Thursday, December 29, 2011

"Total Money Makeover" by Dave Ramsey

One of the best books I have ever read is "The Total Money Makeover" by radio host/author/financial guru Dave Ramsey. The guidelines he lays out are simple to figure out, but challenging to do. This is not a "get rich quick" book you see advertised at 3 am in a 30 minute infomercial. You do not need to be a CPA or an MBA to understand his tips on how to manage your personal finances more effectively. His credo is "Live like no one else, so that later you can live like no one else." This means that good decision making, and sacrifices made before retirement can lead to a retirement where you can thrive financially. His main piece of advice is to get rid of debt, whether it be an auto loan, student loans, credit card debt, medical bills, etc. Most need to borrow money for a mortgage, but he has stories in his book of some who made sacrifices to be able to pay for a house 100%. Certainly this is the rare exception, but some have done it. The main thing standing in the way of building wealth is debt. The average car payment in America is $378 per month. If this money was invested in a growth mutual fund earning 12%, which is the average return for long term investing over the history of the stock market, from age 25 to age 65, at retirement you would have over $4 million dollars! Dave says to pay off debt, starting with the smallest to the largest, then work on building an emergency fund. The starting goal for an emergency fund is $1,000. The ultimate goal for an emergency fund is to have it equal to 3 to 6 months of living expenses. That way if the car needs $500 worth of repairs or the furnace goes out and it is $400 to fix it, that can be paid from the emergency fund rather than on a credit card so that it can be paid in one lump sum with no interest. The emergency fund can be used for living expenses in case of a job loss, or for medical bills that come up, and the like. The emergency fund should be liquid, meaning it is easy to access without paying penalties. Those who are debt free with an adequate emergency fund can allocate more money to retirement investing than those who do not. In a nutshell, here are some tips from his book;

Stay away from rent to own places, it is not a good use of your money. You will pay $1000 for a $300 TV by the time you make the payments to own it.

Payday lending businesses are another bad use of your money. Their interest rates are incredibly high.

Do not buy a new car, the depreciation is too quick to be worth it.

Do not lease a car, buy one instead.

Go with term life insurance, the investment component in whole life is not worth it. It gets eaten up by fees and it is better to invest your money elsewhere.

Do not play the lottery, your chances of winning are miniscule.

Do not buy a trailer home. They do not last as long and the depreciation is high.

Debt consolidation services are no way to re-organize your finances.

Do not pre-pay for a funeral or college expenses.

Do not take out a home equity loan.

Invest 15% of your gross income in a growth mutual fund.

A Roth IRA is a good investment since it will grow tax free.

He stresses that money will not buy happiness and that the love of money is the root of all evil. Many have money as their god. Having adequate money gives one peace of mind and he says that money is good for three things--investing, having fun, and giving away. He says that giving it away can be especially enjoyable. Dave Ramsey is a Christian, and he is the author of "Financial Peace University" which is used by many churches to teach their congregations about how to manage finances wisely. He knows what it is like to struggle. He made millions in real estate in his 20s, managed it unwisely, and ended up broke. Anyone who wants to learn about how to handle money effectively should check out the books by Dave Ramsey.

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