By Kimberly Schluterman
So, if I may brag, my husband and I are both really good with money management. So good, in fact, that in our premarital counseling, we had no issues to work through whatsoever. We both practiced good habits as individuals and we have no problems practicing them together. This is what we said to my friend-mentors as we stood in their dining room one evening. They listened happily, congratulated us on our smart choices, and then did what mentors do best: challenged us to be even better. Dr. Bob asked if we had ever read a book called The Total Money Makeover by Dave Ramsey. No, we hadn’t and we didn’t want to read it either, especially not six weeks before our wedding! We hemmed and hawed but finally, they talked us into reading just the first chapter. If we weren’t hooked after the first chapter, we were off the hook for having to read it.
So that’s what we did. And the first chapter was all we did for about 12 weeks. It wasn’t so easy to dismiss, however. Some of the concepts lingered in our minds, and after things finally settled down post-wedding, we ended up wanting to read the rest together. And the result was surprising! For two people who consider themselves advanced personal money managers, that book totally kicked our butts. Although almost 90 percent of the book was stuff we already knew, the 10 percent that wasn’t has changed our lives.
Below is an overview of the principles in the book, and I would encourage you to consider their wisdom. Ramsey is a Christian, but this book is not about Christian finances, per se. His wisdom is, however, old-fashioned and sensible. The program he lays out is simple and straight-forward, but for the person of average self-discipline, kind of tough to follow.
The Dave Ramsey financial plan is broken down into seven “baby steps.” Steps 4, 5, and 6 include saving for college, quickly paying off your home mortgage, and investing for retirement. Since those are way down the road for both you and me, I’ll let you read the book and learn about those yourself. I want to talk about 1-3 and 7. In general, the book assumes the reader is the average American, meaning you have debt (car, students loans, credit cards). If you’re not in debt, good! You’re ahead of the game and the Dave plan will teach you how to never be a slave to money.
Baby Step 1. Quickly save $1,000. I was surprised by this because I thought he’d want us to pay down debt before saving money, but his reasoning is reasonable. Essentially, if you don’t have some money stashed away for emergencies – which are as certain as death and taxes – then you will go into debt again in order to pay for them. The quick $1000 is the first step in breaking the debt cycle. Ramsey gives specific rules about where to keep the money, but to summarize, he wants it on-hand but tucked away. It needs to be something you can put your fingers on today if necessary, but also something that you’re not going to lay your fingers on unless it is absolutely imperative. A Certificate of Deposit that has an early withdrawal fee is not the place for your $1,000, but neither is your purse.
If you are reading this and thinking, “Ha – a thousand dollars might as well be a million!” then I’ll beg you to read just the first chapter like I was “forced” to do. It’ll change your outlook and your life. The key is to get the money quick, like within a month or two. Sell things, cancel your cable and unplug everything that uses electricity if you have to. But save $1,000.
Baby Step 2. Pay down what Ramsey calls the “debt snowball.” Whereas I would have thought that if you have multiple creditors, the smart thing to do would be to start with the highest interest rate, pay it aggressively, and then move to the next highest interest rate, Ramsey suggests otherwise. He says to start with the lowest balance, pay it aggressively while paying minimum balances on all other debt, and then move to the next lowest. Similar to the $1,000 quick cash, the goal is to change your behavior. It’s a baby step. If you aggressively pay off your lowest-balance debt, then it should pay off quickly. Then you’re motivated and encouraged to keep going! Take everything that you were paying on your lowest balance, which is now paid in full, and apply it to the second lowest balance. It snowballs from there until your debt is paid off quicker than you ever thought.
Depending on your debt, it might take a couple years to make it through Baby Step 2. But once you have, you’ve accomplished something major. Yes, it is difficult to sacrifice for so long, but Ramsey’s motto is, “If today you will live like no one else, later you can live like no one else.”
Baby Step 3. Finish building your emergency fund. Right now, you have $1,000 stashed away and no debt. That same amount that you were paying toward your debt each month will now be added to your Emergency Fund. If you had been paying a car payment, credit cards and maybe a student loan, all of those payments you no longer have to make can now be applied toward building your emergency fund quickly. Most financial advisors recommend having 3-6 months of life expenses in the bank. Personally, in this economy, I feel more comfortable with 9-12, but it’s your decision.
When you are finally finished with Baby Step 3, you step back and think, holy cow. Can you believe you just did that?! I’m going to skip Steps 4-6, not because they aren’t important, but because you have enough to keep you busy for a while. I have to leave you a reason to read the book, right?
But I’m going to be a plot spoiler and let you in on Baby Step 7: Build wealth and give! One of the best parts of wealth, besides peace of mind and security, is being able to give it away. Have you noticed that poor people can’t help poor people much? Although the Lord loves a sacrificial giver, he has no problem with wealth. Remember: the love of money is the root of evil – not money itself.
The Total Money Makeover spends a lot of time teaching you about myths and not-so-secret secrets about money management. He rants about bad money habits – and he should know, he had a bunch – and why they will leave you a slave to debt forever. By the way, Ramsey has been bankrupt and come back again, so he learned many of his lessons the hard way! Ramsey informs on where to invest, how much to invest and strategies for success. It is not a get-rich-quick scheme, but rather a get-rich-slowly plan.
As you become financially independent and rely less on your parents for financial support, you will probably run across all kinds of “financial advice.” A lot of what you hear may be really, really bad advice – and certainly not grounded in God’s word. And yet, I wouldn’t say that the Dave Ramsey plan is the only smart plan out there either. I would encourage you to read the book and decide for yourself. If nothing else, it’s hard to argue with his motto that if today you will live like no one else, later you can live like no one else! The concept of sacrificing today for a bigger payout later will be present in any successful financial plan… and you can take that one to the bank.