As I mentioned a couple of posts ago, I credit much of our getting on a solid financial road to participating in Dave Ramsey’s Financial Peace University or FPU. Committing to attending the 13 weeks of classes was one of the best financial decisions we’ve made. The course covers a broad range of topics regarding personal finances and really gives you a good 10,000 foot view of your financial situation. In this post I’ll describe how FPU works and then give a detailed summary of the content and principles in Financial Peace University. I’ll cover the first 6 weeks of the program in this post and the remaining weeks in my next post.

How Financial Peace University is structured

Financial Peace University is broken into 13 classes each about two hours long. In each class you watch a DVD recording of Dave Ramsey presenting a different principle or concept on stage in front of a live audience. At the conclusion of the DVD the moderator then guides the group through a small discussion on the topic of the week. I’m sure the discussion portion of the classes can vary widely based on the charisma and promptings of the moderator. Our discussions were rather brief and not overly soul-bearing which was nice. There were about 15 attendees at our classes and we didn’t really get to know the other attendees. In retrospect it would have been better if the discussion was just a little bit more open so we could hear about others’ experiences.

The best thing about Financial Peace University: Consistency

One of the best things about FPU is not necessarily what is taught, but rather that it forces you to consistently engage with your spouse about personal finance issues week after week for three months. Anyone who chooses to simply listen to the CDs or read the book without attending the classes misses out on the primary benefit. You will miss the recurring opportunity to discuss finances with your spouse every week. You will be less likely to implement what you’ve learned because you’re acting alone. You won’t be able to take your finances in small chunks a week at a time. You won’t strengthen your wealth-building muscles. You won’t be able to create a solid foundation from which to build your financial relationship.

It’s amazing what you can accomplish over 13 weeks when you take it one small step each week. We were able to discuss otherwise sensitive issues without any conflict because we weren’t having one huge meeting every couple of months where we try to hash out everything at once. I believe it truly was a key to our success. If you want to go through Financial Peace University and can’t attend the classes, please make a commitment to meet weekly with your spouse and discuss the principles. The value of the lessons will be quadruple what they would be alone.

The Dave Ramsey Show and FPU

I’m actually not an active listener of the Dave Ramsey show. I came across FPU from another radio news snippet about Dave Ramsey. I went to his site and saw the program. He must have effectively marketed his program because my wife and I decided to sign up. The materials that came with FPU seemed a little homemade to me which is surprising since the program was made by a a nationally-syndicated radio show host. But in the end the quality of the content was much more important than the physical presentation.

FPU summary

Here is a week-by-week summary of the topics discussed in FPU. I’ll cover weeks 1-6 in this post and 7-13 in the next post.

Super Savers (week 1)

Dave Ramsey provides an overview of the program. He covers the value his “baby step #1,” a short-term emergency fund which he defines as “$1,000 in the bank.” Do not touch the emergency fund, except for in emergencies. Savings is about emotion and you’ll only save if you make it a priority. Social Security will not provide enough for a secure retirement. Money is amoral – it’s not good or bad but can be used for good or bad purposes. Don’t spend more than you earn.

You need to save for three things: emergency fund, purchases, wealth building (retirement, college, etc.). By saving for purchases and paying in cash you can negotiate better deals. Start saving NOW – the sooner you start the more of an impact compound interest can have. He goes through some examples of how compound interest works. He emphasizes the importance of a high interest rate. Make your long-term savings automatic. Cut up your credit cards and never use them again. Budget ahead for things like clothes, Christmas, and other expenses that you know are coming.

Cash Flow Planning (week 2)

Dave Ramsey explains the basics of budgeting (spending plans, or cash flow plans). I found that this is one of the areas that lacked the most detail. He explains enough to get going but didn’t cover how you reconcile budgets. He defines a budget as simply telling money what to do rather than wondering where it went. Creating and refining your budget takes time – don’t expect it to be perfect the first month. Persistence is key. Do not go into any more consumer debt.

Dave addresses some relationship issues. A budget is not a tool to control your spouse. Instead, you need to have a civil agreement concerning your budget. Many people avoid creating a budget because they don’t want to face their messed-up financial situation. A budget must be comprehensive and include ALL expenses. Don’t make your budget too complicated. You need to live your budget. Don’t just write it down and ignore it the rest of the month. When you start budgeting, you may have to meet daily or weekly to keep on track.

Make sure you fund your necessity categories – food, shelter, clothing, and transportation. He addresses what to do if you can’t pay for everything. He enumerates the benefits of peace and stress reduction that come from following a budget.

Dave explains the concept of a zero-based budget and promotes the use of cash in your budget (monthly cash flow plan). He briefly discusses recommended percentages that each category should take in your budget.

Relating With Money (week 3)

Dave Ramsey describes the difference in how men and women relate to money. Money is one of the top (if not the top) causes of divorce because money accentuates value differences. Both partners should be involved in budgeting and make money decisions. There are two types of people when dealing with money: nerds and free spirits. Nerds like analyzing and creating complex spreadsheets. Free spirits don’t want to be controlled. If you’re not married, it’s good to get an accountability partner.

Dave then outlines the rules for a budget committee meeting.

• The meeting can’t go longer than 17 minutes
• Nerds make a proposed plan and bring it to the meeting. They give it to the free spirit and then shut up and let them look at it.
• The free spirit has to show up, act like an adult and give positive feedback.

Dave talks about teaching kids how to relate to money and the value of paying “commissions” for chores. You can teach your kids to be responsible with money by making them save for some of their own purchases. Whenever they get money, help them separate the funds into three envelopes: giving, spending, and saving.

Buying Big Bargains(week 4)

In this lesson Dave talks about how to get big bargains and never pay full price. In other countries, bargaining is the standard. But here in the U.S. we’re uncomfortable bargaining.

The first principle in getting good deals is to ask for them. When bargaining you’re not out to hurt the other person. Some helpful “rules of engagement” are:

• Tell the truth
• Have good intentions
• Seek a win-win deal

Here are some other tips for buying big bargains.

• Utilize the power of cash – by paying in cash, there is an immediacy that makes people more willing to bargain with you.
• Utilize the power of silence in negotiating. Most people say too much. One good line to use when bargaining is to say “that’s not good enough” and then stay silent and let the seller make an offer.
• When bargaining, make sure you’re talking to the decision maker.
• Use the phrase “If I…then.” In other words, if I take the item at this price, then I want you to throw in x.
• Try bartering products or services – maybe you have something the seller wants.
• If you’re trying to save money and get out of debt, give homemade gift certificates as gifts.
• Great places to find bargains include estate sales, auctions, consignment stores, garage sales, government auctions, repo auctions, and buying from individuals (classifieds, etc).
• You can often get free products by staying at a convention as it’s closing. Many vendors want to get rid of products so they don’t have to ship them home and are willing to give them away for free.
• One negotiating tactic is to tell the seller “you may be able to sell it for more, but I’ll give you this much right now in cash.”

Dumping Debt (week 5)

Dave addresses many myths about debt and gives a step-by-step plan to get out of debt.

Debt Myths

• Myth – Lending to a friend or relative helps them. Truth – Instead it really changes the dynamic of the relationship and damages it.
• Myth – Co-signing on a loan is ok. Truth – Statistically the person you’re co-signing with won’t repay the loan. That’s why the bank requires someone to co-sign.
• Myth – Cash advances help poor people get ahead. Truth – Cash advances are a way for poor people to have things they can’t afford.
• Myth – Lottery and power ball will make me rich. Truth – Lottery and power ball are a tax on poor people.
• Myth – Car payments are a way of life. Truth – Most millionaires drive paid-off used cars.
• Myth – Leasing is a good deal and a sophisticated way to drive a car. Truth – Any expert or analysis will tell you it’s one of the most expensive ways to drive a car.
• Myth – I can get a great deal on a new car. Truth – The value of the car goes down 60% in the first four years.
• Myth – Home equity lines are good for tax deductions and are a good replacement for an emergency fund. Truth – The math doesn’t work. You shouldn’t take out more debt just to avoid paying some taxes.
• Myth – I’ll get a 30 year mortgage and pay extra. Truth – Nobody pays extra. You should get a 15 year fixed-rate mortgage.
• Myth – It’s ok to take out an adjustable rate or balloon mortgage because I know I’ll be moving. Truth – You will be moving when they foreclose on your house.
• Myth – You need to have credit cards and take out a car loan to build your credit. Truth – Open credit card accounts with zero balances and car loans count against you when qualifying on a home.
• Myth – You need a credit card to rent a car. Truth – All major car rental operations accept debit cards.
• Myth – It’s good to use a credit card for the rewards points. Truth – 78% of credit card owners don’t pay off the balance every month.
• Myth – I’ll make sure my teenager gets a credit card to teach them to be responsible with money. Truth – Credit card companies target teens because they become life-long customers and can go deeply into debt.
• Myth – Debt consolidation is good. Truth – Personal finance is 80% behavior. If you don’t change your behavior, you’ll just end up taking on more debt.
• Myth – Debt is a tool to be used to build wealth. Truth – 75% of Forbes 400 wealthiest people said getting and staying out of debt is the #1 key to building wealth.

Steps to getting out of debt

1. Quit borrowing more money. Don’t take on any more debt.
2. Cut up credit cards. Go cold turkey. Credit cards can mess up your budget on many levels.
3. Sell stuff. Go crazy. You have way more than you need or use anyway.
4. Get an extra job. Take side jobs to accelerate paying off your debts. This can be temporary.
5. Debt snowball. Pay off the lowest debt first, then use the amount you were paying for that debt and roll it over to the next debt.

Understanding Investments (week 6)

Dave explains the basics of investing and recommends what you should invest in. Don’t invest in anything you couldn’t explain to a 7th grader.

Diversification means that you spread your investments around. The more you diversify, the lower your risk.

He explains the relationship between risk and return. Typically, the higher the risk, the higher the return. For example, saving money in a cookie jar is very low risk but provides no return. On the other hand, investing in a high-growth stock is very risky (you could lose all your money) but the potential return is also very high if the stock does well.

Dave explains what liquidity means. Typically low risk investments are very liquid meaning you can access your money quickly and easily. Again using the cookie jar analogy, you can access money in a cookie jar at any time – it’s very liquid – but it doesn’t provide any return. On the other end of the spectrum if you invest in real estate the potential return is very high but the investment in the house is not very liquid – it can take months to actually get the cash in hand from the sale of the house.

Dave explains the difference between saving for something and investing. If you’re saving for something with a horizon of 5 years or less you should put it in a highly liquid, low risk investment like a money market account. If your investing horizon is over 5 years you can afford to take more risk and should buy a mutual fund. On a 5+ year investment you need to make 6% to break even with taxes and inflation (inflation has averaged 4.5% according to CPI).

Dave explains how all main-stream investments work including: money market accounts, bonds, CDs, mutual funds, stocks, Rental Real Estate, Annuities, Commodities and Futures.

Dave’s strategy for allocating investments (he prefers mutual funds) is as follows:

• Standard Diversification
• 25% Growth and Income (large cap, big companies)
• 25% Growth (mid-cap, mid-sized companies)
• 25% International
• 25% Aggressive growth (tech, web, health care, bio-tech, small companies, emerging markets)
• Conservative Diversification
• 25% Balanced
• 25% Growth & Income
• 25% Growth
• 25% International

That concludes the first part of the Financial Peace University summary. I’ll be posting the second half next week.

The question of how much of a mortgage you can afford is a tricky question. Make the wrong decision and you will constantly be strapped for the financial resources you need. The fact is, housing is the largest single expense for most people (other than taxes). The size of your mortgage can literally make the difference between financial happiness and financial misery. The term “house poor” means that you have such a high mortgage payment, you can hardly afford your living expenses let alone anything purely for your lifestyle or enjoyment. I prefer to be “house rich” by buying a house that is well below what the bank is willing to loan you. By buying a less expensive house and lowering your monthly payment by up to a few hundred dollars, you can have more than enough money for vacations, grown-up toys or any of the things you value. Rather than struggling to simply buy furniture for your home (without going into debt), you could fully furnish your home pretty quickly and make it suit your taste perfectly.

We learned this lesson of being “house poor” the hard way. Our home is on the high end of what we really should have purchased. While we can afford the payment and our living expenses with funds to spare, we don’t have much wiggle room. When we had some significant medical expenses a couple years back we were almost forced to move. We still haven’t furnished our home to our taste (partially because of a lack of motivation and partially due to finances). When expenses are normal there’s no problem, but at the first sign of an emergency we really have to plan to make it through. Budgeting and small raises over time have alleviated our tight financial situation quite a bit but I still would have chosen a less expensive house if I started over again. In fact, we’ve considered moving several times and may yet decide to do so.

How to calculate how much mortgage can you afford?

Banks will tell you that you can afford up to 41% of your gross income as debt (sometimes referred to as the front-end ratio) — If you earn $3,000 a month, you can afford to have $1,230 in debt. But trusting this advice is a big mistake. First of all, banks are self-interested. Taking on debt that’s 41% of your income is what the bank feels comfortable lending you, not what you really can afford. Borrowing the full amount that the bank is willing to lend is a sure way to get in over your head. Your situation can be even worse if you make regular charitable contributions. Many people donate 10% of their income as tithing or for charitable causes. This 10% is part of your fixed expense structure and really should be considered more like a debt payment when calculating your total debt load. This also applies to expenses like child support or alimony.

Here’s another, more accurate way of calculating how much house you can afford. Consider it the “altered” front-end ratio.

1. Calculate the monthly payment for the loan amount you’re considering.
2. Calculate all your expected home expenses including property taxes, insurance, and utilities. If you’re not sure how much they will be, your realtor might now. Even better, ask someone you know living in a comparable house how much their total housing expenses are.
3. Calculate the total monthly debt payments you already make.
4. Calculate any fixed charitable contributions you consistently make.
5. Calculate any other payments that are required every month such as child support or alimony.
6. Add all the amounts together and divide the total by your gross income (income before taxes). If the result is less than 41% (.41) you can probably afford the house without being too “house poor.”

Don’t believe what home mortgage lenders tell you that you can afford

Our original mortgage payment (we’ve since paid our mortgage down about $20,000) as a percentage of our gross income is only 24%. By the bank’s definition we could have afforded almost twice the house and mortgage, yet we still felt house poor. When adding in housing expenses and charitable donations this ratio jumps to 37%. Still within 41% recommended above but much closer to the threshold.

If you define 41% as being “right on the edge of what you can comfortably afford”, 37% seems to accurately reflect how I feel about our financial situation – we can afford our house and have a decent amount of disposable income assuming we don’t have significant unexpected expenses. Even with unexpected expenses we can get through since we have total control over our budget. We can even occasionally deal with these emergencies without dipping into our emergency fund. But without total control over our budget, we probably would end up going into consumer debt to go on vacations or pay for emergencies.

What if my ratio is over 41%?

If your altered front-end ratio is only a few percentage points above 41%, you may be ok as long as you get your budget under tight control. That means you know exactly what is coming in and how every dollar of income will be spent before you spend it. You still may want to consider moving or making a dramatic housing change (like we’ve considered doing).

If you are more than 4 or 5 percentage points about 41% you should probably make a dramatic lifestyle change. Typically that means moving to a less expensive home since that is the easiest expense to decrease significantly. You can only squeeze so much out of your grocery budget. Also keep in mind that a cheaper house typically means lower taxes and utilities.

Don’t believe what mortgage calculators tell you that you can afford

Some people might think I’m crazy suggesting this alternative way to determine how much you can afford. I went online and used some mortgage calculators to see how much they said I can afford and their conservative estimates were $500 more than our actual mortgage payment. That’s ridiculous! If people are to ever get out of the debt death spiral, they have to set themselves up to win and one of the main ways to do so is to make sure you can afford your housing.

I would love to hear from GFD readers how they have determined how much house they could afford. Go ahead and calculate your altered ratio and share it with us. Help us calibrate the scale – does 41% seem to be the right threshold according to your experience? Please leave your comments below.

Another article from Money magazine writer Jean Chatzky recently caught my eye. The article discussed whether or not money can buy happiness – or more specifically if buying things brings happiness. It caused me to reflect upon the role money has played in my life and how it has or hasn’t contributed to my happiness.

Little statistical correlation between money and happiness

There’s really no scientific basis that equates money to happiness. In fact, the Money magazine article points out that there’s little difference in the overall happiness of millionaires vs. the middle class. Money can affect happiness if it brings someone out of poverty, but past that it has little to do with overall happiness.

One survey found “virtually the same level of happiness between the very rich individuals on the Forbes 400 and the Maasai herdsman of East Africa.”

Another study actually did find a positive correlation between money and happiness but concluded that the increased happiness was not a result of earning a pre-determined amount of money but rather how much money people made compared to others in their age group. It was a “keep up with the Joneses” mentality.

Yet another survey showed little correlation between money and happiness and points out that those with incomes over $100,000 a year spend 19.9% of their time engaging in leisure activities while those making less than $20,000 spent 34% of their time on leisure activities. This implies that those with more leisure time have more happiness (a conclusion I don’t quite agree with).

Some polls show that Americans are no more happy now than they were 50 years ago despite large increases in the overall standard of living. A Minnesota University researcher postulates that happiness is 50% genetics and 50% determination. As Abraham Lincoln once said “Most people are as happy as they make up their minds to be.”

Spend money on experiences

If you’re determined to spend money in the attempt to find happiness, Jean recommends spending money on experiences rather than objects. Objects may give us a temporary boost in happiness, but most people quickly adjust back to normal levels of happiness where the object becomes part of the norm. On the other hand, if the object gives you particular experiences, the memory of the experience or even friendships created during the experience can produce much longer-lasting, robust happiness.

What would you be doing if you were financially independent?

I was recently contemplating what my life would be like if I were financially independent and had enough money to do or have anything I wanted. What would I do every day? What would I have been doing that evening? As I thought, I realized that I would have spent the evening exactly the way I had just spent it — spending time with my wife and family and engaging in things that I’m passionate about (writing this blog being one of them). I powerfully realized at that moment that money had absolutely no impact on my happiness that day. Having more money I may have spent time with my family in a nicer house or wrote articles for this site on a nicer computer but those things wouldn’t have made me any more happy (with the possible exception having dual monitors which does make me consistently happy).

When I started this website I set three goals for myself:

1. Enjoy myself – I would only continue creating and managing this site if I enjoyed doing it. If I found I wasn’t enjoying a majority of the time I spent writing, I would stop.
2. Help others – I hope to be able to give others the tools they need to get control of their finances. If I can even help just a few people gain clarity about their finances I’ve succeeded.
3. Earn supplemental income – Notice that this is the last and least important goal. If I never make a dime from this site but accomplish the first two goals, this project is a success. As it is, this site actually has generated a decent supplemental income most of which I plan to reinvest in financial management tools or products.

It was clear to me when I created Getting Finances Done that making money couldn’t be my first or only goal. What an empty, meaningless project it would be for me if that were the case. So far it’s been an incredibly rewarding experience as I’ve seen the discussions, comments and questions that have been raised. Doing what I’m passionate about has created way more happiness than any money I’ve made.

Some material things that make me happy

On the other hand, there are some material things that have contributed to my happiness. These are typically things that either a) I consciously enjoy on a daily basis or b) things that promote interaction with others.

Let me give you a couple of examples. I jokingly referred to my dual LCD monitors above. While it may seem bizarre, they truly bring me a degree of happiness. I use them every day and consistently find them improving my work flow and increasing my quality of life. I find conscious enjoyment from them. I haven’t “gotten used to them” so to speak. Maybe my perceived increase in happiness from the dual-monitor goodness is not really an increase in happiness but simply an increase in my standard of living and quality of life. Is there a difference? Would I be less happy without dual monitors? In some small way I think I would be slightly less happy or have less enjoyment but I certainly wouldn’t go into depression or have a significant decrease in happiness.

An example of something that promotes interaction with others is a game (video or board game). My wife and I have been fans of Dance Dance Revolution for some time and have had many opportunities to play with others. This activity has helped us develop relationships with others that bring happiness, both in the moment and ongoing. I realize that the true happiness comes more from the interaction with others than the game, but the game can facilitate increased happiness and is definitely fun to play in the moment. There have been many board games that we’ve played with friends and family to a similar end.

Assessing lifelong learning & the pursuit of happiness

In the end I tend to think that happiness is mostly a choice that can be slightly enhanced or degraded by some material things. But if we’re looking to outward things as the basis for our happiness we’re on unstable ground. Focusing on serving, health, lifelong learning, relationships, and doing things you’re passionate about are much better foundations for persistent happiness. The Get Rich Slowly blog has a nice summary of Ten Steps to Greater Happiness that are more effective than most material attempts at happiness.

Happiness, health, wealth, money

What makes you happy? Does money bring you happiness? Do material things bring you happiness? A little? A lot? What would you do if you were financially independent and could spend your days however you wanted?

Related articles:

• Shopping for happiness? Here’s what to buy [money.cnn.com]
• Ten Steps to Greater Happiness [Get Rich Slowly]
• The Keys to Happiness, and Why We Don’t Use Them [livescience.com]
• Study: Money Does Not Buy Much Happiness [livescience.com]
• Can money buy happiness? [rediff.com]
• Money Won’t Buy You Happiness [forbes.com]