Dave Ramsey and Financial Peace

20 Mar


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.”

daveDave Ramsey


Posted by on March 20, 2009 in Finances


12 responses to “Dave Ramsey and Financial Peace

  1. Shannon

    March 20, 2009 at 7:23 am

    Great post! Chris and I were so focused on steps 1 and 2 that we’re having a hard time accomplishing the other steps with the same fervor. Thanks for the great reminder.


    March 20, 2009 at 12:45 pm

    Thanks for this great post. I have been hearing a lot about Dave Ramsey on the internet, but am not familiar with him aside from that.

    The question I always have about this sort of financial advice is: what order should one take the steps in? Are Ramsey’s steps meant to be completed in order one after the other or simultaneously? I think tithing obviously comes first, because everything we have is the Lord’s. After that, everything is a whole lot murkier. For example, for those blessed to work for a company that matches 401k contributions, it seems crazy to leave money on the table. On the other hand, it is also crazy not to pay off your credit cards.

    One often hears the advice to have a healthy emergency fund of 3 to 6 months expenses, and this advice often seems to be prioritized above paying off one’s house. But interestingly, I’ve never heard anyone say, “oh, and if you don’t have 3 months worth of expenses, be sure to take out a home equity loan right away.” In other words, it seems crazy to borrow (and pay interest on) an emergency fund, but it doesn’t seem crazy to build up an emergency fund before we have paid off our mortgage. But isn’t it the same thing? So, my question is: which idea is the crazy one and which is the sensible?

    Although I am unsure of the correct order in which to take each of these steps, I do know that the order can make a difference. For example, if you save for your children’s college, but don’t save for retirement, you may have a problem because it would have been possible for your children to borrow for college, but you can’t borrow for retirement. If you put money in a savings account at 3%, and borrow on your credit card at 15%, you will be sorry. If you had $50,000 to invest last year and had to decide whether to put it towards your mortgage or your mutual fund, you will feel a lot happier right now if you chose your mortgage over your mutual fund. And of course, (evaluating only in terms of one’s net worth), a few years ago, the reverse would have been true. You would have been better off choosing your mutual fund over your mortgage.

  3. Chris

    March 20, 2009 at 1:56 pm

    It’s frustrating to complete a plan that demands such discipline and patience. You are doing an amazing job. We finally met our goal of getting rid of the snowball debt but I am amazed at how bad I am tempted to just jump right back in. All I can think about now days is getting a 50″ HD LCD screen. There’s so many things that you can get with financing. It’s a struggle but I think it must surely be well worth it in the end. Congratulations on your success thus far.

  4. Dan Brewer

    March 23, 2009 at 8:30 am

    I’m so excited about being able to talk “weird” with the family. Chris and Shannon are on the baby steps and now you are too. If only we could get Amber and my Mom and Dad converted we would really change our family tree! As you know I have been a loyal fan of Dave Ramsey for a couple of years now. We were doing a great job of snowballing our debt until the recession cut my income by 70%, but what is really amazing is that because of Dave’s teachings we really are not struggling like so many of my peers are. We keep to our budget using the software on and are kind of on the “baby step 2B” plan where we are piling up cash because Murphy is banging on the door. We basically have six months of expenses in the savings account and $7000 of debt besides the house. Once the storm is over we will be in a position to really take off.

    I am so glad that you and Robin are being smart with your money. Not having financial peace ruins peoples’ lives, I’ve seen it happen. I also believe that Debt is really slavery and when it comes down to it is actually immoral. Our whole economic system is dependent on it, and now we suffer for it. Are we truly any different as a society today than we were before the civil war? Hopefully this recession will open people’s eyes, you know.

    The only thing that I disagree with Dave on is paying for your children’s education. I don’t really feel like it should come before the mortgage. It belongs down with step six and it should be something that you cash flow as they attend school, if they attend, and then only if they are proving that they are doing well. We saved money for Alex to go to college, but as soon as we allowed him to have access to the account he blew it all. Kids have to learn to make their own way in life, and they dont respect what they don’t earn themselves. Also, I question the risk of saving in a 529 plan verses the increasing costs of education. University tuition goes up sometimes 15% a year and a 529, even if you start when the kid is very young, will only keep up with that if it is put into an moderately aggressive portfolio which I feel is really too much risk to assume. Whereas if that same money went toward your mortgage your dollars are 100% affecting your debt and your bottom line. If you are snowballing your mortgage, then simply cut on your extra principal payments and cash flow the school expenses while they are in school.

    One other aspect that Dave does not take in to account when it comes to our children is the innate value of having a parent at home. I really believe having Robin there for the children outweighs any income that could be earned from her working. You don’t have daycare expenses, and the tutoring and mentoring she gives will help in getting them scholarships, etc. In this respect she really is your baby step five, don’t you think?

    My love to you all, and take care, Dan

    BTW, I still have a free 6 month gift subscription to if you want it or know someone who could benefit let me know.

  5. Robin

    March 23, 2009 at 10:15 am

    From what I remember, these steps are the order that you should do them in. Get the small emergency fund first, then pay off the debts. If your debts have a higher interest rate than the interest rate on your savings, which is most likely, then you are losing money by saving instead of paying them off. After you are debt free, then you can increase the amount of your emergency savings, and then worry about long-term, specific savings such as retirement or college.

  6. Dan Brewer

    March 26, 2009 at 7:18 pm

    That’s correct, Robin, unless there is a specific threat or expected expense on the near horizon, such as a baby coming or in my case, being furloughed. In this case you put the money that you would have otherwise put on your debt snowball into your emergency fund. The goal is to not aquire ANY new debt, ever again, for any reason. If it takes longer to pay off your existing debt that’s life. Hopefully, the bad times will not be so bad and you will have an opportunity to pay off the debt from your savings when the “storm” is over. Dave refers to it as “baby step 2b”.


    March 26, 2009 at 10:01 pm

    Okay, so I am now clear on the fact that Ramsey recommends doing these steps consecutively in the order that Andrew details above. I find that I still have the same question: why? I am not quite ready to argue that this is the wrong way to go about one’s finances, but it sure isn’t clear to me that it is the right way.

    I understand that mortgage debt is the “good” debt and that for those of us blessed with a low fixed interest rate mortgage, if one must owe money, that is the best situation to be in. However, despite all the press coverage about people who choose to “walk away” from their mortgages, for most of us mortgage debt is a certainty. No matter what happens with the economy, no matter how good or bad the stock market does, we will still owe that money until we pay the mortgage off. So, if we have a limited amount of money and we invest it in a 529 for our kids or in a 401k for our own retirement, we are taking a risk. This is because our market investments may or may not do well, but our mortgage debt is a certainty and we will still owe the money on the mortgage even if we lose money in the market.

    Also, I wonder why paying down one’s mortgage isn’t evaluated as part of or as a step in saving for retirement or college. If we have no mortgage payment, paying for either college or retirement would be a lot easier wouldn’t it?

    Lastly, I still wonder about the big emergency fund. I wonder if Ramsey thinks that if one is debt free when one buys a house but has just enough money to buy the chosen house one should attempt to make sure a 3 month expense cushion is rolled into the mortgage loan. In other words, is a 3 month expense cushion something every financially savvy homebuyer would have even though it increased his or her debt? Or does he think that ideally one would buy a house that was priced so that one would have a 3 month cash cushion left over after buying it? It seems he must be committed to this view or it really wouldn’t make sense to go about amassing the cash cushion before paying off the mortgage.

  8. Matthew

    March 26, 2009 at 10:09 pm

    Good stuff. Not sure I agree though with the idea that the last step is to give. I feel like this has to be part of the plan all along, and I don’t just mean tithing. It is an important responsibility to think through what good causes we want to pro-actively support. It may not seem rational to be giving money to a charity when you haven’t yet saved money for your kids college but what good is a college education if we aren’t being charitable.

  9. andrewalma

    March 27, 2009 at 7:31 am

    Great comments all. I’m going to include my responses in a new post. -Andrew

  10. David Hill

    September 24, 2009 at 4:25 pm

    I am also an intensly devoted Dave Ramsey fan & in 4 years (this Nov ’09) will be COMPLETELY debt free, INCLUDING my house! When I started 4 years ago I knew VERY little about finance but Ramsey’s steps saved my financial life! My question is…when the mortgage IS paid off SOON…did I hear Dave say that it is a good idea to raise the retirement investing to above 15%??? I KNOW I heard him say it but cannot find it anywhere! Thanks!

  11. Canisius

    November 17, 2009 at 8:21 am

    Some good ideas but why in the world would you want to pay off the mortgage early. If you have a fixed rate rate of say 5 percent, why not take the extra cash and invest for the long term. You will make more money than the cost of the loan over the same amount of time. And if you had to pay off the loan you would have the cash to do it. I just do not agree with giving more money back to the bank than necessary


    January 23, 2010 at 12:21 pm

    paying off your home is wise. its puts more money back into your budget. and with a paid for home, you don’t have to worry about defaulting on the loan and losing your house.


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