First off, a few notes, and then an introduction.
NOTE 1: If you haven’t read Annoying Nomad’s article on retiring, do yourself a favor and go read it right now.
NOTE 2: Over the course of this series, I’m going to throw my financial books wide open. Some of the numbers will be guesstimated or altered to keep some of the mystery. The ones where magnitude actually matters to the story will be real.
NOTE 3: I’m not a financial advisor. The biggest lesson you should take away from this series is “don’t take my word for it.” Personal finance is learnable, and there are plenty of great resources out there to help you figure things out.
One thing has really struck me as I’ve gotten older. Calories and Dollars are actually quite similar in many ways. After starting GlibFit a couple years ago, I immediately felt a draw to putting together a personal finance version of it. At the time, my finances weren’t in amazing shape, so I shelved the idea for a while, waiting for a time when my GlibFin success story could be told. Of course, GlibFit was never about me touting my success (I’m still within 5 or 10 lbs of where I started on day one of GlibFit 1.0), but nobody wants to hear about personal finance from a broke guy.
Still, calories and dollars are quite similar. It’s not uncommon to see an obese person lose weight when they get their money under control. The same attention and self-discipline are required to achieve your goals with calories and with dollars. There are plenty of ways that you can look healthy (physically or financially), but be woefully unhealthy. And there are plenty of people out there looking to sell you on the latest fad diet or financial instrument that promises to make your woes go away, but never actually does.
5 episode 7 episode 10 episode ok, I dont know how many articles there are going to be, I’m just going to write until I run out of stuff to say about personal finance. In this series, I’ll touch on various aspects of personal finance, including budgeting, debt, retirement, saving for purchases, etc.
I grew up in a fairly frugal home, my dad turning on Dave Ramsey’s CNBC show every night during dinner. I think most people know who Dave Ramsey is, but for those who don’t have his philosophy memorized, I’ll provide a quick overview. Dave believes that the average American relies way too much on debt and way too little on forethought. He has a program (the baby steps) that helps people who finally one day get sick of being in a financial mess dig out and get back on the right track.
I could recite the baby steps at age 15, and could talk for an hour on how the baby steps were so amazing. Out of college, I had minimal debt ($15k), and was rapidly paying it off when, well, life happened. I met my now-wife and we got engaged. Still, she had gone through Dave Ramsey’s class and her dad was frugal, too. Just a little pause in the debt payoff, and we’ll be able to leverage two incomes to be debt free in like a week. We planned the wedding on a budget and cash flowed it. I paid off her student loans as a wedding present. The only debts we had when we got back from the honeymoon were $7k in my student loans and $5k on a 0% loan for the engagement ring. Just buckle down for 6 months, and that could be gone. No problem….
Well, that freight train derailed all of 4 months after the ink dried on the marriage certificate. Within 3 years, I was seriously contemplating divorce because it was going to be cheaper than staying married. I remember a thought wafting through my head one day while I was decompressing on the back patio. I could give her all of the assets and take on all the debts myself, and I’ll be in better financial shape in two years than if I stick around. When I finally deigned to tally up the damage, we had over $550k in outstanding debt, over a quarter million of it being non-mortgage debt. With interest, that number crept up and over $600k before we paid it off (erm, it’s actually not quite that simple, but I’ll not spoil the story).
That poor naive new husband, bright eyed and bushy tailed, ready to jump into the deep end of the pool of life, didn’t understand three very important truisms. 1) That which is unwatched tends to go to shit. 2) Marriage amplifies what you put in, both good and bad. 3) Finance is more about discipline than intelligence.
You see, I was used to doing things at a breakneck pace. In college, I was an A- engineering student, worked full-time for 5 semesters, participated in multiple competitive engineering clubs, volunteered in the industrial relations office, did government research over the holidays, and still had time to work out 2 hours a day, play tennis and racquetball with my friends and date a high-maintenance girl.
The picture is probably well-painted. I knew how to juggle a bunch of different responsibilities, and I assumed that, as a newly married couple, there’d be some breaking in period (giggity) before we got the hang of things and resumed our breakneck pace.
As I started night school, I didn’t account for the fact that my wife has different strengths and weaknesses than I do. That well oiled machine that cash flowed a wedding was reliant on each of us playing to our strengths, mine being leadership and obsessive attention to financial planning and detail, hers being the ability to muster great determination to achieve a goal on the near horizon.
See, while I was blaming my wife (who does have a share of the blame for the financial mess), I was missing how much I set us up for failure. Rather than being a leader, I was being a dictator, not out of power lust or hatred, but out of necessity. I wasn’t around, so I wasn’t there to develop a plan together. Add in some medication of abandonment issues, some “gonna be a lawyer” entitlement, a heaping helping of spite, and an income that was all over the place, and it was the perfect recipe for a debt explosion.
Our conflict was rooted in the fact that our money wasn’t working for us. We had no plan, no long-term vision, and no accountability.
Dave Ramsey has a plan, a long-term vision, and a tough love version of accountability. He was exactly what we needed to dig ourselves out of this giant financial hole.
Dave’s plan is separated into seven phases he calls the baby steps. Discipline yourself into following them in order and you’re practically guaranteed to eventually become financially healthy. You may not end up rich, but worrying about where next week’s dinner is coming from is a thing of the past.
Baby Step 1: Save up a starter emergency fund of $1000
For some, this is the hardest part of the process. Getting away from the vicious cycle of too much month for the money requires a huge shock to the system. Often, it takes drastic change like a new job, moving back home, taking on a roommate, or moving to a cheaper city to release the ice dam. Sometimes, the logjam is at the implied baby step 0: get current on all of your bills.
For us, the prodigal children that we were, we still had the ghost of Dave Ramsey past haunting us enough to have a $2500 emergency fund in savings. Our leap of faith when starting the baby steps was to throw $1500 of that fund into baby step 2.
Baby Step 2: pay off all of your (non-mortgage) debts from smallest to largest.
I would say that this step is the start of the controversy, but there are plenty of people who think that the $1000 emergency fund is either too small or too big. Largely, they miss the point. It’s enough money to get you out of most run of the mill emergencies, but it’s small enough to make you scrappy, both in dealing with emergencies, and in getting the hell out of debt so that you can fully fund your emergency fund. As Dave says, it’s supposed to be uncomfortable.
Anyway, the controversy continues in baby step two, when the math geeks pitch a fit about inefficiently paying down debt. “But muh interest rate!” cries the pencil neck in debt up to their eyeballs. Occasionally you even get an arbitrager complaining about all the money being left on the table by not investing leveraged cash.
Emerging from all of that FUD is a package of Dave’s simple principles. Debt, no matter the interest rate, is risky because it makes you beholden to the lender. On average, people aren’t sophisticated enough to “win” against the banks when it comes to debt. People suck at measuring risk. Most people will use debt irresponsibly to extend their purchasing power beyond their means.
Dave’s plan says to ignore the interest rates and focus on the outstanding balances. No longer do we think in terms of monthly payments or of interest points. That car isn’t a $500/month car at 2.5%. Its a $32,000 debt that has to be repaid.
Dave’s program is heavily focused on baby step 2, so it’s hard to cover all the nuance in a few paragraphs, but the short of it is that you line up your loans by total balance owed, you pay the minimum on all of them, and then you dump every extra penny into the smallest loan.
Where do the extra pennies come from? From not having a life until the debt is gone. Discretionary spending: $0. Embrace the suck. Learn 50 different ways to cook rice and beans, because you’re not going to see the inside of a restaurant unless you pick up a second job there.
Baby Step 3: fully fund your 3-6 month emergency fund
There’s a bit of wiggle room here, depending on individual situation, but we’ve erred in the 6 month side of things. Basically, take essential monthly expenses and multiply by 6, and then save up that amount of money.
Baby step 4: save 15% for retirement
Up until now, everything has been done in sequential order. Baby emergency fund THEN pay off debt THEN full emergency fund. Now are three simultaneous baby steps that help prepare for the future.
Baby step 5: save for kids’ college
Notice the priority order here. Pay yourself first. Pay your kids for college next. Nothing is a worse way to leave a legacy than being a financial burden to your kids in your old age.
Baby step 6: pay your house off early
Dave hates 30 year mortgages, and I agree with him. It’d be nice to pay the house off in less than 15, so Dave has any extra money left after retirement and college aimed at cutting down the time until you own the house free and clear (sld’s apply). Now, this stage of life is meant to be enjoyed, so the intensity of baby step 2 doesn’t carry over here. If you can only swing the minimum, so be it.
Baby step 7: live and give like nobody else
Baby step 7 is the end goal. It’s the pot of gold at the end of the rainbow. Retirement is funded, kids are given a good head start in life, house is paid off, and your finances are about enjoyment and leaving a legacy.
Well, this article is already a mile long, so here ends the crash course in Dave Ramsey. Next episode will talk about the suck that is disciplining yourself to a budget.