Complete Guide to Money by Ramsey
Ref: Dave Ramsey (2012). Complete Guide to Money. Ramsey Press.
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Summary
A beginner’s guide to personal finance.
The problem isn’t really that we don’t know or can’t understand what to do. The problem is that we choose not to do it.
Effective people are proactive. That is, they happen to things instead of waiting around for things to happen to them.
Don’t take advice from broke people anymore. I figured out a while back that if I want to win, I need to find some people who are winning and do what they’re doing. If you want to get in shape, go spend time with some athletes. If you want to have a successful marriage, go spend time with a gray-haired couple who have been married sixty years and are still holding hands. And if you want to win with money, go find some people who are doing it right and do what they’re doing.
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Basics
List your Debts (except your primary mortgage) from smallest to largest based on payoff balance, not interest rate. Then, work down the list and knock them out in that order.
401K: Match your company plan up to the limit, if there is one.
ROTH IRA: Maximize it.
After the account has been open for five years, you can take out withdrawals up to your contributions with no penalties.
You can also take up to $10,000 out for a first-time home purchase.
Once you hit age 59.5, you can make tax-free, penalty-free withdrawals of up to 100%.
Invest 15% of your income by going back to your 401(k) or other company plans.
Discuss major purchases with your spouse (if married) or with an accountability partner (if single).
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Inflation
Inflation has averaged around 4.2% over the last 70 years.
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Investments
Once you factor in taxes on your growth, you really need your investments to make around 6% just to stay ahead of inflation.
Gold was worth $21 an ounce in 1833, up to $275 per ounce by 2001, and then shot up to about $1,345 by 2010. Even including the crazy growth gold experienced in the first decade of this century, the 177-year track record for gold is just 2.38%.
Roth 401(k): Works just like a Roth IRA, you invest after-tax dollars into the Roth 401(k), but it comes out of your paycheck automatically on payday just like a regular 401(k). It grows just like a Roth IRA, and you pay zero taxes on it when you withdraw the funds at retirement. So on that end, you get all the benefits of a regular Roth IRA, but you can do it in addition to a Roth IRA and you may get a company match on top of your contributions. Even better, the Roth 401(k) doesn’t have income limits attached to it, so you can use a Roth 401(k) even if you don’t meet the income limits for a normal Roth IRA. This thing is awesome!
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Insurance
There are seven key areas of insurance that you need to understand (and get—immediately if you don’t have them): Homeowners (Renters), Auto, Health, Disability, Long-Term Care (60+), Identity Theft, Life.
Two Main Types of Insurance: Term and Cash Value:
Term Insurance: Specified time period. If you get a five-year term policy, you are insured for a five-year term. That’s why they call it “term.” Term is easy to understand, cheaper than other options, and has no savings plan attached to it. It has one job and one job only: it replaces your income when you die. If you buy a $400,000 term policy for a twenty-year term, and you die within that twenty-year period, your family will get $400,000. It’s pretty simple.
Cash Value Insurance: For life. They are a lot more expensive, because you’re not just paying for the insurance; you’re also funding a savings account inside the insurance policy.
Let’s say Joe gets a $125,000 cash value policy at thirty years old. He’ll pay somewhere around $140 per month for that if he’s in good health and doesn’t smoke. Part of that $140 goes to pay for the insurance, and the rest goes into that “great” savings account someone sold him. After forty years of paying way too much for his insurance, Joe’s built up around $65,000 in cash value by age seventy. So, he has $125,000 in insurance and $65,000 in cash value. At that point, Joe dies. How much will the insurance company pay out to his wife? She’ll get $125,000. Can you guess what happens to the $65,000 he’s built up by overpaying for his insurance for forty years? The insurance company keeps it! Good-bye, Joe! Thanks for playing!
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Lending Money
Myth: If I loan money to a friend or relative, I will be helping them.
Truth: The relationship will be strained or destroyed.
The bottom line is that everything in my friends’ and family’s lives is not my responsibility. Whenever someone wants something of mine—time, money, resources, etc.—I look carefully at the request. I always ask, “Will this truly help him, or will I just be giving a drunk a drink?”
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Annuities
Two types:
Fixed annuities: Terrible. They’re basically a savings account with an insurance company, and they pay somewhere around 5%. They’re really not that different from a CD you’d get from your local bank. By now, you know that a 5% rate of return isn’t worth your time, so pass on those.
Variable annuities: Essentially mutual funds inside an annuity. The annuity provides some protection against taxes for the mutual funds inside, so if you’ve already maxed out your other tax-favored plans, like a 401(k) and Roth IRA, then a variable annuity might make sense. There are fees involved, but in exchange for the fees, you don’t have to worry about taxes on the investment. Plus, some variable annuities offer a guarantee on your principal. If you put $100,000 in the investment and the value drops below that level, you’ll still be able to get your $100,000 back out of it.
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Real Estate
According to current tax law, you can have a gain of $250,000 if you’re single or $500,000 if you’re married and pay zero taxes on the sale of your personal residence if you’ve lived there at least two years.
Securitization: Investors pool money in a trust. The trust money is given to a bank to loan to home buyers as mortgages. The Mortgages are packed together and the trust receives a monthly payment.
One of the reasons Sallie Mae and other private student loan lenders make out so well is that Congress guarantees the lenders 97% if a borrower defaults. Beyond the 97% of the principal, and the compound interest, it can also seek to collect the loan from the borrower as well- and if it is successful, it gets to keep up to ¼ of whatever it recovers.
Here's how it works: Let's say you borrow $12,000 from Sallie Mae for college, and then you default. Sallie Mae hits up Uncle Same for 97%of the $12,000 or $11,640, plus compound interest. Let's say that after years of dunning and lawsuits, Sallie Mae manages to force you to pay back the $12,000. Sallie Mae keeps $3000 of the money you paid back. So it gets $3000+$11640 + compound interest. Pretty neat for them- and an outrage for us.
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Misc Quotes
Nightline reported that when McDonalds started accepting credit cards as a form of payment, their average sale went from $4.75 to $7.-Complete Guide to Money by Ramsey.
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Chronology
1997: US Congress privatizes Sallie Mae (a process that finished in 2004). As a private entity, Sallie Mae manages $123 billion in student loans with 10 thousand employees. Its stock price has risen 2,000% since 1995. One of the reasons Sallie Mae gets so much business is that it generously provides “incentives” to colleagues to push their student loans.-Complete Guide to Money by Ramsey.
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