25 of 27 people found the following review helpful
Possessing Financial Peace,
This review is from: Financial Peace Revisited (Hardcover)
I've read Financial Peace a couple times before but this time was in conjunction with going through Financial Peace University. Both the book and the course have some great information on personal finance.
The driving principles behind Ramsey's philosophy are live on a budget, pay off debt as quick as possible, build an emergency fund, and get rich slow through diversified investments rather than trying get rich quick schemes.
He describes 7 baby steps (a phrase borrowed from the movie "What About Bob?") to financial peace. The first is to go crazy to build up a $1,000 emergency fund. This will allow you to take care of true emergencies while getting out of debt. (Things like going out to eat, new clothes for school, Christmas presents, etc. would not qualify as emergencies.) This emergency fund also allows you to cut up credit cards and never use them again. Since funds are available to cover unexpected expenses credit cards are no longer necessary. (And yes you can purchase anything online, rent a car, or book a hotel with a debit card. Anything you can do with a credit card can be done with a debit card)
He quotes studies by Dunn & Bradstreet indicating that consumers purchase 12-18% more when using a credit card versus using cash. Having to look Uncle Benjamin, Abraham, George, and Andrew in the eye and tell them that they'll being going to live with someone else is an emotional experience and has an ouch factor to it that swiping a card just doesn't have. McDonald's has also done studies indicating the people paying with credit cards end up buying around 30% more than those paying with cash. So yeah, even for those paying off their card every month and getting "skymiles" or "1% cash back," you likely bought 12 to 18% more by using that credit card. Hope you enjoy the "free flight."
The second baby step is to list all debts from smallest to largest and pay minimums on all except the smallest one regardless of interest rate. Once the smallest one is paid off you would roll that money into the second smallest one and so forth. The concept is referred to as a debt snowball.
Mathematically it might seem more advantageous to pay the highest interest card first and on paper this is accurate. However, personal finance is 80% behavior and only 20% head knowledge. When you start seeing the traction and progress you're making you get excited and more focused "gazelle intense" and start really attacking the debts which result in getting out of debt quicker.
Ramsey encourages selling so much stuff the kids start hiding 'cause they think they're next and naming the dog "eBay." Picking up extra side jobs whether that be delivering pizzas, cutting grass, babysitting, cleaning houses or some other hobby which generates money is also encouraged. He also advocates paying only cash for cars not only to stay out of debt but also to avoid the beating in value you take when driving the car 10 feet off the lot.
After paying off all consumer debt not including the house if a home is owned, baby step number 3 is increasing the emergency fund to 3-6 months of expenses. This emergency fund should be placed in something that's extremely safe such as a money market or savings account. One good reason to have this amount of an emergency fund is in cases of losing a job you would have a solid 3 to 6 months to look for one without the pressure of paying bills with no income.
After building the emergency fund to 3-6 months of expenses, you then move on to baby step 4 which is investing in a retirement plan through work if they match a percentage of your contribution and then through a Roth IRA. If there is no matching from the employer in a 401k, 403b, or TSP, you would start with the Roth IRA which grows tax free. Using mutual funds with solid 10 year track records is a great diversified investment strategy for a retirement account. One would also want to spread money around to various mutual funds such as a growth & income fund, an aggressive fund, an international fund, and a value or balanced fund. The goal is to invest 15% of a paycheck into retirement.
You then move on to baby step 5 which is funding education for children. This can be done through a couple different tax defered accounts such as an Education Savings Account (ESA) or a 529 plan. Only after building up retirement should one start on the kids college. Kids can get scholarships and work to help pay for college but retirement is not something that should be put on hold. You really don't want to be eating dog food in retirement.
After all 5 of these steps are in order, you would then pay everything else down on the house as quick as possible.
Once the home is free and clear, you win and have true financial peace. At this point, you invest in 100% paid for real estate as well as continuing to invest in solid mutual funds. You can now live the life you've worked so hard for and give lots of money away.
I highly recommend this book and the Financial Peace University class to anyone. Even those who already know a good bit about personal finance can benefit from them.
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Initial post: Feb 12, 2013 10:53:41 AM PST
Last edited by the author on Feb 12, 2013 10:56:21 AM PST
Over Use of credit cards...My question to everyone is, why on earth would ANYONE use a credit card to pay for food?? It's just more proof of the stupid use of credit. We owe about $200 on tires on our card, which seemed like a reasonable use at the time (total cost ran $600.00), however, that was in October, this is the middle of February, and the last amount is still there-I am really sick and tired of paying these "suits" our hard-earned money, and after reading Dave Ramsey's books it became abundantly clear that the "old timers" had it right years ago; never buy anything, unless you have the cash to pay for it. My father used to point out that people think they "own" things that they went in debt for-surprize...the lender "owns" the stuff you are just renting from them, at an unimaginable cost to consumers. That's why these people are in business in the first place-not to be 'Joe Good Guy' who is out to help the world. So, come payday, we are kissing Union Plus Mastercard, goodbye and good riddence. Do yourself a favor-build a "nest egg" of $1,000, and work from that, as Dave advises. Make sure to replace any money used as an emergency (burgers and fries are not an emergency). Time to wake up, everyone!
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