Americans are up to their ears in debt. According to the Federal Reserve, the average American household has just over $15,000 in credit card debt as well as over $31,000 in student loan debt, as of September 2013.
If you’re one of the millions looking to pay off debt and gain financial stability you may have heard buzz about Dave Ramsey’s Financial Peace University. Let us take an unbiased look at Ramsey’s advice and the FPU program.
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I’m including insight from a young married couple with two children who have been on the program for several months now. You may find that the program isn’t right for you, or you may be ready to find the classes in your area today. Either way, you’ll gain understanding of the basics of the program, its background and its outcomes.
Who is Dave Ramsey?
Dave Ramsey is a well-known financial author and speaker. He has a popular syndicated radio program and has been featured on TV shows due to his expertise in the field. Ramsey created a financial program which he calls “Financial Peace University” (FPU). FPU is an integrative program which involves live classes, small group discussions, video teaching and a book. You can find classes in your area here.
If you like the sound of what Ramsey has to offer but aren’t ready to commit to taking a class, his book The Total Money Makeover provides a solid introduction to the concepts he teaches.
Biblical influences, but not just for Christians
Dave Ramsey is a Christian. As such, Financial Peace University does have a Biblical base to its teachings. In addition there some scriptures quoted in the materials used to teach the program.
However, it’s presented in a very non-offensive way that anyone can relate to, so you don’t have to be a Christian to benefit from the program. A close friend of mine is currently in Financial Peace University. She explains, “I am Buddhist. However, I still relate to a lot of the passages they reference.”
Dave Ramsey’s “Seven Steps”
The meat of the program is the seven steps which Dave Ramsey calls “the 7 Baby Steps”. The baby steps are as follows:
1. Save $1,000 to start your emergency fund as soon as possible.
- That means no spending on anything you do not need. Have a garage sale if you need to, and do everything you can to get that first $1,000 put away.
- By completing this first step you have to commit to a budget and follow through with the rest of the steps.
2. Pay off all of your debt using the Debt Snowball method.
- The Debt Snowball method is the greatest way to get rid of your debt. Simply put, you pay off the debt with the lowest balance first. Once that is paid, apply what you would have continued to pay monthly to the next debt and so forth. By doing so, you create a snowball effect and before you know it, your debt will have been paid off in a much shorter amount of time.
3. Save 3-6 months’ worth of expenses to further complete your emergency fund.
- A real emergency fund should have about 3-6 months’ worth of expenses, according to Dave Ramsey. Once you have established an emergency fund you will find that credit cards are no longer needed to be kept for those so called “emergencies”.
4. Invest 15 percent of your household income into a retirement account.
- By this step you should have eliminated all debt except for your home mortgage. Dave suggests investing 15% of your entire income into a Roth IRA.
5. If you have children, start saving for their college education now.
- Start saving for your kid’s college with Education Savings Accounts (ESA’s) and 529 plans. DO NOT use insurance, savings bonds, zero-coupon bonds or pre-paid college tuition.
6. Pay off your home.
- Start pouring all of your extra money into paying off your home mortgage. This is the last debt you will ever have to pay.
7. Build wealth and give!
- Donate money regularly and bless others with your successes.
Criticism of the debt snowball
While it’s clear to see that following the seven steps taught in Financial Peace University can help a person pay off debt and grow their savings, it’s also easier said than done. Financial Peace University is far from a “get rich quick” scheme; it’s more a slow and steady wins the race program.
Some financial advisors criticize the debt snowball method because it isn’t necessarily the fastest way to reduce debt.
Mathematically speaking, paying off the debt with the highest interest is actually a better idea. However, Ramsey claims that the debt snowball method is effective because it is more of emotional accomplishment when people can see credit cards being completely paid off and therefore they are more likely to stick with the program.
Criticism of FPU and real estate
The idea of putting extra money down each month to pay down your mortgage as quick as possible (once you’ve paid off other debt) is solid because it eventually gets you out of all debt.
However, one thing that some people have a tough time swallowing from Dave Ramsey’s program is that he recommends only buying real estate with cash or – if absolutely necessary – with a 15-year fixed rate mortgage. Depending on what area you live in, that may be reasonable. But for some parts of the country, that idea is essentially impossible for many families, even if they save up for years and years.
There’s also the fact that many Americans successfully carry mortgages at low interest rates while investing money and earning a far greater rate of return. Still others take on additional mortgage to buy investment properties, which Ramsey would never recommend. I don’t think either approach is right or wrong; it depends on your financial priorities and risk tolerance. Do you want to be debt-free at all costs, or are you willing to shoulder some debt (and some risk) for the chance to build wealth more quickly?
Most of FPU is reasonable for many
If you have debt to pay off like the majority of Americans, the first steps of FPU are good ones. The difference between paying the smallest debts first (as opposed to those with the highest interest rates) may cost you a few hundred dollars in lost interest, but both plans will work if you stick to them.
My suggestion is to implement a personal program for your family based on the seven baby steps, but suited to meet your needs. Only you know exactly what will work for you.
If you want to buy a home but can’t pay all cash, save up as much money as possible first. Put as much money down as you can and make sure that your monthly payments are comfortable even if you do have unforeseen live changes.
Have you ever tried Financial Peace University or a similar program? How has it worked for you? Share your best tips for getting rid of debt here.