We use credit cards to
get what we want now, rather than earning till we have enough to
afford them. There's a word for wanting things now, whatever the
cost: immaturity.
"My contention
is that debt brings on enough risk to offset any advantage that
could be gained through leverage of debt. Given time, a lifetime,
risk will destroy the perceived returns purported by the
mythsayers." (p. 21)
"The Forbes
400 is a list of the richest 400 people in America.... When
surveyed, 75 percent of the Forbes 400...said the best way to
build wealth is to become and stay debt-free.... They all lived on
less than they made and spent only when they had cash. No
payments." (p. 23)
Don't cosign for
loans. You can ruin your own credit and will be responsible to
pay if they don't. Lending institutions are eager to loan money. If
they consider the person a bad risk, why shouldn't you?
Stay clear of these
bad deals: Cash advances, Payday Loans, Rent-to-Own, Title
Pawning, Tote-the-Note Car Lots.
Don't make car
payments. Most people make car payments their entire lives. The
average payment is $378 over 55 months. Let's imagine that instead
of making car payments, you purchase a car outright and put that
money in a mutual fund every month from age 25 to age 65, making 12%
interest. You'd have $4,447,084.01. (p. 32)
"Taking a car
payment is one of the dumbest things people do to destroy their
chances of building wealth." (p. 32)
"You have to
reach the point that what people think is not your primary
motivator. Reaching the goal is the motivator." (p. 33)
Even if you pay your
credit cards off each month, they are a bad deal.
"A study by
Dunn and Bradstreet showed that the credit-card user spends 12 to
18 percent more when using credit instead of cash." (p.
42)
On buying a trailer:
It's better to rent rather than to buy a trailer, which goes down in
value.
A home is a good
investment, if you can afford one.
Do a budget.
"A budget is
people telling their money where to go instead of wondering where
it went." - John Maxwell
On homeowners' and
auto insurance: Save on premiums by choosing higher
deductibles.
On life insurance: Choose
twenty-year level term insurance "equal to about ten times your
income."
On health insurance:
Go with a larger deductible to lower your premium.
On long-term
disability insurance: Get it. "You're twelve times more
likely to become disabled that to die by age sixty-five."
On long-term care
insurance (for nursing home or in home care): Get it if you're
over 60.
Get a will. 70%
die without one.
Baby
Step #1: Save $1,000 cash as a starter emergency
fund.
78% of us will have a
major negative event in the next 10 years. Without an emergency
fund, you might sink!
Have a garage sale;
deliver pizza on the side if you have to, but save that $1000!
Baby
Step #2: Start the "Debt Snowball."
Begin with the small debts first (in order to give you some quick
wins and keep encouraged). Pay off every debt except for your
home.
Flee debt with the
intensity of a gazelle running from a cheetah.
Rule of thumb: "If
you can't be debt-free on it (not counting the home) in eighteen
to twenty months, sell it." (p. 125)
When you're out of
credit card debt, perform a plasectomy: cut up your credit cards!
Baby
Step #3: Complete Your
Emergency Fund. It should
cover three to six months of expenses, in case you lose your
income. So...three or six? It depends on your amount of risk.
If you've worked for 15 years as a postal worker and you're
healthy, go for three months. If you're a real estate agent,
consider three months.
A Parenting
magazine pole found that 49 percent of its respondents could last
less than a month if they lost their income.
Keep the money liquid,
so that you can retrieve it without a penalty. Not in a mutual fund.
Not in a CD. A money market fund is usually best, since you can write
a check on it and make some interest as well.
Baby
Step #4: Invest 15% of
Your Income in Retirement
Invest 15% of your
gross income. Don't include company matches.
Don't count on Social
Security benefits.
USA Today: "56
percent of Americans do not systematically prepare for retirement
age by investing." (p. 153)
Wealth Builder Magazine:
"80 percent of Americans believe their standard of living
will go up at retirement." (153)
USA Today:
Ninety-seven out of one hundred sixty-five year-olds can't write a
check for $600. (p. 154)
Don't pay off your
house first. You need to get that investment money
multiplying.
Ibbotson Research: "97%
of the five year periods and 100 percent of the ten-year periods
in the stock market's history have made money." (pp. 156,
157)
Start with any
investment that your company will match.
Next, open a Roth
IRA, which grows tax free. Invest as much as you're allowed to
invest each year.
If you still have
more in your 15%, go to 401ks, 403bs, 457s, or SEPPS.
Dave selects mutual
funds with a winning record for more than five years, preferably
more than ten years. He puts 25% into Growth and Income funds, 25%
into Growth funds (an S&P Index fund would work), 25% into
International funds, 25% into Aggressive Growth funds.
Have a goal! Plan
to live off 8% of your nest egg each year. If you have an annual
income of $30,000 and think you can live off that much in
retirement, then multiply $40,000 by .08 to get your needed nest
egg of $500,000.
Baby
Step #5: Save
for College
Education is for
knowledge, not to guarantee a great job or success. In a few
fields of study, it can matter which college you attend. In the great majority of
fields, it doesn't matter. Pay cash. Don't borrow. "Student
loans are a cancer."
Recommended: Invest
in an ESA (Educational Savings Account) so that it can grow
tax-free. Put it in a growth-stock mutual fund to get a high rate of
return.
If you reach college
age and don't have enough saved, find alternatives to student
loans. Some companies have work-study programs. The military
offers a free education to people who enlist for a certain number
of years. Check into what the National Guard offers. Look into
scholarships.
Baby
Step #6: Pay
Off Your Home Mortgage
Dave
counters the two traditional arguments for not paying off your
mortgage.
Argument
#1: "I don't want to lose my tax break on my interest
payments."
Counter
Argument:
When you run the numbers, you'd be paying much
less each year by not making a payment (since your house is paid
off) than by making a payment and getting a deduction. Example: if you had to pay $10,000 in interest last year and were
in the 30% tax bracket, you'd get $3000 off of your taxes. But if
your house was already paid off, you wouldn't have had to pay the $10,000 in the first place, so that you come out $7000
ahead.
Argument
#2: Since the interest rate on my house is lower than the interest
I can get in an investment, I'd be losing money by paying off my
house.
Counter
Argument: Let's say you're
paying 8% on your mortgage and you think you can get 10% on your
mutual fund. First, you have to pay taxes on the money you make
each year in the mutual fund, so that you don't get the full
10%. Second, you take more risk by keeping the loan on your
house. If your house were paid off, nobody could take it from you
because of missed payments.
Never take more than a
15 year loan.
Never take out a loan
for more than 25% of your take home pay.
Baby
Step #7: Build Wealth Like
Crazy
There
are three good uses for money:
-
For
Fun
-
To
Invest
-
To
Give
He
invests in "simple mutual funds and debt-free real
estate...."
"Always
manage your own money. You should surround yourself with a team of
people smarter than you, but you make the decisions." (p.
208)
"Giving
is possibly the most fun you will ever have with money." (p.
212)
The
Total Money Makeover: A Proven Plan for Financial Fitness, by Dave
Ramsey, 240 pp.. (Also
available in Spanish and audio on CD)