I recently read “The Total Money Makeover” by Dave Ramsey… Dave proposes a very common debt reduction plan – and one that has gained a lot of popularity in recent years. He calls it a “debt snowball”, and says to start with your smallest debt, work on paying it off using “gazelle intensity”, and then adding the payment from it (and any other money you can come up with) to your next smallest debt until it is paid off, and then applying all of those payments to the next smallest debt until it is paid off, and so on. Dave says that if you use this plan, and you truly give it everything you got, most people will be debt free in approximately 2-5 years (all debts paid off except their primary mortgage, which apparently will sometimes be paid off in that amount of time and sometimes will take a little extra work after that). The snowball effect being that, each time a debt is paid off, the payment from it and all previous debts grows like a snowball, and gains momentum, making it easier and easier to pay off bigger debts.
In the stone age of financial planning, financial planners said you should make the minimum payment on all debts except for your debt with the highest interest rate, and apply all extra payment to that debt. The problem with that was it didn’t consider the psychological make up of people. If your highest debt was a large one, it took a very long time to make a significant dent in it, and most people would give up because they didn’t see enough progress. Same idea as in weight loss – you do crazy dieting or exercise in the beginning, which you can’t maintain forever, because you must see progress; if you diet and exercise for weeks without any noticeable progress, your enthusiasm fades and you give up. If you start with a very small debt, you can make noticeable progress, get fired up, and have even more intensity to continue the plan. The concept is not unique to Dave Ramsey – though the book at times makes it sound like “his plan”. What is unique is Dave taking the “debt snowball” up as his personal crusade, and backing it with a fire and intensity rarely seen in financial planning. Let’s face it – most people find budgeting to be slightly less exciting than… watching grass grow.
Dave’s passion for his plan is catchy, and it is probably a great plan for a lot of people, but I am not sure that Dave will admit it is not for everyone. Dave apparently crashed and burned in real estate investing using debt/leverage, and he takes on the idea that any and all debt is bad and will ruin anyone and everyone. He fails to acknowledge anywhere in the book that I could find even the remote possibility that debt can be a tool for good (a la Robert Kiyosaki). Many a man has made his fortune by the wise use of debt (as a tool). Most large and successful businesses, at some point or another, expanded through the use of debt. Countless real estate millionaires made their fortunes by borrowing wisely, leveraging their real estate investments, and benefiting from positive cash flow, mortgage pay down, appreciation, tax benefits, etc. (and, yes, admittedly many have failed in these same endeavors through the unwise use of debt).
By the same token, let’s talk about credit cards. They are a double-edged sword – a weapon that can badly injure the user, and that, used correctly, can be a great tool. Dave Ramsey suggests no one ever keep any credit cards for any purpose. I disagree. I use my credit cards wisely, and I love them. I learned it from T. Harv Eker. I charge almost all of my standard business expenses on one of two credit cards, and I pay the balance in full every month. Also, I charge enough in routine business expenses (my business is rental properties and rehabbing houses) that the cash back and other bonus awards from my credit card use provides my family with nice meals out regularly, gives my wife funds that pay for most of our family pictures and photo books, and other occasional bonuses. Harv says his credit card use pays for his family’s all-inclusive vacations. Terrific. I have good credit. I get credit card offers in the mail all of the time offering me zero interest on balance transfers for up to eighteen months. I recently took advantage of two such offers. I had 2-4 years left to pay on my wife’s car and my truck. I decided that, by transferring to zero interest for eighteen months, I could pay the same amount I was already paying every month in vehicle payments, and, because 100% of every payment would go to principal (no interest), I could have both loans down to nothing or a fraction of what I owed on them in eighteen months. At that point, if my interest jumped up to 20% for the remaining balance, and I had no other options to reduce that rate or pay off the balance (which is unrealistic), I STILL WOULD HAVE BEEN MILES AHEAD! Dave, show me the flaw in my logic!!! What Dave should say, somewhere in his book, at some time, is that his plan is great for many, but is not for everyone. He should mention that, if you have self discipline, and if you manage your money well, that maybe, just possibly, debt can be a tool that works for you. I ASSURE YOU IT CAN BE!!!
Anyhow, the book is a quick, easy read, with many interesting stories, and, as I have said, it can benefit many (including most average Americans). Dave exposes many common misconceptions about money and finance, and proposes a plan that has definite value for those who are serious about eliminating debt from their lives (and are willing to really throw themselves into it). Now, don’t kid yourselves into thinking that Dave is sharing a big huge secret, and that, once you know it, you can become debt free fast without applying any effort. Dave preaches that you have to really throw yourself into the plan, and do whatever it takes to get out of debt. He talks about extreme budgeting, garage sales, overtime or second jobs, part time businesses, etc., in addition to managing your money wisely, but he says it will be one of the most worthwhile things you could ever do for yourself, and it will change your life. Dave says, “if you will live like no one else, later you can live like no one else”; in fact, it is printed across every single page! I like it better the way I have heard it before – if you are willing to do the things others won’t for a short time now, you will be able to do things others won’t for the rest of your life! Either way, there is value in Dave’s plan, and if the idea suits you, I absolutely would recommend “The Total Money Makeover” for you, my friend!
P.S. – Dave provides a bunch of budgeting forms in the back of the book that might be helpful – I even wrote up a copy of “The Debt Snowball” chart myself, as I may apply some form of it myself some time if and when it suits me.
Great related quotes:
“A budget is people telling their money where to go instead of wondering where it went.” –John Maxwell
“If you aim at nothing, you will hit it every time.” -Zig Ziglar
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