The biggest problem people have is that they spend carelessly. Ramsey’s first chapter is about “stuffitis” or how many of us are possessed by our possessions rather than vice versa. We have developed habits and expectations for our standard of living, and we feel entitled to it - even if we are taking on debt to finance our spending. A related problem is financial illiteracy. Many people just do not know very much about finances, saving, or investment. As a result, they have little or poor planning for major life expenses or emergencies.
A third problem is the fragility, stress, and inefficiency of living beyond or at one’s means with high levels of debt. When an emergency happens, whether the car breaks down or you lose your job, folks with little money saved have to scramble. They put the expense on the credit card and then pay exorbitant interest on the balance. They buy the first car they can find and they can “afford” because they are in a bind. When people don’t save and plan ahead of time, they end up paying more in the long-run for things like housing, clothing, food, vacations, and cars.
Ramsey argues we should adopt his system because it empowers us to live well and to live proactively. Having savings in your account gives you the power to address unanticipated expenses/emergencies with confidence and alacrity. It gives you the freedom to give freely, or to modify your plans if you desire. Having a significant amount of money saved also puts you in an excellent position to act quickly on good deals or good investment opportunities.
Not having debt is also empowering. It means you are not on the hook for certain financial obligations if your circumstances change. Ramsey likes to repeat the phrase: “the borrower is a slave to the lender.” And there is truth in that - the borrower is constrained and subject to the terms under which he borrowed money.
Finally, Ramsey claims that having a lot of cash gives you power. It allows you to get better deals by acting quickly and because people are often willing to give a discount for cash purchases - especially if you are willing to bargain! Using cash can make budgeting easier too. Ramsey recommends having envelopes for different budget categories and filling them with cash for the amount you want to spend in that category each month. This way you have a visual, tangible reminder of whether you are within or exceeding your budget. It also helps you visualize tradeoffs, such as whether to spend more on groceries or on eating out. Ramsey argues that using cash in purchases also subtly discourages us from spending too much. The visible and tangible transfer of money during a purchase is harder than a purely electronic transaction.
Ramsey argues that following his system will give you peace regarding financial issues. Part of this simply comes from the fact that those who follow his system are now spending much more time planning and preparing for emergencies and opportunities than they did before. They understand now how much money they make, how much they spend, and how much they need to save to reach their financial goals. They have thought about setting and sticking to a budget. They have strategies for paying down debt and investing for retirement. All of this gives a greater sense of security and predictability to navigating life’s hurdles.
Taking initiative, being proactive, and being purposeful, as Ramsey suggests, also contribute to one’s financial peace. Problems are addressed in a timely manner. The unknown is not terrifying because one can be confident in their ability to meet whatever comes their way. And after practicing Ramsey’s recommendations, people no longer have debt, they have significant savings and investments, and they can devote more of their time, energy, and attention to other things in life - not worrying about how to make ends meet or to pay the bills.
Practical Financial “Baby Steps”
- Pay minimum on everything until you reach $1000 in savings (small emergency fund); then,
- Pay off all personal debt besides your home mortgage (use snowball method); then,
- Build out emergency fund; 3-6 months of living expenses; then,
- Save 15% of your gross household income in retirement plans; then,
- Start building a “college fund” for children; then,
- Put everything towards paying off your home mortgage; then,
- Build your wealth free of debt and use your cash to get great deals
There are many helpful ideas in Financial Peace. Dave Ramsey has had a huge impact on how many Christians (and some non-Christians) think about their finances. Most of that impact has been good - helping people get out of debt, save for retirement, control their spending, and be responsible for the livelihood of themselves and their family. At the same time, what Ramsey suggests is pretty basic.
I found the writing style off-putting, and not only because there were many typos and errors throughout the book. He is direct, which I appreciate, but unfortunately he often comes off as condescending and/or kitschy. Most of his audience knows next to nothing about managing money, budgeting, or investing.
I’m intrigued by his argument that one can make a lot of money without using leverage (debt) to do so. In real estate, leverage can be used to magnify your rate of return 5-20 fold. Ramsey argues that this doesn’t take into account risk very well. He also argues that using cash opens the door for huge discounts that you can’t get when you finance a deal using debt.
His emphasis on repaying debt was helpful and practical. You are paying to use someone else’s money - why not use your own? If you have tons of high value / high return options for using your money, I can understand holding a lot of debt. But holding debt simply because “it’s cheap” is a little like buying the Costco size soy sauce container that you use once a month because “it’s cheaper per ounce.”
His focus on the importance of setting financial goals was also helpful for me, ironically enough. Even though I think about finance a lot, I realize that many of my financial goals are rather fuzzy and vague at the end of the day. Setting tangible goals allows better planning of what kinds of saving and investing are necessary to get there. I usually keep track of my spending and finances after the fact rather than planning them ahead of time.
So there are many worse books you could read about finance, but this one is unlikely to make it onto my list of recommended financial books.