This is the third of twelve parts of a “book club” reading and discussion of Dave Ramsey’s The Total Money Makeover, where this book on debt reduction is teased apart and looked at in detail. This entry covers the fourth chapter, finishing on page 76. The next entry, covering the fourth chapter, will appear on Saturday.
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Do you smell the snake oil yet?
There are countless sharks in the water that want your money. One powerful technique for selling you something you don’t need is to prey on your fears. Perhaps you fear the government’s long term future (been listening to too much talk radio, haven’t you?). Perhaps you fear immediate personal financial failure. Perhaps you fear your professional failure – and what others might think of you if you’re not successful.
People will prey on those fears. They try to do it all the time. Commercials telling you that you can eliminate your debt. Pitchmen talking about how great an investment gold is. Smooth talkers telling you about their “program” for quick income at home.
Almost all of these plans do two things. They grab onto your fears and they combine it with some sort of widely-spread myth. The myth of the person who got rich quickly. The myth that debt can be whisked away through this or that loophole in the law.
Myths are dangerous things. They’re usually based on information that might have been true a hundred years ago – or are based on extremely rare cases that, again, don’t reflect how you live your life. Yet they persist because they sound good.
Denying Risk Because of Laziness
Early in the chapter, Ramsey goes on a rant about the dangers of denying risk in your life. One point he makes on page 52:
Sometimes risk denial is a kind of laziness, when we don’t want to take the energy to realize that energy is needed to win.
I think this very factor holds people back from a lot of career advancement. They look at the huge amount of energy they would need to expend to get ahead – networking, building a business, and so on – and decide that they’d rather expend their energy doing something else.
Another example: we look at the effort that it would take to keep track of our spending for a few months and get a real grip on our finances – and we decide that the status quo is just fine.
Or we think about the effort that it would take to actually build a price book and figure out which grocery store really is the cheapest for what we buy – so we shrug it off and just go shopping at the Wal-Mart Supercenter.
Laziness is the enemy of success in every area.
Denying Risk Because of the Beat Down
Dave’s rant against risk denial continues:
Other times, risk denial is a kind of surrender in which we settle for a bad solution because we are so beat down or beat up that we wave the white flag and do something stupid.
I’m reminded of those ludicrous debt elimination programs advertised on late night television. “We can eliminate 90% of your debt with our program!”
Well, this means one of two things. You’re either going to file for some sort of bankruptcy protection (which has a whole different can of worms) and pay them for the “help” or you’re going to sign up for their debt repayment plan, where you pay them money for something you could cook up yourself.
Either way, you lose. Why not just make your own debt repayment plan? It’s easy and a lot cheaper than paying outrageous monthly fees for companies to do this for you.
Denying Risk for False Security
Yes, I liked the denying risk theme. Dave goes on to say:
At still other times, risk denial can have an active component in which we search for a false security that simply doesn’t exist.
Gold investing immediately comes to mind. The local talk radio station in Des Moines carries tons of ads for buying gold as an investment, coupled with shows like Glenn Beck which talk breathlessly about the fall of the American government (I wish I were kidding).
Gold sellers prey on that fear, bringing up the old tales about how gold is the safest thing to own when governments are falling. In practice, though, that’s rarely true – gold is scarce enough that most people resort to a barter system until things straighten out, and land, skills, and resources have the real value.
Gold is that false security. It makes people believe that they’ll be safe if the government collapses. In a fearful environment, people seek out that safety.
That’s not to say gold doesn’t have a role in a diversified investment portfolio, but people with enough of a bankroll to need diversification into precious metals probably aren’t reading Money360 or listening to talk radio all day.
Cash Value Life Insurance Is Junk
This is one of those points that I absolutely love in this book. Dave lays out the case against whole life and universal life insurance on page 58:
All of the [extra payments beyond the price of term insurance] per month disappears in commissions and expenses for the first three years; after that, the return will average 2.6 percent per year for Whole Life, 4.2 percent for Universal Life, and 7.4 percent for the new-and-improved Variable Life policy that includes mutual funds. These statistics are from Consumer Reports, Consumer Federation of America, Kiplinger’s Personal Finance, and Fortune magazine, so these are the real numbers. Additionally, a recent article in National Underwriter, The Industry Mouthpiece, showed charts of returns from fourteen national companies. The returns they show average only 6.29 percent over twenty years. […] Worse yet, with Whole Life and Universal Life, the savings you finally build up after being ripped off for years don’t go to your family upon your death; the only benefit paid to your family is the face value of a policy […]. The truth is that you would be better off to get the [inexpensive] term policy and put the [extra payments beyond the price of term insurance] in a cookie jar!
That pretty much sums it up. If you want insurance, buy bread-and-butter term life insurance. If you want an investment, buy an investment from a brokerage with low-cost investments (like Vanguard, for one). Mix the two and you’ll find yourself eaten alive by fees and commissions.
Look, I don’t blame a well-meaning grandparent for buying whole life insurance for their grandchildren. Their heart is in the right place – they want to protect their own children when their grandchildren are young and give the grandchildren a valuable investment when they’re older.
However, I’d encourage them to split that $100 a month into two batches instead of putting it all into the insurance. Use a small part of that money for a small term policy on the child so your own children won’t have a financial burden if the unthinkable happens. The other $93 a month? Put it in an investment account.
One of the handful of useful ideas in Stephen Covey’s book The 7 Habits of Highly Effective People (which I reviewed a while back) is the idea that our tasks all fall into four groups – Urgent & Important, Urgent & Not Important, Important & Not Urgent, and Not Important & Not Urgent.
Covey argues that the distinction we should make is whether something is important or not (tasks in the Important & Urgent and the Important & Not Urgent groups), but in practice we usually focus on the urgency instead (Urgent & Important and Urgent & Not Important).
This has a huge impact on personal finance. Dave spells it out on page 62:
We take care of the Urgent/Important stuff, but what is Important/Not Urgent […] is planning. You can pay the electric bill or sit in the dark, but if you don’t do a monthly spending plan, there is no apparent immediate damage.
I think this is one of the biggest reasons people put off financial planning. They are aware that it’s important, but they’re also aware that it’s not urgent.
Since so many of our lives are seemingly in constant “crisis mode” where we move from one fire to the next, we find ourselves falling easily into a situation where we just deal with what’s urgent and don’t even consider what’s important.
The end result? We find ourselves often missing out on many very important things in life because they’re not urgent. We skip playing with our kids because a client is calling us about a minor detail. We gloss over financial planning because there are fifty eight household chores that need to be done.
That lost time costs us. Every month we don’t save directly hurts our retirement. Every week we don’t contribute to our 401(k) hurts us. It comes around.
A Weird Argument for Cash
I think Dave goes off the rails on page 71 when talking about the risk of carrying cash versus carrying credit cards:
The crooks assume that your purse is like all the others filled with credit cards that are over the limit. Look, I’m not making light of crime. There’s a chance you may get robbed, because people do get robbed -whether they carry extra cash or not. And if it happens to you, the cash will be taken. But, trust me, you need to be far more worried about the danger of using credit cards than the danger of being robbed while carrying cash. Carrying cash doesn’t make you more likely to get robbed; on the contrary, the mismanagement of plastic is robbing you every month.
First of all, why not use a debit card instead of cash? A debit card allows you to only access the cash you actually have – the stuff sitting in your checking account. It also has virtually the same consumer protections as a credit card – if someone steals your debit card, just call up your bank and things are secure.
Second, having $200 in your purse (or wallet) makes it just as easy to blow $200 on something unnecessary as it is having a credit card in your purse (or wallet).
A credit card is just an excuse to exercise a lack of self control.
Having a large amount of cash on you is a security risk, no two ways about it. Dave is making the mistake of confusing one kind of risk (the risk of a lack of self control, which can take hold whether you have cash or a credit card in your pocket) with another kind (the risk of having your money stolen, which is much easier to fall prey to with cash on hand than with a credit card on hand).
Do you have any other thoughts on the fourth chapter of The Total Money Makeover? Please share them in the comments – and feel free to respond to any of my impressions as well. After all, a good book club is all about discussion!
On Saturday, we’ll tackle the fifth chapter – Two More Hurdles.