“There is no secret to becoming rich because the principles are not secret.”
The Most Important Financial Principle: Contentment
As Ramsey puts it, we all suffer from the disease of stuff. We have been sold the idea that things bring happiness and that only through money can we find the enjoyment we crave and a sense of fulfillment. The single greatest principle for taking financial responsibility is learning contentment. It’s the lead domino that makes all the rest follow,
“Contentment brings peace. Not apathy…We say things to ourselves like, ‘I’ll be happy when I get that boat;’ or ‘I’ll be happy when I get that china cabinet’…Not true. Happiness is sold to us as an event or a thing, and consequently, our finances have suffered. Fun can be bought with money, but happiness cannot.”
Happiness is a feeling. You can be happy in the most boring circumstance. Most people hate their job. They could not imagine being happy during their typical 9 to 5 day. But that’s a choice they are making. That’s a choice you make each day. Happiness is intrinsic. You create it.
You can’t decide everything that happens to you in your life, but you decide how to respond. You can get over small upsets or you can let them linger for weeks. You can make your baseline mood happy, or you can choose to be miserable. It’s a choice, and it doesn’t change because you bought enough things to finally make you happy. Going to an amusement park is the act of purchasing fun. Having a positive outlook on life, being content with who you are as a person and how you are spending the time you have on this planet is the essence of happiness.
Financial Freedom is the Result of How Hard You Are Willing to Work
“The haves and have-nots can often be traced back to the dids and the did-nots.” –D. O. Flynn
The examples Ramsey gives are of average people pulling themselves from crushing financial debt and circumstance. Most do not have good jobs. Most did not have cushioned childhoods or come from privileged backgrounds. Like so many others, they were taken by the common American myth that debt is okay. They spent more than they had, loaded up credit cards, purchased expensive car loans and added a mortgage to top it off. They got themselves into the mess of massive debt, but they were also willing to do everything possible to dig themselves out—and in a reasonable time frame. I’ll be the first to say, some of the math in his examples does not always add up. A family of five living on a $40,000 income can’t realistically pay off 120K in debt in two years. But it’s the principle behind the lesson that matters. You’ve got to be willing to work hard for financial freedom,
“Are you willing to get another job and work a few 80-hour weeks? If you are in financial stress because of something you’ve done, you need to get yourself out of the mess by working. If you think that is too hard, you will never get out of the debt that you brought upon yourself. Laziness is a sickness, and it will get you absolutely nowhere in life. We all make mistakes, but the question is whether you are willing to take responsibility for your mistakes!”
Laziness is a sickness. Let those words sink in. Not everyone in debt is there because they are lazy. But the ones who stay there perpetually are. Becoming financially free is not easy. Most people are content with the road of least resistance. They plan on paying the minimum payment each month and don’t bother saving for retirement because that’s decades away.
You don’t want to be like that. You need to take responsibility for your financial life and it starts by putting in hard work now. There’s nothing wrong with overtime or picking up a second job. If anything, it brings you greater satisfaction: an additional paycheck and the thought-comfort of knowing you are working towards the specific goal of eliminating debt. You can be financially free, you can have nice things in life, but you have got to be willing to work for them.
You Must Be Delusional to Avoid Saving for Retirement
“There are dreamers and there are planners; the planners make their dreams come true.” –Edwin Louis Cole
Let’s talk about compound interest for a moment. Most of the people reading this article are smart enough to know what compound interest is and how to apply it to their investing/financial lives. Yet so many people continue to ignore the value in saving for retirement now as opposed to later or not at all.
Let’s take a simple scenario. Ramsey likes to refer to 12% interest from the stock market’s average since 1930. I would rather stick with a more conservative number of 7%. Say you invest $100 at a 7% year-after-year rate of return. After one year, you have $107. After two $114.50, and so on. Over a 40-year period, assuming you start investing at 25 and retire at 65, you will have a balance of $1497.45.
That’s $1500 you grew from an investment of $100. We are talking about a return of 1500%. Of course, that is spread over the course of 40 years, but we were also referring to a static principal amount across that duration. Imagine if you were to add an additional $100 a year. Now that final number grows to over $22,000. For a yearly investment of just $100.
You must start planning for retirement now, and the only way to do it is through investing and harnessing the power of compounding interest. I’ve met with many people, friends, coworkers, etc. who are in their late thirties and forties and feel hopeless about saving for retirement. They look at the scenario above and think, “Yea but I missed the boat. I’m retiring in 10/15/20 years, not 40.”
It doesn’t matter.
Start investing today and be more aggressive than you would at half your age. It’s like getting into severe, financial distress. You made poor decisions to get to that position. Now is not the time to avoid the problem and keep your head in the sand. It’s time to double-down, work hard and remedy the situation.
Any reason you can come up for avoiding saving for retirement is an empty excuse.
“I love my job. I plan to work well past 65 and continue receiving an income.” Really? Can you predict how you are going to feel when the time comes to retire? At one point in the future, every single one of your friends and colleagues are going to be taking off to enjoy the fruits of their labor. Do you want to be the one left behind?
“Investing is too risky. People lose all of their retirement money and are left with nothing.” Investing is not like playing poker: it’s only as risky as you make it. There is inherent risk in investing. If the stock market collapsed the year before you planned on retiring, you will probably be forced to work an additional couple of years. But there’s also risk in socking away money in a shoe box under your bed (which is losing value each year to inflation) or putting it all in a bank. Overall, it’s far less risky to invest your money in a way that prepares for retirement as opposed to doing nothing at all.
“There is no guarantee that I will live past retirement. Might as well spend and enjoy that money now.” You’re right. There is no guarantee. Like there is no guarantee for anything in life. I would not want to be the person who held a YOLO attitude their entire life up until they hit 70 and realized they were going to be alive for another couple of decades. Unless you are into adventure sports or active duty military, I would plan on living far longer than the current retirement age of 65.
A Plan that Works is Better than a Perfect Plan
Dave Ramsey has built his career upon the debt-snowball concept. The idea is that you pay off your lowest balance debt first, and ignore all other factors such as interest rate. Consider the following scenario.
Credit Card A: $700 Balance, 13.2% APR
Credit Card B: $5,000 Balance, 19.0% APR
Car Loan: $12,700 Balance, 3.9% APR
You would start by paying off Credit Card A, despite the much higher interest rate of Credit Card B. I happen to disagree, along with many others, on implementing this plan. In the long-run, it is far more cost-effective to pay off balances with higher interest rates. But I concede to Ramsey’s philosophy and the fact that he testifies his plan has worked well for many people.
The idea is to simply get motivated and moving on paying down your debt. Too many people become paralyzed in deciding how to get rid of their mounting debt. They pay a little bit on each loan, or just the minimum, and whittle away at their debt over the course of a lifetime. Ramsey’s plan may not be perfect, and may cost you more money in the long run that an optimized approach would not, but there is value in the simplicity. Make a list of all your debt. Circle the one with the lowest balance and get aggressive paying it off. When it’s done, move on to the next.
I like the leap-frog approach and the satisfaction of crossing off an item one at a time. Consider this: the first debt you pay off is also your smallest, meaning that you should reach your goal relatively quick. The best way to get anyone motivated for a diet or exercise routine is to design something that will bring them fast returns. It’s about building momentum. Paying off one debt makes you that much more motivated to get rid of the next. Soon, instead of having three credit card payments, you have two, then one, then just a car loan, etc.
College Is What You Make of It, Not How Much You Spend
I won’t go too deep into detail here, because I am writing a separate post related to Ramsey’s take on the pursuit of college. But put simply: don’t bankrupt your future, or your child’s future, in the pursuit of an education.
The typical response to higher education is one related to gut-checked emotions. As we know, emotions and finance rarely mix well. The traditional message of a college education is one that will open a multitude of possibilities and high paying careers. “You need to get an education so you don’t spend your life working at McDonald’s. Nobody will hire you without a college diploma.” Now would seem an appropriate time to quote Matt Damon in Good Will Hunting,
“You wasted $150,000 on an education you coulda got for $1.50 in late fees at the public library.”
Obviously, there is some benefit in a college education. If you are reading this and plan to attend medical school, there is no possible way to become a physician without first attending college. The same applies to law school, pharmacy, becoming an accountant, etc. A college education can be the conduit to other specific careers. However, if your real goal in pursuing medical school was to help other people in a clinical setting, there are many, many occupations and career routes you could pursue that did not involve attending college. They may not pay the $187,000 median salary that physicians make in the U.S., but it also doesn’t require eight years of school and hundreds of thousands of dollars in tuition.
The point is, most of what you want to accomplish in life can be obtained if you are willing to be more creative than your competition and work harder in the right direction. I have a college degree, so in some ways I am making a hypocritical argument. But, like most things in life, it’s hard to tell the value of something you want until you have obtained it. Before you have your diploma in hand, you idolize a college degree. You think of it as a key that will unlock guaranteed fortune and success. Myself, and many others, are here to say that’s not often the case.
Not to carry out the Good Will Hunting reference, but think of the wisdom in what Matt Damon’s character is trying to say and apply it to your own situation. Think about what exactly you plan on doing after college. If you can obtain the skills and education elsewhere, either from self-teaching or finding free mentorship through the internet or other means of access, then try that first.
The pursuit of an undergraduate degree is immensely limiting for two reason: 1) You don’t know what’s out there in the world but you have been told your entire life that you need an education to get it. 2) You can’t find creative solutions to your problems (in this case, obtaining a rewarding career) until you allow yourself to see alternative avenues. The current climate around college has created a massive funneling effect, where the top 1% of students benefit immensely from the system and go on to lead idyllic careers on Wall Street and in operating rooms. But most graduates are not much better off than where they started. They have a degree. They have four years of maturation over their high school self. But they lack direction. They lack experience and true ambition that is necessary for the quality jobs and the big opportunities. And they never learn what it’s like to try something completely new, bold and risky like setting off on their own path. Not to mention they are saddled with $50,000+ in student loan debt.
If you want to go to college, as so many do, make sure it is for the right reasons.
Personal Finance is Mostly About Behavior
The most attributable quote to Ramsey in Total Money Makeover is: “If you will live like no one else, later you can live like no one else.” It’s printed along the bottom of each page in the hardcover edition. It reminds readers that following a personal finance plan involves sacrifices. The average person does not have the sort of capital to live a fabulous (in terms of wealth) lifestyle for the duration of their existence. This isn’t true for everyone, but it is true for the majority. Therefore, personal finance becomes a practice in establishing what you can do without now to improve the prospect of your future.
The first step is not putting yourself in a position of crippling debt that will handicap how you can live the rest of your life. Hence the emphasis, from page one, on eliminating present debt and creating a cushion for unseen financial burdens.
The second most attributable quote to Ramsey, and my favorite, is “Personal finance is 80% behavior and 20% knowledge.” Most of the decisions you make in determining your current financial situation are the result of behavior, not knowledge. Investing can be as complex or simple as you make, but the day to day decisions to get into debt, to purchase over-priced commodities and unnecessary luxury vehicles stem from a person’s behavior. At some level, we all know what we should be doing with our money. If you have the gut feeling, “I probably shouldn’t buy this,” or “I probably shouldn’t keep putting things on my credit card,” then listen to that feeling. Because behavior gets you into debt, it only makes sense that modifying behavior is one of the essential steps to getting out of debt and becoming more financially secure.
It’s easy to take what Ramsey says and imagine a miserly life of coupon cutting and waiting on retirement. In some ways, that’s a valid interpretation. Making decisions now to improve your future amounts to the inverse gamble of a person who lives for the moment—including each paycheck as it comes. The former is assuming they will live a long enough life to reap the reward of their investments. They plan on having the health, the longevity and peace of mind to better enjoy their money in the back-half of their life as opposed to spending freely in their youth. However, this assumption also requires that the world continues upon it’s relatively peaceful, non-disruptive trajectory. The person who is more concerned with immediate gratification, who doesn’t concern themselves with saving for retirement and is comfortable existing with copious amounts of debt, is also assuming, somehow, their future will turn out okay. It’s not that these people are intending to die before their working years end, they are just avoiding having to deal with their future in exchange for a more enjoyable present.
Personally, I find the second viewpoint to be immature and likely to backfire. But that’s a decision you must make for yourself. You decide, each day, how you want to live and what sort of future you are sculpting. Time is such an abstract concept for us to comprehend that it is understandable to avoid thinking about the future. There are no guarantees in life. Spending money on college does not guarantee a higher income to make up for it. Going to professional school to obtain a high paying occupation does not guarantee a happier life overall. There is a survivorship bias that ignores the millions of people who work hard, who go to college, who try their hand at entrepreneurship and never manage to succeed.
But, in the end, much of your personal finance behavior can be viewed as a sure thing versus wishful thinking. Money stashed in an investment vehicle over forty years is a tangible commodity. Investing in your skillset and education, not always through traditional University routes, is real value which you can utilize. Debt is also real. So is aging. At some point, you can’t just assume the future will be bright without investing in that future. You can’t ignore a looming a retirement—or you will never have one. The inability to comprehend or plan the future can be as much attributed to procrastination as fear. For many people, escaping debt, having rewarding retirement and just money in general invokes a sense of discomfort. Rather than attempting to tackle the problem, they turn away. They put themselves deeper in debt spending money they don’t have on things they don’t need to make themselves feel better about the hole they’ve dug. You can’t fix a situation by making it worse. The first step of Alcoholics Anonymous is to admit that you are powerless to your addiction. You must recognize that you have a problem and that you need to do something about it.
Debt is a problem. The only way to get out of debt is changing the behavior that created it.