Saturday, April 7, 2012

Financial Peace Revisited

Book: Financial Peace Revisited
Author: Dave Ramsey
Edition: Hardcopy, 2003
Read: March 2012
319 pages
Rated: 3 out of 5

Financial Peace Revisited is a companion book to his Financial Peace University 13 week seminar. Much of the seminar is oriented towards people who are in big debt and need a way out. As such, its focus is narrow—how to be wise with your money.

Ramsey describes a different life-style. His slogan describes it: You are to live like no one else, so that you can live like no one else.

The biggest point Ramsey makes is that debt is a drain on you, both financially, emotionally and goal wise. How can you be achieving great things when you worry about how to pay your bills. So he spends a considerable amount of words on why you need to be debt -free, why you need to be debt-free and how to get out of debt.

As an offshoot of this, there is a section on how to deal with creditors. He takes the stand that if you owe the money, you should pay off the debt, and as quickly as you can. But he recognizes and encourages the the debtor be protected from unreasonable harassment. He gives tools to work with the creditor to make this time livable. He encourages people in debt to figure out what they need to live on—food, transportation, utilities, housing—and then start paying off the debt. Come up with a realistic plan, paying off creditors.

One of the first things he points out, money is active (19). by this he means that just because you put away a dollar, that dollar's value does not stay equal to that value a year later. Inflation eats away at the value, while a dollar invested should grow.

He then talks about “Baby Steps” on getting out of debt and on to financial security and peace. These steps include:
  • Getting a $1,000 in savings
  • Start paying off your debt, from the smallest to the largest.
  • Save your emergency fund. This should be three to six months of your income.
  • Put 15% income into your savings
  • Save for college
  • Pay off your house
  • Invest

He notes that personal finance is who you are. It is a measure of your character. For example, by restraining your spending and only paying for items with funds you already posses speaks to a certain amount of discipline you posses. But by going into debt, you become beholden to someone else.

Communications between spouses makes it so you each know what is going on. The budget is a communication tool rather than an area where there is power struggle. It is important that each of the spouses comes to the table. The one more nerd-like (budget minded) may prepare the budget, but the other spouse will have revision authority. The important thing is each has equal say in the budget and spending plans of the family.

Some rules of thumb Ramsey talks about, includes:
  • Savings should be 10% of your take home pay
  • Giving should be 10-15% of your take home pay.
  • With a good emergency fund, you can raise the deductible on your insurances-home and auto—to $500 or $1,000.

The section he had on investing was the most needed for me. More of the motivation to invest rather than how to invest. That is one of the main short comings of this book in my mind. He is very much into motivations, but sometimes short on either fact or explanation. On the fact part, one of his favorite is about the effects of power of compounding. Cites that a person can put money away for 10 years at 12% and have more money at the end of 30 years than the person who waits 10 years and puts the money away for the next 20 years at 12%. Of course wht he does not play with is the effect of interest rates. Which gets into the second problem—he talks about being able to get 12% on your money. He cites that this is true for the last 69 years that in any decade, yo would have averaged 12% in 97% of the mutual funds.

But he has made me realize I need to be more focused on wisely getting a good return on the money we are charged with. His rule of thumb is to put 25% of your investment funds in four different types of mutual funds: balance fund, growth and income fund, growth fund, and international fund. Also as you have more to invest with you can look at an aggressive fun such as a small company fund or an aggressive growth fund. His rule is that a fund must have at least five years of track record with the current manager. He prefers 10-15 years. He expects 12% returns.

Buying is a significant area where you can save money. He has several techniques. He notes that people are non-confrontational. Consequently, if you work this, there is a good possibility you can pick up substantial savings by being strong-not obnoxious-in your areas. The idea is for both you and the seller to win. The seller because he can sell his item; you can win either with cost or terms. He has seven items to buy:
  1.  Always tell the truth
  2.  Use the power of cash
  3.  Walk away power
  4.  Shut up
  5.  That is not good enough
  6.  Good guy-bad guy If I give you this, what will you give me

Last things is another important area. Have a will—current, with power of attorney. Also make sure there is written instructions for a spouse for what they should do with the assets.

 This is a book which is meant to be used, rather than thought about.  He is dogmatic in his approach, such as you should not have credit cards. On the other hand, he is dealing with people who have ruined their lives by over-extending themselves.  His methods I think will help most people who are in debt, if they have the discipline to carry out his strategy. For a person who is financially stable, much of what he has to say is rudimentary.

New Words:
  • Beta: Measure of volatility of a fund. A beta of 1 tracks perfectly with the S&P 500. A value greater than 1 indicate more swings than the SP500.

Good Quotes:
  • Measure wealth not by the things you have, but by the things you have for which you would not take money. (21) Unattributed
  • The ultimate measure of a man is not where he stands in moments of comfort and convenience, but where he stands at times of challenge and controversy. Martin Luther King, Jr, Strength to Love, Chpt 3, On Being A Good Neighbor
  • Just as riches are an impediment to virtue in the wicked, so in the good they are an aid of virtue. St. Ambrose, as quoted by Dave Ramsey, pg 26
  • First, gained all you can, and, Secondly saved all you can, Then give all you can. John Wesley, Sermon 50, The Use of Money
  • Life is never made unbearable by circumstances, but only by lack of meaning and purpose. Viktor E. Frankl, as quoted by Dave Ramsey, pg 45
  • Almost any man knows how to earn money, but not one in a million knows how to spend it.  If he had known as much as this, he would not have earned it. Henry David Thoreau, Journal 1837-47
  • Attitude is the only difference between saving and hoarding. Larry Burkett, How to Manage Your Money.


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