Personal Financial Fitness
If you’re ready for the journey to financial peace, start with The Total Money Makeover: A Proven Plan for Financial Fitness by Dave Ramsey.
Dave’s first book, Financial Peace: Putting Common Sense Into Your Dollars and Cents, explains WHAT to do with money. It is a guide to commonsense money management that is currently used as a textbook in some high schools. The Makeover book is more about HOW to do the things described in the Financial Peace book.
Mr. Ramsey’s Seven Baby Steps
One of the most basic, parts of Dave’s collected advice is called the Seven Baby Steps. The premise is to focus on one step at a time, not worrying about the others. As soon as you achieve one, you move on to the next one.
0. Stop overspending and get current with all creditors.
(not part of the official steps, but a necessary precursor)
1. Save $1000 to *start* an emergency fund
2. Pay off all debt (except the house) using the “Debt Snowball,” paying off the SMALLEST debt first
3. Save 3 – 6 months of expenses for a full emergency fund
4. Invest 15% of your household income into Roth IRAs and pre-tax retirement
5. Save college funding for children
6. Pay off your home early
7. Build your wealth and give
He calls them baby steps, but by the time you’re at step 7, you’re at a place of Financial Peace.
Dave’s totally reasonable tips for home ownership
Now to paraphrase some bits of Dave’s advice (from a variety of sources) as it relates to home ownership:
Eliminate Debt First
Before you even think of buying a house, eliminate your other debt. First, pay off your credit cards, pay off your student loans, pay off your car. Be past Baby Step #2.
100% Cash Downpayment
Buy your home for cash. Save up until you can afford to do that.
What? Who does this? This is absurd, but only because homes are so stinking expensive. Maybe a tiny house?
Or Get an “Affordable” Mortgage
If you MUST have a mortgage, only get a payment you can really afford.
Be conservative with terms: Get a 15 year fixed rate mortgage. Never a 30 or 40 year, never an ARM or a balloon mortgage.
Remember that banks are in business to get money from you. Do not take their advice on how much debt you can bear.
For the path to Financial Peace, Dave says that what’s AFFORDABLE is a mortgage payment that is less than 25% of your NET* monthly income.
- * Banks often recommend 28% of your GROSS income just for the mortgage (called “front end”) or 36% total of your gross income for the mortgage plus any other credit payments (called “back end”).
- 31% back end is the definition of “affordable” from the U.S. “Making Home Affordable” program.
- The FHA back end max is 41%.
- Dave’s “back end and “front end” are the same thing, since you are not buying a home until you’ve paid off your other debt.
The above percentages give vastly different answers as to what is supposedly affordable on a $5K/month gross income. Remember that the banks are allowing you to borrow as much as they dare.
What happens if you apply for and are “awarded” (!!) a payment that is twice what you can actually afford? Exactly.
Find an affordable home
The next step is to find a home that meets your financial criteria and is a home that suits your needs in a neighborhood with good schools or nightlife or farmers’ markets or whatever you’re into.
Finally, once you have a mortgage, pay it off early (Baby Step 6).
Assuming you followed all the steps above and actually purchased a home, don’t keep paying interest simply because that interest is a tax write-off. Pay off that baby early.
Do not get a 2nd mortgage or a home equity loan… that’s going in the wrong direction (towards more debt).
Mr. Ramsey has a mortgage payoff calculator on his website to help you figure out how to pay your mortgage off early and reduce the financial hemorrhage.
Is any of this clearly great advice feasible?
IF you have a steady income AND you make more than you need, this is quite realistic, but that’s a big IF. Plus, you’ll have to pay rent while you’re saving for a down payment or waiting for that perfect home at just the right price to come up for sale.
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