Dissecting Dave Ramsey’s “Total Money Makeover” - Build Wealth [Part 7 of 7]

Posted by panzer on July 19, 2008. Filed under [Total Money Makeover, book review, financial freedom dream, financial freedom in Singapore, financial freedom principles, financial literacy in singapore, paying off debt, personal finance, personal finance in Singapore]
Tags: [Dave Ramsey, personal finance, Timothy Ferriss, Total Money Makeover]

You have come to the final instalment in the series reviewing the 7 baby steps in Dave Ramsey’s “Total Money Makeover“. Let’s review the 7 baby steps in his book:

1. Save $1,000 cash as starter Emergency Fund
2. Start the Debt Snowball
3. Finish the Emergency Fund
4. Invest 15% of your Income in Retirement
5. Save for College
6. Pay off the Home Mortgage
7. Build Wealth

Building Wealth Towards Financial Freedom

If you have reached this step after doing steps 1 to 7, you find yourself in the enviable position of building up wealth from this point on. Your wealth is represented by the personal net worth of all your assets less your liabilities. Reaching this stage means you have no liabilities and all savings can be channelled into investments into your own retirement fund.

This is truly when you are working for yourself. I am a believer in the concept of financial freedom or financial independence not because I want to more and more to be happy but because with an investible capital that is sufficient to support my lifestyle, I can choose to do whatever I want in life without worrying about the time-money trade-off when you need to work for a living.

The “Four Hour Workweek” by Timothy Ferriss has refueled my interest towards seeing how I can find my muse or money making idea and implement it to run on autopilot to sustain the desired lifestyle. Lifestyle design sounds more and more attractive over time.

Putting Total Money Makeover into Practice

Dave Ramsey’s approach towards total money makeover applies for those who are overtaken by debt and do not see the solution out of problems. Dave’s approach is common-sensical and in order to implement it successfully, you must have your eyes opened to one’s dire situation and to take concrete action to solve it. It isn’t easy to get out of debt and Dave’s stories from ordinary Americans demonstrates that success in measured in years of financial discipline, living way within your means and trying to raise income through having a second job or selling your stuff.

Some of his methods sound extreme because the situation warrants it. To be made bankrupt is not a laughing manner as you can read from IPTO’s information about rights and responsibilities of an insolvent person.  You cannot travel freely and are obliged to inform the other party when you intend to obtain credit of more than $500 that you are an undischarged insolvent or risk 3 years jail and/or $10,000 fine.

For those of you who are on  your way towards building wealth, congratulations are in order. This is the true start to one’s journey towards financial freedom because you can now concentrate on building up investible net worth so that you will be out of the rat-race. My own dream of getting out of the rat-race is to make full use of my public library card and consume as much non-fiction as I can. I want to learn new things about the world and avoid brain-rot. I also want to experience the pleasures of reading fiction especially science-fiction and fantasy genres because of the magical worlds created by the authors allows me to travel to magical realms and worlds and to explore alternate realities all within my mind.

Where are you at in your own journey towards financial freedom and in practising the 7 baby steps in “Total Money Makeover”?

Tell me about it by leaving a comment!

Be well and prosper.

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Dissecting Dave Ramsey’s “Total Money Makeover” - Pay off the Home Mortgage [Part 6 of 7]

Posted by panzer on July 17, 2008. Filed under [Total Money Makeover, book review, financial freedom dream, financial freedom excellence, financial literacy in singapore, paying off debt]
Tags: [baby step 6, Dave Ramsey]

Dave Ramsey’s “Total Money Makeover” baby Step 7 is to pay off your home mortgage. I have written posts on this topic before and am amazed at how people are split right down the middle when it comes to this topic.

Your Mortgage Loan - Good or Bad Debt?

Proponents of good debt believe that you can leverage off the low costs of home equity to borrow monies to invest and provide cash flows for general day-to-day use because in Singapore you can use your Central Provident Fund ordinary account monies to pay your mortgage instalments. Thus, you do not have to touch your take-home pay and can use it to spend, save or invest.

Opponents of good debt or those who like Dave Ramsey believe ALL DEBT IS BAD BAD BAD take a diametrically opposite view. Because the longer you take to pay, the interest you incur increases the true cost of your home. Besides the actual purchase cost of your home, the financing costs in terms of interest makes you pay more through interest. Paying off your mortgage earlier by increasing the instalment payments or making pre-payments to principal saves you interest costs. Delaying payment and investing the same amount of money will result in a gain only if you can get a higher return than your cost of borrowing.

Panzer’s Take on Good vs Bad Debt

I weigh on the side of being a supporter of Dave Ramsey. Debt is bad bad bad for a whole host of reasons. I talked about “the bearable likeness of being” and also in my previous post “Should I pay off my housing loan first“.

After managing my own monies for the last 5 years, I’ve realised that it is difficult to consistently beat the market and paying off your mortgage earns you the interest saved every time. For instance, let’s say you borrow $150,000 at 2.6% to finance your HDB apartment. Your total interest costs over a 30 year term at 2.6% is $323,975.44 representing an interest cost of $173,975.44. If you borrow $10,000 less instead, this savings will translate into a total interest cost of $162,377.07 or savings of $11,598 on interest costs. So every $10,000 prepaid now saves you that same amount plus more in interest costs alone 30 years down the road.

Being the stingy accountant that I am, I don’t want to pay a penny more to the borrower more than I have to. Thus, I took a decidedly aggressive approach and got myself housing debt relatively quickly by borrowing less and using almost all my CPF ordinary account plus savings for my home purchase. I also made regular capital re-payments because my loan package from the bank allowed me do so subject to a cap of 30% of the principal each year for the 1st three years. I literally ploughed back most of my year-end bonuses and windfall gains from shares into such payments.

My approach is not for everyone as not everyone shares my view on debt. Some believe that life is to be enjoyed and a balance has to be struck between today’s wants and tomorrow’s needs. I agree. Decide on your approach to your home mortgage based on your own values and principles and take appropriate action accordingly. But do be aware of the advantages and disadvantages of different approaaches.

Be well and prosper.

Related Posts:

1. Dissecting Dave Ramsey’s “Total Money Makeover” - Start Your Emergency Fund [Part 1 of 7]
2. Dissecting Dave Ramsey’s “Total Money Makeover” - Start the Debt Snowball [Part 2 of 7]
3. Dissecting Dave Ramsey’s “Total Money Makeover” - Finish the Emergency Fund [Part 3 of 7]
4. Dissecting Dave Ramsey’s “Total Money Makeover” - Invest 15% of your Income for Retirement [Part 4 of 7]
5. Dissecting Dave Ramsey’s “Total Money Makeover” - Save for College [Part 5 of 7]

Dissecting Dave Ramsey’s “Total Money Makeover” - Save for College [Part 5 of 7]

Posted by panzer on July 16, 2008. Filed under [Total Money Makeover, book review, financial literacy in singapore, personal finance, personal finance in Singapore, save and invest]
Tags: [saving for college, saving for university]

The more you learn, the more you earn.

Conventional wisdom on saving for College

Many of us as parents want the best for our children, and that means saving up for their college tuition or university education. Readers who are from the Lion City (i.e. Singapore) also want the best for their children and the costs of providing tertiary education looms large in their scheme of financial planning. Some parents even cite the high costs of university education both locally and abroad as reasons for not having more children. That gives us an indication of how important higher education is to many of us here.

Dave Ramsey’s baby step #5 save for college debunks some of the myths of college education. He is supportive of getting a college degree but he warns his readers not to put themselves and their children into serious debt by going for brand-name colleagues and off-campus accomodation just for the sake of looking good. An ivy-league education if it mades you a slave to debt may not be in your best financial interest.

The Singapore University (College) Education Scene

University cost inflation is real. When I studied in NTU back in the early 90s, my tuition fees for my first year in Accountancy was $2,600. NTU’s university fees for an academic year are now $6,360 (after MOE subsidies) even for non-laboratory based courses. The annualised inflation rate is 5.4% compounded annually. The costs of overseas university education would be even higher after factoring accomodation and other living expenses abroad.

Depending on where you intend to send your child for his college education, you would need to plan to save and invest accordingly until your baby boy or girl turns 18 or 21 and embarks on his or her college education. How much monies are we potentially talking about?

I’ve done some computations in a post on kidsRICH on affordability of university education and you can check it out. Basically, you would need to save around $287 per month for the next 18 years to provide for a university place for your child born today assuming a investment return of 3.5% and inflation at 7%. If we use 5.4% as the inflation rate for university costs, then you will need to set aside $219 per month for the next 18 years in order to put your child through a 4 year university (college) program in Singapore. All costs are projections and actual results will depend on investment returns, actual inflation rates for university costs etc.

Un-conventional Wisdom

Providing university education appears to be a given in Singapore with most parents saying they would fund their education.  However, the reality could be different because costs are going up due to inflation and even today peak oil and high commodity prices make real wage growth challenging for middle and lower income folks. Breaking free from conventional wisdom, there are many ways to fund your child’s college (university) education. Some examples could be:

1. Co-funding - Get your child to borrow 50% while you fund 50%. This would make him a stakeholder for his own college funding
2. State-funding - If your child is able to secure a scholarship from the State or any of the Temasek Linked Companies or Statutory Boards, this could be another means.
3. Self-funding - Borrowing 100% from banks and paying off after graduation is common in the US but less so in Singapore. I know some ex-colleagues who studied in Polytechnic, worked a few years after graduating from Poly before pursuing university program overseas.

If you are willing to be different, there can be many ways out of the university funding issue. The more critical issue is whether your child’s academic results are sufficient to gain entry into the preferred course of study.

College funding can take different models depending on your own financial situation.

A university degree is nowadays a hygiene factor in the employment market but increasing the complex marketplace also rewards people who have talent outside academic qualifications per se.

Be well and prosper.

Related Posts:

1. Dissecting Dave Ramsey’s “Total Money Makeover” - Start Your Emergency Fund [Part 1 of 7]
2. Dissecting Dave Ramsey’s “Total Money Makeover” - Start the Debt Snowball [Part 2 of 7]
3. Dissecting Dave Ramsey’s “Total Money Makeover” - Finish the Emergency Fund [Part 3 of 7]
4. Dissecting Dave Ramsey’s “Total Money Makeover” - Invest 15% of your Income for Retirement [Part 4 of 7]