Where Dave and I Differ, Part II-Practical Stuff

Following up yesterday, here are a few more specifics of where I fail to follow the Ramsey plan. This will include my reasoning/rationalization for why I don't get with the program. To quote guru Steven Covey, "when we rationalize, we tell rational lies."

Step 1: $1000 in the bank for emergencies. I like more. Seems like we're always on step one, always having to re-fill the emergency fund after some real or imagined emergency. I know that Dave points out that "Christmas isn't an emergency--it comes at the same time every year!" But in our world, there is not a separate line-item in the budget for those annual or unplanned events like appliance replacement, Christmas, or car repairs. We just toss money in savings and are happy we have it when we need it.

Step 2: Debt free except for the house. NEVER make a car payment. Pay off all consumer debt ASAP so you have that money for investment. I agree with all of these things, but it conflicts a bit with my alleged "plan" for step one. What little bit of consumer debt I have is so small that the payments are manageable (and we pay extra), but rather than load up and knock them out right away, it gives my personal "comfort meter" a boost to see the savings balance rise. I know the math of it is the same or even better Dave's way. But I personally experience more peace with more cash and the debt gradually disappearing. As for the car, I did take out a small loan to buy a van that was almost $4000 below Kelly Blue Book value. I could have bought another $1000 beater for cash, but it seemed then (and now) to be a long-term wiser decision to have at least one vehicle in my family that has a range of over 50 miles. I'll pay it off early and drive it till the doors drop off (as I have every car I have owned). In my mind, this is far different than having a never-ending car payment and swapping new cars every 3-5 years.

Step 3: The "full" emergency fund. This is the one that messes me up. I agree 100% that we should have this. However, my school scenario for the kids makes it impossible. Our financial aid package is based partly on our assets. If I were somehow to save $20,000 for "emergencies," it would just get snatched up for tuition, and we'd be back to square one. But, as I wrote earlier, private school is a high (essential) priority for us.

Step 4: Retirement funding at 15% of gross salary. My employer does 10% for me. I intend to gradually raise my own contribution, as well. But I don't have that much "extra" so long as I'm paying private school tuition and trying to stay ahead of debt and savings goals. Fortunately, my projections based on what I'm currently saving and future needs looks pretty good. We may not retire super-early or super-rich, but we'll be just fine.

Step 5: Kid's college fund. Same as the emergency fund. You can't save for future education expenses and still expect somebody else to pony up for your currrent educational expenses. I hope that the good education we are sacrificing for now, plus getting used to paying a significant sum every month for tuition, will set us up to where college isn't as big a shock for us as for some folks. But we'll have to cross that bridge later. I'm at peace with that.

Step 6: Pay off the house early (on a 15-year, fixed rate note, with a payment no more than 25% of your take-home pay). This is not a finance question, it's a geography and math question. If you take my income (which ain't bad) and start backing out the numbers to figure how much house I can afford on that formula, I have to move out of town. Charleston housing is steep, and teacher salaries are not. I took out a 25-year fixed rate loan (that pays off on time before my anticipated retirement) that has a payment in the 25% range. That's for a very reasonable house in a great location, and we've got good equity. Again, I am more comfortable with that quality of life decison than I would be with being financially further ahead but commuting an hour each way to work every day.

Step 7: take all that "saved" money and invest for wealth-building. Sorry. If I found myself with an extra $1000+ a month, I'd bank it and take my family on cool trips (debt-free, of course) every summer. I'm not looking to get rich, just to be comfortable and make good long-term decisions.

So, in summary, it looks like I pretty much screw up every one of Dave's baby steps. But really I'm in line with the big picture--live on less than you make, don't borrow to buy "stuff" you don't need, have savings between your family and the wolf at the door, invest for retirement, don't be house-poor. Got all of those. Quality of life (which for me includes a short commute, good education for the kids, summers off without working summer school or a 2nd job to meet some wealth-building or debt-retiring goal, and the ability to eat out occasionally at a place that doesn't deliver the food in a bag) trumps some of the wealth-building stuff, but I do have what Dave calls "Financial Peace."

Where Dave and I Differ, part 1-Philosophy

Disclaimer first: Dave Ramsey is a millionaire. I am not. He is a nationally known financial expert. I once taught his stuff in watered-down form to an adult Sunday-school class. So there is no doubt in my mind that his plan is better than my modifications, nor that I would be better off if I would just follow his tried-and-true format to the letter. That said, I don't. Here are a couple of reasons why:

First, I began the program in a different position than many people. I have been very fortunate to ride up a pretty good period in the real estate market, and was able to dump some debt that way before I discovered Dave. If I had been dragging around $800 a month in debt service, then naturally freeing that cash up in the budget would have given me a really big tool with which to build wealth. But with minimal debt, I was only able to make minimal change to my budget. When you have a tiny shovel, it takes longer to fill a big bucket.

Second, and perhaps most importantly, I live in arguably the worst school district in the state which is 49th out of our 50 in education (thank heaven for Mississippi). I also teach at arguably the best (and also most expensive) private school in our area. Having my three kids safely in school where I work rather than in some of the other choices in this town is simply non-negotiable. It is more important to me even than making wise financial decisions for the long-term. Therefore, I do some things differently than I would otherwise.

Finally, I'm not quite as willing to "live now like no one else" so that sometime in the far future I can then "live like no one else." I don't mind being a good bit more frugal, saving more than average, driving less car, living in less house, etc. But I don't want to miss out on the opportunity to do SOME things NOW, rather than when I am retired. I admit, I borrowed a little money so I could take a $10,000 trip to Rome for only $1500. I want to travel to the islands with my wife while she still looks great in a bathing suit. And I don't want to do Disney with my kids when they are in their 30's. If that means fudging on the baby steps a bit, I'm fine with that.

There's one more consideration, too. My "job" is not just a vocation, but an avocation. I work for my alma mater, coaching my old team, teaching my favorite subject. My employer contributes a good chunk to a good retirement plan on my behalf, and I get 10 weeks off every summer. And if, heaven forbid, something bad were to happen to my school, there's always a market for teachers. So my goal is not exactly to zip through to the point where I can chuck my job and travel. I can travel now, and I may teach till I'm 70+. I'd like the OPTION of not doing so, but for now, I'd be fine if we can make ends meet comfortably, take good vacations, and make solid progress toward eventual retirement (and all that entails, including a paid-off house, etc.)

Later I'll post some specific things we do, or don't do, based on these factors.

Dave Ramsey

I'm a big fan of the financial philosophy of Dave Ramsey, the author of the books, Total Money Makeover and Financial Peace. I wish I did a better job of following his advice--which, as he describes it on his radio show, is "the same thing your grandmother said, only I keep my teeth in." Simple common sense. I wanted to throw out there what his basic philosophy is, and then spend a couple of posts on how and why I've had to modify the plan.

Dave basically operates on the premise that one's income is his biggest asset. And that most of us have a significant portion of that income tied up in paying revolving debt. Basically, if you can get out of debt, you can free up that cash to then use for other, far wiser, pursuits. Dave suggests getting on a tight budget (he calls it "beans and rice") until debt is retired, and working gradually up the following ladder of "baby steps" until financial peace is achieved:

1. Save (ASAP) $1000 in a liquid emergency fund. Otherwise, every time you have a problem, you'll have to go back in debt.
2. Pay off all non-home debt using the "snowball" method. (more on this later). Never borrow again.
3. Take the money you used to spend on debt and save 3-6 months expenses in a liquid investment as a "full" emergency fund. This will cover anything up to a job loss or disability.
4. Once debt-free, invest 15% of gross income in a mixture of mutual funds, preferably tax-advantaged, for retirement.
5. Only after retirement is covered, save for kids' college funds.
6. Pay off mortgage (which should only have been a 15-year note at a fixed rate with a payment of 25% or less of your monthly take-home pay).
7. Once that is all done, you have zero payments... take all that money and invest for wealth-building... as soon as your investments can throw off enough return to pay your expenses (which are low since you're debt-free), you have reached the point of total financial independence.

The slogan is, "if you'll live like no one else (frugal, below your means, debt-free), later you can live like no one else (wealthy)."

In later posts I'll tell what my family does and doesn't do according to this plan.

I've Been Tagged!

Apparently, I have been Tagged in one of those silly internet games. Since the "tagger" was my wife, I'll play. Here goes (copied and pasted directly from Ann):

Post the rules at the beginning... 2. Answer the questions about myself.. 3. At the end of the post, I tag 5 people and post their names 4. Then go to their blogs and leave a comment, letting them know they’ve been tagged and ask them to read my blog for the info.

1) What was I doing 10 years ago? I would have been 29. I probably was celebrating the end of track season with my team at Garrett Tech. And running. Fast, because I wasn't an old fogey yet.

2) Five things on my TO DO list today? Just for starters--copy all handouts till end of school year, file medical FLEX plan reimbursement for $133, lecture all day on the Impeachment of Andrew Johnson, run with XC team (slower than I did 10 years ago, but further than I did last week), and hopefully get to bed before 10 PM.

3) Things I would do if I were a Billionaire: Set up investments that made work optional. Give a lot away. Set my Dad up in the nicest assisted living situation around. Travel--lots. Put in a really good all-weather track at PG. Build a new middle school building and insist they name it after Maje Richardson and Randy Clark. Who am I kidding? If I won a billion dollars this payday, by the 21st of next month I'd still need to be careful not to eat out until payday again. That's just life.

4) Three of my bad habits? I procrastinate. I'll get to the other two later. :-)

5) Five places I've lived...Charleston, Columbia, Greensboro, NC. That's all, unless you count different addresses. I may have been in Florida for a short time as an infant, but I'm not sure.

6) Five jobs I've had ...Going backwards: teacher and coach, grad assistant (teaching, and also as a glorified clerk in the USC Legal Dept, Student Health Center, and Graduate Admissions Office), bookkeeper and grunt laborer in a lumber yard, bagboy/stock clerk in a grocery store, school bus driver, dishwasher/shrimp peeler in a seafood place.

People I "Tag:" Nobody. If you read this and want to play, feel free. But I never forward chain letters.

Success! (and feeling a bit old!)

I got a little positive feedback in the past 24 hours that made me feel pretty good about this crazy job I do. (And anytime you can feel good about teaching in MAY, that's pretty cool.) Last night we ate out, and a young lady came up to our table. I recognized her immediately--had to have a little help with the name, but it was one of my very first students. She's over 30 (which makes sense, if I taught her junior-year US History 14 years ago), and has an 11-year-old son. THAT made me feel old. She told me that my class was her favorite, and she still remembers it. THAT made me feel proud. I met her husband, her mother-in-law, and her children. Wow.

Then today, our school yearbooks came out. I didn't get one (since my kids will bring home three of them), but I was able to sneak a peek. Of course, I only had eyes for the track team page, and the senior pages of my captains. Almost every one of the seniors I coached this year had put down one of their favorite high school memories was something involving the track team. They ranged from "track practice" (with the quotes... the girl told me later she meant that to indicate she LOVED going to practice with the team, but that didn't necessarily include the gut-busting workouts), to "track season '06," to "winning the 4x4 state title." But it was very encouraging to know that, at least for now, the kids I have had a chance to work with in track value the experience. I know I sure do (both my experience as an athlete 20+ years ago, and what I'm doing now).

Steven Covey (the guy that wrote The 7 Habits of Highly Effective People) wrote that the four universal human needs are "to live, to love, to learn, and to leave a legacy." It's nice to feel sometimes that where we spend our time really does contribute to a real legacy.

War! What Is It Good For?

... absolutely nothin', ya'll! (Edwin Starr, 1970). That is, except for gaining independence, freeing the slaves, saving the union, stopping Hitler, and a few other minor things.

I've been blogging for over a year and have studiously avoided blogging anything about the war in Iraq. I know it's an issue that provokes a great deal of passion, and I would never want to offend anybody. Let me preface my comments by saying that I don't think everybody who is in favor of staying in Iraq is a baby-killer or warmonger, nor do I think that those who oppose it are unpatriotic traitors or any other such straw man argument. Good people can disagree on this. But here's what I think, on this , the 5-year anniversary of "mission accomplished."

I was in favor of invading Iraq. I thought, based on the information that we had then, that Iraq under Saddam Hussein represented a potential threat as a state sponsor of terrorism who had once had and used chemical weapons and was currently in a long-standing violation of the cease-fire at the end of the Gulf War. I don't feel duped by the Bush Administration about that... I feel like the CIA, the British, the IAEA, Colin Powell, Hillary Clinton, and a large majority of the congress and the American people believed that on good faith. When we didn't find large stockpiles of WMD in Iraq, I believed (and still do) that Saddam probably had used the long period between our initial deadlines and our arrival to get rid of whatever he did at one time have, possibly to Syria. I also never faulted the Bush Administration for "going it alone" when the UN Security Council refused to give a specific authorization for invasion... the French and Russians, with their vetoes (as happened all the time during the cold war--the UN being worthless is nothing new), overrode a clear majority of the security council, and I always belived that both the presence of the "coalition of the willing" and the admittedly weakly-worded resolution 1441 that promised unspecified "consequences" was cover enough.

Of course, the toppling of Saddam took about three weeks and minimal loss of blood and treasure. Bush was greeted with the infamous "mission accomplished" banner on board the aircraft carrier, and "major operations" were over. Despite the embarassment of not uncovering any huge cache of WMD's, I felt like we had done a good thing. Saddam and his murderous, torturing regime were out of power, his sadistic sons were dead, and the rape rooms and torture chambers were out of business. When the Iraqis held their elections, I felt further vindicated.

Then came the long slog to put humpty dumpty back together again. Despite my approval of the initial invasion, I am the first to admit that there was a long period during which our reconstruction strategy was quite flawed. The sectarian fighting (bordering on civil war) and the importation of foreign terrorists calling themselves AQI (Al Quaeda in Iraq) threatened to overwhelm our efforts to build a stable Iraq, and the Iraqis didn't seem to be doing enough quickly enough to warrant our loss of life. It was tempting during that time to "declare a victory" and get the heck out. Many folks who had been against the invasion from the start were ablet to say "told you so." As one who had supported the invasion, I felt then (and feel now) that I was stuck with what Colin Powell called the "Pottery Barn" theory--you break it, you buy it. We had birthed this mess, and had an obligation not to abandon those tens of millions of Iraqis to their fate. Besides that, I felt (and still feel) that the idea that we would somehow be better off had we never gone was simply not true. Had we never gone in, Saddam would still be running the same evil, totalitarian, and potentially dangerous regime. But it was a lonely place to make a stand.

Then came David Petreaus and "the surge." I was, of course, hopeful that it would work, but I was skeptical. Then, miraculously, casualties came down, and things began to get better. I have a friend who is serving in Baghdad who emails me regularly, and there is no doubt from his letters that things are much, much better. Far from perfect, of course. But I think Harry Reid's oft-repeated quote of "this war is lost" was more than a little premature. What's more, we now have this AQI group repeatedly calling Iraq the central battleground of the worldwide jihad. Even if we brought that group into the area by our own poor choice in going in, that's where they are now. And it looks to me like we're beating them.

That's why I oppose a precipitous withdrawal from the region. Some troops are already home, others are on their way, and I hope more will follow as the generals on the ground decide it is safe. But I envision an immediate pullout ending with the equivalent of helicopters lifting off the roof of the US embassy in Saigon in 1975. And let's not forget that following that evacuation, there were the boat people, the refugees, the re-education camps, the killing fields in Pol Pot's neighboring Cambodia. I feel the US was at least partially responsible for those things then, and would not want to do the same thing now. (As an aside, I don't think it would have been necessary to go 100% back into Vietnam in 1975... aid to the south and air power might could have done the trick.) I think that a withdrawal followed by chaos in Iraq would be viewed (and correctly) as a retreat, and as weakness that would embolden those who hate us.

However, I would be very, very happy to see the whole thing over as soon as possible. The sooner, the better. But the part I want to see over is 100,000+ troops on long-term deployments taking regular casualties. It wouldn't bother me at all to have 30-50,000 troops stationed there as a regular duty station, without a full war footing. After all, we've got bases in Germany, Japan, South Korea, even the infamous Guantanamo Bay (a relic of the Spanish-American War of 110 years ago). All of those are after-effects of wars we WON. And some (like Korea) are still in harm's way. Notice that we don't have a base in Vietnam... because we lost that one.

Anyway, I guess that makes me "pro-war." Or at least "anti-withdrawal." It's one more reason (along with my personal key issue of being pro-life) that I can support John McCain in spite of my numerous other issues with him. Please notice before you drop flaming vitriol in the comment section that I have tried very hard not to disparage those who feel differently, only to walk through what I personally believe out here in public.

Econ 101

It amazes me how little average (and even above-average) people understand some of the basics of economics. For example, this "recession" we're in. The standard definition of a recession is "two consecutive quarters of negative economic growth." Translation: if the economy shrinks for 6 months, we're in a recession. But it hasn't shrunk yet. Last quarter, the economy grew at 0.6%. Now, admittedly, that's crummy, especially compared to the robust growth we've gotten used to for years. Yet everywhere you turn, allegedly smart people think we're on the verge of another great depression. I even had a friend (and a guy who should know better) opine last week that the primary reason for "this recession" is the war in Iraq. Now, it's fine to be anti-war, and even to think that the cost of the war is a good reason to get out. But to think that the main reason our multi-trillion dollar economy is sputtering is the war--not the housing bubble, not the price of oil, not inflation--that's just amazing to me.

Speaking of the price of oil, that's another one that gets me. EVERYBODY thinks something oughtta be done about the price of gasoline. But nobody seems to understand the law of supply and demand. We want to wave a magic wand and just have the price go down. Yet supply is low, and demand is high. We are unwilling for a variety of reasons to do anything about supply... won't drill offshore, won't drill in ANWR, won't build new refineries, won't even use certain kinds of Candian oil. So price goes up, which is supposed to temper demand (and it does, just like it's supposed to). Then we complain. In a logical world, we should want the price to keep climbing, as that's what will make alternative fuels relatively more competitive.

Then there is ethanol policy. The government subsidizes corn used for ethanol. So farmers, who are not stupid, would rather sell corn at a high price than the lower one for feed corn. Currently about 28% of US corn production goes for ethanol (which costs roughly the same as gas or diesel). Of course, supply and demand means that there's less corn for everything from people food to cow food to chicken feed. At a time when some of the poorest people in the world are literally starving due to an insufficient fuel supply, we burn our corn up so we can feel "green." Of course, you can make ethanol out of sugar, too. And sugar is cheap. But not US sugar, because we subsidize the domestic stuff and put huge tariffs on the imported stuff.

Meanwhile, the Fed just cut rates... AGAIN. This to "stimulate" spending, because of the not-quite "recession." So we increase the money supply. And once again, the magic of supply and demand works, causing each dollar to fall in value. The US dollar is trading like a glorified peso on the world market, and our brilliant government keeps devaluing it. How a bout a rate hike? We could slow inflation, strengthen the dollar (and therefore each dollar would buy that much more oil...) No. That would make too much darned sense.

I don't have an answer to this. None of the major candidates have put forth anything like a sensible strong-dollar policy. McCain would (foolishly) give us a gas-tax holiday. Hillary would, too. Obama would raise the capital-gains tax rate (love to see what THAT does to the market). All will dance to any tune the environmentalists play regarding fuel. And nobody will touch the sugar tariff. I'm just griping. But at least I'm not griping that this is the "worst economy since 1932." Nonsense on stilts!