Millionaire gives practical advice for a debt-free life

10 years ago by in Uncategorized Tagged:

Observer Contributor
April 23, 2008

Author Dave Ramsey.

Not long ago, Tammy Wade of Tulsa, Okla. had a debt problem. Following the suggestion of her husband, the mother and small business owner followed Dave Ramsey’s book: Financial Peace. A transformation took place and the family eliminated more than $36,000 of debt in less than two years.

“Ramsey really cares about changing peoples’ lives,” Wade said. “He taught us that we don’t need to follow society’s measure of the ‘American Dream.’”

Ramsey, a hit syndicated radio personality and millionaire, makes his money by helping Americans get out of debt. On average, those who follow 7 Baby Steps decrease their debt by $8,000 and pay off their mortgage within seven years, according to Ramsey’s public relations director, Beth Tallent.

“If you’re in debt, then you’re a slave because you do not have the freedom to use your money to help change your family tree,” says Ramsey.

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For some, Ramsey’s program brought peace of mind and balance to their families. For others, he is just a source of entertainment. Listeners and viewers are drawn to his personality and find his tips helpful. However, changing behavior is a big challenge that Ramsey takes on. Ramsey followers discuss what makes the program different from others and how they were able to stick to it. Financial experts have some concerns about his advice, but overall they believe it may be a good program for many people.

Ramsey celebrates with listeners when they call into his radio show to share their joy of becoming debt-free. More than 3.5 million fans hear Ramsey’s nationally syndicated radio program, The Dave Ramsey Show,” each week. His evangelical Christian stance on improving your life, marriage and relationships by eliminating debt draws his listeners in to follow his Total Money Makeover program, participate in his Financial Peace University, purchase one of his books or attend one of his 16 live seminars per year. More than 500,000 people attended Ramsey’s live events and spend between $30 to $180 per ticket.

Much like losing weight, Ramsey says eliminating debt is 80 percent behavior change and 20 percent head knowledge. Ramsey provides advice and teaches his audience how to eliminate debt. But getting people to change their behavior is much more challenging.

The fundamental part of Ramsey’s program is learning how to follow Ramsey’s 7 Baby Steps. The second step of “Paying off all debt using the Debt Snowball” can take years.

Laurie Yeargin, a mother of four living in North Carolina, explained the snowball phenomenon as paying off your smallest bills first, regardless of the interest rate. Once the smallest bill is paid off then the monthly amount you would have paid towards the first bill goes towards the next smallest bill. Eventually the next smallest bill is paid off. This process repeats for the third smallest, then fourth smallest, etc.

Yeargin said this was opposite to what she thought of how to pay bills.

“I had always been told pay off the highest interest bills first, so that was a complete turn-around,” Yeargin says. She found that within a couple of months, she was able to pay off four or five bills.

Ramsey said the debt snowball is very psychological. While there are financial benefits of paying off bills with the lowest interest rate last, the thrill of paying off bills provides a person with a sense of accomplishment. Paying the bills from the lowest balance to the highest achieves that psychological rush that most people need to keep the momentum up and reward the saving behavior, Ramsey said. Wade found it fun to find creative ways of cutting back on expenses. She quickly saw results, which she found rewarding.

However, not all financial professionals believe the debt snowball is the right approach. Phil English, a personal finance professor at American University, said that classical finance principles suggest debts should be paid off with the highest interest rate first. He doesn’t follow this approach, but he does believe David Bach’s system of “DOLP” or “Debt on Last Payment” system, as described in The Automatic Millionaire is the best out there. This method calculates interest rates into the equation and suggests calculating the balance of each debt divided by the minimum payment. The lowest amount determined by this equation should be paid off first. This equation is a bit more complicated, but it does take into account the interest rate on each bill.
English also said that consumers should be aware that minimum payments may not cover the total interest accrued each month.

Therefore, someone paying the minimum balance each month on a high interest credit card could pay nothing towards their principle amount and not even cover their accrued monthly interest, causing the amount owed to creep up each month. If someone is following Ramsey’s debt snowball, they may fall into this trap if they have a credit card with a high balance and terms that set minimum payments too low. However, English still believes the debt snowball is a great idea because of the personal satisfaction one gets from paying off debt.

Most of Ramsey’s advice is practical, such as creating a budget, setting long term goals and avoiding poor financial decisions. While these are good ideas, it is much more of a challenge to stick with the program. Ramsey says that 80 percent of eliminating debt is to make behavioral changes.

Behavior changes are much more challenging to teach, and this is where Ramsey’s faith and lessons are crucial to getting people to follow his seven-step program and succeed.

“He brings a spiritual aspect into giving that was very motivating,” Yeargin says of Ramsey.

Ramsey’s first audience was not directed towards church congregations. Initially Ramsey rented out ballrooms at hotels and gave seminars. When that took off, Ramsey recorded a video that landed in many churches. His public relations director, Beth Tallent, said the program was never designed as a Bible study because the proverbs he uses are universal.

It may be tougher for some non-Christians to get through some of Ramsey’s lectures due to the Biblical content. For example, “Myths and Truths of Personal Finance” from Ramsey’s Web site references Proverbs 22:7, “The rich rule over the poor, and the borrower is slave of the lender.” This proverb is often repeated on Ramsey’s radio programs, books and television program.

Despite his abundant use of Christian phrases, many listeners connect with his messages—even if they do not consider themselves religious. Katherine Zinder, an occasional listener from Virginia, says she enjoys the entertainment value of Ramsey’s show and doesn’t mind the overused biblical proverbs. Zinder says Ramsey’s “personality is what makes the show so good.” She said the tips Ramsey provides help her think of ways to maintain a good budget.

Ramsey’s books, DVDs, software and CDs are available at retailers nationwide. The programs range in price from $19.95 for Financial Peace Junior, a resource to teach children about debt, to $329 for the thirteen-week Financial Peace University Home Study DVD. He sells additional programs designed for specific audiences such as church groups, Spanish speakers, workplaces, students, and those in bankruptcy.

Tammy Wade, who has all of Ramsey’s books, said she found the investment well worth it because her family and business debts are now under control. Her debt is nothing like it was before, since she now has the keys and knowledge to fix it. Wade met Ramsey several times and volunteers at his events.

“We have been thrown a lifeline and it’s such a more peaceful way to live,” she said.


A Little More about Dave Ramsey
Ramsey suffered a personal financial loss of a four million dollar real estate portfolio and became bankrupt when in his twenties. With an education in finance and real estate, he decided to return to the basics of personal finance. He worked to rebuild his fortune. Along the way others asked him how he did it, so Ramsey wrote and self-published a book. After selling the books, Financial Peace, out of the back of his car between real estate deals, he found an audience. From there he started hosting seminars in hotel ballrooms and eventually created a video of his seminar to meet the demand.

Ramsey now has three New York Times bestselling books, his own privately owned syndicated radio program, a nightly television program on Fox Business and the number-one downloaded podcast about personal finance.

Ramsey has helped most of his followers save an average of $8,000, according to his Web site. His public relations director says he is not trying to change America; he is just helping one person at a time.

Sidebar 2:
The 7 Baby Steps According to Dave Ramsey
1. $1,000 to start an Emergency Fund
2. Pay off all debt except mortgage using the Debt Snowball
3. 3 to 6 months of expenses in savings
4. Invest 15 percent of household income into Roth IRAs and pre-tax retirement
5. College funding for children
6. Pay off home early
7. Build wealth and give! Invest in mutual funds and real estate

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