Yesterday, I finished listening to the 13 lessons of Dave Ramsey’s Financial Peace University. Our church is hosting his class, but my schedule wouldn’t allow me to participate, so a friend of mine let me borrow CDs with the 13 recorded lessons. I have to admit, Dave’s lessons are kind of addicting; he’s funny and entertaining, which makes it fun to listen. His advice on creating financial peace isn’t groundbreaking by any means — he’ll be the first to admit that. It’s simple. It uses common sense. And yet in today’s world, it’s unusual. We have become a culture of consumers, a culture of borrowers. We want stuff and many of us have the ability to get that stuff, regardless of whether or not we have the money! Dave breaks his plan down into some fairly simple “baby steps” that make it so people can get their financial lives in order. So where am I on the baby steps?
1. Get a $1,000 emergency fund for, you guessed it, emergencies! Thankfully, I have this one done; it’s in the bank.
2. Pay off all non-mortgage debts using the “debt snowball” — systematically eradicating debts from littlest to biggest. I started this process a few years ago and within about 12 months I was debt free. I had paid off my cars and all consumer debt. It felt great to be debt free! Then I decided to go back to school to get my MBA. It wasn’t cheap. It was $25,000 for tuition, fees and books. My former company paid for about $4,000 and I paid for about $4,000 out of my pocket, leaving me with about $17,000 in subsidized stafford student loans. I’ve been paying on it now for about a year and I have about $15,000 left. The combined interest rate on the two loans is about 4%, so it’s cheap money, but my goal is to pay it off MUCH sooner than 2018. With extra principal payments, I hope to pay this off within two years. Thankfully, that’s my only non-mortgage debt.
3. Complete the emergency fund with 3-6 months of expenses. I have about two months worth of expenses in my reserves right now, so I still have some work to do on this one. I’m hoping to have three months of expenses in this emergency account by July. It’s going to take some discipline and self control, but its doable.
4. Invest 15% of household income into retirement. I’m currently contributing 4% to my 401(K) and am taking advantage of my company’s 4% match. It’s not 15%, but I hope to work up to that amount as I pay off debt and expand my emergency fund. I want to be sure to have sufficient in my retirement account so that Robin and I can do the things we want to do like traveling, church missions and giving to our children and others. It’s sometimes hard to contribute to my retirement when it’s at least 30 years away, but compound interest is very powerful and it makes retirement savings we put away today so much more valuable. (Some may argue that investing in the stock market is stupid with the recent challenges it’s had. However, historically, the market has been a great place grow money over the long-term, assuming you have a diversified portfolio. I could just stick money in a mattress somewhere, but 3% annual inflation would make that money much less valuable. So I still believe conservative mutual fund investments are the way to go!)
5. College savings for children. I hate to admit this, but we haven’t saved a dime specifically for our kids’ college education. I know I should set up a 529 savings plan for them. However, right now, I’m more interested in funding pre-school tuition, dance lessons, sports teams and other activities for the kids. Robin and I both assume that our kids will get scholarships and will subsidize their education by working while in college to get them through. That’s how we did it. We both got very little help from our parents in this area. However, college is getting more and more expensive (about a 7% increase annually) and so I intend to get going on this baby step as soon as I can. It’s an investment in my children’s future. And that’s much more important than that extra pizza each month!
6. Pay off the house early. This is a great goal. Imagine what you could do without a mortgage payment?! A friend of mine just paid off his house by switching his mortgage to a 15-year plan a few years ago and then paying quite a bit extra on principal each month. I just refinanced my house through my company, US Bank, and got a lower interest rate resulting in a lower monthly payment. I SHOULD take those savings and pay the difference to principal to accelerate the payoff of my home. It could save me thousands in interest over the life of the loan. But all of the above mentioned “baby steps” are calling for that money, so it’s hard to do it right now.
7. Build wealth and give. I don’t own any real estate besides my home. Many people think it’s a great investment, and I suppose it is. But I’m just not that interested in being a landlord. I’m not a handyman and I have enough to worry about with my own house. Plus I really don’t like it when people owe me money. I think I would be a basket case if I had renters who were late with their payments, especially if it put a cash flow crunch on me. So I don’t have plans to invest in real estate right now. But I am exploring ways to build long-term wealth so I can leave a lot of it to my children and to different worthy causes. I’d love to be very wealthy so I could give more.
Dave Ramsey believes in 10% tithing and so do I. I’ve received many blessings from paying an honest tithe and from giving generous offerings to help the poor. I have a testimony that God blesses us when we cultivate the attitude that all that we have comes from him. God doesn’t NEED our money. He asks for tithes and offerings to help us overcome our selfish tendencies. It is a true principle that “givers gain.”
Dave’s common sense approach to money outlined above has given me a lot to think about. I share these somewhat personal thoughts on my financial life because I want to encourage more people to get their financial house in order. I’ve got a decent start, but I have a long way to go still. But as Dave says, you need to “live like no one else so later you can LIVE like no one else.”