This is a series of posts about what you will find in Dave Ramsey’s Financial Peace University course. This is week four (week one — week two and week three)
This week’s lesson focused on getting out of debt. We’re getting to the meat of the plan now, and I was eager to hear Dave’s ideas for paying off debt. The lesson began with Dave debunking some common money myths, such as playing the lottery will make you rich, payday lenders are helping people, loaning money to relatives and friends is “helping” them, debt consolidation is a good idea, and you’ll always have a car payment. While these were interesting and entertaining to listen to, I didn’t think that the majority of them had anything to do with getting out of debt. Yes, doing these things can cause trouble and get you into debt, but I doubt too many people in the room got into debt by playing the lottery or even loaning money to friends. And even if they did, the lesson was titled “dumping debt,” not “how to get into debt.” If you’re already in debt as a result of one of these myths, you know it and you probably know where you went wrong. What you want to know is what to do about it now.
I was expecting a lesson full of hardcore tips for paying off debt and most of the hour was spent on these money myths. Interesting, but not what I was expecting to hear. I found myself doodling in the margins of my notebook, waiting for the “dumping debt” part to begin. I tried to remind myself that some people in the room might not have heard these ideas before, but to me they were all common sense. Two of the myths in particular, however, raised my antennae.
The first myth was that you need a credit card to travel or make online purchases. Dave says that this is a myth because a debit card will do all of these things. I disagree. I can’t imagine traveling without a credit card. Car rental companies and hotels sometimes put a “hold” of up to $100 on my card to hedge against any damage done by me. I also can’t imagine using my debit card in foreign countries or online. And even here at home, card number theft is rampant, both online and off. The risks of having the number stolen and your checking account compromised are too great. Dave makes a big production about how debit cards offer the same protections as credit cards. In theory, they do. You will get your money back in the event of fraud with either card. But with a debit card, you are out the liquid cash until the dispute is resolved. With a credit card, you aren’t out anything while they fix the problem.
His other argument is that studies show that people spend 12-18% more when they use plastic than when they use cash. I suppose this is true for some. It is easier to part with money that doesn’t feel real. But in my house it’s the opposite. We use the cards for everything (and pay them off every month) but I find myself being much more careful when I use the card because I don’t want to see a huge bill at the end of the month. Seeing big numbers freaks me out, even knowing I have the money to pay it and that it’s all budgeted. When I use cash, it seems to drift through my fingers quicker. I realize I’m the oddball here, but I won’t be giving up my credit cards.
I suppose that if you are totally undisciplined with cards then the risks of card theft or overspending are outweighed by the risks of racking up debt. Kind of like an alcoholic that can’t even smell beer without going on a bender. But for people who can be at all responsible and controlled, a credit card can be a useful tool.
The second myth was that a thirty year mortgage is a good idea. Dave thinks you should never take out anything more than a fifteen year mortgage. While I agree with him that ARM’s and other risky products are a bad idea, I don’t have a problem with the traditional 30-year mortgage. Yes, it means you’ll pay more in interest, but at a fixed rate it’s not that bad. A fifteen year will save you money, but if the thirty year’s lower payments make you more comfortable, there’s nothing wrong with it. You can pay more as your finances allow to pay down the balance sooner. If your choices are between a 30-year mortgage or an ARM, by all means take the thirty year.
After the myths he hit briefly on how to get out of debt. Stop borrowing money, save money, sell stuff, work more, and pray. I guess I’m the sort of person who really enjoys tips and hints and details because I would have liked to hear more aggressive ideas for getting out of debt. Dave’s ideas sound so simple, but I know that they’re really not. There are a lot of ways to save money. There are a lot of ways to bring in more income. I’d rather hear about that than money myths. If you’re not religious, you need more ideas because the prayer thing isn’t going to apply to you, anyway.
The one thing he did bring up that was helpful was to stop asking the wrong question. Broke people with debt ask, “How much are the payments?” when they buy things. Rich people just ask, “How much?” and work to get the lowest total price, not the lowest monthly payment. This is sound advice because for too long too many people have been asking about the payments, assuming that if they could make those payments they could afford the item. What matters is the total cost of the item and whether or not you can afford it in total, not the payments.
For all the hype Dave makes about the debt snowball in his other books and talk shows, very little attention was paid to it here. He briefly showed how the math works: You pay as much as you can to the first debt and the minimums on everything else. Then, when that first debt is paid off, you add that payment to the minimum on the next debt on the list and go at it until it’s paid off. Then you add those two payments to the minimum on the third debt and pay that off, and so on down the list until you’re debt free.
He also mentioned that you should line up your debts from smallest to largest. I, like a lot of financial pros, would argue that you should hit the one with the highest interest rate first and then order them from highest to lowest interest rate. This way saves you the most money since you lose the most money on high interest debt. However, Dave feels like the psychological boost you get from paying something off quickly is worth more than the money you save by paying off higher interest debt first. I don’t disagree with that, but from a purely financial standpoint it’s better to pay off the highest rates first. But, if you’re the sort who really needs that mental boost of paying things off quickly, then paying smallest balance to largest balance is a good way to go. At least you’re paying things off, which is what really matters.
All in all it was a disappointing lesson. I came away feeling like, if I had debt, I still wouldn’t have a clear plan for getting rid of it. I’d be motivated and I’d know where I’d gone wrong, but I’d still be missing the concrete action steps to get myself on the right track. The debt snowball was the closest thing to an action plan that was given, and even that was only hit on briefly.
On a side note: If you’ve ever listened to Dave, you’ve probably heard him talk about being gazelle intense when it comes to paying off debt. The idea is that you focus as much attention on getting out of debt as the gazelle does when he’s trying to get away from the cheetah. The highlight of this week was Dave’s video illustrating this principle. It’s just a gazelle escaping a cheetah, but Dave does a comedic voice over where the cheetah is “debt” and the gazelle is the person trying to get out of debt. It was one of the funniest things I’ve seen in a while. I wish I could find it on the Internet so you could see it, but no luck. If you ever do sign up for FPU, make sure you go to class in week four so you can see that video.
Unfortunately, small group discussion was cancelled this week since three of the five leaders were out sick or with family problems. Plus, the video was well over an hour and it was getting late so the coordinator decided to send everyone home. I didn’t get to find out how the people in my group did with their budget forms from last week, or what they thought about how they were going to get out of debt. Next week should be a lively discussion!
Homework roundup: This week we’re to fill out our credit card history form so we can track our cards as we close them. Since I don’t carry credit card debt, I’m skipping this assignment. Technically I’m supposed to go completely credit card free, but I refuse. This is one Dave assignment that I just won’t do. I’ve never carried credit card debt and enjoy the convenience (all transactions on one bill), protection, and rewards that come from using credit cards responsibly. Dave argues, and I mentioned this above, that a debit card offers the same protections as a credit card, but I disagree. I don’t want my checking account compromised if someone steals my card number. While I might get my money back, it’s likely to take a while. In the meantime I’m out that money. I’d much rather it be a credit card that I can close immediately with no damage to me. So at this time I won’t be closing any cards.
We also have to fill out the debt snowball form. On this form we list our debts from smallest to largest and then track the payments and payoffs as we go. Since I don’t have any debt, I don’t have anything on this one to fill out, but I will look at it and read the instructions so I get a better idea of how it works and how others in the class are doing with it.
As for my budget dilemma from last week. You may recall that I had about $900 left over in my zero based budget. I did discover a couple of things that I failed to account for that totaled about another $100 per month. That brought my overage to $800. So I just moved $800 from my checking to my savings. Now my budget for February balances to zero. I’ll do this for a couple of months and see if I run short anywhere. If not, then I’ll start investing that $800 more aggressively (and kick myself for not realizing I had it sooner). If I run short, I should be able to easily figure out what I forgot to account for in the budget. If this $800 turns out to be money I can really be saving, then Dave’s class was well worth it.