Dave Ramsey Financial Peace University Review: Week 4

This is a series of posts about what you will find in Dave Ramsey’s Financial Peace University course. This is week four (week oneweek two and week three)

This week’s lesson focused on getting out of debt. We’re getting to the meat of the plan now, and I was eager to hear Dave’s ideas for paying off debt. The lesson began with Dave debunking some common money myths, such as playing the lottery will make you rich, payday lenders are helping people, loaning money to relatives and friends is “helping” them, debt consolidation is a good idea, and you’ll always have a car payment. While these were interesting and entertaining to listen to, I didn’t think that the majority of them had anything to do with getting out of debt. Yes, doing these things can cause trouble and get you into debt, but I doubt too many people in the room got into debt by playing the lottery or even loaning money to friends. And even if they did, the lesson was titled “dumping debt,” not “how to get into debt.” If you’re already in debt as a result of one of these myths, you know it and you probably know where you went wrong. What you want to know is what to do about it now.

I was expecting a lesson full of hardcore tips for paying off debt and most of the hour was spent on these money myths. Interesting, but not what I was expecting to hear. I found myself doodling in the margins of my notebook, waiting for the “dumping debt” part to begin. I tried to remind myself that some people in the room might not have heard these ideas before, but to me they were all common sense. Two of the myths in particular, however, raised my antennae.

The first myth was that you need a credit card to travel or make online purchases. Dave says that this is a myth because a debit card will do all of these things. I disagree. I can’t imagine traveling without a credit card. Car rental companies and hotels sometimes put a “hold” of up to $100 on my card to hedge against any damage done by me. I also can’t imagine using my debit card in foreign countries or online. And even here at home, card number theft is rampant, both online and off. The risks of having the number stolen and your checking account compromised are too great. Dave makes a big production about how debit cards offer the same protections as credit cards. In theory, they do. You will get your money back in the event of fraud with either card. But with a debit card, you are out the liquid cash until the dispute is resolved. With a credit card, you aren’t out anything while they fix the problem.

His other argument is that studies show that people spend 12-18% more when they use plastic than when they use cash. I suppose this is true for some. It is easier to part with money that doesn’t feel real. But in my house it’s the opposite. We use the cards for everything (and pay them off every month) but I find myself being much more careful when I use the card because I don’t want to see a huge bill at the end of the month. Seeing big numbers freaks me out, even knowing I have the money to pay it and that it’s all budgeted. When I use cash, it seems to drift through my fingers quicker. I realize I’m the oddball here, but I won’t be giving up my credit cards.

I suppose that if you are totally undisciplined with cards then the risks of card theft or overspending are outweighed by the risks of racking up debt. Kind of like an alcoholic that can’t even smell beer without going on a bender. But for people who can be at all responsible and controlled, a credit card can be a useful tool.

The second myth was that a thirty year mortgage is a good idea. Dave thinks you should never take out anything more than a fifteen year mortgage. While I agree with him that ARM’s and other risky products are a bad idea, I don’t have a problem with the traditional 30-year mortgage. Yes, it means you’ll pay more in interest, but at a fixed rate it’s not that bad. A fifteen year will save you money, but if the thirty year’s lower payments make you more comfortable, there’s nothing wrong with it. You can pay more as your finances allow to pay down the balance sooner. If your choices are between a 30-year mortgage or an ARM, by all means take the thirty year.

After the myths he hit briefly on how to get out of debt. Stop borrowing money, save money, sell stuff, work more, and pray. I guess I’m the sort of person who really enjoys tips and hints and details because I would have liked to hear more aggressive ideas for getting out of debt. Dave’s ideas sound so simple, but I know that they’re really not. There are a lot of ways to save money. There are a lot of ways to bring in more income. I’d rather hear about that than money myths. If you’re not religious, you need more ideas because the prayer thing isn’t going to apply to you, anyway.

The one thing he did bring up that was helpful was to stop asking the wrong question. Broke people with debt ask, “How much are the payments?” when they buy things. Rich people just ask, “How much?” and work to get the lowest total price, not the lowest monthly payment. This is sound advice because for too long too many people have been asking about the payments, assuming that if they could make those payments they could afford the item. What matters is the total cost of the item and whether or not you can afford it in total, not the payments.

For all the hype Dave makes about the debt snowball in his other books and talk shows, very little attention was paid to it here. He briefly showed how the math works: You pay as much as you can to the first debt and the minimums on everything else. Then, when that first debt is paid off, you add that payment to the minimum on the next debt on the list and go at it until it’s paid off. Then you add those two payments to the minimum on the third debt and pay that off, and so on down the list until you’re debt free.

He also mentioned that you should line up your debts from smallest to largest. I, like a lot of financial pros, would argue that you should hit the one with the highest interest rate first and then order them from highest to lowest interest rate. This way saves you the most money since you lose the most money on high interest debt. However, Dave feels like the psychological boost you get from paying something off quickly is worth more than the money you save by paying off higher interest debt first. I don’t disagree with that, but from a purely financial standpoint it’s better to pay off the highest rates first. But, if you’re the sort who really needs that mental boost of paying things off quickly, then paying smallest balance to largest balance is a good way to go. At least you’re paying things off, which is what really matters.

All in all it was a disappointing lesson. I came away feeling like, if I had debt, I still wouldn’t have a clear plan for getting rid of it. I’d be motivated and I’d know where I’d gone wrong, but I’d still be missing the concrete action steps to get myself on the right track. The debt snowball was the closest thing to an action plan that was given, and even that was only hit on briefly.

On a side note: If you’ve ever listened to Dave, you’ve probably heard him talk about being gazelle intense when it comes to paying off debt. The idea is that you focus as much attention on getting out of debt as the gazelle does when he’s trying to get away from the cheetah. The highlight of this week was Dave’s video illustrating this principle. It’s just a gazelle escaping a cheetah, but Dave does a comedic voice over where the cheetah is “debt” and the gazelle is the person trying to get out of debt. It was one of the funniest things I’ve seen in a while. I wish I could find it on the Internet so you could see it, but no luck. If you ever do sign up for FPU, make sure you go to class in week four so you can see that video.

Unfortunately, small group discussion was cancelled this week since three of the five leaders were out sick or with family problems. Plus, the video was well over an hour and it was getting late so the coordinator decided to send everyone home. I didn’t get to find out how the people in my group did with their budget forms from last week, or what they thought about how they were going to get out of debt. Next week should be a lively discussion!

Homework roundup: This week we’re to fill out our credit card history form so we can track our cards as we close them. Since I don’t carry credit card debt, I’m skipping this assignment. Technically I’m supposed to go completely credit card free, but I refuse. This is one Dave assignment that I just won’t do. I’ve never carried credit card debt and enjoy the convenience (all transactions on one bill), protection, and rewards that come from using credit cards responsibly. Dave argues, and I mentioned this above, that a debit card offers the same protections as a credit card, but I disagree. I don’t want my checking account compromised if someone steals my card number. While I might get my money back, it’s likely to take a while. In the meantime I’m out that money. I’d much rather it be a credit card that I can close immediately with no damage to me. So at this time I won’t be closing any cards.

We also have to fill out the debt snowball form. On this form we list our debts from smallest to largest and then track the payments and payoffs as we go. Since I don’t have any debt, I don’t have anything on this one to fill out, but I will look at it and read the instructions so I get a better idea of how it works and how others in the class are doing with it.

As for my budget dilemma from last week. You may recall that I had about $900 left over in my zero based budget. I did discover a couple of things that I failed to account for that totaled about another $100 per month. That brought my overage to $800. So I just moved $800 from my checking to my savings. Now my budget for February balances to zero. I’ll do this for a couple of months and see if I run short anywhere. If not, then I’ll start investing that $800 more aggressively (and kick myself for not realizing I had it sooner). If I run short, I should be able to easily figure out what I forgot to account for in the budget. If this $800 turns out to be money I can really be saving, then Dave’s class was well worth it.

Next: Dave Ramsey Financial Peace University Review: Week Five

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22 Responses to Dave Ramsey Financial Peace University Review: Week 4

  1. Natalie says:

    I really wanted to find that video! Here’s what I did find though: http://www.youtube.com/watch?v=Ot-uECCNQf8

    Kinda funny!

  2. Annie Jones says:

    “When I use cash, it seems to drift through my fingers quicker. I realize I

  3. I have a big problem with the “debt snowball” or paying off your smallest debt first. People who are deep in debt are often there because they are choosing psychological”good feelings” over solid math based decisions. By encouraging people to take the psychological happiness approach instead of doing the actual math to make a decision, I think it perpetuates the problem that needs to be solved.

  4. Julie says:

    I won’t give up my credit cards either. I pay them off each month and earn about $50 in cash on my chase rewards card every month.

  5. Richard says:

    I can understand how the debt snowball thing would work for some people. We just consolidated our debt using a HELOC @ 3.25%
    The interest is low and we can write it off.

  6. Cristi Smith says:

    oh my gosh that video was tooo funny. talk about having dinner delivered!

  7. fisher_man says:

    You don’t seem to have given Dave Ramsey a chance from the start. I thought your post was flimsy and not well thought out.

    Don’t let your lack of imagination stop you from traveling without a credit card. If you follow his plan you will have enough to withstand a measly $100 hold, or more. Also, we are allowed to have more than one checking account with a debit card. Then, all your money would not be tied up with one unauthorized use.

    Finance for people is not about interest rates, it is about numbers. Consider that you are, in essence, taking out a loan each time you use a credit card. That is a major reason people spend more, they are not yet spending their own money. Why not save the money up, on top of a sufficient reserve amount?

    All of your reasons for clinging to credit cards are hollow. You haven’t given a single valid reason for using them. I can do everything you mention as a reason for having credit cards, with debit cards. Unless you don’t actually have the money, they are redundant. Yes, you can see all your purchases on a single statement too. Just consider the possibility that Ramsey might know better than you, in this instance.

    From a “purely financial standpoint,” it is better not to borrow in the first place. Interest is lost money and debt adds risk. The numerical interest rate should not be the focus, it’s the amount owed as an obligation. That’s why his gazelle analogy works so well.

    “I don

  8. Scott says:

    The facts are more and more people are using their debit card for hotels and rental cars. Its

    While I still have my American Express card I rarely use it anymore. I dumped all other credit cards years ago.

    I think the most important thing my dad taught me was to never ever buy a depreciating asset with credit.

    From clothes to groceries to cars. Just don’t do it and you will be so ahead of the game you won’t believe it.

  9. Doug says:

    “I suppose that if you are totally undisciplined with cards then the risks of card theft or overspending are outweighed by the risks of racking up debt.”

    Yeah. Just the other day I was reading where Warren Buffett said the secret to his wealth was using a credit card. All those “cash back” points really added up over time . . . oh, wait, Buffett’s advice is to stay away from consumer debt.

    You know, if you’re gonna go through Financial Peace, then go through it. You’ve already seen that a zero-based budget might have actually allowed you more savings. Maybe, just maybe, if you put aside your preconceived notions, you’ll actually learn something.

    Right now, it’s like you’re going on a diet but saying “Oh, I don’t want to give up ice cream. After all, ice cream is a dairy! I have to get my calcium from somewhere!”

    Good luck.

  10. DeeDee says:

    I look forward to reading your posts on the FPU class, and I’m glad you decided to share your experience. I’m more of a Suze Orman fan, but I do listen to Dave Ramsey on the radio because I like some of his advice.

    I am using the debt snowball method, but I am paying the highest interest rate first. Dave’s way makes no sense to me, but I’ve had enough of these discussions (arguments?) to realize that each person has to do what works best for them and leave it at that.

    As a victim of identity theft, I prefer to use my credit card over my debit card, for the security and the rewards. As I am paying off my debt, I have one card that I use for monthly expenses which I pay in full every month. I then get cash back rewards that I put towards my snowball. I am a Christian, so I do tithe and I do pray, and Lord willing I will be debt free this time next year. I only mentioned this because you said Dave suggests that you pray, and I agree with him on that and on tithing.

    Thanks for another great post!

  11. Ben Stutts says:

    There is more than one way to skin a cat. What works for one person may not work for another. The purpose of Dave’s plan is exactly the same as any other real get out of debt plan. I still have one credit card that I use for internet purchases – and pay off every month. I also have a 30 year traditional mortgage that I just took out – as I am now 63, I will probably never see that mortgage paid off. But it is a whopping $388 a month because of the large down payment I put up. I have no other debt.

    Dave’s plan will work if people follow it. But other plans can also work.

  12. Jackie says:

    @ Debt Free Dude … I’ve never thought of it that way. I’m a big proponent of doing what works and, yes, if someone needs that psychological push to keep going, what’s the harm? But, if the underlying debt behavior is emotional spending, then feeding that emotionality could actually sabotage their debt pay off. Or, for someone who makes emotional decisions it’s a way to connect with them and get them on the road to being debt free by showing them the emotional benefit. lol, whatever works.

    As for the others, I thought her arguments about debit vs. credit were plenty compelling. I almost never use my debit card and I use my credit cards for 95% of my purchases. I pay them off every month and accrue rewards in cash back and points. I can go all cash just fine, but why would I do that if I can get cash back from my credit card without even having to pay a yearly fee?

    As for the protection it offers – heck yes. It is absolutely convincing to me that if I need to fight a fraudulant charge on a dc I am already out that money whereas I still maintain payment control with a cc. In fact, one of my credit card numbers was recently stolen, a physical card was manufactured and then used in South Africa. My cc company caught it, removed the charge and issued me another card with a new number. If that had happened with my debit card, I’d be out over $500 (plus interest that I would have accrued had it stayed in my account) until this whole thing was resolved.

    And if you’re someone with a small bank balance, a $100 hold on your debit card for a hotel room (that sometimes takes 48-72 hours to clear) can make a big difference in your purchasing power. Shoot, the gas pumps check your card to see if you have at least $75 free to pump (as of 14 yrs ago when I worked at a gas station) – if you’re on the raggedy edge already you may not have money clear for that on a debit card. I don’t, but some people may keep their checking account artificially low because they want to keep the bulk of their cash in higher interest accounts.

    Basically, I agree with the author that credit cards can be a useful tool if you are responsible with your money and pay your balance every month.

  13. Jackie says:

    Oh, and I’m loving this review of the program. I don’t have a pressing need to join, but I’m glad for the insight on the religious factor here. If I ever did want to go or had a friend who wanted to go, I can let them know to be prepared for the religious angle.

  14. Nichole says:

    I just wanted to point out that the Visa Debit Card Policy states that your financial institution must replace your funds within 5 days. Also, you can have a separate account with a debit card just for internet use and travel. I’ve done it in the past and never had a problem.

  15. Tom says:

    I have a friend, who recently had a fraudulent charge hit his debit card for over $4000. He got it back within a few days, but I would prefer to have that hit my credit card so that I don’t have it interfering with my main bank account.

    Every day or so, I update all of my credit card balances in Quicken, and mark that amount as a future debit from my checking account. Then I pay the monthly credit card bill in full when the bill arrives. I will take anyday as opposed to having every charge hit my checking card via a debit card.

    Many people are not disciplined enough to use credit card effectively, so I assume the Ramsey method is best for them.

  16. Blake says:

    I have a question for Maggie or any other that have attended this seminar. Iknow we can save money in our budget and make changes and spend less and we can also sell some things. My question is what if your house is alreay paid off and you do not have any credit card debt and the things you have do noy have a payoff date. For instance the care for an elderly parent. That debt is not going to go away or be paid off, at least until the good Lord brings them home. Does he cover things like that? If your monthly debt (minus the budget savings) does not come to a zero balance? Like tuition for the next four years, nursing home costs, and other reoccuring expenses in the monthly budget. We are taking the class in april but I keep hearing about paying down credit cards and paying off your home neither of which we have to pay for now.


  17. NoDebt2 says:

    Its alarming that some Ramsey devotees are so radical in their zealous pursuit of THE Plan that they glibly gloss over the VERY REAL shortcomings of using DCs vs. CCs. Doug & FisherMan parrot standard Ramsey fare in a mocking smug tone that is soooo characteristicly typical.

    Used properly CCs are a tool, not a crutch. You can pay the balance off on them online every week if you want… utilizing them much like a DC, but with the extra layer of protection, plus perqs, like cash-back points programs. Its not high finance, by any means, but when my savings account is paying .75% per yr & a CD is at about 1.5%, I’d say getting between 1.0 & 5.0% back in cash, simply by running my expenses through a CC, is an excellent use of CC as a tool.

    OBVIOUSLY, never put more on the CC than is ALREADY in the checking account, BUDGETED for spending!

  18. David says:

    When I started reading this series I was hoping you would learn something (non-financial). Keep trying and the articles are well written.

  19. Wild Bill says:

    Above it states that the avalanche (highest interest rate first) dept payment is better. So, I ran my own $75,000 debt using both avalanche and snowball (Dave

  20. Wild Bill says:

    Yes CC

  21. Josh says:

    As far as I understand it, Dave isn’t all out against CCs…I think he understands that sometimes the benefits are worth it….I just think he wants his students to get their main finances together first and then learn how to use and abuse the credit card companies to their advantage instead of being on the companies playing field….and I think he makes a good point that sometimes those “rewards” that people praise about CCs aren’t all that impressive…..like getting 2000 flyer miles only after spending 10s of thousands on CCs when you could just save up for that flight and not have to spend all that much on a CC….and, keep in mind, some banks offer rewards on their debit card accounts as well. Just food for thought.

  22. JMK says:

    If someone is spending money in order to earn CC benefits, that would be a problem. The suggestion here is simply to spend the planned/budgetted amount on the CC and get the benefit for doing what you were already planning to do. When I buy my groceries or fill my gas tank, the weekly amount is already listed on my spreadsheet of planned spending for this week. The money is in the account. If I swipe my debit card I get the groceries or gas and pay for it a few seconds later. If I swipe the CC I get the gas or groceries, a bunch of flight miles in my case, and I pay off all that week’s charges on Friday. End result is that the identical amount was spent, I paid no interest, never put my bank account at risk of fraud and earned free flight mileage toward our next trip.
    Another up side to CC which hasn’t been mentioned is that if you have all your monthly bills (phone, internet, insurance, utilities etc) charged directly to the card, you are never late with a payment and then you only have to pay one bill and never worry about tracking multiple due dates. When I pay off my weekly CC charges it always includes gas and groceries, but depending on the week it also includes other bills. They were all listed in the spending plan because they are not surprises. They arrive (on the card) on the same day every month and in most cases for the identical amount. Utilities may vary with the seasons, but I plan for an appropriate amount based on actual numbers for each month for the past 5 years.

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