Financial Peace - Part 2

Week 3 - Budgeting
Dave is VERY big on budgets. Why? "A budget is telling your money what to do; not letting your money tell you what to do." Aka- not getting to the end of the month and wondering what happened to all of your money.  Dave's preferred budgeting tool is a "zero-based cash flow plan."  This means that you should write out where every dollar of your paycheck goes before you spend a penny of it. This way, you control your money. You have then allocated every dollar to where it should go, leaving a zero balance at the end.
As I'm typing this I am watching the Today Show, and a segment just reported that nearly 70% of Americans live paycheck-to-paycheck (even with annual income figures up to $100,000)! Newsflash: we are not managing our money, our money is managing us!!!
Now, a cash-flow plan will not work if you leave things out (don't forget, and don't hide things from your budget!), you make it over-complicated (too many categories on your budget sheet!), you don't do it, or you don't actually live on it (duh).
To begin, fill out Dave's Quick-Start Budget HERE to get an idea of where your money is going.
Then work on your cash-flow plan with these forms HERE.
Your budget may (and likely should) change from month-to-month. Dave realizes this, and expects you to do a new budget at the beginning of each month, especially as you get started and learn where and how to tweak your budget to suite your needs better. And, if there is any money left over at the end of each month, it should go towards your emergency fund (or other investments that come later).
How do you abide by your budget? use the cash envelope system. This is it's own lecture from Dave, but I'll be brief. For each category of your budget you have an envelope with the allocated amount of cash. If you run out of money in that category/envelope you are DONE for that month in that category. Do not move money from one envelope to another. Whatever you have leftover in any category goes into saving/emergency fund. Plain and simple.

What I got from this lesson:  Budgeting is very important, and we were not doing enough of it. This was a very straight-forward lesson, and you really just follow the forms to set up a budget.

Week 4 - Dumping Debt
How do you manifest peace in your finances? Get rid of all of your debt! Imagine how wonderful it would be to alleviate that burden, and to owe nothing to no one.
Here are several myths Dave delivered for us to consider:

• Playing the lottery (or gambling) will make me rich.
  False: Gambling preys on the poor. The lottery is not filled with rich people. Those without high school diplomas spend ~$173/month gambling, while those with high-school diplomas spend ~$49/mo. This money is likely to all go to waste, when you could have invested it and let it grow over time.
• Car payments are a way of life, and you will always have one.
  False: Stay away from car payments by buying used, reliable cars. Never buy new! Ideally, save for a used car, pay in full with cash. Then take the money you would use for a car payment each month and invest that. The average car payment is $464/mo - at age 30, if invested with a 12% interest rate can result in $5.5 million by age 70!  
• You'll take out a 30-yr mortgage and pay extra.
  False: Life happens, and you will likely not pay extra. Dave recommends only taking out 15-yr mortgages, and keeping your mortgage payment below 25% of your take-home pay.
• You need a credit card, especially to do things like rent a car or buy things online.
  False: You can do everything you need with a debit card, these days. One of Dave's favorite things to do is cut up credit cards so you will stop using them. Those that use credit cards spend ~16% more than those that pay with cash (even if you pay off your balance in full each month).

How to get out of debt: Stop borrowing; Learn to save; and work hard to remove the debt, even if that means taking on a (temporary) extra job!

Dave's guide to getting rid of debt is the "Debt Snowball." You list all of your debts from smallest to largest. Pay the minimum on all debts, except the smallest one which you should work the hardest to pay on. Once the smallest debt has been tackled, apply what you were paying to add to the next debt's payments so that you are tackling those harder now too. And so on. HERE is that form. Doing it this way is motivating as you pay off smaller debts, and then even larger ones!

What I got from this lesson:  Becoming and staying debt free is the key to wealth-building. Dave's steps seem like a great plan to tackle debts one step at a time. Again, this takes effort, but it's all worth it in the end! Plus, paying off your debts and avoiding future debts allow you more freedom with your money - you can give more and enjoy vacations or other memorable activities.

Week 5 - Credit Sharks in Suits (Understanding Credit Bureaus & Collection Practices)

Dave hates the "credit score" or FICO score - a faulty standard that is based on debt, not wealth; based 35% on your debt.
You cannot repair your credit; only inaccuracies can be removed. And 79% of credit reports contain mistakes of some kind. Beware of credit "clean-up" scams - it is illegal to remove accurate data.
He discussed identity theft and what to do if that happens. You can read his advice HERE.
If you are in a bad situation and have debt that is being collected (Dave has been there himself), he gave the following advice:
- Debt collectors are not your friends. Their job is to get the money you owe them, however they will use many emotional tactics to do so.
- Know about the Federal Fair Debt Collection Practices Act (1977), which basically protects you from unfair collectors (you can demand they only call between 8am and 9pm, and not at work). Also no creditor or collector can take your bank account or garnish wages without proper and lengthy court action (except in cases of delinquent IRS or student loan debt) - other threats such as these are bluffs. A "cease and desist" order allows you to insist the creditor stop all contact except to notify of lawsuit proceedings - but do NOT do this unless your situation is horrible because all negotiations will stop and a lawsuit is likely.
- So what do you do if you're in over your head?  Your plan should include as much prompt repayment of debt as possible, but you must set your priorities (food, shelter, clothing, transportation).

What I learned from this lesson: Even if you feel like you have dug yourself into a big hole of debt, there is still hope and a way out. The point of this lesson was just this, and not to find ways to avoid creditors or paying your debts. I hope to never have to deal with this, but I enjoyed getting this bit of knowledge about this situation.

Financial Peace - Part 1

A couple of months ago I finished going through Dave Ramsey's Financial Peace University 13 week program with a group from church. The program was great, and while it is full of common sense practices it still has plenty of information for people in all financial situations.  It is not just a program for those with tremendous amounts of debt to pay off, and it is also not just geared towards those with plenty of money ready to invest- it is for everyone! I learned a lot from the program and took a lot of notes.  I wish everyone could go through this course to learn how to be smarter with their money. Just check out some of the current figures of the average American:

• Average Credit Card Debt: $15,191
• Average Mortgage Debt: $154,365
• Average Student Loan Debt: 33,607
• and just for kicks... Average Medical Student Loan Debt: $169,901
• Plus a fun fact (which I thought surprising): Debt increases with age. Those 65 and older have greater debt than each younger age group.

(Data gathered from nerdwallet.com and the AMA)

Not to mention we are a society that is consumed with instant gratification. We want nice things (because others have them), and we want them now. We think we must drive nice cars, so we have a payment for that. And we must have nice phones with internet access, which we pay a large sum for each month. And at home we must be able to click through hundreds of channels and record shows to watch at our on leisure... and on a big screen, high def TV, none-the-less, for which we also pay a pretty penny. I could go on... None of these example items are "bad" if you can afford them, but they are simple, unnecessary items to cut out of the budget if you can't. Dave addresses these as well.

Dave has lots of materials and options for his programs, from books and online tools to DVDs; group and home editions, etc. But he charges for most of them (a bit too much in my opinion, considering he is aiming to help your financial situation... but it's made him a billionaire, so....) I wanted to summarize each lesson for you in case you can't get your hands on the actual program.  (I believe there is a newer edition than what we did, but I'm sure the principals are all the same; some titles may be different).
There are some free resources and worksheets you can find HERE (or surf around the web yourself for pdfs from workbooks).

How we entered the program:  I'll be honest and say that we are in the best financial situation we have been in, single or married. With Jesse having a full-time job bringing in more than minimum wage, we have moved up from our first year of marriage. However, I am accumulating student loan debt by the minute for optometry school. We are fortunate enough, though, not to have undergraduate debt and to only take out the minimum amount to cover my current tuition without using loans for living expenses. This made the program a bit difficult though, because Dave talks about loans and debts as if they have occurred in the past, and it's difficult to decide what to do about it while in the midst of accumulating the loans when you know you can't pay them in full (or avoid them altogether).  At the end of these posts I'll discuss what we implemented from the program.

Let's cover the first two lessons quickly:
Week 1 - Super Saving:
Dave revealed his "Baby Steps" to financial peace. These are referred back to during the 13 week program and are the main steps to financial peace. These are discussed to let you know what is ahead, not to be completed before you return to week 2 (because that would be impossible).

• Baby Step 1: Save a $1,000 emergency fund (expected time 2-3 mos)
• Baby Step 2: Debt snowball (pay off all of your debts, excluding mortgage; expected time 18-24 mos)
• Baby Step 3: Save 3-6 months (necessary) expenses in emergency fund.
• Baby Step 4: Start investing - 15% of income into retirement investments
• Baby Step 5: Help plan your child's future - college funding
• Baby Step 6: Pay off your home early
• Baby Step 7: Build wealth and give!

What I got from this lesson:  Saving money must become a priority and wealth building requires discipline. A common misconception is that "money is the root of all evil" and is perceived as a bad thing. This is not true - money is not good or bad; it becomes good or bad depending on what you do with it and your emotions towards it. It is the love of money that is the root of evil. Your attitude towards money determines if you are saving responsibly or hoarding it. 

Dave gave 3 reasons to save: emergencies, purchases, and wealth building. The emergency fund is very important, as it will protect your investments in a time of urgent need. And this is only to be used for actual unexpected, emergency expenses- such as car repair, unexpected bills, or job loss. He discussed when you have an unexpected expense such as car trouble (a "car crisis") - if you are prepared financially you pay the bill and move on, solving the car crisis. If you are not prepared, you not only have a car crisis but also a financial crisis at the same time, and a large amount of resultant stress. Saving money may take a lot of effort on your part now, but it will pay off in the future. Imagine how much stress could be alleviated from your life if you could reduce your debts (completely), had an emergency fund in case something happens (avoiding a financial crisis), and had enough in the bank to live comfortably today and investments for later. Dave's motto is "live like no one else now, so that you can live like no one else later." Some may think this is impossible, but it is definitely an attainable goal at any stage of life. It may take time and some sacrifices along the way, but the end result is liberating. Testimonials are scattered through the DVD series, and they are remarkable. Go HERE to read some for yourself.

Week 2 - Relating with Money:

I didn't get to go to this class, but I did get caught up on the subject. 

Dave hits on the topic of how men and women are different, and how you and your spouse may not have the same ideals when it comes to budgeting, saving, and wealth building. He divides people into two groups: nerds and free spirits. Nerds enjoy numbers and creating a budget and are generally more disciplined. Free spirits are just the opposite and enjoy not having to think about numbers and budgets. The main point is that all people are not alike, and if you are a couple you should work together to do this program. Two heads are better than one, and you can use your differences, strengths, and weaknesses to help each other. If you are single doing this, you may want to seek an accountability partner to help you stay on track, especially if you identify with the free-spirit group.

What I got from this lesson:  Jesse and I are definitely different when it comes to, well...most anything, and it was good for us to think about these characteristics. We would agree that we both like to save, but that doesn't mean to don't both like to spend as well. We just do so differently. Jesse doesn't buy many things, but when he does it is usually big-money items, like a new TV. I, on the other hand, will drop $20 at 5 different places throughout the week and not realize I've spent 100 bucks. I'm glad this was a focus at the beginning of the program so that we could assess what characteristics would work to our advantage, and what habits we need to work to change. 

This post would be extremely lengthy if I didn't split these lessons up, so come back soon to read my summary of the next few lessons!

Have you done a Dave program before? How did you do, and what did you implement to better your financial situation? Share your experience or concerns in the comments section below!