Hobbit
02-14-2007, 02:35 AM
I got it for Christmas from my mother. It's a book by radio great Dave Ramsey about how to manage your money. Everybody should read this book. You're never too old or too young to start managing your money correctly, and this guy knows how. To give you a little background, Dave graduated from college with a degree in business and by his mid-20s was a millionare from real estate investing. However, when his bank was bought out, all the loans he'd used to make his money were called in, since the bank thought he was too young to be trusted with that much debt (had never had so much as a late payment). He went bankrupt, and when he hit rock-bottom, he studied the habits of millionares and, using what he learned, worked his way back up to millionare status free of debt. Here's the basics:
First, debt is not a problem, it is a symptom of the problem of spending beyond your means. What you need to do first is make yourself a budget and make sure you don't spend any money you don't have to. The budget should, however, have money to 'blow,' as every human being will have this impulse, and putting a limit on it will make sure you don't overspend.
Second, you need an emergency fund. One of the most common credit card excuses is 'in case of emergency.' What you need is not a way to rack up debt and pay more than what something costs. What you need is a fall back plan. Save, scrimp, sell, or just do whatever you can think of to pinch another penny. Once you have $1000, put it someplace where you have access free of charge, but not at your fingertips (a savings account unassociated with your checking is a good idea). Do this as fast as you can and get used to the pace.
Third, pay down all of your debts (excluding one home mortgage, which is acceptable). List them from smallest to largest. Use the interest rate to break ties. Trust me, you may save a little money paying them off in a different order, but the morale boost from paying them this way ensures that you'll finish. If you can, go ahead and sell any newer, high cost cars you have, pay the loan, and use the difference to buy a cheap car. Pay minimum payments on all of your debts but the smallest, and pay as much as possible into the smallest debt. Once that debt is free and clear, move to the next smallest debt. Every debt you pay will be payed down with all the money you can spare plus all the minimum payments from the debts below it. This is called the 'debt snowball.' If you run into an emergency and must dip into your emergency fund, put the snowball on hold and get the balance back up to $1000.
When you finish all of that, you will find that you have a lot of cash flow without those monthly debt payments, but don't stop and enjoy yourself yet. Remember that emergency fund? It isn't big enough, just enough to pad you a bit. Recessions happen, as do natural disasters. Calculate around 6 or more months worth of expenses. This is the target balance of your emergency fund. Get it there.
Now, you're secure. Your emergency fund should be able to pay for anything that crops up. Put 1/4 of your income into a mutual fund for retirement. If you can get that mutual fund large enough, you should be able to retire and live off the dividends without any drop in your standard of living, or maybe even a boost. Remember, the stock market grows 12% a year over any 10 year period (including all 10 year periods containing 1929).
Now, it's time to tackle that home mortgage. Use whatever you can (you should have a lot to use, despite your high retirement savings) to pay it off early. If you can eliminate your mortgage payment, you'll have more money than you know what to do with.
The final step is to enjoy your money. Using savings instead of debt, you can give mounds to charity, buy a Harley, go on a cruise, or even be unemployed for a couple of months, all without putting a dent in your wealth.
The book goes into much more detail, but those are the basics. His web site is www.daveramsey.com. My parents have been using this plan to pay off all the debt they accrued in their more foolish years, and my dad is about to pay 100% down on his dream car, the latest Toyota FJ (back in the day, he had an 80s one, and regretted selling it for years, but he was unemployed and we couldn't afford it any more). If you try this plan, people will call you crazy and stupid. That's good, and lets you know you're doing it right. The bottom line of the plan is that you must live like no one else now so that you can live like no one else later. Statistically, if the average American household starts his plan at around 30, they can retire with 7 figures, and raise their standard of living post-retirement, not to mention leaving all seven figures to their kids. That's including the debt they have to pay off.
First, debt is not a problem, it is a symptom of the problem of spending beyond your means. What you need to do first is make yourself a budget and make sure you don't spend any money you don't have to. The budget should, however, have money to 'blow,' as every human being will have this impulse, and putting a limit on it will make sure you don't overspend.
Second, you need an emergency fund. One of the most common credit card excuses is 'in case of emergency.' What you need is not a way to rack up debt and pay more than what something costs. What you need is a fall back plan. Save, scrimp, sell, or just do whatever you can think of to pinch another penny. Once you have $1000, put it someplace where you have access free of charge, but not at your fingertips (a savings account unassociated with your checking is a good idea). Do this as fast as you can and get used to the pace.
Third, pay down all of your debts (excluding one home mortgage, which is acceptable). List them from smallest to largest. Use the interest rate to break ties. Trust me, you may save a little money paying them off in a different order, but the morale boost from paying them this way ensures that you'll finish. If you can, go ahead and sell any newer, high cost cars you have, pay the loan, and use the difference to buy a cheap car. Pay minimum payments on all of your debts but the smallest, and pay as much as possible into the smallest debt. Once that debt is free and clear, move to the next smallest debt. Every debt you pay will be payed down with all the money you can spare plus all the minimum payments from the debts below it. This is called the 'debt snowball.' If you run into an emergency and must dip into your emergency fund, put the snowball on hold and get the balance back up to $1000.
When you finish all of that, you will find that you have a lot of cash flow without those monthly debt payments, but don't stop and enjoy yourself yet. Remember that emergency fund? It isn't big enough, just enough to pad you a bit. Recessions happen, as do natural disasters. Calculate around 6 or more months worth of expenses. This is the target balance of your emergency fund. Get it there.
Now, you're secure. Your emergency fund should be able to pay for anything that crops up. Put 1/4 of your income into a mutual fund for retirement. If you can get that mutual fund large enough, you should be able to retire and live off the dividends without any drop in your standard of living, or maybe even a boost. Remember, the stock market grows 12% a year over any 10 year period (including all 10 year periods containing 1929).
Now, it's time to tackle that home mortgage. Use whatever you can (you should have a lot to use, despite your high retirement savings) to pay it off early. If you can eliminate your mortgage payment, you'll have more money than you know what to do with.
The final step is to enjoy your money. Using savings instead of debt, you can give mounds to charity, buy a Harley, go on a cruise, or even be unemployed for a couple of months, all without putting a dent in your wealth.
The book goes into much more detail, but those are the basics. His web site is www.daveramsey.com. My parents have been using this plan to pay off all the debt they accrued in their more foolish years, and my dad is about to pay 100% down on his dream car, the latest Toyota FJ (back in the day, he had an 80s one, and regretted selling it for years, but he was unemployed and we couldn't afford it any more). If you try this plan, people will call you crazy and stupid. That's good, and lets you know you're doing it right. The bottom line of the plan is that you must live like no one else now so that you can live like no one else later. Statistically, if the average American household starts his plan at around 30, they can retire with 7 figures, and raise their standard of living post-retirement, not to mention leaving all seven figures to their kids. That's including the debt they have to pay off.