Save $1,000

After you've got into the habit of planning a monthly budget and after you've got current with all your debts, the next step is to save an emergency fund. This savings is just for emergencies.

There's nothing so frustrating as to do all that work with budgets, make progress with bills, and then to get hit with some kind of emergency. You get right back behind on the bills again and you feel, "what's the use?" The emergency fund is for life's little emergencies.

As I said in the past, Dave is okay with his advise, however for many people there may just not be enough income to do all these things. What is needed is discipline and more income. An additional, part-time job to supplement the income may be necessary. Just note, that the Rich Dad crowd doesn't have the corner on financial wisdom, either. Additional income, without the spending discipline steps that Dave Ramsay suggests will only mean more spending. To truly get out of debt, some people may need to do both.

Get Current With Debt

By this he means that you stop having past due bills. He suggests prioritizing bills. Get current with necessities first. Things like your utilities, transportation, and so on. You cannot have your electricity or water cut off, nor your car repossessed. So, concentrate on these things first.

Then the other bills like credit cards and student loans. He does not say this, but I think you ought to negotiate with your creditors on ways to make increased payments to get current. You do not have to make lump sum payments, just increased payments to get current.

Final word: this is different than paying off your debt. This is just about getting over the past-due stage. First big savings are those late fees!

Budget Monthly

Budgets need to be practical. That’s why he recommends that you begin fresh each month. Budget what you earn, when the money comes in, and then schedule out what bills to pay.

My parents used a very simple method. They used to cash all checks and then put the money in envelopes. They paid only cash for all their bills and expenses. The system worked for them.

One Step at a Time

He writes that one should not try to accomplish everything at once. In the rest of his book, he writes about taking things one step at a time and in order, not skipping around. Sounds good to me; one must stick to a plan.

In the Rich Dad series, Robert Kiyosaki and Donald Trump deride the advice to live below one's means. They say that their approach is to expand one's means. I think that they're setting up a false conflict here.

Ramsay emphasizes getting one's expenses under control; RK and DT emphasizes expanding one's income. Both emphasize their areas but I notice that neither excludes the other. Hence, Ramsay mentions taking a part-time job in order to save $1,000; and Trump mentions cutting an expense and investing it.

It seems to me that one ought to be concerned about increasing income and decreasing expenses. I would integrate the two by saying this. While one ought to seek additional income, that income ought to be used to accomplish Ramsay's steps first. (Get an emergency fund and get out of debt.)

Status Symbols

Dave's was a Jaguar. He has a story about it starting on page 87. My take on that is why own an expensive thing you do not need if you cannot afford it?

From doing people's people's tax returns, I've seen the harm that status symbols can cause. People live in houses that they cannot afford, take vacations, wear clothes and play with stuff - all on borrowed money. Since, I do not have these things, I have hard time relating but I know that this is a real problem for many people.

Kids' Credit Cards

Another of Dave's big no-no's. Giving children credit cards does not teach them to be responsible with their money. It does the opposite.

Basic Insurance

Some insurance you just cannot do without. Car insurance, for example. The law requires that you have it. Here are some other kinds of insurance:

Life Insurance. Purchase only insurance, no saving plan features, only insurance. Some riders may make sense but buy only those riders that actually affect the insurance. For savings and investments, life insurance is just about the worst vehicle there is.

Disability Insurance. Did you know that you’re more likely to get disabled than to die? Dave recommends that you buy enough insurance to replace 50% to 70% of your income.

Health Insurance. Dave’s book was written before Obamacare, so I’ll say this about health insurance. While the payments may go up, the quality of the insurance policy may go up, too. – At least what the Democrats think goes into a “quality” insurance policy. You may agree or disagree with them on what that is. The newspapers reported monthly premiums going to $500 per family. You doctor may not participate in some of these new government programs, so getting the insurance does not necessarily mean that you will get treated. You may have to look around and wait for doctors who will treat you.

Long Term Care. When your age gets to the late 50’s, your premiums goes way up. Best to get this kind of insurance in late 40’s to early 50’s. Dave recommends it if you’re over 60. My opinion is that over 60 know that the insurance companies are looking at the same cost calculations that you are and have priced their policies accordingly.

Homeowner/Renter Insurance. This posts addresses personal property.

I’ve seen a number of yard sales as old people try to unload their accumulated belongings. The plain fact is that for most household items, very little value will ever be recovered from them. Also, a lot of the junk you have you can do without. Sorry, but that’s the facts. Dave does not address this but I believe that you should just determine what you absolutely have to have in case your home/apartment building burns down and buy enough insurance to get that.

Note that real estate is another matter

Retirement Ripoff

This is the headlines in a TIME Magazine story from the October 31, 2005 issue:

The Great Retirement Ripoff

Millions of Americans think they will retire with benefits are in for a NASTY SURPRISE.

How corporations are picking people's pockets with the help of Congress.

The generations have developed the mentality of just kicking the funding of retirement issues over to the next generation. Trouble is that this just makes the problems even worse. Eventually one generation will get stuck with the tab.

People have go to develop their own retirement personal fund that they alone control.

Carry Cash

Dave advises to carry cash instead of credit cards even though you may get robbed. He believes that you loose more money through credit card fees than through the risk of robbery.

My parents used an envelope system for their expenses. They had envelopes for groceries, mortgage payments, gas and so on. Then they cashed their paychecks and allocated the money amongst the envelopes. They lived out of these envelopes. That’s how they budgeted.

From Mark Twain

They cap their section on self reliance with a quote from Mark Twain.

"Don't go around saying the world owes you a living. The world owes you nothing. It was here first."

Debt in Divorce

Divorce decrees may obligate one spouse to pay the debt but both are still responsible for it. The creditor can still go after the “innocent” spouse. That spouse still has to pay. The divorce decree just gives the “innocent” spouse lift to sue the other spouse. Moreover, the credit report of both spouses still gets hammered.

Dave counsels people to refinance debts in the individual’s name before the divorce gets finalized. Divorce attorneys ought to make that part of the divorce process.

Debt Management Companies

Debt management such as Consumer Credit Counseling Service help get debtors out of debt by consolidating debt and getting lower interest rates. Dave says that they hammer your credit rating by hammering your credit rating the same as if you had filed a Chapter 13 bankruptcy. While people may not be able to get home loans by going through this program as he claims (I do not know about this) I do know that people were able to obtain car loans as well as new credit cards after going through this program.

Sometimes a person just needs outside intervention. Being able to make just one payment a month can get that past that psychological block of keeping track of many payments each month to multiple creditors.

Investment Diversification

Warren Buffet said, “Diversification is protection against ignorance. (It) makes very little sense if you know what you’re doing.”

Their book is about knowing what you're doing.

More on Budgeting

John Maxwell wrote, “A budget is people telling their money where to go instead of wondering where it went.” Everyone ought to budget – everyone!

Prepayments Are Bad

Prepaying things like college tuition and burial expenses are not good investments. The rates of return do not justify the investments. Better to invest the money in mutuals and use that to pay expenses later. Making arrangements in advance are good; it is just that prepaying those arrangements that are bad.

Mobile Homes

He’s against them – because they loose their value like cars. His suggests renting instead of buying a mobile home.

This works only so long as rent payments for an apartment are lower than mortgage payments. In my own opinion, a better way to look at this is to estimate the time one lives in the mobile home and then compares the total amount of the mortgage payments versus the total amount of the rent payment for the same period. An added wrinkle is to determine if the mortgage interest and the real estate taxes throw you over the threshold of itemizing taxes. The taxes you save because of itemizing go in favor of mobile homes.

Conclusion: he believes mobile homes are a bad choice; I believe that it depends.

Money Can Not Solve Poverty

No it cannot. I recall that during the period when welfare spending was riding high, over a trillion dollars was spent. If that money had been given directly to the poor, this was enough to make each of them rich. All that spending really accomplished was to create a culture of poverty: government bureaucrats and recipients alike enjoying careers based on this program. What the poor really need is financial education. – And jobs.

Life Insurance

Whole life insurance is one of the worst products available. Do not buy life insurance with a savings plan feature. Life insurance is for insurance in case you die. Period. Riders that address payments under various contingencies are okay.

Do not buy life insurance with cash value, no matter how it is disguised. Ever.

There! I cannot make it any plainer than that. Dave's book gives some details.

Mutual Funds

They say that they do not invest in mutual funds because the funds’ expenses are not disclosed. For myself, I think that mutuals are a way station on the path to building wealth. It is a place for ordinary people to get their start. And mutuals give a rate of return that is higher than bank accounts.

Once one builds a pot of money that one can afford to loose (at least partially), then I think that one can “gamble” on a wise, active investment.

Get Rich Quick - Forgetaboutit

This goes back to Ben Franklin. Basically both Dave and Ben agree on the principle that any scheme that advertises riches for just a few hours a day is bad.

I do not necessarily agree with this. Some schemes are valid but are just marketed wrong. For example, Dave disses real estate. He states he worked 60 hours a week and it took him years to get to a six figure income. I can’t help but think of people who work two or more jobs and never get to a six figure income.

The way the scheme needs to be evaluated is this: with a lot of effort, is a target level income achievable?

If the scheme is multi-level marketing, and an up-line is promoting it as easy money, maybe you need to get under another up-line. The problem may be with the particular individual trying to recruit you, not with the MLM company itself.

I’ve noticed that all the legitimate schemes have one thing in common: they all require a great deal of work. So, I would not dismiss schemes out of hand. Like everything else in business, independent, informed evaluation is necessary.