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

Posted by panzer on July 19, 2008. Filed under [personal finance]
Tags: [book review, Dave Ramsey, financial freedom dream, financial freedom in Singapore, financial freedom principles, financial literacy in singapore, paying off debt, personal finance, personal finance in Singapore, 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 [personal finance]
Tags: [baby step 6, book review, Dave Ramsey, financial freedom dream, financial freedom excellence, financial literacy in singapore, paying off debt, Total Money Makeover]

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” - Invest 15% of your Income in Retirement [Part 4 of 7]

Posted by panzer on July 14, 2008. Filed under [personal finance]
Tags: [book review, Dave Ramsey, financial freedom in Singapore, financial freedom principles, financial literacy in singapore, personal finance, personal finance in Singapore, retirement planning, saving 15% of your income for retirement, Total Money Makeover]

We are now at baby step #4 from “Total Money Makeover” by Dave Ramsey which comprises the following 7 steps:

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

My previous 3 parter on “Are You Ready for Retirement” has addressed some of the issues relating to retiring here in the Lion City. The conclusion from that series was you can retire at 55 IF you build up your own personal retirement funding on top of the Central Provident Fund (CPF) because majority of CPF (Singapore’s version of 401k, ROTH IRA retirement fund) members would very likely just about have sufficient funds to meet minimum sum by age 55 and can only live on $5,000 from age 55 to 62/65.

Dave Ramsey’s step #4 becomes more critical if you do intend to retire earlier than 55. [Panzer's sidenote: If you want to be even more radical, you may want to read Timothy Ferriss's "The 4-Hour Workweek" on the outmoded concept of retirement.]

Saving 15% of your income towards retirement

15% is not a magical number and it is a rule-of-thumb rather than a mathematical truth the exact amount required by the time you are aged xx is dependent on so many factors outside your control e.g. health, family circumstances, job circumstances, investment returns, unexpected emergencies etc. So if you can go for a higher or lower percent depending on if you are able to meet all the other steps in “Total Money Makeover”.

15% sounds about right to me because our CPF is already based on a contribution rate of 14.5% from the employer and 20% from your own contributions. In Singapore, if you are already contributing to your CPF, the additional 15% will help make up whatever short-falls due to having a major chunk of your retirement monies from CPF ordinary account being used to pay for our home mortgage. If you are still paying your home mortgage from CPF, you may want to target to put aside more than 15% for your retirement.

Panzer’s Reactions to 15%

Dave’s step 4 challenges the assumptions of many who believe that CPF savings is “enough”. I don’t think it’s enough and hence try to save and invest 30-40% of my income. I may not always hit my  targeted 30-40% but to hit 15% is achievable in the long-run. Having to salt away 15% makes you have to budget and live within the remainder 85%.

One of the reasons why I enjoy reading “Total Money Makeover” is Dave’s tagline:

If you will live like no one else, then you can live like no one else.

His reference to eating Alpo (a brand of dog food) if you fail to get with the program in “Total Money Makeover”, while hilarious, has a serious message. I remember my maternal grandparents who lived in a one-room rented flat in Kreta Ayer, Chinatown. Their neighbours were samsui women who had no one to take care of them in their old age and literally subsisted on rice and salted vegetables. I shudder when I think back of the annual Lunar New Year visits we made before they passed on.

What do you think you would be eating when you retire at 55, 65 or 85?

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]