stocks you would have lost money 29 of the last 69 years. However, by leaving your investment alone in any possible 10-year period in the last 69 years, you would have made money 97% of the time and would have averaged over 12% per year."

"Never invest in something if the risk robs you or your spouse's peace."

"You have to avoid getting buying fever. When you get the fever, you lose all patience and negotiating power."

"Money--how it is handled and how it is managed--plays an intense role in the dynamic of the family."

"Most men draw much of their self-esteem or ego satisfaction from a sense of accomplishment in their chosen career, and in America we seem to keep score on the success of the career by dollar amounts. So money, the lack of it or the poor management of it can have an empowering or devastating effect on the husband."

"Women derive something different from the way money is managed in the household. They draw security and peace from the proper handling of household finances. If the money is managed poorly and there is constant stress, the wife will tend to feel insecure."

"I think we should learn financial principles and then pass them on to our children as if our life depended on it. Teach the children and start young."

"The man, woman or couple who makes significant financial decisions without careful consideration of outside counsel first is destined for pain and heartache."

"God gave women a sixth sense called women's intuition, which He did not give us. Most women have the ability to come to the right decision even if they totally misunderstood or have not a clue about the data. I am a very logical person so I fought this for years--and I can't tell you how much money it cost me and how much I've saved since taking my wife's advice. Women often get the right answer by "feeling" it."

"It takes an emotionally secure person to seek and seriously consider the counsel of parents."

"Everyone needs a written budget.... Something mystical happens when we commit something personal to writing. We somehow begin to live out our plans.... A good plan lives and moves--is dynamic--and changes as your life changes."

"If you want to control your estate and be responsible to your family, you need to have a current will."

"Successful people know the value of discipline in their lives."