Debt is Slavery, My Favorite Chapters

Introduction

I thought the introduction of this book was very well done as it provides some background information on both the author and the history of money.  Mihalik’s father passed away when he was just 13, which explains the subtitle of the book.  Like most of us raised by a struggling single parent, or by two parents that were bad money role models,  Mahalik made some bad choices early on borrowing heavy debt loads while in college and immediately thereafter.  It reminds me of my own story of borrowing money to finish school, and then borrowing money to pay for various life expenses when I was newly married because we were living beyond our means.

The introduction also includes an excellent section on how to select a teacher for the world of finance.  Two basic questions are really the key to this section:  Have they done what they are teaching?  Do they have your best interests at heart?  If the answer is no to either of these questions you ought to move on.

Chapter 2:  Time May Not Be Money, but Money Definitely is Time

I think the technique of converting purchases into hours worked is a great one.  Let’s assume you bring home $12.50 an hour from your current job.   A new Nintendo Wii game just released and retails for $49.99.  Are you willing to work half a day at your job to pay for a video game?  The seriousness of that question grows as you consider larger, more expensive purchases.  Let’s say your local bike shop has an awesome deal on a mountain bike you’ve had your eye on–$600 and you can ride it home from the store.  Earning $12.50 an hour it would take you over 40 hours to pay for that bicycle.  That is a week’s worth of full time employment.  There are only 52 weeks in a year.  Are you sure you want to give up one of them for a new bike?  So you see how converting the price of something to hours worked can be an effective strategy to weed out the needs from the wants.

Chapter 6:  Don’t Sell Your Soul for a Salary

I sold my soul for a salary for a long time (and not a very good salary, I might add!).  I worked for a credit card processing company, and I just hated my job.  It was a toxic environment, I didn’t believe in the work I was doing, and I was all-around miserable.  Why was I there?  Because I thought at the time it would lead to something better – more money, more perks, etc.  In this chapter Mihalik looks at the various reasons why we choose the jobs we do, and why we stay there when things go bad.  Lesson learned:  Do not choose a company/profession/position for the money–choose it because it is something you love to do.  And if you find yourself working in a job you hate, find a way to change and fast.

Chapter 9: Save 50 Percent of Your Salary

I’ve written about the 50 Percent Savings Plan before, and when thinking about it I find myself wishing I had a time machine to go back and start the plan in my twenties.  At the moment I’m devoting a large portion of my earnings to debt repayment, so saving half of my income is not feasible.  However, I fully intend to save 50% when I’m debt free.  For every year I accumulate half of my earnings I’ll earn one year of financial freedom, without a change in lifestyle.  Pretty cool idea!

Conclusion

Debt is Slavery was a short, enjoyable read with tons of nuggets of wisdom on repaying debt, living frugally, and finding financial freedom.  At around $10 on Amazon.com I consider it a steal.  It’s going on the bookshelf at home, which is rare for most books I read.  I typically send them back out into circulation via eBay, or just check them out at the library.  But not this one–it’s a keeper.

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This book is easily worthy of my first-ever giveaway here at Frugal Dad.  If you would like to receive my autographed, gently-handled copy simply leave a comment on this post and be sure to include your email address so I can contact you.  Comments will remain open until next Sunday (April 20th) at 12:00pm (eastern time).  I’ll use the handy list randomizer at Random.org to select the lucky recipient and ship your book as soon as we confirm your address.  Now, here is a quick review of my three favorite chapters from the book.

A Sneak Peek Inside The Ultimate Cheapskate’s Road Map to True Riches

Chapter 2:  Fiscal Fasting

Yeager’s fiscal fasting idea is a bit more extreme than my 48-hour spending fast,  but the rules are the same.  For one week participants must not spend any money that is not absolutely required for life or career-sustaining needs.  No shopping, no eating out, and if you are hardcore, no utilities!  The thought of going a week in some parts of the country with no air conditioning is daunting, so plan accordingly, or stick to the beginner’s level.  I did pick up another book idea from this section, Children of the Great Depression, by Russell Freedman.  Yeager included it on his recommended reading list for your family’s fiscal fast – since you won’t be watching much television or going out for entertainment.

Chapter 3:  Six Golden Rules for Ruling Your Gold

“Gold nugget #1:  Live within your means at thirty and stay there”.  What a great concept!  So many people spend right up to their income, even as their incomes increase.  Applying this golden rule, your spending levels and the amount you “live off” at 30 years-old would never increase.  Any additional income you earn would be used for saving towards financial independence.  Since I just recently turned 30 myself I guess I can kiss any future raises goodbye – thanks Jeff!

Chapter 5:  Buy a Home, not a Castle

How relevant is this advice in the current housing market?  Many people who find themselves in trouble today bought more house than they could really afford, thanks to creative financing from questionable lenders and overconfident borrowers.  Yeager’s advice in The Ultimate Cheapskate’s Road Map to True Riches is to buy a starter home and finish there.  I agree.  So many people are in a constant search for something bigger and better, particularly when it comes to real estate.  What a revolutionary idea – buy a home you can afford, pay it off early and remain there mortgage free.  Actually, this isn’t all that revolutionary.  As Yeager points out, it is the way our grandparents bought real estate a few decades ago.

The Ultimate Cheapskate’s Road Map to True Riches is a definite buy, two thumbs up!  In fact, I liked it so much I almost backed out of my giveaway, but I’ve taken good notes and in true frugal fashion would like to pass it on to someone else who could benefit from the advice.  Don’t forget to leave your comments for a chance to win an autographed copy!

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A Look Inside Kiss the Rat Race Good-Bye

Chapter 1: Here Today…Where Tomorrow?
Are you one of those people who put their dreams on hold to pursue a “safe” career? I wrote about this myself a while back, and I think at some level we all are guilty of doing this at some point in our lives. Unfortunately, it isn’t a realistic expectation that everyone in the world can realize self-actualization in their careers from the very start. For most of us, work involves toiling away at the daily grind to pay necessary life expenses, provide for our families, and save for a rainy day. However, at some point we should all aspire to break free from the rat race and do what it is we believe we were put here to do. If you personally believe you were put on this earth to sit in an office nine hours a day and create reports on widget production then congratulations – you probably won’t have a hard time realizing your ultimate dreams. For the rest of us financial independence comes with the promise of blazing our own trail, setting our own schedules, and doing work we love.

Chapter 2: Life Begins at…
This was by far one of the book’s best chapters. Author Elizabeth Lewin establishes the ground work for creating different kinds of goals: short-term goals, medium-term goals, long-term goals, lifestyle goals, and financial goals. Each type of goal has a different time line associated with it, but each is establish through the same methodical approach described by Lewin in Chapter 2. If you need to brush up on your goal-setting or finishing skills this is a great section for you.

Chapter 3: Up Your Assets
As I mentioned in my 7-Day Turnaround series, the first step of determining direction with any new plan is to establish a starting point. Lewin describes in Kiss the Rat Race Good-Bye her ideas for “gathering the data.” This involves taking inventory of all important financial accounts related to your assets and liabilities, and Lewin includes a handy checklist for recording this inventory. After identifying each type of account as an asset or liability you can put together your personal balance sheet, a task Lewin suggests readers do at least once a year.

Chapter 4: You Can Design Your Life-Style
The most significant thing keeping most of us from retiring early is the lifestyles we have chosen. By saddling ourselves with debt, expensive mortgages, car loans and student loans, the idea of retiring early is a pipe dream. After all, we’ll need to work fifteen years just to pay this stuff off and get back to zero! Lewin makes the point in this chapter that is the lifestyle you choose that has the most impact on whether or not you will be able to make an early exit from the rat race. There are some great tips in this section on setting up a budget, monitoring your cash flow and quite a few money-saving tips as well.

Chapter 5: Managing Your Debt
The opening sentence of this chapter is, “Buy now, pay later.” Might as well be the mantra of the average credit card user. Some are responsible and paying for it “later” means when the bill arrives. Others take “later” to mean some point in the future after interest and fees have doubled the initial cost of that single item bought years earlier. Lewin presents an eye-opening statistic on debt levels at the time this book was written.

When the Diner’s Club card was started in 1950, the total outstanding consumer debt (excluding home mortgages) of the American consumer stood at $21.5 billion. Forty years later, the figure had reached $750 billion.

Now that’s a sobering statistic! Obviously this amount of debt is disproportionate to the population growth during this period, so something else has to account for the staggering increase in American’s debt loads. That “something” is spending. We have bought and swiped ourselves into a financial hole that many will never dig out from. Nothing can derail your plan for an early retirement like amassing large amounts of debt.

Chapters 6-16
The next ten chapters covered many of the same topics you will find other personal finance books. I have consolidated their review here not because there is nothing remarkable, but in the interest of time (mine and yours), and because these are fairly standard sections in any book about money. Of course, this book introduces all the concepts with an added sense of urgency since the ultimate goal is to get us out of the rat race within the next decade or two. Topics covered include social security, corporate pension plans, company and other tax-deferred plans, saving and investing, mutual funds, investing for college, insurance, estate planning, and record keeping.

Chapter 17: Putting It All Together: Real-life Scenarios for Kissing the Rat Race Good-Bye
The final chapter of Kiss the Rat Race Good-Bye was an inspiring summary of the plans detailed in previous chapters. The last chapter provided some real-life scenarios of people who had managed to reach their goals of financial independence in ten to fifteen years. It’s always nice to hear of others who manage to break free from the rat race. It makes the very idea a little more believable to those of us who have a hard time imagining what life would be like without doing the corporate shuffle five days a week. I recommend this book for anyone not doing the work they love, or hoping to step away from the rat race to pursue a more fulfilling calling free from financial concerns.

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A Look Inside Generation Debt

Chapter 1: Why Do We Have So Much Debt, Anyway?
Author Carmen Ulrich focuses much of this first chapter on the costs associated with obtaining a college degree. College costs continue to skyrocket and kids and parents are struggling to keep up. Most are turning to student loans to finance the degree. This is leading to a whole new generation of young adults graduating school owing thousands of dollars. I picked up a few student loans myself the first two years of school, and then worked my final two or three years to finish up. If I had it to do over again, I would have worked the entire time and skipped the student loans.

Chapter 2: Get a Grip. Set Goals. Make a Plan.
This may be the book’s best chapter where Ulrich helps readers separate needs and wants, an important exercise for anyone struggling with their finances. Other topics discussed in this chapter include delayed gratification, budgeting, and the creation of an overall financial plan. I appreciated Ulrich’s tone in this section, not overly preachy like some financial gurus tend to get around the subject of budgeting, etc.

Chapter 3: Master Your Student Loans
Like the first chapter mentioned, thanks to rising costs of a college education, most students graduate with large amounts of student loan debt. This chapter walks readers through the various types of student loans available, the payback options for those who discover they can’t afford to repay, and provides an explanation on the popular consolidation method. I also found the section on student loan cancellation scenarios helpful for those who find themselves deep in student loan debt with minimal starting salary job offers. Military service, or an agreement to teach in an inner-city school district, may come with the perk of loan cancellation.

Chapter 4: The Potential Prison of Credit Card Debt
What financial book on debt wouldn’t include a chapter, or entire section, devoted to credit cards? Generation Debt provides some important background on the use of credit cards over the last few decades. One of the statistics I found most compelling was that “in 1970 the average card holder owed $185.” Compare that to the $8,000 or so the average household has in credit card debt. It’s obvious that the credit card’s marketing campaigns have worked, and carrying large, revolving credit card balances is now the norm in most families. What a sad commentary on our society. We have become a bunch of over-indulgers, buying up things we couldn’t afford to pay for at the end of the month. The remainder of the chapter goes on to explain the mechanics of credit card use, and includes a section on Consumer Credit Counseling Service and bankruptcy law.

Chapter 5: To Rent, Perchance to Buy
Home ownership has long been touted as the American dream. Unfortunately, for many that dream has become a nightmare in the last few months. A booming housing market has come to a screeching halt, thanks in large part to the subprime mortgage lending community who doled out loans to people who couldn’t afford to repay them. Consumers bought into the idea and snapped up properties they knew they couldn’t afford without “creative financing.” If you cannot afford home ownership, or are planning to move in a couple years, or are not sure about the stability of your job, there is no shame in renting. What a timely message from Ulrich in Generation Debt. Somewhere along the way “renting” became a dirty word. Realtors and banks sold consumers on the idea that renting was “throwing your money away.” Why rent when you could buy? Ulrich makes a strong case for renting, but concedes that it is time to buy if you “got a great promotion, love your city or town and you’ve decided to stick around.” The remainder of the chapter provides an excellent overview of mortgages, down payments, closing procedures, and real estate taxes.

Chapter 6: The Need for Wheels
Home ownership may be the American dream, but cars remain American’s first love. There is something about owning a car that makes us feel free, and the bigger, the faster, the sexier, the better. Of course all this comes at an enormous cost. Next to our homes, cars and their associated costs make up most household’s second largest expenditure. Generation Debt walks readers through the maze of car buying options: new or used, lease or purchase, trade-in or private sale, extended warranty or no warranty. I agree with most of what Ulrich has to say in this chapter, but I personally would have put more emphasis on the idea of buying used, and driving it until the lug nuts fell off! Too many people tie up their incomes trying to impress people at a stoplight.

Chapter 7: Honor the Tax Man
Yes, death and taxes are the only real certainties in life. This chapter is a great introduction to the payroll tax system, explaining how W-4s translate to the tax man getting his “fair” share out of each paycheck. I’ve always said that if taxes were not automatically deducted from worker’s paycheck, and taxpayers had to sit down every week and write out a check for 28% of their pay, we would have a tax revolt in this country. But, since Uncle Sam takes his portion right off the top we barely notice. This chapter emphasizes the importance of paying your taxes on time, whether you agree with them or not. Ulrich provides younger readers (and older ones who still don’t understand much about taxes) with an excellent overview of deductions, available credits, and ways to legally minimize your taxable income through pre-tax contributions to 401k plans.

Chapter 8: The Golden Net of Insurance
Insurance is one of those necessary evils in life. Ulrich walks readers through the importance of health insurance, particularly for young adults just beginning to start a family, but otherwise feeling invincible. Many young people are afflicted with illnesses that can crack and scramble a young nest egg. Health insurance costs have been on the rise, but it is just too big a risk to skip this coverage, particularly if you have the opportunity to join a group insurance policy through an employer. I really could have used this when I was 22 and signing up my young family for my employer’s health insurance. The options for health, dental, life, long term disability, short term disability, etc. were all a little overwhelming. Again, this is a time when I could have benefited from a book like Generation Debt, where many of these options are explained in a way a Gen X or Gen Y reader could easily grasp.

Chapter 9: The Magical 401(k)
There are few plans out there with the kind of wealth-building power as the 401(k). I know it is hard for twentysomethings to think about a retirement some forty or fifty years away, but if you start early it is possible to become extremely wealthy over the years thanks to tax-deferred compounding growth. I wish I had started contributing to my 401(k) and Roth IRA at twenty years old! I like Ulrich’s plan of paying off “bad” debt, or debt with interest rates above nine or ten percent, before you begin to invest. However, if you have low-interest debt, such as a mortgage or student loan, continue to pay on that debt and simultaneously make contributions to saving plans.

Chapter 10: A Pricey Future
All indications point to costs continuing to rise, so now more than ever it is important to get out of debt (and stay out), save a significant portion of your income, and keep costs low. Ulrich shares with readers her wishlist of reform she hopes to see in the coming decades. Here are a couple of my favorites:

• Expand access to health insurance for part-timers and/or expand dependent coverage for young people who do not have their own insurance, but are no longer eligible for coverage under their parent’s plan.
• Make student loan deferments longer (a year or eighteen months, instead of the existing six month grace period after graduation). This would allow graduates a longer period to get on their feet before larger student loan payments came due.
• Require more personal finance education in schools. I think this one may be the most important. If we did a better job of teaching our kids the principles of sound personal finance, and prepared them for the dangers of credit cards, car loans and other financial traps, perhaps they would be better prepared to go out in a world full of financial pitfalls.

Again, I believe Generation Debt would make an excellent read for any young person starting out in a new career, or just beginning to think about college options. Personally, I think this book and The Total Money Makeover make excellent graduation gifts for a loved one, because they reinforce sound personal finance concepts, and provide information in an entertaining way that sits well with young people. Some personal finance books make you think the author is some stuffy finance professor talking down to you over his glasses. Generation Debt is a relatively short read at 241 pages, but is packed with great information for any young person hoping to get a better understanding of the principles of personal finance.

Check out my other book reviews in the 52 Books in 2008 Series.

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Getting a Life

The first 100 pages or so of Getting a Life are dedicated to recounting the former extravagant lives of the authors, and the various motivators that precipitated their adoption of a more frugal lifestyle. The introduction of the book was written by Joe Dominguez, author of Your Money or Your Life, and it may have unfortunately been his last. Dominguez died in January of 1997, but as the authors eloquently state in their dedication, “his work and message live on in these pages and in the transformed lives of program followers throughout the world.” Indeed it does.

To give a detailed review of this book would be highly redundant to the one I provided for Your Money or Your Life (YMOYL), as many of the principles are the same. YMOYL was a relatively quick read for me, while Getting a Life took a bit more mental energy to work through. The book is riddled with examples of people who have successfully applied the YMOYL principles – almost to the point of overkill.

I enjoy books with personal examples sprinkled in because it makes the author’s advice more palatable - sort of the, “If they could do it, I could do it” line of thinking. However, I found most of the examples in this book difficult to relate to. Many of these referenced had high-flying jobs in corporate America and simply decided to walk away, selling off many of their possessions and living on the earnings they had managed to accumulate through the years. For us “regular Joe’s” out here in middle class jobs with a wife, two kids and a dog to feed walking away doesn’t seem very feasible. Now, in most cases the loss of full time employment was replaced with part time work, or consulting. I guess this makes the idea a little more believable, but certainly not any more attainable in my current situation.

If you enjoyed Your Money or Your Life and want to read some follow-on material related to the principles first introduced by Joe Dominguez and Vicki Robin then I think you will enjoy reading Getting a Life. If you finished up YMOYL and decided you had your fill of the “living simple” message, this might be a little overkill. Weighing in at 342 pages it makes for a long read, but one that is full of real-life examples of people who have had their lives successfully transformed by Your Money or Your Life.

Check out my other book reviews in the 52 Books in 2008 Series.

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The Lies About Money

Chapter 1 – The Importance of Saving Regularly
People used to invest to make money. That seems logical, and fundamentally speaking that approach hasn’t changed much over the last thirty or forty years. However, with the disappearance of company pensions, and the questionable solvency of social security funds, many folks are now concerned with making enough money from their investments. Edelman breaks down retirement investing in four basic steps:

1. Save regularly
2. Hold your investments for very long periods
3. Build a highly diversified portfolio
4. Periodically rebalance the portfolio

The remaining portion of chapter 1 goes on to explain in detail the benefits of allocating to a diverse portfolio, making regular contributions, and scheduling periodic rebalances of your retirement accounts.

Chapter 2 – The Academics Behind the Strategy
This is the nuts and bolts behind the strategies Edelman and his team of financial planners use at Edelman Financial, the firm he and his wife Jean founded. Math nerds will delight in some complex formula sets used to describe calculations for rate of return, average returns, risk, and risk comparisons between two investments.

Chapter 4 – The Demise of the Retail Mutual Fund Industry
If you are new to the mutual fund industry, or haven’t been watching the news for the past four years, this chapter is a great reminder of the causes behind the fall of the once powerful retail mutual fund industry. Edelman leads off the chapter with the top 25 reasons why the industry collapsed, and many are very astute observations of an industry gone bad. The remaining 44 pages in Chapter 4 are dedicated to recounting the timeline of scandals from October 2003 to May 2007. It’s evidence enough of gross mismanagement that it took 44 pages to list all the major scandals from that three and half year period!

Chapter 8 – Three Important Insights to Insure Your Investment Success
At this point in The Lies About Money you have a solid understanding of how to beat the retail mutual fund industry at its own game, and how to build a well-diversified portfolio for long term investment growth. Chapter 8 provides three “crucial insights” to successfully manage those investments over the long term.

1. Never Let Your Investment Decisions Be Determined by Taxes
2. Never Let Investment Decisions Be Determined by Fees
3. Keep Your Portfolio Consistent with Your Current Circumstances

Chapters 9 – 14 – Applying This Strategy to Your Employer Retirement Plan, Saving for College, Investing for Income, Life Insurance, and Variable Annuities.
Each of these investment types are discussed in detail and an effective strategy for investing in each is developed based on the principles discussed in earlier chapters. I particularly liked the chapter on saving for college, because I personally believe 529 College Savings Plans are headed for a similar demise as the the retail mutual fund industry. They started off strong, but lately many states have taken a beating over offering limited investment options and high management fees. Sounds all too familiar.

Throughout the book readers are introduced to the Edelman Guide to Portfolio Selection®, Edelman’s self-developed maze of questions to workflow you to one of 43 recommended portfolio allocations. I do like the implementation of this guide as the questions appear as footers throughout the book with answers leading you to other pages with a new set of questions. It reminded me a little of first generation computer games, or those self-directed stories where by choosing different options the reader is lead through different storylines.

My overall impression of the book was good. I’ve seen Ric Edelman speak on PBS and CNBC as a participant in money makeovers and discussions on the broader market. I tend to agree with most of his advice when it comes to investments, but we have slightly differing opinions on general finances. In past books he has advocated going into debt for what he deemed justifiable causes. I generally don’t advocate going into debt for any reason, accept maybe buying affordable housing. That said, I thought this book was an outstanding read on mutual funds, their history and their future. Mutual funds have always been one of the tougher investment vehicles for newcomers to understand. The Lies About Money offers a comprehensive introduction to the industry and the strategies needed to successfully invest in them, and their cousin – Exchange Traded Funds (ETFs).

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The Maui Millionaires

It’s hard to imagine an event that goes for $30,000 per couple being sold out over a year in advance. That is the case with Maui Mastermind, a wealth retreat founded by authors David Finkel and Diane Kennedy. During this week-long retreat clients network and form “mastermind networks” to bounce off business ideas and to form partnerships. Of course, I don’t anticipate ever attending one of these events, so I thought the book might be the next best thing, as the authors have pitched the book as the “inside secrets” of this wealth retreat.

Instead of walking through the book chapter by chapter, or section by section, I’m going to take a different approach and present the five most thought-provoking ideas I found in the book. This book reads a little bit differently than other personal finance books. Sure, there are five steps laid out for the readers guaranteed to help you discover wealth, but around those specific steps are some noteworthy insights into what it takes to become financially independent. I also found the steps themselves to be full of sales pitches for the Maui course itself and references to other author materials.  It seemed like every other page’s footnote was pointing you to their website.  Not a big deal, but a bit distracting.  Now, for the five most important ideas I took from the book:

1. “One of the greatest wealth skills you can ever develop is learning to get comfortable with the feeling of uncomfortable; learning to not be so afraid of feeling afraid. ” This is so true – to grow we must get out of our comfort zones and be willing to try new things.
2. Where do our ideas about money and wealth-building come from?
   1. The parents who raised us
   2. Friends and family
   3. Teachers, coaches, and other adults of influence
   4. Cultural influence of media that we were exposed to growing up
   5. Societal influences
3. Our opinions, beliefs and convictions about money are formed at a very young age. A great example provided by the authors was a child asking his parents for money.  The parents were ashamed that they couldn’t help, but responded with anger that the child would even ask.  The child remembers the pain associated with that experience and grows up with a fear of ever asking anyone for help again.
4. The concept of  “timeline reframe.” Pretend you are watching a movie about your life and remember a particularly painful childhood experience.  What could the adult you tell the young you to help provide some comfort?  That’s the concept of timeline reframe – using the experience, wisdom and insights you’ve gained as an adult to heal wounds created when you were younger and didn’t have that toolset to deal with issues.
5. Your Wealth Operating System (which is really just your collection of beliefs about wealth-building), typically mirrors that of the five people you spend the most time with. To upgrade your W.O.S you must surround yourself with successful people whose W.O.S. is in alignment with yours.

The Maui Millionaires is a great collection of wealth building advice, sprinkled around marketing for a website and a wealth-building retreat.  If you can ignore the marketing materials and pull out some of these great nuggets I think you will enjoy the book.  If you are the type that gets hung up on footnotes and subtle sales pitches this book probably isn’t for you.

Check out other book reviews in the 52 Books in 2008 Series.

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Chapters 1-5: Debunking Financial Myths

In Denial. The number one reason people refuse to change is because the refuse to accept they are in trouble to begin with. Even those with just a small amount of debt refuse to accept they are in debt and work to kill off what they owe. Instead, they just kind of wander along through life with no goals of ever improving their financial lives.

Debt Myths. Thanks to a billion dollar banking and credit industry we have been sold on the idea that debt is normal. “Everyone has to have a car payment” and “you can’t buy a house without a mortgage” are commonly accepted ideas regarding debt. It’s Dave Ramsey’s assertion that we don’t have to live with debt, we simply need to deny ourselves life’s latest toys and save for those that we do want to buy. The bumper sticker on my old truck best sums up this section of the book: “Debt is normal. Be weird.”

Money Myths. This section reminds me of the old phrase, “Money is not the root of all evil, the love of money is the root of all evil.” In other words, money is not the answer to all life’s problems, but it can make life easier if we use it wisely.

Financial Ignorance. Our public education system has done a particularly poor job of giving our youth a solid financial footing before setting them out in the real world. Unless these kids have financially-savvy parents they grow up ignorant on how to manage their finances. I was in this category – though I wouldn’t call myself ignorant, just confused. I sort of floundered throughout my 20’s when I could have been building a fabulous foundation for my family.

Got to Keep Up With the Joneses. Financial peer pressure is a net worth killer. We spend more time, money and energy trying to keep up with others than we do appreciating what we have. This is particularly true of young people. As you get older, you start to develop an “I don’t really care what other people think” attitude. This is the attitude that sets you free, financially. Quit trying to keep up with the Joneses – they’re broke, too!

Remaining Chapters: The Baby Steps

The remainder of The Total Money Makeover outlines Dave Ramsey’s plan for making over your finances in seven “baby steps.” The “baby steps” theme comes from that old Bill Murray movie, What About Bob. Remember, his therapist (Richard Dreyfus) convinces him to take “baby steps” to break through his paralyzing fear of the world. Ramsey’s baby steps start with saving a beginner emergency fund and end with investing for wealth. Here’s more on the baby steps:

1. Save $1,000 in a Beginner Emergency Fund. Until you put some separation between you and the financial cliff you’ve been dangling over the last several years you will never succeed, financially. $1,000 isn’t a lot of money these days, but it is enough to cover most car repairs and replace broken appliances. This baby emergency fund should be kept ultra-liquid, and easily accessible. A good place to start is at your local bank account or credit union. Do not “invest” this money; this fund is for emergencies only.
2. Develop a Debt Snowball. Forgetting interest rates and annual fees for a moment, Ramsey advocates lining up your debts smallest to largest. Make minimum payments on all the debts, and attack the little one with every extra dollar you can squeeze from your budget. When that smallest debt is paid off move on to the next one, combining that debt’s minimum payment with the amount you were paying on the first debt, plus any extra you can squeeze from the monthly budget. In this way, each time you move up a debt your “snowball” gets larger and larger. By the end of the your debt snowball plan you could be making monthly payment well in excess of $1,000 a month towards a car payment or large credit card balance.
3. Save 3-6 Months of Expenses in an Emergency Fund. Now it’s time to beef up the emergency fund you started in Baby Step 1. Calculate 3-6 months of expenses (not income) and use that as your savings goal. If you are single, or married with only one income, lean towards the 6-month figure. For most families their goal amount should be around $10,000 in a high-yielding savings account. *Note, step 3b is to begin saving for a large purchase, such as a down payment for a home or to upgrade a car with cash. This should only be started after you have a fully-funded emergency fund in place.
4. Save 15% of Your Income for Retirement. If you suspended retirement contributions to get to this point, now is the time to restart those contributions. If you have an employer-sponsored plan such as a 401k that offers a match, invest up to the matching percentage, but no further. Any amount above that, up to 15% of your income, save in a Roth IRA.
5. Save for the Kid’s College. It’s important to note that this step comes after saving for your own retirement. Many parents, with good intentions, put saving for their kids’ college funds ahead of their own financial goals. This is a bad idea. They don’t offer grants or work-study programs to pay for your retirement. If you are without savings for college, there are alternative ways to fund an education. Ramsey sort of hedges here – citing that kids tend to get more out of their education if they pay for it themselves. Then again, he confesses that it is a noble goal to pay for your kid’s education. Since I personally took the student loan route, and lived to regret it, I will try to find a way to cover most of my children’s education expenses. Part time jobs aren’t all bad though, and if they develop an expensive taste for clothes or toys in college they can get a job and pay for those themselves.
6. Pay Off Your Mortgage Early. This is one of the most controversial steps because most financial experts will tell you that money spent reducing a mortgage could earn you a much better rate in the market. Maybe, but Dave Ramsey isn’t all about math. His specialty is personal finance. Without a mortgage payment, and no other debts, you can become very wealthy, very fast. Paying off all debt, including mortgages, eliminates a large amount of risk from our lives. If you are thinking of buying a house consider a 100% down plan – paying for the entire purchase with cash. If you must finance the deal, consider a 15-year, fixed rate mortgage and then work to pay it off even earlier.
7. Invest for Wealth. The final step in your total money makeover is to invest all remaining income for wealth. Without any debt payments, a large percentage of your income (your best wealth-building tool) can be invested above retirement account savings.

As I mentioned in the introduction, I credit this book with really getting my financial life turned around. I’m one of those people who loves to do things in steps. I attack many problems this way, and developing a game plan around The Total Money Makeover’s baby steps is a great way to turn around your finances. I highly recommend this book as one of my top three favorite financial books of all time.

Post by Frugal Dad

Our local library is very small, and its business and finance section looks like something out of the 1980’s with worn copies of Dale Carnegie books and the entire “Real Estate for Dummies” series. Since I couldn’t read these books for free I would have to find the next best thing.

Start with a small “hobbies” budget. To allocate money to invest in my new hobby I relied on the same budget principles we already had in place using envelopes. In November and December we set aside $40 a month towards hobbies, and since my new hobby would be reading I spent the majority of my share on [tag]books[/tag]. My wife enjoys reading magazines, so she planned to invest her share on a couple subscriptions (a much cheaper route than newsstands). I consider this money “seed capital” and an investment in the business of self improvement. Because I wanted this money to last I need to minimize my costs to purchase, and maximize my earnings during resale.

Look for books at online retailers to maximize your seed capital. Traditional brick and mortar book sellers such as Barnes and Noble or Books a Million do a great job of creating a rich environment conducive to perusing the latest best sellers. What they don’t do, typically, is offer great deals on books. Store overhead, markups, and other associated costs generally keep them from competing with bargain [tag]online booksellers[/tag] such as Amazon.com. I still love to visit Barnes and Noble and look through the books and magazines, but I usually put them back on the shelf and order online. To not look like a complete cheapskate, I recommend ordering a small coffee or other treat to support the store.

Sell books online to recover a majority of the costs. I recently provided some tips for maximizing sales on eBay. If you are not a fan of auction sites, a service like Cash4Books could work for you. At Cash4Books you simply plug in the ISBN and they make an offer for your book. They even cover the cost of shipping the book to them. [tag]Amazon.com[/tag] Marketplace offers a site to sell your books back as well, as does Half.com. With any of the sites my goal is to recover as much of the original purchase price as possible. Occasionally I flip a small profit doing this, but it isn’t going to make me rich. Besides, any money I make in the process is reinvested in “Me, Inc.”

I grew up understanding very little about the world of finance, and what I have learned can be attributed to reading books. Like Charlie “Tremendous” Jones once said, “You are the same today you’ll be in five years except for two things: the people you meet and the books you read.” Books offer the opportunity to learn on just about any subject imaginable, and using the techniques above you can do it at very little cost.

Post by Frugal Dad

• Overspenders - Overspenders, the largest of the four groups, live life way above their means. You probably know several serial overspenders in your own life. As Gallen points out, overspenders buy things they know they can’t afford, “damn the consequences.” They intentionally drive themselves further and further into debt by buying things they can’t afford in an effort to boost their poor self esteem, or relieve some unrelated anxiety.
• Workaholics – This category almost seems dated. We rarely call people “workaholics” these days; we call them “dedicated” or “hard working.” As Gallen points out, that alone is a sad commentary on where we’ve come as a working society. Workaholics sacrifice relationships with families, friends and even their own colleagues in the name of getting ahead. They justify this sacrifice with the promise of some future promotion, or partnership, that will bring them floods of money, and at that point they can “back off.” Of course, workaholics never do.
• Money Obsessives - Interestingly, money obsessives can suffer from the disorder regardless of their level of wealth. Both the broke and wealthy are equally at risk of obsessing over money. Essentially, anyone who has money at the center of their lives is a money obsessive. Many pour over spreadsheets and ledgers for hours each evening to update bank account balances, stock portfolios, or debt accounts. Not that updating your checkbook is a bad thing, but anything can become obsessive if done at the expense of all other areas of your life.
• Underearners - Underearners develop money disorders for many of the same psychological reasons Overspenders do. However, underearners are polar opposites in terms of earning and spending. They tend to shrink their world to avoid all forms of external temptation. Sure they want things too, but their reactions are much different than that of Overspender. Underearners acknowledge when the cannot afford something, and tell themselves that they could never afford it. Nice things are reserved for rich people, and they will never be in that club. Underearners would be best represented by “Eor” from Winnie the Pooh. You know the type, “Eeeee-orrrr…poor man can’t get ahead.”

The remaining sections of The Money Trap go on to provide some real world examples of representatives from each category. Gallen has consulted with people on each extreme end of the money disorder spectrum. You’ll meet some habitual overspenders, a few workaholics bent on getting ahead at their jobs at all costs, a couple who obsess over money, and a classic underearner. I found a little bit of myself in each example, particularly when I looked back at past life stages. Early in my career I was a workaholic, putting in way too many hours for the returns. I’ve caught myself obsessing over money at times (mostly the lack of it) to the detriment of relationships with loved ones. Interestingly, my underearning phase came when I was making a decent salary, but felt so broke thanks to previously accumulated debts that I went into a deep spending diet, cutting any excess from my own spending plan. I’m trying to loosen up some, but the ultra-frugal inside of me still leans towards this underearning disorder.

The final three or four chapters provide the mechanics for getting out of debt and developing a personal spending plan. I particularly like the section on developing a spending plan because it provides more detailed budgeting advice than you typically find in a personal finance book. Gallen provides detailed recommended budget categories along with a great explanation on how to determine a percentage of income to allocate to each category.

At 199 pages The Money Trap is a relatively quick read, but certainly worth it. I recommend it for anyone concerned that they may be suffering from a money disorder.

Post by Frugal Dad