Category Archives: Debt

There’s a lot to Like About the Total Money Makeover

I just finished reading Dave Ramsey’s The Total Money Makeover and I have to say, it was better than I expected.  It’s more than a how-to book.  It’s a book that gives you an action plan along with motivational success stories from people who have followed the plan and come out on the other side as winners with money.

The first half of the book focuses on honestly assessing where you’re at with money, dispelling some of the common money myths, and challenging the stereotypical beliefs of what a wealthy person looks like.

The second half of the book lays out Dave Ramsey’s plan: The Baby Steps.  A plan that he admits comes from the 1980s Bill Murray movie called What About Bob? (Which, by the way, is one of my favorite comedies of all time)  The steps Mr. Ramsey outlines for becoming wealthy are in fact small, bite-sized steps designed to change your behavior.  The steps are not a get-rich-quick scheme, but a get-rich-slow plan.  To use a weight loss metaphor (which Mr. Ramsey sprinkles liberally throughout the book), instead of opting for the magic pill of gastric bypass surgery, the Baby Steps direct you to struggle and suffer to realize change.  If you opt for the quick fix, you miss the behavior change and it’s easy to fall right back into old habits.

There’s lot’s to like about the Mr. Ramsey’s financial principles:

  • Pay off all consumer debt smallest amount to largest.
  • Build an emergency fund of 3-6 months of expenses or around $10k.
  • Save 15% of your income for retirement.
  • Start a college savings account if you have kids.
  • Pay off your mortgage if you own a home.
  • Once you’re wealthy, be healthy with money – have fun with some, invest some, and give some.

There are, however, a few quibbles I have with Mr. Ramsey.  For one thing, he advocates getting off credit cards completely.  For some that have a true addiction to cards, shredding the plastic might be the a necessity.  But, I think for most people, credit cards are useful tools that provide an added element of convenience and security over say cash or debit cards.

The other area in which Mr. Ramsey seems a little off-target is investing.  He encourages his readers to invest in growth stock mutual funds that have at least a 12% return and at least a ten year track record.  The ten year track record is a good quality in a mutual fund and a 12% return isn’t all that unreasonable since, as Mr. Ramsey points out, “the S&P 500 has averaged 11.67 percent per year for the last eighty plus years…”  The problem though is he encourages finding mutual funds that beat this S&P average return.  I think you’d be better off buying the average and sticking with cheap, low-risk index mutual funds.

Bottom line, The Total Money Makeover is one of the most complete and easy to understand personal finance guides that I’ve read.  While I have a couple minor disagreements, the overall plan seems sound.  It’s a book for anyone starting from square one who needs some motivation and a plan of attack.  It’s also a book for anyone who might be pretty good with money and just needs some fine-tuning   If you complete the marathon that is Dave Ramsey’s seven Baby Steps, I have little doubt that your behavior will change and you’ll become wealthy for life.

Moving on to Square Three – Pay off Your Debts

Last week, we talked about square two and creating an emergency fund.  Now we’re moving on to square three – paying off your debt.  What kind of debt?  Everything but the mortgage – car, credit cards, student loans, unpaid medical bills, your parents.

Why?  Because in order to become financially independent and be able to retire comfortably, you need to invest.  An investing while you’re in debt makes no sense.  Why invest in tomorrow when you can’t afford to pay for today?  Besides the cash you’re burning every day in interest payments, you’re one job-loss or medical emergency away from repossession, foreclosure, or bankruptcy.  You don’t want to be forced to sell your investments at the wrong time in order to keep your car.

How?  One at a time.  There are differing strategies.  Some folks like the idea of paying off the debts with the highest interest rates first, but I like the behavioral approach touted by Dave Ramsey.  He calls it the Debt Snowball Plan.  You start by paying the smallest debts off first and then working your way up to the largest.  Don’t worry about interest rates, just get after the low-hanging fruit first.  Once you start feeling that sense of accomplishment from paying off the smaller debts, the momentum will build, and you’ll be motivated to continue on and pay off the larger ones.

Paying off debt takes money.  So, what if you live paycheck to paycheck?  Just like with square two, you may have to do some uncomfortable things to get some traction.  Cut unnecessary expenses, sell things, get a second job.  Also, if you’re contributing to a 401k, stop.  You don’t need to be saving for retirement when you’re trying to climb out of debt.  Keep in mind that as you pay off your debts, the money you were using to make those monthly payments goes back into your pocket.  Now you have even more money to throw at those larger debts.

Remember, the sacrifices you make are only temporary.  Once your debts are paid off you can go back to buying name-brand Cheerios.  Although, the Walmart brand tastes pretty good to me.

Sadly, More College Debt and Generation Y Go Hand-in-Hand

According to this paper by Jason Houle at Dartmouth College, young adults in Generation Y are twice as likely to have a negative net worth than Baby Boomers when they were the same age.  Houle’s study, based on data from the Labor Department, compares Early Boomers who were 24-28 years old in the mid 1970s, Late Boomers who were that age in the late 1980s, and Generation Y who are in that age group today.  Around 16% of both sets of Boomers said they had more liabilities than assets.  That number jumps to 35% for the Gen Y group.

Is this a good thing for Gen Y? Not really.  Starting out in the workforce after college with a negative net worth puts you in a hole.  You have to spend extra time and money just to dig out of that hole before you can start saving for retirement or a house.

The study also found that young people are incurring debt in different areas than their older counter parts.  Gen Y is carrying more school debt, but less home and auto debt than their Baby Boomer cohorts.  This is also a bad thing for Gen Y.  For one, school debt never goes away.  Unlike other types of debt, you can’t declare bankruptcy and wipe it away.  Less auto debt is probably a good thing.  Less home debt might be a good thing, but I think it’s because Gen Y’ers are putting off home buying until they can dig themselves a little further out of the school loan hole.

Much of the blame for increased school debt tends to go towards the skyrocketing price of college.  But, I think most high school seniors (and their parents) aren’t being smart shoppers when it comes to finding a college education.  Too often, they target the most expensive school for which they are qualified and overlook the cheaper alternatives.  Going to a community college for the first two years can cut your college bill nearly in half.  State schools are generally much cheaper than private schools with little difference in the level of education.  No college at all is another viable option for some.  As Mike Rowe points out, trade schools are much cheaper than traditional colleges and are a great option for someone that wants to learn a skill and make good money.

Video Game Trailblazer

This morning I was sad to read that Hiroshi Yamauchi, the man who ran Nintendo for 53 years, had died.  I was a little surprised to learn that Nintendo, a video game company, had been around for that long.  Then I read that his grandfather actually started the company in 1889 making playing cards.  The video games came later.

The thing that impressed me the most about Mr. Yamauchi, was that he didn’t go into debt to fund his video game company.  In this article, Robert Fenner & Takashi Amano describe how “[Nintendo] was almost forced to file for bankruptcy in the late 1960’s after several failed attempts to expand its product lineup into toy guns, baby carriages and even to fast food…”  Mr. Yamauchi learned from this experience and “…vowed then not to borrow money to fund Nintendo’s operations.”  According to Bloomberg, Nintendo remains debt-free as of June 30th.

As a child growing up in the 80’s, Nintendo had a huge impact on me.  Some of my favorite days in the summer were spent playing Super Mario Brothers, Zelda, Top Gear, and more.  I remember how excited I was when I bought my first NES.

Nintendo Entertainment System

Then in the early 90’s the SNES came out.  My friend Matt was the first in our neighborhood to get one.  I spent hours at his house playing games like F-Zero, Pilot Wings, and Gradius III.  The graphics were amazing (for the time period of course).  I had to have one!  I saved up my pennies and raced over to my local game shop.  I was a little short on money, so I traded in my old system and games to make up the difference.  Once I had my own SNES, I probably spent more time playing video games than I should have.  Sadly I grew up and gradually stopped playing.  But I still have that SNES system (as well as a Game Boy) stuffed in a cabinet somewhere.


Super Nintendo Entertainment System