Financial Peace: Revisited, by Dave Ramsey
When it comes to finances, Dave Ramsey is probably the most well-known and most highly respected reference. I’m disappointed that it took me this long to consume some of his content; I learned a lot from this book. However, Dave originally published his book in 1993, and some of the ideas are a bit dated. In general, I think that his concepts are wise, but they need to be considered with a grain of salt.
At the beginning of the book, Dave says that “an extreme amount of money, or an extreme lack of money, magnifies character.” I think that’s a great quote. A person who is not totally committed to honesty, will accelerate his dishonesty when he has immense wealth. On the other hand, a person totally committed to helping the needy will accelerate his charitable actions with immense wealth.
Money is amoral; it is something that we simply manipulate. And the ways that we act with our money reveal if we are honest, righteous, dishonest, or wicked. The better that you become at manipulating money, which is an active entity and always moving, the more of it you will control. Therefore, be proactive with your finances. Money is always moving, which means that you if you are not actively manipulating the money, then you will lose it. Money is active and amoral, and with that foundation, Dave expresses his frustrations with Americans. In general, Americans have a poor understanding of money, and they have extraordinarily high levels of debt, as demonstrated by the housing market.
Dave’s first two steps for having financial peace are: (1) give money away! (2) develop power over purchase. I think this is great – the first thing that you should do with your wealth is give it away. Give money to your church, to the needy, or other organizations that help the helpless. The Bible clearly instructs us to do this. Also, recognize that people want to sell you stuff, and you can always spend more than you make. For any purchase over approximately $300, or any purchase that feels significant, you feel a “buyer’s high.” When making big purchases, make sure to sleep on it for one night. A talented seller will find that thing you are most interested in and latch onto it. For example, as Grace and I look at houses, we need to make sure that Grace does not buy a nice back yard that happens comes with a house. Salespeople spend exorbitant amounts of money to determine the ideal position of tables, position of signs, colors, and details that most positively influence the sale. I’m disappointed that at my workplace, we focus very little on the small details; we are generally poor salespeople, and this is sad. To sell well, you need to ask good questions.
Without good habits, all the book knowledge in the world will do you no good. Develop good habits. What bad habits do I have that need to be changed? Sleep is one. I need to get in the habit of getting enough sleep. Recently, I have been sacrificing sleep in an effort to do more during the day.
According to Thomas Edison, “the secret of success is the focus of purpose.” This means that you need to find a job that you love and work hard at it. If you do this, you will find yourself in an excellence cycle. You can outwork 80% of your coworkers and outsmart 15% of the rest. Therefore, this places you in the top 5%, which pays very well.
There are a number of finance options that Dave considers BAD: credit cards, home equity loans (HEL), auto loans, and co-signing. The only one that he considers acceptable is a regular home mortgage loan with low interest. However, he says that you should only purchase a house that is significantly below your financial means. Other general tips include: check your credit report for inaccuracies, save money, save 10% of your take-home pay, have 3-6 months of income in liquid savings such as a money market fund or savings account, start saving now because compound interest is your friend, spread your investments around to minimize risk, and keep it simple. For keeping it simple, Dave uses the example of a doctor who had a net worth of $2.5M but could have easily had a net worth of $5.0M+ if he did not try to be fancy with his investments. Sometimes, it is best to admit you are not an intelligent investor and hence avoid sophisticated investments. Avoid investments that you do not fully understand. You should be able to explain your investment in simple terms to your spouse, or even to a 13-year-old. Keep it simple.
For average investors, Dave does not recommend the stock market. Similarly, he says that bonds are not a good option. His recommendation is mutual funds. His other recommendation is an IRA (Individual Retirement Account). A mutual fund is exactly what it sounds like - a collection of money, mutually funded, by many different people, and there is a single fund manager. The fund manager is responsible for investing the funds in good, growing stocks. The fund manager will select 100 different stocks to invest in, with the hope that a majority of them yield a profit. Behind the scenes, the fund manager has a team of experts investigating all of the companies and determining if those companies are worth investing in, ranging from aerospace to band aids to dishware to manure. If you cannot leave the money alone for 5 years, then do not invest. “Ibbotson’s Yearbook” is supposedly a good reference for mutual fund brokers. Dave Ramsey recommends to diversify your investments across 4 different mutual funds to minimize your risks.
Types of mutual funds
Balanced fund – investments in a balance of small companies for growth, plus large company stocks for growth and income
Growth and income – mostly large company investments with not much fluctuation
Growth fund – concentrates solely on long term growth
International fund – international investing is more wild but has better returns over the long haul
Aggressive growth fund – aka a small company fund that focuses on investments in small companies that either make big or lose big. On average, these funds have quality returns, but you must hold on for the roller coaster ride
4 criteria for selecting mutual funds
Performance – choose funds that have a good track record, that is 15+ years
Family – there is a family of 4-5 fund managers. The diversification of management is good
Roller coaster – what is the fund’s beta? Beta = 1.0 is the same bumpiness as the S&P 500. Beta > 1.0 is aggressive, and aggressive funds typically have a beta = 1.5 or 1.7. Beta < 1.0 is a balance fund and growth, and these have a beta = 0.8 or 0.9.
Expenses
Loaded/un-loaded – it doesn’t matter if the fund is loaded or un-loaded, and you need to consider the whole package
Invest with pretax dollars
Don’t pay taxes on retirement dollars until you use them, because you earn interest on those dollars. Dave also recommends to fund a Roth IRA. To save for college, invest in an Educational Savings Account (ESA) or 529; these grow tax free and are used for education. The sequence of events is:
Pay off debt
Accumulate 3-6 months of savings
Invest in mutual funds
Learn basic negotiating skills and look for deals and bargains, because these things help save money.
Money and marriage
In marriage, it is important to recognize that men and women are different. If two people who are alike get married, then one of you is unnecessary. Because men and women are different, we are going to approach money differently. Generally, men view money as a type of scorecard, whereas women view it as a security blanket. I think that’s accurate, and I also think that many of the differences that Ramsey highlights are accurate. Here are some good differences to remember:
Men love to share facts; women love to express feelings.
Men connect by doing things; women connect by talking.
Men tend to compete; women tend to cooperate.
Men tend to be controlling; women tend to be agreeable.
Men tend to be independent; women tend to be interdependent.
I liked the part where Dave talked about “The Reluctant Spouse.” That’s me! In my relationship with Grace, I am admittedly the reluctant one. In the past, I did not care to talk about money or finances. My mind was not interested in these topics, but fortunately, that has recently changed, hence I read “Financial Peace.” When dealing with a reluctant spouse like myself, Dave offers some tips. For women that have reluctant husbands – I particularly like this one – Dave recommends that the wife takes both of her husband’s hands in hers and press her knees to his, and say that she would find it really romantic if he helped fight the financial fight alongside her. Even the most thick-headed man will understand this approach. For men with reluctant wives, Dave recommends that the husband tell his wife that he would like more communication, intimacy, and unity in heir marriage. Then, ask her to work on a budget, because creating a budget together will build all of these things. With any reluctant spouse, nagging and whining do not work. These things only cause the spouse to get defensive; they don’t work. They never did and they never will. So, what does work? Honest communication. Don’t tell them to read Dave Ramsey’s book or beat them over the head with book knowledge. Instead, explain that you are excited about building wealth, planning, and living for financial peace. Honest communication is always the right answer.
Money and children
There is also some discussion about how to raise financially responsible children and how to approach familial relationships regarding money. He offers some practical tips for raising children that I should revisit when the situation becomes applicable to myself. With other family members, it is important to set boundaries and be honest. His recommendation is to avoid loaning money to family members, because it most often will drive a wedge in the relationship.
Personal actions
As a result of reading this book, there are a number of actions that I have identified:
Put more money into retirement
Create a will
Develop a plan for investing additional income
Once married, Grace and I need to create a detailed budget. We need to sit down with one another and identify where each of us spends money - to the dollar. As part of preparing our budget we should answer the following questions: (1) What is our monthly income? (2) How much per month do we each spend on gas, food, and other expenses? (3) Where do we have money saved or invested? (4) What are our insurance policies? (5) What are our retirement plans?
Read other personal finance books to learn about different perspectives
Conclusion
In conclusion, get yourself in a great financial condition so that you can help the ones you love. I love that idea! The purpose of wealth is not for winning the game of life or for security; wealth should be used to help the needy and help the ones you love. That’s an idea that I can get on-board with. I would love the ability to financially help my loved ones. Practically, Dave recommends that you spend 30 minutes every morning to reflect; I agree that this is a good practice. Another good practice is to ask God for wisdom. Ask your Father for advice, and because God is good, He will provide answers. True peace is only found in Christ – that’s an excellent way to close!