Dave Ramsey Super Saving (Class 1 of 13)

Last night I presented Lesson 1 of 13 in Dave Ramsey’s Financial Peace University at our church. In this first lesson, Dave presents the general outline of the course (the seven baby steps)

1) $1,000 in an emergency fund ($500 if combined family income is under 20,000)
2) Pay off all debt except mortgage using the debt snowball
3) Complete emergency fund containing 3-6 months expenses
4) 15% of your gross income into a pretax retirement plan
5) Save for your children’s college education
6) Pay off your mortgage early
7) Build wealth and Give

In order to accomplish all these worthy goals, one must first develop a habit of adding to savings every month. Unfortunately this is a novel idea in a culture that has been programmed to spend first then pay. Accumulating debt turns the power of compound interest against the consumer.

The first step in breaking this pattern is setting a goal of $1,000 in an emergency fund. Breaking the chains of spend then pay is so important that Dave Ramsey recommends taking a temporary part time job or selling household items on Craig’s List or a yard sale to reach that goal in 30 days or less. An emergency fund is for emergencies only. Its purpose is to cushion a household from unforeseen events, like unexpected automobile repairs. This is much better than paying for the emergency with plastic money at a rate of 18%-24%.

Dave Ramsey also introduces the idea of saving and then paying cash for depreciating assets such as furniture and automobiles. I have always paid cash for such items. It was the way I was raised, but most Americans believe they will always have a car payment even if they pay cash for furniture, clothing, vacations and other such items.

Finally, Dave Ramsey introduces the third reason for saving money, seed capital for investments. In order to make money one must first have money. Investing, even a little money, consistently over a long period of time turns the power of compound interest in your favor. A number of Suze Orman type Starbuck’s examples are presented. Investing $100 a month from age 25 to 65 (a normal working life) at 12% in a growth stock mutual fund will build up to over $1,156,000. The bottom line is that every American household has the potential to build significant wealth with consistent disciplined effort.

Early in presentation, Dave Ramsey takes time to examine unhealthy attitudes towards money, typically money and people who have money are evil. Dave Ramsey points out that there are rich selfish jerks and poor selfish jerks just as some poor people are generous and saintly and some rich people are generous and saintly. He builds the case that money is just money, an amoral commodity. Evil and good come from the hearts of those who use it.

A metaphor that I find useful compares money to energy. I believe I first heard Maria Nemeth use this example, although she attributes it to Joseph Campbell. It takes a lot of energy to bring money into your world. Your time, physical exertion, mental exercise, and emotional energy are all stored in your money. It is potential energy, like a battery, that can be used in any device you choose. If you choose not to control it properly, like electricity your money can go where you do not want it to go. The results can be shocking, even fatal.