by Dave Ramsey
MYTH: I’ll just file bankruptcy and start over; it seems so easy.
TRUTH: Bankruptcy is a gut-wrenching, life-changing event that causes lifelong damage.
Kathy called my radio show, ready to file bankruptcy. Her debts were overwhelming, and her cheating husband had left with his girlfriend. The house was in his name, as was all the debt except $11,000. Kathy was twenty years old, and her brilliant uncle, a lawyer from California, told her to file bankruptcy. Kathy was beat up, beat down, and deserted, but she was not bankrupt. When her soon-to-be ex-husband ends up with all the debt in his name, he may be bankrupt, but Kathy wasn’t.
Bankruptcy is not something I recommend any more than I would recommend divorce. Are there times when good people see no way out and file bankruptcy? Yes, but I will still talk you out of it if given the opportunity. Few people who have been through bankruptcy would report that it is a painless wiping-clean of the slate, after which you merrily trot off into your future to start fresh. Don’t let anyone fool you. I have been bankrupt and have worked with the bankrupt for decades, and it is not a place you want to visit.
Bankruptcy is listed in the top five life-altering negative events that we can go through, along with divorce, severe illness, disability, and the loss of a loved one. I would never say that bankruptcy is as bad as losing a loved one, but it is life-altering and leaves deep wounds both to the psyche and the credit report.
Chapter 7 Bankruptcy, which is total bankruptcy, stays on your credit report for ten years. Chapter 13 Bankruptcy, more like a payment plan, stays on your credit report for seven years. Bankruptcy, however, is for life. Loan applications and many job applications ask if you have ever filed for bankruptcy. Ever. If you lie to get a loan because your bankruptcy is very old, technically you have committed criminal fraud.
Most bankruptcies can be avoided with a Total Money Makeover. Your Total Money Makeover may involve extensive amputation of stuff, which will be painful, but bankruptcy is much more painful. If you take the thoughtful step backward to get on solid ground instead of looking at the false allure of the quick fix that bankruptcy seems to offer, you will win more quickly and easily. I know from personal experience the pain of bankruptcy, foreclosure, and lawsuits. Been there, done that, got the T-shirt, and it is not worth it.
We’ve never handled money well at all. I guess that’s a bit of an under-statement—we’ve filed bankruptcy three times!
The first time we filed, we felt like bankruptcy was our only option. Our small-business loan to buy a body shop went from 4 percent to 22 percent APR, and we lost all our earnest money. Soon after, my husband had his first heart attack, and other problems seemed to pile on. Before long, we lost our house and cars. We moved to a different state with four kids, two cats, a dog, a motorcycle, a U-Haul trailer, $800—and no jobs.
We were depressed and felt like failures as we put our life back together. You’d have thought we would have learned our lesson, right? Wrong.
Instead of learning from our mistakes, we actually repeated the whole thing again a little over a decade later. After an injury due to a fall, my husband was out of work for six months. Our income went from $4,000 a week to $400 a week. We racked up credit-card debt and ended up filing bankruptcy a second time. Again, we lost our house and most of our possessions.
Although the first bankruptcy felt like the end of the world, the second one didn’t upset us too much. We felt like it wasn’t a big deal because we’d been down that road before. So we just started over a third time, still making the same bad choices.
Over the next seven years, we started a new business, made a lot of poor decisions, and closed yet another company. Then we filed bankruptcy a third time. After filing, we were ashamed and too embarrassed to tell anyone. We had this awful, dirty secret that we hid from our family and friends. To make matters worse, all the stress and shame caused my husband to have two more heart attacks.
Going through the bankruptcy process was horrible. No one will meet your eye in the trial room. It’s like everyone has the plague and is afraid to talk to anyone. Filing bankruptcy three times made us feel like a fraud. We wondered, What’s wrong with us? Why do we keep repeating the same mistakes?
When our son came home from deployment with a mental illness, we became his full-time caretakers. Money was extremely tight because we were caring for our son on only one income—my husband had retired after his third heart attack. We were close to filing bankruptcy for a fourth time when my daughter came to our rescue by introducing us to Dave Ramsey.
Now, we’re on The Total Money Makeover plan and trying to make a dent in our financial mess. It’s tough trying to correct a lifetime of bad decisions and behaviors about money! But even though we’ve restarted Baby Step 1 three times, we’ve still been able to pay off $26,000 of debt! Finally, we have hope for our future, and we are motivated to help others so they don’t go down the same path we did.
Larry (age 67) and
Susan (age 52) Hickman
Retired Insurance Broker; Collection
Manager
We teach people to carry cash. In a culture where the salesclerk thinks you are a drug dealer if you pay with cash, I know this suggestion may seem weird. However, cash is powerful. If you carry cash, you spend less, and you can get bargains by flashing cash. Linda e-mailed my newspaper column, complaining that she would get robbed if she carried cash. I explained to her that crooks don’t have x-ray vision to look into her pocket or purse. The crooks assume that your purse is like all the others filled with credit cards that are over the limit. Look, I’m not making light of crime. There’s a chance you may get robbed, because people do get robbed—whether they carry cash or not. And if it happens to you, the cash will be taken. But, trust me, you need to be far more worried about the danger of using credit cards than the danger of being robbed while carrying cash. Carrying cash doesn’t make you more likely to get robbed; on the contrary, the mismanagement of plastic is robbing you every month.
MYTH: I can’t use cash because it is dangerous; I might get robbed.
TRUTH: You are being robbed every day by not using the power of cash.
We have already destroyed the myth of credit cards and shown that when you spend cash, you spend less. When you put together your written game plan, you will find that managing spending categories as part of your Total Money Makeover is a must to gain control. Cash enables you to say no to yourself. When the food envelope is getting low on cash, we eat leftovers instead of ordering pizza again.
DAVE RANTS . . .
Breaking Down the Envelope System
It’s easy to overspend when you don’t have a clear boundary line. The budget tells you what that line is for each category, but when your gas money and grocery money and entertainment money are all sitting in one big lump in your bank account, one category can plow right past the line without you knowing. That’s why I recommend using the envelope system for some categories.
Say you budget $600 for food this month. Well, when you get paid, you take that $600 out of the bank in cash—yes, actual cash—and put it in an envelope. Write “FOOD” on the outside of that envelope. When you go to the store, take your envelope and spend your cash.
You don’t use that money for anything other than food, and you don’t buy any food except with the money out of that envelope. When the cash is gone, you’re done! That’s a pretty clear boundary!
The envelope system works best in categories like food, entertainment, clothing, gas—stuff like that. You don’t need to use it for monthly bills that you send through the mail or have automatically debited from your account.
Here’s the deal: Swiping a piece of plastic doesn’t register in your brain the same way cash does. When you actually lay a couple of Benjamins on the counter, you know you’re spending money! That’s why using the envelope system will help you change your spending habits.
Cash is king!
MYTH: I can’t afford insurance.
TRUTH: Some
insurance you can’t afford to be without.
One day as I went to lunch, I met Steve and Sandy in my reception area. They came by to say thanks. What for? This young couple in their twenties listens to our radio program, and because I constantly push people to get the right kinds of insurance, they did. This year they got term life insurance and a Medical Savings Account health-insurance policy. “Good thing we did what you said to do,” said Steve as he pulled off his cap to reveal a shaved head with a big scar across the top. “What in the world happened?” I asked. The scar was from a biopsy that revealed inoperable brain cancer. Sandy smiled and said, “The health insurance has already paid over $100,000 in bills, and we would be sunk if we hadn’t followed through as you push all the time.” Also, Steve was uninsurable, so he was thankful to have his term life insurance in place. Steve and Sandy became friends of mine over the next few years as he fought cancer. A friend of mine heard their story and gave them a seven-day Caribbean cruise. Steve lost his battle to cancer in 2005, and we buried him on the day his son was born. He would be proud if his story inspires you to get and keep the right kinds of insurance. He was a good husband and father. By being responsible and buying the right kinds of insurance, they had covered life and death, which we all have to do.
Two years ago, my wife and I were just an average family making the typical financial mistakes most “normal” families do. We believed all the money myths people kept telling us. However, once our mistakes started adding up, they began to really take their toll on us. It wasn’t until we stumbled upon Dave’s radio show and the Total Money Makeover that we put a stop to our financial foolishness.
Years ago we were not handling our finances well at all. At one point we were married with no kids, making more than $80,000 a year, and we did not have the cash to buy a washing machine. We went along with too many “buy now, pay later” deals. “Ninety days same as cash” sounded like a good idea at the time. WRONG! We ended up paying much more than the items were worth. When we make purchases today, we “buy now, pay now,” with $1,800 buying $2,000 worth of furniture.
Another big mistake we made was our life insurance plan. People warned us that we needed to have Whole Life insurance before we turn thirty “or else.” They talked about how amazing the cash value savings feature was. WRONG! We were ignorant about how overpriced the coverage was, how high the fees were, and how long it really took to build cash value. We now know better. We plan to save, invest, and become self-insured.
In 2006, we were still making minimum payments on student loans that we had for more than a decade. We bought into what all the “normal” people were telling us: “Student loans are good debt. Everyone has them.” WRONG! We knew we needed to kick Sallie Mae to the curb once and for all. Now, instead of writing her a check every month, we are able to save in advance for our children’s college fund.
Fast-forward through the Financial Peace University Home Study Kit and fifteen months of complete sacrifice—we’ve paid off $27,000 in debt, saved an emergency fund, dumped the Whole Life insurance and purchased term life, created wills, and saved cash for a two-week “Freedom!” beach vacation to celebrate. After a lot of hard work and gazelle intensity, we are finally living like no one else!
Travis (age 33) and
Merry (age 35) Skinner
AutoCAD Draftsman in land surveying;
Registered Nurse
We all hate insurance, until we need it. We pay and pay and pay premiums, and sometimes we feel insurance-poor. There are certainly many gimmicks in the world of insurance. We cover insurance in detail at Financial Peace University and in other books, but you must have insurance in some basic categories as part of a Total Money Makeover:
• Auto and Homeowner Insurance—Choose higher deductibles in order to save on premiums. With high liability limits, these are the best buys in the insurance world.
• Life Insurance—Purchase twenty-year level term insurance equal to about ten times your income. Term insurance is cheap and the only way to go; never use life insurance as a place to save money.
• Long-Term Disability—If you are thirty-two years old, you are twelve times more likely to become disabled than to die by age sixty-five. The best place to buy disability insurance is through work at a fraction of the cost. You can usually get coverage that equals from 50 to 70 percent of your income.
• Health Insurance—The number one cause of bankruptcy today is medical bills; number two is credit cards. One way to control costs is to look for large deductibles to lower your premium. The HSA (Health Savings Account) is a great way to save on premiums. The high deductible creates a much lower premium, and this plan allows you to save for medical expenses in a tax-free savings account.
• Long-Term Care Insurance—If you are over sixty, buy Long-Term Care insurance to cover in-home care or nursing home care. The average nursing home stay costs $40,000 per year, which will crack and scramble a nest egg in a heartbeat. Dad in the nursing home can use up Mom’s $250,000 savings in just a few short years. Make your parents get it.
I was so impressed with Dave when I heard him for the first time on the Oprah Winfrey Show. I knew the personal responsibility and financial accountability he was challenging people with was exactly what Ken and I needed. Our financial problems had been accumulating for twenty years and were pretty substantial.
It all started the year after Ken and I were married. He was thirty-one and I was twenty-two—excited about life and the future ahead of us. But everything changed when Ken suffered a severe stroke and was left a quadriplegic. We didn’t know what to do (in many regards). Financially, we started putting everything on the credit card because we weren’t bringing in much money. Thankfully Ken’s medical bills were covered. Without that coverage, the medical bills would have been too much to handle.
For years we racked up debt and were struggling to get by. Nevertheless, God truly blessed us and continued to pull us through everything.
And then we found Dave. Ken and I read The Total Money Makeover and began to practice the principles immediately. When we started budgeting, Ken really showed interest in helping me handle our finances and started paying the bills online. The first time that I didn’t have to pay the bills, I actually sat down and cried because it was one thing that I didn’t have to worry about. Ken lit up, knowing that he was an active partner, making my life a little easier. We have made budgeting and planning our future together enjoyable and fun. It’s like dating again! Ken is the most amazing man I have ever met and has been my rock all these years. I am so blessed to be on this journey with him.
Cheryl (age 44) and
Ken (age 52) Rhoads
Mary Kay Independent Sales Director
MYTH: If I do a will, I might die.
TRUTH: You are going to die—so do it with a will.
Estate planners tell us that 70 percent of Americans die without a will. Dumb, really dumb. The state, known for its financial prowess, will decide what happens to your stuff, your kids, and your financial legacy. The proverb says, “A good man leaves an inheritance to his children’s children” (Prov. 13:22 NKJV). I am a pragmatist, and so I don’t understand all the fretting over a will. A will is a gift you leave your family or loved ones. It is a gift because it makes the management of your estate very clear and light-years easier.
DAVE RANTS . . .
Whole Life insurance is a horrible product. Why would you pay someone interest on your own savings? That’s backward, and it does not make you smart.
You are going to die, so go out in style, and die with a will in place.
We’ve revealed Debt Myths and Money Myths. If you have carefully read and understood why these myths are untrue, I have great news for you. Your Total Money Makeover has already begun! The Total Money Makeover is a remaking of your view of money so that you permanently change how you deal with money. You must walk to the beat of a different drummer, the same beat that the wealthy hear. If the beat sounds common or normal, evacuate the
dance floor immediately. The goal is not to be normal because, as my radio listeners know by now, normal is broke.
5
Two More Hurdles: Ignorance and Keeping Up with the Joneses
Denial (I don’t have a problem), Debt Myths (debt is how you become wealthy), and Money Myths (stories told by the culture) are three major obstacles that keep you from becoming a fiscally fit body of money management and staying power. Before we move to the proven plan, we must explore two more enemies of your Total Money Makeover.
If you have a major issue with Ben and Jerry’s ice cream, you should tell your trainer before you try to change your diet and exercise program. First, you must admit your ice-cream problem and recognize the myths about ice cream as a great weight-loss product. The point is, we must identify the enemy, the hurdles to winning. To set out a game plan and not acknowledge the obstacles to that plan would be immature and unrealistic. Those of us who have been knocked around by life know that we must find the problems or obstacles and plan a way over them, through them, or around them. If you can box up the things that would defeat your Total Money Makeover, then the plan will work. The first step to losing weight and toning up is to identify weight-loss myths, overeating, wrong eating, and no exercise as problems to overcome; the same is true for a Total Money Makeover. As the great philosopher Pogo from the Sunday comics said years ago, “We have met the enemy and he is us.”