Saturday, September 3, 2011
So what's the deal with Dave Ramsey?
On The Well Trained Mind forum which I frequent often, people seem to be obsessed with Dave Ramsey. Any time money comes up it's Dave Ramsey says this, Dave Ramsey says that, or I love Dave Ramsey! Well, I personally had never read anything by Dave Ramsey or heard of him before. Before we killed our cable TV, the Cobbler and I watched Suze Orman religiously (I loved her "Can I Afford It? segment) and read all her books. I can't even tell you how many times I thumbed through her book The Road to Wealth before passing it on to my sister. I figured I'd check this Dave Ramsey guy out so I checked out two of his books from the library --- Financial Peace Revisited and The Total Money Makeover.
Essentially, these two books contain the same concepts --- Dave's baby steps for eliminating debt, preparing for emergencies, and building wealth.
His seven baby steps are:
1. Save $1000 for emergencies.
2. Pay off all debt using the Debt Snowball (the snowball is covered extensively in the book, but essentially you make a list of all your debts excluding your mortgage and pay them off one by one starting with the smallest one first so you can have some early victories).
3. Get 3-6 months of expenses in savings.
4. Invest 15% of household income into Roth IRAs and pre-tax retirement.
5. Save money for college for your children.
6. Pay off your home early.
7. Build your wealth and give.
How to complete each step in detail is outlined in the books. Between the time these books were written, his philosophy has not changed. If I had to pick one of the two to recommend for you check out, it would be The Total Money Makeover, which includes the detailed steps to "financial fitness", a huge appendix in the back full of forms to help you get started, and loads of letters from his followers who have successfully implemented his plan. One letter that stood out to me was from a couple in their mid 20s who had paid off all their debt and were only five years away from paying off their mortgage. Another letter that impressed me was from the winner of their Total Money Makeover Challenge. The Total Money Makeover Challenge was a contest they had when the book was first released to see who could have the greatest change in financial position in six months. The winners took home $50,000. That family started out with $56,000 in credit card debt and only a $35,000 income. Their minimums on their credit cards were $1200 a month! Four years later, they are debt free and own their home outright. They claim that's 36 years earlier than their financial planner had projected! Now that's results!
The Cobbler and I discussed after I read it about whether or not we thought Ramsey's plan was sound. Overall, we agreed with the exception of paying off your house early. We live in an area where home prices are still depressed and falling. We're currently significantly upside down in our mortgage, even with putting 20% down 7 years ago, as are most of our neighbors. There's always a chance with his job that we'll have to relocate. The company will pay the difference to get you out of your loan to move if you're upside down. In our case, it would make absolutely zero sense to pay off our mortgage; however, for others it may be a good choice.
What do you think of Dave Ramsey's Seven Baby Steps? Do you think he deserves all the positive hype he receives?