Is Financial Literacy Out of Reach For The Ordinary Person?

Many college students have just recently completed college and have graduated. They have gained a vast knowledge of their chosen realm of study and are about to start their first job. They will be making more money than they ever have before in their young lives. Yet, for the most part will be completely ignorant about financial matters. 

These new graduates will be starting at their new jobs confused which investments are good for their 401(k) or how they should be paying back their student loans. After all that education they will be lost in all thing financial. So much time and money is spent on their chosen subject of study but almost no time is put into educating them about financial subjects.

It matters so much more these days that you know what your doing financially. Having to juggle credit card debt, student loan debt, and participation in a 401(k) can make someones head spin. Statistics show that this lack of knowledge has made them wholly unprepared for the future retirement.

Are financial subjects to complicated for us to be knowledgeable about? Yes, it is complicated for beginners, but it's something that can be learned over time. It is your responsibility to educate yourself. There can be no excuse to not learn how money works. There are many professionals who can help walk you through your financial life. Or if you are a do-it-yourself type you can educate yourself with many online services, books, and knowledgeable websites.

To get started on the financial journey I can recommend financial guru Dave Ramsey. He has a daily radio show and has written many books on financial success. He has created a plan for the average person he calls the "Baby Steps". These baby steps walk you through the process on step at a time. If done in order and correctly you will enjoy a great financial life.

Dave Ramsey’s 7 Baby Steps

• Step 1 – $1,000 to start an Emergency Fund: Before you even get started on the rest of the plan, you need to save up a little bit of cash just in case small emergencies happen.
• Step 2 – Pay off all debt using the Debt Snowball: You list your debts from smallest to largest. Pay the minimums on all of your debts. With any leftover money you may have you pay extra on your smallest debt until it is paid off. You then roll that amount over to the next smallest debt.
• Step 3 – 3 to 6 months of expenses in savings: Save up 3-6 months of expenses in case of extreme misfortune like a job loss, illness or other long term problem.
• Step 4 – Invest 15% of household income into Roth IRAs and pre-tax retirement: Save for your retirement.
• Step 5 - College funding for children: After saving for retirement you can save for your children’s education and college expenses.
• Step 6 – Pay off home early: Make extra payments on the mortgage to pay it off early.
• Step 7 – Build wealth and give! (Invest in mutual funds and real estate): Continue building wealth through mutual funds and real estate, and give, give give!

These steps are the culmination of Dave Ramsey's 20 years experience in financial counseling. He has written many books on this subject, I recommend you read them.

Book Review: Dave Ramsey's The Total Money Makeover

Cover via Amazon

Financial Guru Dave Ramsey has made financial fitness cool. Between his radio program, web site and Money Makeover Live Events he 's making new in roads to the main stream culture. I was first exposed to him on his web site when I was looking for some debt help. I believed he was some cult leader trying to sell a book. But under further scrutiny I've been sucked into drinking the Ramsey kool-aid big time. His latest book titled "Dave Ramsey's Total Money Makeover", now updated for 2010, is on bookshelves now.

His book describes a plan for becoming financially fit. Whether your a beginner or on track, this book can help you. Early in the book he describes his financial life. Starting poor and becoming a millionaire in real estate. Losing it all and declaring bankruptcy. He started a  journey to learn the right way to become wealthy. He talked to many people especially millionaire's learning how they made it and how they kept it. He has a heart for people who have lost everything like he did. Even the day they repossessed his child's furniture. His car was also repossessed and electric shut off. He eventually paid of his debts and began to build wealth. Also a career teaching others how to do it right. His book explains this plan with something called the " 7 Baby Steps".

The 7 Baby Steps are:

1. Save up a $1000 baby emergency fund for a rainy day. Cut up all your credit cards and set up a budget. Also never use credit again.
2. Begin the "Debt Snowball Plan" by paying only the minimums on your debts. Writing down your debts smallest to largest. Paying the smallest with all the extra money you can. After that one is done rolling that money and more into the second one. Thus making the snowball bigger. With that ones done, roll that one into the third. By then your making huge payments and accelerating your debt payoff plan.
3. Finish your Emergency Fund by making it 3 to 6 months of expenses in savings.
4. Invest 15% of your income in retirement accounts.
5. Setup college funding for children with Educational Savings account invested in good Mutual Funds.
6. Now work hard to pay off your home with large principle payments till is paid off.
7. Build Wealth and Give.

As he describes his plan, snippets of real peoples testamonials are interspersed throughout the book. Included in the back of the book are budget, debt and planning forms for the reader to use. Dave Ramsey says its how he got to where he is today and it can work for you.  The book is written on a 6th grade level so its easy to understand by anyone. This book takes you by the hand and leads you down the road to success.

From my point of view,I am someone closer to retirement than just starting, I could see it working. Lots of books on personal finance look good on paper, but don't translate well to real life. In writing a book its hard to explain a plan that could apply to everyones situation. This one is so simple it could just work. I reccomend this book its a good read. I have enjoyed the testimonials I can see how they could be inspiring. What didn't I like about this book is baby step 2. Saving 3 to 6 months expenses in savings could be a waste. You could be using it to pay off your house or invest. He also says you should be getting an average of 12 % on your investments. Its doubtful anyone could average that. I wish he would reveal these great Mutual Funds that produce 12%. Always when reading books you take from it the best information. You apply it where appropriate.

There is something about Dave Ramsey's plan that is different from all the other plans. It's the way people talk about it. People will say "I'm on the Dave Ramsey plan." and  "Dave Ramsey got me out of debt". Do you ever hear anyone saying that about Suze Orman.

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Debts True Effect On Your Self and Family

We all know the problem with debt. It all starts simply when you buy something with that little piece of plastic. Its all so fun and innocent. Its a mindset that you need somethimg now. you don't have time to save for it. Get it now and worry about the bill later. Maybe you don't have the money, but you'll just make the payments

The short term effects of debt are you have to make your payments with your finite amount of income. This bill arrives in the mail with a small monthly payment, you pay the bill and go on with your life. It still feels good, your paying it back. You see the credit card is your friend, it helps you live a better life. You continue this cycle of credit and it works for a while. Till it doesn't. You eventually don't have enough money to pay your debt. You get behind and here comes stress, fear and worry. Credit has made your life better.

That's only the beginning. Think of all the things you do and can't because of all this wonderful debt. I can relate in my life the many things I miss out on because of debt. For starters my mortgage is 40 percent of my income. Dave Ramsey's rule of thumb is that it shouldn't be more than 25 percent of your income. I can see why my house is keeping me poor. My mortgage is keeping me from saving and paying other bills in my life. The lack of of cash has made me go into further debt when an emergency comes up. A lot of things around the house get neglected like repairs and maintenance. As the debt payment rises, taking more cash from our budget, we don't do a lot of other activities, namely vacations. If we do vacation its put on debt making the situation worse.

More effects are you have to work more. I had to start working on the weekends just to make ends meet. I can't go back to a 5 day week I need the money, guess why, my debt payments. Its incredible I have to give up my Saturday to pay my debt. I'm not working for me but I am working for the bank till I pay them off.

Your quality of life reduced. Your in a bondage to your debtor. You have to do things you don't want to do, your choices are limited when you are in debt. How would things be different if you were not in debt. Think about this carefully. For me I could work one day less per week. I would not worry about getting sick and missing work. For most of us we are one week from financial disaster. Think what your life would be like if you had no debt.  I would have a great reduction in stress. My family would have more stability and security.I could be using my income  to build an emergency fund or build a Roth Ira.

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Debt Snowball. What is it?

Image via Wikipedia

Image via Wikipedia

This term "Debt Snowball" what does it mean, does it refer to when Frosty the Snowman went over his credit limit? I don't think so. Its a term made famous by financial guru Dave Ramsey. The way it works is first be current in all your debts. List all your debts from smallest to largest ignoring interest rate. Pay the minimums on all your debts except the smallest one. The smallest one pay the minimum and as much other money you can scrape up to pay it off as fast as possible. After the first debt is paid off take that amount and add it to the second debts minimum. Hence increasing the payment on the second debt. When that one is paid off, take all that money add it to the the third minimum debt payment. Keep doing this till you go thru all your debts. This plan allows you to focus an ever increasing amount of money on your smallest debt. Every time the debts are paid off the snowball payment keeps getting bigger ultimately getting you out of debt sooner.

The key to this plan is the focusing on the smallest debt for an emotional win. Even though other debts may be a higher interest rate. You may be thinking paying off the highest interest debt first would be mathematically correct. The emotional win is more valuable to the individual. To have a couple of wins under your belt is a ego boosting feeling. This gives you the encouragement to keep going. In my personal experience it the only thing that kept me going and still does. The tedium of going thru this process is exasperating. It takes a long time and is a lot of work. You could lose patience and chuck it all if you didn't have some early wins. It like when you go on a diet and exercise. If you don't see results you most likely give up.

The argument of paying higher interest debt first is mathematically correct. It seems the right way to go. But responsibility with money is more psychological than math related. If you did the math on using credit, you wouldn't us it. It goes along with impulsed purchasing. Did you ever want to purchase an item. Maybe something you were exposed to when you were walking down the isle of a store. You just grabbed an item and put it in your shopping cart. Your whole thought process consisted of: See item, like item, I have credit card, Buy it. Totally a Pavlov's dog reaction. Not more than 2 second thought process and programed response. Now if you had left that credit card at home and only had cash the entire event would of happened differently. Thought process would go something like this. See item, like item, I only have cash, Do I want to use my little bit of cash on this piece of junk. Answer, "No". Its not automatic, it actually takes longer to decide to purchase because using cash actually hurts. Using credit is fun and painless and can be rationalized easily. You actually buy more stuff when you use credit. 

Here is an example of the debt snowball in action:

My Debts listed smallest to largest:

1. Home Depot - Balance 1214.00 - minimum 22.00 - Interest 15%
2. Chase 1 - Balance 2858.00 - minimum 36.00 - Interest 2.9%
3. Chase 2 - Balance 7076.00 - minimum 170.00 - Interest 16%

Here is the plan for paying off $11,148.00 of debt in 19 months. Its the plan I am going to follow. Of course if  I have any other extra money I will add it to the snowball. Again it will take discipline and focus to complete this. You must establish goals and make a written plan on how to complete them . The Debt Snowball is the best plan for getting out of debt. Some people have gone the way of "Debt Consolidation". Thats when you refinance all your bills into one amount and have one small affordable payment. This is not a plan for success. Its a lazy way of just moving your debt around and believing your actually doing something. Its a false economy to think that. Another way people pay back debt incorrectly is go to a credit consolidation company that takes charge of all your debt and renegotiates your balances and interest rates down. You end up paying them a large fee and wrecking your credit. Take charge of your debt, do this your self.

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GOALS, GOALS, GOALS

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Through all my life i have been told that to accomplish something in life you must have a plan. Mom and Dad would constantly say "Go to school, study hard, go to college and get a good job." Was I the only one to here this? I know this was my first plan given to me by my parents. If I followed it I would become successful. It didn't work to well, life got in the way.

I had some of my own goals in my life that I set up. For instance "Try to finish college, get some kind of job and try to pay your bills." That plan was the one I did accomplish. Who said, "When you aim at nothing you'll hit it every time."?

Well that's not going to happen anymore. I am setting goals here and now for the world to see. In time we will see what I accomplish. Now what are these goals?

1. Have $1000 saved in the bank for emergency's.
2. Get on a budget.
3. Spend less than I make
4. Pay off all debts but the mortgage.
5. Have 3 to 6 months expenses in savings.
6. Save for college for my 10 year old daughter.
7. Save 15% of my income to a Roth Ira for retirement.
8. Pay off Mortgage.

There are my goals. I have the first 2 completed. I am struggling to do the third goal. Maybe I'll get better with time. The fourth goal is what I'm concentrating on now. Are these lofty goals? I don't think so. I do think that if I don't do them I will be reading the book "50 Ways to Cook Alpo" in my retirement.

I must admit I am stealing this list from Dave Ramsey's "7 Baby Steps". He is real good with these things, check him out. I did edit it for my life but "Baby Steps" are great.