Money and Wealth (Part 34) - Dave Ramsey's 7 Baby Steps (Part B)

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Money and Wealth (Part 34) - Dave Ramsey's 7 Baby Steps (Part B) 6. Baby Step #5: Save for College A. Ramsey recommends beginning to save for your children’s college as soon as they are born in a tax-favored college saving plan. B. I do not recommend this, unless you have a boy who you have good reason to believe will need to go to college for science, technology, engineering, medicine, and related fields that require a college degree and pay well. C. College is one of the worst places you can send children today; so beware. D. If you do send your children to college, tell them to not take out student loans under any circumstances. i. “All the savings options we've covered just go to support my first rule of college: pay cash. If you can't pay cash, put the kid to work for a semester and then send him back to pay cash later. Student loans may look like a quick fix, but they turn into a nightmare and send college graduates out into the world with a boat anchor of debt around their necks.” (Dave Ramsey, Dave Ramsey’s Complete Guide to Money, p. 246) ii. “...all debt is horrible, so you can go ahead and get rid of any notion of college loans being ‘good debt.’ There's no such thing. The only ‘good debt’ is no debt. The unending stream of payments from student loans doesn't look or feel any different than an unending stream of payments from a car loan or  credit card. There's nothing "good" about that, emotionally or financially.” (Ibid, p. 247) iii. “Bottom line: Student loans look easy on the front end, but they will absolutely destroy your graduate as he or she enters the workforce. Students on average graduate from a four-year college with over $20,000 in student loans. If you include all students (graduate and undergraduate), that number tops $42,000. Can you imagine what it feels like to step out of college and, on the first day of your adult life, have over $40,000 of debt on your shoulders? That's no way to start a career, and the student loan bills start coming whether you have a job or not. Don't put that kind of stress on your kids. Avoid student loans like the plague!” (Ibid, pp. 247-248) E. They can work summer jobs, parttime jobs while in college, and get scholarships to pay for it, and go to cheap state schools to keep costs lower. F. “College is just like anything else we spend money on: You don’t deserve it unless you can pay for it.” (Ibid, p. 243) G. Don’t allow your children to ruin their lives by being chained down with student loan debt for (oftentimes) worthless degrees that do not pay, and are many times not necessary for the career they will end up in. 7. Baby Step #6: Pay Off Your Home Mortgage Early A. Once you have all your other debts paid off, have 3-6 months of expenses saved in an emergency fund, and are putting 15% of your gross income into retirement savings, now it’s time to focus on paying off your house early. B. If you have a 30-year mortgage, refinance into a 15-year fixed rate mortgage. i. This will save you a huge amount of money (see figures on page 89), and will deliver you from debt slavery 15 years earlier. ii. “Thirty-year mortgages are for people who enjoy slavery so much they want to extend it for fifteen more years and pay thousands of dollars more for the privilege. If you must take out a mortgage, pretend only fifteen-year mortgages exist.” (Dave Ramsey, The Total Money Makeover, p. 191) iii. “When asked about mortgages I tell everyone never to take more than a fifteen-year fixed-rate loan, and never have a payment of over 25 percent of your take-home pay. That is the most you should ever borrow.” (Ibid, p. 198) iv. “Only get a fifteen-year fixed-rate conventional mortgage with at least 10 percent down and a payment that is no more than 25 percent of your take- home pay.” (Dave Ramsey, Dave Ramsey’s Complete Guide to Money, p. 300) v. “If you can’t put at least 10 percent down, that’s a sure sign that you aren’t ready to buy a house. I’d prefer you put 20 percent or more down, though. That gives you a more solid position and it keeps you out of the PMI territory.” (Ibid, p. 300) vi. “If more than a fourth of your take-home pay is eaten up by your house payment, you’ll essentially be what is known as ‘house poor.’ That just means you have too much of your monthly cash flow tied up in mortgage payments. Even though you should be debt-free with a full emergency fund  before you buy, a house payment of 35-50 percent of your pay can put a serious strain on your family and prevent you from hitting Baby Steps 4-6 like we’ve talked about.” (Ibid, pp. 300-301) C. Don’t fall for the trap of taking out a 30-year mortgage and promising yourself you will pay it off in 15 years or less. i. “Myth: Take out a thirty-year mortgage and promise yourself to pay it like a fifteen-year, so if something goes wrong you have wiggle room. “Truth: Something will go wrong. “One thing I am sure of in my Total Money Makeover, I had to quit telling myself that I had innate discipline and fabulous natural self-control. That is a lie. I have to put systems and programs in place that make me do smart things. Saying, “Cross my fingers and hope to die, I promise, promise, promise I will pay extra on my mortgage because I am the one human on the planet who has that kind of discipline,” is kidding yourself. A big part of being strong financially is that you know where you are weak and take action to make sure you don’t fall prey to the weakness. And we ALL are weak. “Sick children, bad transmissions, prom dresses, high heat bills, and dog vaccinations come up, and you won’t make the extra payment. Then we extend the lie by saying, “Oh, I will next month.” Grow up! The FDIC says 97.3 percent of people don’t systematically pay extra on their mortgage.” (Dave Ramsey, The Total Money Makeover, p. 190) ii. “Stay away from adjustable rates, balloons, ARMS, and all the other garbage options. And definitely stay away from a thirty-year loan! Let's break down some hard numbers. If you take a thirty-year loan on a $225,000 mortgage at 6 percent, your payment will be around $1,349. The same loan on a fifteen- year term will have a payment of about $1,899, or $550 more. These are the numbers most people look at when they're sitting at the finance table. But remember, rich people don't ask, "How much per month?" Instead, they ask, "How much?" So let's see "how much" this deal eventually costs. “In this example, if you took out the thirty-year mortgage, you'd end up paying $485,000 for that $225,000 loan. But if you take the fifteen-year, you'd end up paying just $341,000. That means for an extra $550 per month, you'd save yourself $143,000 and fifteen years of debt! And the thing about fifteen-year mortgages is that they always pay off in fifteen years―or less. If you get a thirty-year and think you'll pay it off like a fifteen-year, you're fooling yourself. Something else will also be more important or more urgent, and you'll never systematically pay it off early.” (Dave Ramsey, Dave Ramsey’s Complete Guide to Money, p. 89) D. Make extra payments on the 15-year mortgage, if possible, to pay it off in less than 15 years and save yourself a lot more money in interest. E. “Every dollar in your budget that you can find above living, retirement, and college should be used to make extra payments on your home. Attack that home mortgage with gazelle intensity.” (Dave Ramsey, The Total Money Makeover, p. 156) F. A better option than a 15-year mortgage: Pay cash for your home. i. Most people will tell you that it’s impossible to pay cash for a home. ii. This is not true. It used to be much easier to do before housing prices exploded in 2020, but it is still possible today if you have a decent income and are disciplined, patient, and can be content with less than you desire for a time. iii. “I don’t borrow money―ever. Luke called me from Cleveland to tell me that some of our listeners and readers are doing what Sharon and I have done, “The 100-Percent-Down Plan.” Pay cash. Most people don’t think that can be done. Luke did it. “Luke made really good money. His income at twenty-three years old was $50,000, and he married a young lady making $30,000. His grandfather had preached to him never to borrow money. So Luke and his new bride lived in a very small apartment over a rich lady’s garage. They paid only $250 a month for it. They lived on nothing, did nothing that cost money, and they saved. Man, did they save! Making $80,000 in the household, they saved $50,000 a year for three years and paid cash for a $150,000 home. They closed on the home on Luke’s wife’s twenty-sixth birthday. They lived like no one else, and now they are living like no one else. If you make $80,000 per year and don’t have any payments, you can become very wealthy very quickly. Keep in mind, though, that Luke’s friends and relatives thought he should be committed. They made fun of his cars, his lifestyle, and his dream. Only his bride and his grandfather believed in his dream. Who cares what broke people think? “You may not make $80,000 per year, but you may not need a $150,000 home as your starter either. You may not make $80,000 per year, so your dream might take five years instead of three, like Luke’s. Ask any eighty- year-old if five years of sacrifice is worth it to change your financial destiny for the rest of your life! Ask any eighty-year-old if five years of sacrifice is worth it to have the satisfaction of knowing you changed your family tree. Paying cash for a home is possible, very possible. What’s hard to find is people willing to pay the price in sacrificed lifestyle.” (Ibid, pp. 198-199) G. Rental real estate i. “Don't mess around with real estate until you are out of debt, have a full emergency fund, have maxed out your 401(k) and Roth IRA options, have paid off your own house, and have some wealth built up. Only then are you ready.  “And, of course, don't even think about real estate as an investment until you can pay cash for the houses. Never, never, never borrow money for an "investment." The risk is enormous. “I've seen literally thousands of so-called investors lose their shirts in real estate because they bought houses when they were broke. If you start playing with rental real estate without any money, you will crash. I promise. That is exactly how I went broke and ended up in bankruptcy court myself. I know what I'm talking about here.” (Dave Ramsey, Dave Ramsey’s Complete Guide to Money, pp. 212-213) 8. Baby Step #7: Build Wealth and Give Like No Other A. Now that you have no debt, a fully funded emergency fund, retirement savings, and a paid-for house, now it’s time to build wealth. B. After years of sacrifice, you can now enjoy some of the fruit of your labor. C. And, most importantly, now is the time to give like no other. D. Giving is the most fun use of money. E. “Someone who never has fun with money misses the point. Someone who never invests money will never have any. Someone who never gives is a monkey with his hand in a bottle. Do some of each, and if you are married, let your spouse have some slack as soon as there is some.” (Ibid, p. 217) F. “If you will live like no one else, later you can live like no one else.” – Dave Ramsey G. The Pinnacle Point i. “In your money, the Pinnacle Point is the point when your savings and investments—after years and years of dedication and hard work—make more money for you in a year than you make for yourself. It's when your investments produce a higher return than your work. That's the best downhill ride you'll ever have.” (Dave Ramsey, Dave Ramsey’s Complete Guide to Money, p. 196) ii. “When your money makes more than you do, you are officially wealthy. When you can comfortably live on your investment income, you are financially secure. Money is a hard worker, harder than you. Money never gets sick, never gets pregnant, and is never disabled. Money works twenty- four hours a day, seven days a week. Money gets its job done, and it asks only for directions and a firm master. “You have reached the Pinnacle Point when you can live off 8 percent of your nest egg. Go ahead, multiply your nest egg by .08, and if you can live on that number or that number is more than you make, you are coasting downhill. Congratulations! Your money makes more than you do! By doing this calculation, you will discover how close you are to hitting this major financial security milestone. You will be able to calculate what your Pinnacle-Point nest egg is, and then, using all your available income, see how many years it will take you to climb that hill. Believe me, everything is  downhill after that. Enjoy the ride.” (Dave Ramsey, The Total Money Makeover, p. 212) II. Forget about being “normal.” 1. Forget about living like everyone else. 2. “You must walk to the beat of a different drummer, the same beat that the wealthy hear. If the beat sounds common or normal, evacuate the dance floor immediately. The goal is not to be normal because, as my radio listeners know by now, normal is broke.” (Dave Ramsey, The Total Money Makeover, p. 76) 3. “The bottom line is this: ‘Normal’ in North America is broke. ‘Normal’ is using credit cards, taking on a lifetime of car payments, and spending more than you make. ‘Normal’ is living on a razor’s edge, where any unexpected emergency can send you into panic mode. I finally figured out that I don’t want to be ‘normal.’ I want to be weird.” (Dave Ramsey, Dave Ramsey’s Complete Guide to Money, p. 22) III. My hope 1. When I preached on Money Management 10 years ago, I ended by stating my fears which were as follows: A. You're not going to listen to a thing I've said. B. You're going to keep piling on more debt and saving little to nothing. C. Kids -- please listen to me and take heed before you embark on a life long journey of serfdom and debt-slavery. D. Chances are, you won't listen to me either. E. I am just a lonely preacher fighting against a world of banksters, politicians, media, commercials, teachers, parents, and peers. And you still can hear me singin' to the people who don't listen, To the things that I am sayin', prayin' someone's gonna hear. And I guess I'll die explaining how the things that they complain about, Are things they could be changin', hopin' someone's gonna care. I was born a lonely singer, and I'm bound to die the same, But I've got to feed the hunger in my soul. And if I never have a nickel, I won't ever die ashamed. 'Cos I don't believe that no-one wants to know. - Johnny Cash, To Beat the Devil F. I said, “if you think I'm being ridiculous, please prove me wrong.” i. Come to me and tell me that you: (i) Created a budget and stopped wasting money. (ii) Paid off your credit card. (iii)Paid off your car loan. (iv) Paid cash for a car.  (v) Saved up a 20% down payment on a house. (vi) Paid off your house. (vii) Are debt-free. (viii) Saved up a three-month emergency fund. (ix) Are saving for retirement. (x) Have set up multiple bank accounts and automatic transfers to save for various things. ii. I said, “if the majority of you do that, I will publicly apologize and admit that I was wrong.” iii. I said, “If you refuse to heed this instruction, don't be surprised if you end up in poverty” (Pro 13:18). iv. Not one person told me that they had done any of those things, with the exception of paying off a car loan, which is involuntary. 2. But I am not going to end this series the way I did 10 years ago. A. I think that you are going to heed my advice. B. I think that you are going to create a budget and take control of your money and tell it where to go, not wonder where it went in 10 years from now. C. I think that you are going to pay off your debts as if your life depends on it, because it does. D. I think that you are going to save up 3-6 months of expenses in an emergency fund so that you never again have to take on another penny of debt by the grace of God. E. I think that you are going to save for your retirement and not rely on socialist insecurity to take care of you in your last years. F. I think you are going to pay off your houses early using a 15-year mortgage. G. I think you are going to build wealth and be generous givers. H. I think you are going to be a blessing to others, not a burden on them. I. I am like Paul, “Having confidence in thy obedience I wrote unto thee, knowing that thou wilt also do more than I say.” (Phm 1:21) J. Please do me a favor. i. As you start to take control of your finances and follow this teaching, please give me feedback. ii. You will make me inestimably happy if you tell me in the future that you: (i) Created a budget and stopped wasting money. (ii) Paid off your credit cards. (iii)Paid off your car loan and will never have one again. (iv) Paid cash for a car. (v) Saved up a 20% down payment on a house. (vi) Switched from a 30-year mortgage to a 15-year mortgage. (vii) Paid off your house early. (viii) Are debt-free. (ix) Saved up a six-month emergency fund. (x) Are saving 15% of your gross income for retirement. (xi) Have set up multiple bank accounts and automatic transfers to save for various things. IV. It’s never too late to start. 1. If you are old, and just now deciding to take control of your finances and build wealth, you will probably not die a millionaire, but you can still, “Hear counsel, and receive instruction, that thou mayest be wise in thy latter end” (Pro 19:20). 2. “It is never too late to start. George Burns won his first Oscar at eighty. Golda Meir was prime minister of Israel at seventy-one. Michelangelo painted the ceiling of the Sistine Chapel lying on his back on scaffolding at seventy-one. Colonel Sanders never fried any chicken for money until his was sixty-five, and Kentucky Fried Chicken is a household name worldwide. Albert Schweitzer was still performing surgery in Africa at eighty-nine. It is never too late to start. The past has passed. Start where you are, because that is your only option.” (Dave Ramsey, The Total Money Makeover, p. 164)