Monday, January 12, 2009

The Total Money Makeover Part 2

We have looked at the outline and format of the book, so let's find out what Dave Ramsey recommends as the key principles for personal financial succes.

The first step, according to the Dave, is to honestly face your current situation. Many people have no idea how far in debt they are or where their money goes each month. We think that all we need is more money and everything will be ok. That is a lie! The more money we get, the more most of us spend -- almost always spending more than we make regardless of that income level. Until we understand that the reason we have financial difficulties is related to the choices we make, we will not be able to change our behavior. It is very hard to change behavior, and you have to really want to change your financial situation because it won't be easy. It requires dedication, sacrifice, discipline, and a focus on the long term.

The book reviews money myths, which include:
- Everything will be fine when I retire. I'm not saving yet, but there's plenty of time.
- I can get rich quick if I join this group, buy this tape set, work three hours a week, or buy the lottery
- I don't have time to work on a budget, retirement plan, or estate plan
- The debt-management companies on TV or the radio will save me
- I'll just file bankruptcy and start over; it seems so easy
- I can't afford insurance

It also lists a couple of hurdles that people need to pass to be successful. The first is ignorance. None of us are born financially smart. Many of us have made a mess of our financial situations because we simply didn't know what we were doing. There is an easy way to overcome this...stop justifying your decisions made out of ignorance and learn! Discover where your money has been going and get firm with it...tell the money where to go instead of just letting it disappear.

The second hurdle is keeping up with the Joneses. We all feel a need to be accepted by the crowd we hang around with, and especially with our parents and in-laws. We want them all to think that we are doing well and are making smart financial decisions, but the way to make them believe this is usually based on lies. Having to buy the newest car, the biggest house, and the most advanced 52" TV don't show that we are financially often means we are in debt up to our eyeballs but we don't want anyone to know. So to keep the myth going, we take on more debt and actively live a lie.

One of the first actions couples should take together is to prepare a budget. Look at all the incoming funds and all the places where you spend money (other than charge card balances). How much do you spend each month on giving, savings, food, clothing, household maintenance, transportation, etc. The key here is that the amount spent is EQUAL TO OR LESS than the income! If it is not, figure out ways to either reduce your expenditures or increase your income! Use any excess to create your emergency fund.

Dave Ramsey insists that it is vital to collect $1000 before you take any other actions. This is an emergency be used only in the event that there is a certifiable emergency like a broken car or refrigerator. He is clear that Christmas, vacation, or that terrific couch you have always wanted are NOT emergencies! This fund should be accessible, but not too easy to get to, maybe in a second checking account. Then, when you are faced with a crisis that might have caused you to charge things on credit, you can use the fund to avoid more debt.

Tomorrow we'll talk about Dave's recommendations for becoming debt-free.

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