Yesterday afternoon, we had our very first session of Financial Peace University and it has become a huge hit in our church and community!
We currently have 91 people registered to take FPU and 84 people were in attendance, yesterday! What an awesome way to kick off the very first class of FPU at First Baptist, Raytown, MO. A lot of people in the class are already pumped about making some big financial changes in their lives.
The first session/DVD viewing is titled "Super Saving" which deals with Baby Steps 1 and 3 in the Dave Ramsey approach:
Here's a quick summary of The "Baby Steps" (taken from http://www.mdmproofing.com/iym/babysteps.html)
1. Make minimum payments on all your bills. Squeeze your budget until you've accumulated $1,000 cash. This is your beginner Emergency Fund.
You'll never make headway in your quest to get out of debt if you don't have at least a little something to fall back on. That "little something" is called an Emergency Fund, and that's what this first $1,000 is for (or $500, if you make less than $20,000 per year). Put everything else on hold. Make only minimum payments on all your debts; take on a second job if necessary; fore go retirement-plan contributions (temporarily) if you can. Get your emergency fund together first. Get it together fast.
If you already have more than $1,000 in savings, and in anything other than a retirement account, withdraw everything except the $1,000. Use these proceeds for Baby Step #2, regardless of penalty (if the money were in CD's, for instance, there would like be a penalty for early withdrawal).
Once you have accumulated the $1,000 (or $500), keep it someplace where you cannot easily get at it.
It must be available, but not easily available.
It must be available, but not easily spendable.
Why?
"Sometimes," Ramsey instructs, "you have to protect yourself from you."
2. Pay off your debts in order of smallest balance to largest. "Snowball" the payments as you go.
Write down all your debts except your home. (If you're into spreadsheets, something like my DebtTracker spreadsheet will come in really handy here!) Arrange them in order from smallest balance to largest. Do everything you can to pay off the smallest debt listed (take on a second job, or sell stuff if you have to!) while making minimum payments on everything else.
Once that first debt is paid and gone, then "snowball" that monthly payment money: Apply it to the next-smallest debt (in addition to that debt's normal payment) on your list. When that one is paid off, then take that monthly payment amount and start applying it toward your next debt. Get the picture? The more debts you clear off, the more your "snowballed" payments are increasing, and the more headway you'll make — faster — on your larger balances.
Check my Debt Snowball page for a more thorough discussion of this part of the Baby Steps. And take a look at ExcelGeek's Debt Snowball / Rapid Payoff Calculator spreadsheet if you want a kick-butt way to set up and track your Snowball.
What's the rationale behind paying off your debts in this manner? Ramsey writes: "The reason we list the debts from smallest balance to largest is to have some quick wins. sometimes behavior modification is more important than math. This is one of those times." Furthermore:
When you pay off a nagging $52 medical bill or that $122 cell-phone bill from eight months ago, your life is not changed that much mathematically yet. You have, however, begun a process that works, and you have seen it work, and you will keep doing it because you will be fired up about the fact that it works.
One important caveat: If you're working on this second Baby Step and some emergency arises which forces you to spend any part of your emergency fund, immediately stop this step and return to Baby Step #1. Stay there until you've refunded your Emergency Fund in full.
3. Create a full-fledged Emergency Fund containing 3 to 6 months' worth of expenses. Bad luck and rainy days are a part of life. Expect them. Prepare for them.
If you'll keep three to six months' worth of bills and living expenses in a savings or money-market account, then you'll have gone a long way toward erasing the "what if" stress from your life. The emergency fund allows your family to always be ready for whatever life hurls at you. Sure, that Murphy guy might still stop by your residence every so often, but he won't be able to run roughshod over your financial life the way he used to. Ramsey takes the analogy a step further: "Don't forget that the emergency fund actually acts as Murphy repellent."
You must also flip a mental switch regarding your e-fund: It is there for bonafide emergencies. Nothing else.
Ramsey elaborates: "Beware not to rationalize the use of your emergency fund for something that you should save for and purchase. Something on sale that you 'need' is NOT an emergency. Prom dresses and college tuition are NOT emergencies," he says. [Aside: This, of course, is where Mary Hunt's Freedom Account concept enters the picture.]
In any event, get your full e-fund together, and you'll be in a financially-elite class. You won't need your credit cards any longer ... even for emergencies. And the next time your car's alternator detonates?
"What used to be a huge, life-altering event," Ramsey says, "will now become a mere inconvenience."
4. Direct 15% of your annual pre-tax income into your retirement plans. Utilize tax-advantaged accounts such as 401ks and Roth IRAs, if eligible.
Now it's time to get your retirement funds in shape. Contribute the maximum amount you can, your target being contributions of a full 15 percent of your household's gross (pre-tax) income. If you have tax-advantaged plans (401k or Roth IRA, for example) available to you, then exploit them to their fullest extent. If your company matches any part of your contributions, do not consider this as part of your 15 percent. Additionally, do not include expected Social Security benefits in your retirement calculations. "I don't count on an inept government for my dignity at retirement, and you shouldn't either," Ramsey says.
At this point, if you haven't already done so, it is time to begin seriously educating yourself about mutual funds, stocks, and the financial markets.
"Getting older is going to happen," Ramsey says. "You must invest now if you want to spend your golden years in dignity."
5. Take care of college funding. Fully fund Educational Savings Accounts and/or utilize 529 plans.
If you have kids, then you'll have college to worry about. The earlier you start, and the more attention and funding you're able to give to it, the better off you and your kids will be. Since college tuition inflation averages around 7 to 8 percent per year, your investments will need to (hopefully) do better than that. Always use tax-advantaged accounts (such as 529 plans or Education Savings Accounts) to their fullest extent to assist with this. These plans do have certain income limits and other restrictions and/or fees, so be sure to check the fine print before diving in.
Regardless of how you save for college, do it. Saving for college ensures that a legacy of debt is not passed down your family tree. Sadly, most people graduating from college right now are deeply in debt before they start. If you start early or save aggressively, your child will not be one of them.
6. Become financially "ultrafit" and 100% debt-free: Pay off your home early.
For most people, the mortgage payment is the single largest monthly payment they will ever have. Just imagine what you can do with that money when you've paid it off. Imagine how you'll feel when you make that last payment. Round up every spare dollar you can find and put it toward your mortgage, regardless of all the oft-quoted benefits of mortgage-interest tax detectability. (How wise is it to continually pay, say, $5,000 in interest to a bank each year, just so that you won't have to pay $1,500 in taxes to the government? The small minority of folks who own their homes debt-free probably don't mind paying that $1,500 a bit.)
For more comments regarding home, home loans, and their affordability, you might refer to my "Home, Expensive Home" article from Aug. 30, 2002.
7. Get to the point where your money works harder than you do: Build wealth (mutual funds, real estate, etc.), have fun, and give!
With every bit of your debt zeroed-out and your savings tanks on the full mark, you can finally reach for the "pinnacle point" — that moment in your life where your money works harder than you do. What would it be like to exit the Rat Race and live entirely off the returns of your savings and investments? Find out: Invest more, and more, and more. Invest more to continue to grow your wealth. Give more so that you can continue to grow your soul.
I realize that some people view the Dave Ramsey approach as too simplistic, but I believe for the "average" person, this approach makes a lot of sense. If you follow his plan, then over time you will build wealth. At retirement you will probably be in the top 5-10% of the wealthiest American citizens. As Dave mentioned in the DVD yesterday, there's a fine line between hording and saving, so you have to check your attitude your entire financial journey.
Larry
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