The more I learn about the Great Depression (see last week’s book review) and the more I read current economic thinking, the more convinced I am that reducing our debt burden – individually and as a society – is the only way to long-term prosperity, growth and opportunity. This leads me quite naturally to one of my favorite thinkers / writers in the US today – Dave Ramsey – and his Financial Peace Revisited.
But first, a quick look at some stats:
debt in America today = 190% of GDP (the measure of all goods and services produced in our nation yearly);
debt in America at the start of the Great Depression = 164% of GDP
average home price decline 1929-1933 = 24%;
now = 5% (2006-2008) average
The Economist says, “Debt burdens are high today mostly because so much was borrowed in the recent past.” – Debt burdens were high in the depression due to deflation and shrinking output, not because they went on a borrowing binge like us. This is a major difference and tells us that we can do something about our debt burdens, more than in the Great Depression.
So, how does Dave say to get rid of debt? Simple – spend less than you earn, systematically, over a long term period, applying your residual income to debt reduction.
The first half of Financial Peace Revisited is spent convincing us of the need to limit our lifestyle and that we have a problem, called “Stuffitis”, a very technical medical term that discusses our addiction to stuff. This is often the first step in making any change in our lives – whether it is losing weight, stopping smoking, or getting help with an addiction like stuffitis. We must first recognize that we have a problem. And Dave is great at getting us to realize that, Houston, WE HAVE A PROBLEM.
The one thing that Dave teaches in the second half of the book that I want to highlight is his concept of Baby Steps. If the only idea you come away with today is this one, then great. Getting out of debt, like losing weight, is a process. It can’t happen overnight – it needs daily discipline – and it demands a lifestyle change. This is very comforting for people like me who are very goal-oriented. If I apply myself to this task well, in the end, I will win.
“Baby Steps” begins with the idea of building up a small emergency fund, then using the “debt snowball” (a very simple process with a fancy name) to pay off all debt but the mortgage, then building up some savings and retirement planning / college savings – then finally tackling the mortgage debt. The final Baby Step is planning how you are going to use all that extra cash you’ve been applying toward debt payments and investments to pay cash for things like your next car, the real estate steal, variable annuities and other fancy investment options that only rich people have access to. BECAUSE BY THEN, YOU’LL BE RICH.
I am a planner by nature, so this process was fascinating when I first heard it. Then, I realized the genius in its simplicity. Anyone could follow it and could be the old lady a friend of mine talks about who drove up in a beat up car and plunks down thousands of dollars to help his school build a new facility. She was an astonishingly wealthy person with the lifestyle of a lower middle class person. There is no shortcut to becoming wealthy – the way is filled with hard work, financial discipline, a limited lifestyle and sustained focus on one end goal.
If you are left wanting more, get the book (link above) or check out a Financial Peace University near you. My church has one starting up soon, March 19th to be exact. Get on the Baby Step plan and let’s march our way to freedom from debt and those rich bankers who build all the tall buildings downtown. There’s a reason why they are rich and we are not. Proverbs says, “the borrower is a servant to the lender.”
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April 20th, 2010
Вы допускаете ошибку. Давайте обсудим это. Пишите мне в PM, поговорим….
разнорабочий This leads me quite naturally to […….