Most financial articles are self-help so I thought it might be good idea to discuss how to help others. I suspect most people can’t fix their own finances without some kind of help from someone else. Yes, ultimately it is still up to each individual person to apply financial wisdom, but they need your help.
- Encouragement is one of the best gifts you can give to someone. Encourage means to give courage. Tackling financial problems isn’t easy, and people feel defeated. You can help them by telling them they are smart, intelligent and creative people- because they are, everyone is, in their unique way. You can encourage them by telling them how you struggled or avoided it, and how you clawed your way out. Tell them they can do it, and to keep trying. Few people totally succeed with their first few efforts and encouragement really helps.
- Financial study is key. Tell them how particular authors, blogs, or financial personalities helped you. Great writers and speakers like Mary Hunt and Dave Ramsey too where nearly, or were bankrupt, and they learned from others how to dig their way out. Point people you know towards these writers.
- Taking classes is essential too. We lead two Financial Peace University (FPU) classes each year, because they work. They work because Dave Ramsey’s video lessons teach everything people need to learn to get their house in order. In addition, they have small group breakout discussions so that people can get extra help and accountability. Go to www.daveramsey.com to search by zip code for classes nearby- they are offered all over town, and start soon. If someone lives hundreds of miles away from civilization, they can pay a little more and get the do-it-at-home course.
- Sponsor someone to take the class, but don’t pay the entire amount. Most people need to have some skin, or investment in the game. If people don’t invest a few dollars into it, then they will not be committed to the class. Some people don’t like help, but come up with a creative way to pay some of the cost (usually around $100), or babysit their kids while they are in class.
- Help them budget. If you know someone who is having a tough time, tell them you will sit down with them and show them how to manage their income and expenses so that there is money left over at the end of the month. Research says 70% of people live paycheck-to-paycheck, but most people don’t know how manage their monthly finances or balance their checkbook. Use simple paper and pencil forms, or great software like www.ynab.com, on their PC or mobile device.
- Lead a FPU class, if you have already taken the class. Leading FPU is easy, they provide all of the ‘how-to’s’. Lead a class in your neighborhood, apartment complex, church, work lunch break, or local community center.
- Be a good example, by being wise with savings and investments, and spending. Have a good attitude and tell people who helped you. You can have a lot of nice things, but don’t flaunt your wealth. People around me have been lifelong examples for me of managing money wisely.
- Be generous. Give to organizations helping others with their finances, jobs and other essential lifestyles skills. Help others with basic needs if they are going without food, or utilities. However try to offer it with humility, along with offers to help them budget and take financial classes if appropriate. If people are making bad decisions, and you don’t provide wisdom along with cash, at least at times you might be hurting them more than helping them.
- If you are in the position to start a business, consider doing so. Nothing helps people financially more than a good job with benefits.
- If you are a leader in business, get behind offering financial education classes to your employees. Several studies have shown that they help people with their finances, and help them be better employees.
- Lastly, teach your children how to manage finances at home, and lead financial classes for youth at church. Some financial institutions have sponsored financial classes in schools.
Helping others will be good for them and you. It is satisfying, and character building to do the hard work to help others carry their burdens.
Do you wonder what is the best rate of return that you can get on a savings account, does it really matter? Toward the end of this article I will give you some rates I found, but even though it does matter, it doesn’t matter as much as you think, so don’t sweat it too much. Even though your savings gets a poor rate of return, the idea is the low rate is the cost of having insurance. I don’t mean insurance in the traditional sense, but self-insurance if something happens and you need to get your hands on it for a health condition, lost employment or the transmission going out on your car. The cost of ‘insurance’ is the low rate of return. The benefit is having money readily available, insured by FDIC, and in something that won’t go down in value. Remember what Mark Twain said: “I am more concerned with the return of my money than the return on my money.”
That is the reason I don’t think it is too important to loose sleep over the low interest rate your savings account is earning. Also, the difference in rate of return isn’t going to add up that much anyways. For example, if your account is earning .50% and another one is offering .65%, the difference in accumulation in 1 year on $10,000 is only $15 dollars. However, as you save more money, and you are going to have it in savings a long time, then you should do more homework to find a great rate.
Saving money is all the rage these days. In April of 2005 the US personal savings rate was .80%, today it stands at about 4%. More people are saving money as a result of the recession, now that they see the value of having a safety net. Hopefully the trend to save instead of spending almost all we make will continue and we won’t return to a spend and borrow culture that helped contribute to a recession. People are taking classes, learning from experience and understanding the value of having an emergency fund of savings.
The challenge many people face is where to put their money. We are told to deposit it into a safe money market account, pass-book savings, or certificate of deposit, but the interest rates are horrible. We are supposed to save 3 – 6 months of expenses in case of a rainy day. If someone is self-employed it may be good to have 12 to 18 months of savings, in case of business slumps. If people are paying off debt, Dave Ramsey suggests they start with baby-step #1 and put $1,000 into savings, then start to snowball debt reduction with a gazelle run-hard mentality.
Basic bank and credit union savings and money market accounts are great, because they are easy to get to, don’t go down in value like the stock or bond market, and are insured against loss by the FDIC. Make note though, there are some money market accounts that are not insured.
I looked around the web and found some decent rates, in the neighborhood of .65% to 1.05%, the best from my quick search was at CITBank and Salliemae. I found some institutions with rates as good as 1.50%, but had requirements like balances and checking. Checking Bankrate.com the average money market account was paying from .50% to .70% depending upon minimum balance. Find a good institution, with a good rate, keep an eye on it, but don’t sweat it too much initially.
The Dave Ramsey Financial Peace University multi-week class has an entire lesson on insurance, or risk management. Wisdom with insurance is key to financial planning to protect the things we own or our family from risk, using as few dollars as possible. To underline a few items from this lesson, and a few things I have a little different opinion…
- Evaluate your life insurance and type: if you have minor children and a mortgage a good rule of thumb is 10 times income (an insurance expert or financial planner can help you calculate your amount). You can subtract from that number your group life amount and other insurance, savings and investments. If your spouse doesn’t work outside of the home, she probably needs it too. Consider term insurance since it is pretty inexpensive, and buy as long a term as you can afford usually, such as 10 – 25 year level term
- If you haven’t shopped your auto and homeowners insurance in a while, call some independent and captive agents for quotes for various deductibles, you may be able to save a goodly amount. Be sure to have your policy’s declaration page or description of coverage handy to refer to.
- Talk to your agent about ‘personal catastrophe’ or ‘umbrella’ insurance to protect you from excess liability. A few million dollars of coverage costs less than $200 usually.
- Ask your agent about your homeowner’s ‘replacement cost’ coverage for dwelling and contents.
- For long-term-care insurance, if you are in your 50′s it is not better to wait until 60 as Dave says, since the rates go up with age, and sometimes our health changes more as we age.
- Review your short-term and long-term disability coverage at work, even if you have it, it may be a good idea to consider supplemental since group DI is taxable.
- Dave recommends dropping all permanent life insurance (whole life, universal, variable), but if you’ve owned a policy for a long time or your health has changed you probably should consider keeping it. It is always good to get an enforce computer ledger to evaluate and compare before making this drastic change, and don’t ever drop coverage until the new policy is in force. Also, some people have some permanent needs, so again it is wise to consult a financial advisor first.
- Lastly, Dave recommends good estate planning. Be sure to contact an attorney about having a will, power of attorney written for you. If you believe in end-of-life planning, ask about living wills and health care power of attorney. Trust planning makes good sense for asset protection, and to take care of minor children, not including privacy and tax and probate cost minimization.
Best selling author, nationally syndicated radio financial expert, motivational speaker, and creator of Financial Peace University financial education class Dave Ramsey is an amazing guy with a great institution. Operating under the Lampo group in the Nashville Tennessee area, Dave has grown his company over the last 20 years employing hundreds of people serving millions of people through books and classes taught in business, churches, community centers, schools and prisons worldwide.
We have coordinated about 8 classes over the last 3 years, to almost 700 people, at Vineyard Columbus. Dave’s system of financial education really works, and works well at helping people manage money, become debt free, relate with spouses better about money, and build wealth for emergencies, college education and retirement. Someone asked me once if I agree with everything Dave says, my answer to that is I don’t agree with everything I say- but I do believe in about 95% of what he teaches, because I have studied his concepts and they work.
Why does Dave’s system work so well? It works great because he has researched, refined and improved his program to find out the best way to be financially healthy. His system is proven, and I have seen it work with the classes we have led. Each class that we have led reported that it helped most people. In addition we have seen about $1.5 – $2 million dollars of debt reduction of class attendees.
Dave has recently updated his course and will be rolled out in August, and we lead it again starting September 13th every Thursday for 9 weeks. For those that want to check it out before signing up for it, can attend a preview September 6th at 7pm. The same night we are going to do an orientation, so that attendees can derive the most out of the class. To find out more about this upcoming class go to the link at Vineyard Community Center.
The new class was shortened from 13 weeks to 9 weeks, making it easier for people to commit to. In addition, a few classes have been combined (the two on investments), and the class on dealing with debt collections will only be available online to members, and the class on careers has been eliminated. Lastly, the lessons taught on DVD are all now 60 minutes, some of the prior classes were much longer.
The format for the class is to watch a professional, informative, educational teaching by Dave Ramsey on DVD, jam-packed full of information. Small groups are assembled following the DVD to discuss the lesson and provide accountability for those that want it. Dave not only teaches information well, but talks from the heart from his own deep failures and successes. He motivates, gives sample cases so that you can identify with, and is generally funny and entertaining to listen to, what I call ‘Edutainment.’
If you or someone you know would like to be more financially smart, and improve their financial future, they should attend a class near them, and hundreds of classes with the new materials are scheduled to start nationwide in August and September. To find a class go to www.daveramsey.com.
The 2nd of 13 Dave Ramsey Financial Peace University Classes is Relating With Money. I love this class, because it helps couples understand their differences and work together. This is probably one of the reasons why about 75% of married couples that attend the class report this has helped improve their marriage. Just understanding that we approach money with unique styles, non-judgmentally, is good to open up the doors to be able to cooperate and work together. For singles, this class is excellent too, because many of the recommendations for relating can be applied to accountability partners, and it is always helpful to better understand our strengths and weaknesses.
Some couples are carrying lot of relational money baggage. It can range from feelings that their spouse totally failed them to just disappointment because one is either too obsessive about this, or not interested enough. There may be hurts over mistakes the other made, bad purchases that both are not paying for. How do we get past this? Forgiveness is the answer. There is really no other way to resolve this. Punishment, resentment, ridicule and bitterness just sow the seeds of division. Let’s admit that all of us have made some mistakes, or haven’t managed things wisely, so it is really fair to just let go of those hurts. Love forms the basis of your marriage, and forgiveness is an act of self-less love and grace towards the other one. This fresh start helps couples work together better.
Spouses will either work together on finances or work against each other. You need the other person’s wisdom, strength, support and unique set of gifts and talents that you don’t have to do this together. If you do this I promise not only will your finances improve, but so will your relationship. Is it easy? Heck no, someone once said that marriage requires death to some parts of our self. I think that is true; we sacrifice what we want, for the benefit of the other person, to children and to what He wants. The other does the same for us. In the end it isn’t loss, but we get back much more than we give up. This is love in action.
I hope this is helpful, now be encouraged, work on this together, you will achieve a lot together.
The 1st of 13 Dave Ramsey Financial Peace University Classes is Super Saving. This is an excellent class to start with and begin to set the goal to accomplish Baby Step number one; saving $1,000 in an emergency fund. The emergency fund will provide the safety net, or insurance, when something happens in life like a car repair or the hot-water heater going out. When you have money set aside for emergencies, you will not have to go into debt, fall behind on bills, or pull money out of long-term investments. However some people commented after the first class, since they are living paycheck-to-paycheck how are they going to come up with $1,000? Here are 14 things that you can consider doing to help you accomplish baby step #1:
- Follow a budget and track spending, so that you know where your money goes and you have limits when you shop (you will learn more about this in Lesson #3 “Cash Flow Planning.)”
- Tear up credit cards and use cash. Research indicates that people who use plastic end up spending more money than those that don’t- it is a psychological thing (this is covered extensively in lesson #4 “Dumping Debt.)”.
- Refinance your home now that interest rates are lower than ever, and a lower rate could lower your payment. Be careful, take your time before pulling the trigger, read this post for more information. This will be covered more in lesson #12 “Real Estate and Mortgages.”
- Change tax withholding if you usually get a tax refund. Talk to your tax advisor about the right amount of exemptions for you to take that make sense for you. Your paycheck will go up, and you can use that money for important things.
- Shop for lower insurance rates, this may save you $20 – $100 per month.
- Reduce grocery spending $100 this month. Most people who don’t pay close attention to this area, can save a lot by becoming a more frugal shopper by using coupons and other means. Your local library has dozens of books about how to save money. We like anything by Mary Hunt of Debt Proof Living.
- Cut back on your Cell phone data and time usage.
- Reduce cable to basic or eliminate all together until you are back to where you need to be.
- Lower your real estate taxes, start by calling your county auditor and talk with them about how you can go about adjusting the valuation of your home down for real estate tax assessment purposes.
- Downsize your home or automobile if you can, this will help you have lower payments, maintenance and utilities.
- Obtain a second part-time job.
- Use tax refunds to fund, the for debt re-payment, and don’t buy anything unnecessary with those monies.
- Sell something. In the last few years I sold a few items that I only used a couple of times per year, including golf clubs and a Specialized road bike.
- Do freelance or side work. This has been helpful to me, in the past I painted a friends barn and did other work, and now I do freelance writing.
You can have a successful year, it takes ingenuity and hard work.
Dave Ramsey says that no one should ever lease a car, he calls car leases fleeces, is it true, is this fair, should no one really ever lease a car, and is it always a rip off? Basically a lease is the purchase of the car’s value that you will be using.
Dave’s overall recommendations are to minimize transportation costs, because we often see people making bad (expensive) decisions in this area of personal finances. It is not unusually for us to see people buying cars that they normally couldn’t afford, with large payments that they are stuck with. At best this just is a hurdle to accumulate sufficient wealth for things like retirement, or at worst people end up in poverty. I know this to be true for myself, and for the 100′s of people who I have counseled or had in class over the last few years. I believe Dave’s point of perspective comes from similar experiences as mine, plus he is communicating to millions of people, for this wide audience he wants to keep his message simple, and it makes sense: Buy good used cars cheap, drive them a long time, learn personal financial management, don’t borrow to buy deprecating assets, pay off debt, save and pay cash for things that are needed, such as your next used car. Eventually when your house is well in order as defined by no debt, a lot of savings and funded retirement, then sure go buy a new car now that you can afford.
I think this is sound wisdom, that most people should heed. However, I am car guy, and I love cars, is this from a mathematical standpoint always true? Is this information fair to the auto industry, vehicle dealers, sales people and finance companies?
Keep in mind, whether you lease, borrow, or buy outright, there are always costs of ownership. That is where the devil is in the details. The cost of ownership can be computed to dollars or cents per mile, or for the total number of years of ownership. The calculation should include: 1) purchase price (including financing), or lease payments 2) gasoline usage (this is huge and often underestimated by the SUV crowd) 3) maintenance 4) insurance 5) opportunity cost, or the lost interest on the money if you saved or invested it instead of putting it into car payments or a lump sum purchase 6) depreciation or the value the car is worth at the end of ownership when you sell it or trade it in.
This is a difficult calculation for most people to do, however in a few hours, with a calculator, note paper, and a few different websites, I think you could come close estimating at least 1 through 5 above. I recommend using the Total Cost of Ownership TCO at www.edmunds to only estimate the repairs, maintenance, gasoline, insurance and depreciation of used versus new for the same make and model. Use the auto finance calculators at www.dinkytown.com to estimate the total costs of financing. Comparing say 8 years of ownership: new cars will have an advantage of lower repairs and maintenance costs, and higher residual value. Used cars will have the advantage of lower insurance, and no, lower or shorter finance payments. If you follow the advice of many good articles of how to purchase a good used car, and you find a good one, most of time your TCO will be much less for used versus new. If the difference is small for your analysis, and you will own it for a long time, then a new car might be the wise decision. If you want to then look at comparing leasing, then compute the costs to lease three cars for your comparison, since you will have to lease that many for the same ownership period as your purchase. The advantage will probably be to own instead of leasing.
Do I ever like leasing? Sometimes, but usually only if there is absolutely no money down, the payment is a super low deal probably offered by the manufacturer to move a back log of inventory, and after doing a good analysis like here. However buyers need to be very cautious, become sometimes their emotions get the best of them, and they are tempted by that really nice up market vehicle, and before they know it they have a high payment. Lastly, it might make sense too to lease or purchase new sometimes, if you can get a low-cost high gas mileage car, with low maintenance versus keeping the a low gallons per mile car with constant repairs, but only again if you do the analysis above. Be extremely careful leasing, watch your mileage limit and talk to many advisors before doing it, because after the car is delivered it is almost impossible to get out the deal later and you will be stuck with payments for the duration.
Author, speaker and friend Mary Hunt of Debt Proof Living asked me recently to write an article about Credit Default Swaps, and I thought that was a great idea, and while I was at it, I thought I’d expand the subject to address complex investments in general.
The simple answer to this question posed, is yes they are worthy of consideration. Some of them may be wonderful investments. Many experts think that If you don’t understand it, don’t buy it. So before you invest in something, be sure to read everything you can get your hands on, both negative and positive. Also, talk to the person selling the investment and others that don’t have a personal interest, at length until you understand them before purchasing.
First of all, what is a complex investment? All investments, no matter how simple it is, has many levels of risk not just the conventional different types of risk. Firms will often try to manage these risks to provide a higher rate of return, and here’s the catch, with less risk. They attempt to do this with a whole host of mechanisms that they think will be triggered to help them earn the expected rate of return or minimize risk. The people that build complex investments are really smart and they can, through all types of mathematical probability testing, illustrate how their system will work. However, time and time again these smart guys weren’t smart enough to predict all factors of the future, because as Yogi Berra says “Prediction is very hard, especially about the future.” The darker side of these investments is that intellectual integrity is sometimes compromised by the motive for profits.
The other types of complex investments that warrant much caution are those that have special tax angles, many moving parts to manage, or have an insurance element. Investment of these types such as real estate, retirement plans and life insurance and annuity products can be very good, but require careful consideration first I think. My friends in the insurance industry may object to this point of view, however let me first state I like many of their products, but most of the people who contact me who are most upset over their investments, have either investment real estate or insurance products. Again, if people choose these, they would be best to understand all aspects of their ownership first and purchase them from professionals who take the time to educate and serve them for the long-term.
Commodities and derivatives are also investments that warrant extreme caution, since they have a high potential risk of loss of the entire amount invested. Commodity investing usually entails purchasing metals or agricultural products at a low price and selling them later at higher price. Derivatives are contracts between parties that specify conditions, under which payments would be made, if the conditions are met. The derivatives contracts can involve stocks called stock options (called puts and calls), commodities and even credit (bonds). All derivatives should be considered high risk, and only for very wealthy and sophisticated investors. Credit Defaults Swaps are a type of derivative that can be purchased for multiples of millions, and are a form of insurance often used to protect bond holders if they are defaulted. The problems that have arisen around CDSs are that they were sold to investors for a very low price and didn’t reflect or communicate the true costs and risks involved. Rating agencies rated bonds higher than they should have, and the insurance premiums were too low. Investors were attracted to them because they were told the risks were low and the rates of return were higher than they could get in investment of a similar risk. There are trillions of dollars invested in CDSs, maybe not by you, but by institutions you work with, and could lead to further economic turmoil if they further weaken.
Should I refinance our mortgage to get a lower interest rate? The old rule of thumb was if you are going to stay in your home for a few years, and interest rates drop more than your current rate by 1%, then it will be worth your while to refinance. Meaning since there are closing costs, it may take a few years to make up those costs, with the new lower payment. Ask your mortgage lender to run this analysis for you. You can run them yourself too with the wonderful calculators at DinkyTown.
I have heard about low closing costs mortgages? The last few years many lenders offer mortgages without any fees. They waive some of the costs, such as points and various other fees like the title insurance and inspection costs. They might still have an application fee, which in my experience averages about $500 – $250. These are really nice, because as long as you can lower your interest and thus your payment, and there is not a big fee to overcome, then you can justify refinancing even if staying in your home for a short period of time. Keep in mind, the lender has to make up for the fees they usually charge, so they charge a little higher interest, probably about .25 more.
What else should I think about before choosing to refinance? Make sure that you get quotes of all costs from a few good lenders prior to making your decision. Have the lender run full cost calculations of the options you are considering before you choose. Secondly, compare that analysis to a calculation of the all costs of your current mortgage from now until completion, that way you can see the true net total costs. Lastly, don’t just pick another 30 year mortgage. For example if you are 50 and have 22 years left on your mortgage, don’t just go with another 30 year term or you will be paying until you are 80. Try to always shorten your mortgage to 20 years, 15 years (as Dave Ramsey always suggests), or less.
Is it easy to refinance? If you have a great credit rating, low other debt and overall good debt to income ratios, then it will be okay, if not expect a longer more difficult process. Real estate people I talk to say the mortgage process is much slower now than ever, so be prepared for a long time to process the paper work.
Is there any benefit to staying with the lender I already have my mortgage with? Some lenders will offer existing clients a low-cost and low rate mortgage and may even not have as stringent underwriting, this is a plus considering my comments above. However it is my experience the interest rate is a little higher than the most competitive rates available.
Are there other costs and things to be mindful of? There are many, so talk to your professional advisor prior to jumping in. A couple of things I think you want to be mindful of are escrow and the new paperwork you will sign. Sometimes the escrow account used for real estate taxes and insurance may have to be adjusted, this could result in requiring of up front cash (or could be added to your mortgage), and/or monies paid out. If you receive money, don’t spend it, put it in savings, pay off debt or maybe better yet, use it pay on the principle of your new mortgage. Also due to the mortgage crisis, I have heard some new mortgage documents have wording in them that may be more restrictive to the borrower. As with all contracts that you sign, be sure to always have an attorney read everything prior to signing.
Dave Ramsey in his Financial Peace University class advocates that in order for people to pay off their non-mortgage debt like credit cards, car and student loans, that they should get the Gazelle mentality: temporarily cut back on all expenses, get second jobs, and stop funding their 401k and devote all disposable income to repaying all debt as soon as possible.
However, a lot of people ask 2 questions: “we have funded our $1,000 emergency fund (Ramsey’s Baby Step #1), and have debt to yet to re-pay. Should we forego all of our 401k contributions, and miss out on the employer match? Secondly after we have paid off all of our debt, and begin to fund our 3 – 6 months of emergency savings, wouldn’t it make more sense to resume funding our 401k that provides a nice company match (which equates to an instant 100% return) and invest it in the 401k plan’s mutual funds, instead of a savings account that earns hardly anything.”
Debt is bondage, and the sooner the better for getting out of debt; so that people can enjoy the freedom of being debt free. There is also a behavioral angle, even though it might make more sense to keep contributing to the 401k mathematically, some people might not be able to stay on track to becoming debt free as easily if they don’t stop the 401k. This makes sense, however I think it also is important to analyze the mathematical outcome, so that someone can make an informed decision. How do you analyze this? The actual calculation is complex, because you have to take into consideration such things as taxes, rates of return, debt interest rates, time-value of money, and long-term accumulations on the 401k. I don’t know of any software that will run this, shy of buying incredibly complex cash-flow software. However, I think you can still make an educated estimate. Start by first running 2 debt-snowball analyses; one with the amount that would have gone into the 401k and one without it. Comparing the two will show you how many years it takes to be debt free, how much money you would save if you didn’t wait, and when you can resume funding the 401k. Then calculate how much the employee’s and employer contribution into the 401k would have been had you stopped funding the 401k, plus the growth on the money you expect to have. For one individual I ran the analysis for, if he would have funded the 401k instead, the difference in interest savings on the debt versus accumulation in the 401k was about 1,600 more in the 401k in 5 years. This does not take into consideration the lost income tax savings of not funding the 401k or the long-term accumulation on the 401k. Also, for this person the debt amount was very large (over $100,000), and the loans were mainly low-interest rate student loans. This kind of analysis is just a start, the individual should also examine their tax situation and talk to any other financial advisors that you may have before making a decision.
The second question, is should we fund the 3 – 6 months of emergency savings (Baby Step #3) that earns no interest, and wait to fund the 401k? Financial Planners recommend putting savings into accounts that are low risk and easy to get to like Money Market Accounts, for emergencies like long-term job loss, even though it earns hardly any interest. If you take money out of the 401k there will be income tax + 10% pre-59/12 tax penalty (sometimes waived if hardship), the other risk is pulling money out the 401k might occur during an inconvenient time when the market is down, and experience an investment loss. Some 401k plans though provide access to some of the funds without penalties, through loans if you are working for the employer that provided the 401k.