Category Archives: Dave Ramsey

Lending Money – Advice from Scripture and the Catechism

At Mass on last Sunday, February 19th, the following passage from the Gospel of Matthew caught my ear:

Give to the one who asks of you,
and do not turn your back on one who wants to borrow.

This passage stood out to me because at first glance it stands in contradiction to another passage, Proverbs 22:7, I’m relatively familiar with due to Dave Ramsey quoting this passage:

The rich rule over the poor,
and the borrower is the slave of the lender.

I’ve adopted Dave Ramsey’s advice regarding lending money to others:  Mainly, I prefer to give, rather than lend, money to family, relatives, or friends who are in need, as I don’t want to create an obligation for them and have them indebted to me.  Note that I have to see a strong need present in order to consider giving money to friends, family, or relatives.  Dave often sites the “Thanksgiving dinner situation” where one relative owes money to another, resulting in increased tension between the two due to debt.  I want to avoid this situation in relationships with people I care about.  Proverbs 22:7 certainly supports this philosophy.

Given that Matthew 5:42, though, exhorts us not to turn our backs on the one who wants to borrow from us, how does this not create a contradiction, and where does this leave us when someone wants to borrow from you?  When I need clarification on scripture, I go to the Catechism of the Catholic Church, and it provides some clarity in this case.

VI. LOVE FOR THE POOR

2443 God blesses those who come to the aid of the poor and rebukes those who turn away from them: “Give to him who begs from you, do not refuse him who would borrow from you”; “you received without pay, give without pay.” It is by what they have done for the poor that Jesus Christ will recognize his chosen ones. When “the poor have the good news preached to them,” it is the sign of Christ’s presence.

We are called to help the poor and give and lend to them.  The Catechism also calls us to be prudent in giving and lending:

1806 Prudence is the virtue that disposes practical reason to discern our true good in every circumstance and to choose the right means of achieving it; “the prudent man looks where he is going.”  “Keep sane and sober for your prayers.”  Prudence is “right reason in action,” writes St. Thomas Aquinas, following Aristotle.  It is not to be confused with timidity or fear, nor with duplicity or dissimulation. It is called auriga virtutum (the charioteer of the virtues); it guides the other virtues by setting rule and measure. It is prudence that immediately guides the judgment of conscience. The prudent man determines and directs his conduct in accordance with this judgment. With the help of this virtue we apply moral principles to particular cases without error and overcome doubts about the good to achieve and the evil to avoid.

San Damiano Cross

In my multiple years of serving dinner at a local homeless shelter, l learned that the Dallas/Fort Worth homeless population struggles mightily with mental illness and associated alcohol and drug addictions.  Although these homeless certainly are poor, prudence has us put “right reason in action” and consider that our giving and lending could potentially enable their addictions.  As a result when interacting with the homeless, I prefer to give them food or supplies, or offer to take them to buy a meal.  Further, I give monthly to Catholic Charities, who has expertise in providing services to the homeless while not enabling bad behaviors.

Matters are more complicated, though, when considering lending to family and friends.  As I mentioned before, I have to see a significant need (major health issues, hunger, etc.) as well as effort to improve financial habits that may have placed them in their precarious situation.  A friend recently asked to borrow money from me in order to take a vacation, saying “I would have my money back in five days, so what’s the difference?”  I didn’t lend them money, and certainly didn’t give them money, as I reasoned she should be a good enough steward of her money so that she isn’t living paycheck to paycheck.  More to the point, a vacation isn’t a need.

As in many cases where scripture is difficult to interpret, seeking the guidance of the Church will provide clarity.  The virtue of prudence provides further clarity in this case, as well.

Great Personal Finance Podcasts

One of my favorite things to do on long drives is listen to personal finance podcasts.  There are a handful that I have found (so far) to be better than the rest:

My favorite podcast is Afford Anything with host Paula Pant, as she combines an entertaining delivery with great guest speakers.  Paula encourages listeners to both increase their incomes while decreasing their expenses (increasing the “gap”).  Her focus on increasing income differentiates her from many, many other personal finance bloggers who put a great focus on limiting expenses and frugality.  I certainly think both are important, but Paula’s focus on making the gap bigger blows past the flawed binary view on many blogs that we should focus on either increasing income or reducing expenses, but not both.  Paula provides a ton of insight, too, into real estate investing.  I definitely, definitely recommend the Afford Anything podcast.

The Mad Fientist podcast focuses on reaching financial independence.  The Mad Fientist provides some original (to me) ideas:  How to use a health savings account (HSA) as a “super IRA” account; how to minimize taxes when investing in retirement accounts.

The Dave Ramsey Show podcast is targeted more toward people trying to get their financial house in order, but it is still very motivational.  Dave Ramsey releases three hours of the show every weekday, so there’s plenty to listen to.  My favorite segments are Dave’s millionaire theme hours, where millionaires are interviewed and insights are provided into their spending, saving, and investing habits.

Financial Peace With the Prince of Peace

My favorite mantra delivered by Dave Ramsey is the one that he uses to end his radio show:

The only way to true financial peace is to walk daily with the Prince of Peace.

Our lives should be focused on primarily serving our Lord, our comfort and our King.  Today’s morning prayer from the Liturgy of the Hours speaks of the peace the Lord provides:

Alone with none but thee, my God,
I journey on my way.
What need I fear, when thou art near,
O King of night and day?
More safe am I within thy hand,
Than if a host did round me stand.

My destined time is fixed by thee,
And death doth know his hour.
Did warriors strong around me throng,
They could not stay his power;
No walls of stone can man defend
When thou thy messenger dost send.

My life I yield to thy decree,
And bow to thy control
In peaceful calm, for from thine arm
No power can wrest my soul.
Could earthly omens e’er appal
A man that heeds the heavenly call!

The child of God can fear no ill,
His chosen dread no foe;
We leave our fate with thee, and wait
Thy bidding when to go.
‘Tis not from chance our comfort springs,
Thou art our trust, O King of kings.

As we seek to improve our financial lives, let us always remember to first find peace in the Prince of Peace!

The Debt Snowball

One of my favorite concepts from Dave Ramsey’s Financial Peace University (FPU) is the debt snowball.  The debt snowball is the second of Dave’s baby steps to financial peace and is a technique for paying off debt that pays off the smallest debt first, the next smallest debt next, and so forth.

The debt snowball starts with you listing all of your debts.  You then pay the minimum on all your debts except for the smallest debt.  With the smallest debt, you pour all of your excess cash to paying it off.  An example:  If you have a $40,000 student loan, a $2,500 credit card bill, and a $15,000 outstanding balance on a new car, the debt snowball technique has you pay the $2,500 bill first, the $15,000 bill second, and the $40,000 last.  While you’re paying the $2,500 credit card bill, you continue making minimum payments on the two other debts.  The end result is that you pay off the smallest debt quickly.

You may have noticed that I made no mention of considering interest rates when determining which debt to pay first.  From a mathematical perspective, it certainly makes more sense to pay off debt with the highest interest first.  Dave Ramsey teaches, though, that if personal finance was strictly a mathematical issue, hardly anyone would be in debt.  On the other hand, Dave recognizes that personal finance has a large behavioral and psychological component to it.  By paying off the smallest debt first, you receive a psychological victory that rewards your discipline.  Having achieved this small victory, you’re then more likely to stick to your debt reduction plan.  You then focus on the second debt and gaining another psychological victory.

 

Cash Flow Planning – Step by Step

I previously posted an article regarding cash flow planning and noticed that a lot of the visitors coming to this site are viewing this article.  I decided to create a more thorough walk through of creating your own cash flow planning Microsoft Excel spreadsheet.  Having learned to cash flow plan through Dave Ramsey’s Financial Peace University (FPU), I use my cash flow plan on a weekly basis, but I remember that I had plenty of questions when I first learned the concept.

Of course, if you’d prefer to just download my already-prepared spreadsheet rather than create your own, you can download it here:  Cash Flow Plan

Creating a Cash Flow Plan Spreadsheet

  1. Open Microsoft Excel.  I’m using Microsoft Excel 2010, but any version of Excel will suffice, as we’re not using any of the advanced features.
  2. In cell G1, enter your monthly net income.  In my spreadsheet, I’ve entered $2,878.59, which equates roughly to an annual salary of $42,979.61, the average wage of a U.S. worker in 2011 according to the Social Security Administration.Add Net Monthly Income
  3. In cell A2, type Category. This column will be filled with categories where you will allocate money (for example, savings, housing, etc.).
  4. In cell B2, type Description. This column will be filled with the descriptions of items where you plan to spend your money (for example, rent, renter’s insurance, mortgage, etc.).
  5. In cell C2, type Sub Total.  This column will list the amount spend per each item listed in the description column.
  6. In cell D2, type Total.  This column will include the total amount allocated for a category.
  7. In cell E2, type % Net.  This column will contain calculations indicating how much of your net pay will be allocated per category.
  8. In cell F2, type Actually Spent.  This column will indicate how much you actually spent per item and will allow you to see where you underspend and overspend.  Your spreadsheet should now look like this:2
  9. The next step is to consider major categories that your spending falls into.  Examples might be charity, saving, housing, etc.  Enter your first category in cell A3.  Enter your next category in cell A6.  Then enter all other categories, giving yourself a couple of cells of cushion for each.  The spacing isn’t critical here, as you can simply cut and paste later in order to give yourself more room.  Here is what my spreadsheet now looks like:Categories
  10. You’ll now want to fill in each spending item in column B.  For example, under the Charity category, you may list Church, Catholic Radio, Franciscan Friars of the Renewal, or any of your favorite charities.  Go through each category with the intention that all of your spending is classified (i.e., every penny you spend should fall under a category and sub-category).  Here is what my spreadsheet now looks like:Spending Items
  11. Your next task is to determine how much to allocate for each item.  Certain items are easy to place a number on, like rent, mortgage, and your cable bill.  These bills are the same each month.  Other items will be more difficult to come up with, as they fluctuate on a monthly basis.  After tracking your spending for a few months, you’ll develop a better idea of how much you spend on these items.  You can then update your spreadsheet accordingly.  Here is my updated spreadsheet:Items with Amounts
  12. In cell D57, type the following:  =SUM(C4:C54)  This will provide a sum of all of the values in column C and will tell you how much you’ve allocated.  This should match cell G1.
  13. (Optional)  I consider this step optional, but I like to do this so that I can see what proportion of my money I spend on each category.  In cell E8, type =(SUM(C4:C7)/G1)  This will tell you what percentage of your net monthly pay you have allocated toward the Charity category.  If you aim at a 10% figure for tithing, this tells you that you need to allocate more for charity.  Do this for each category of spending.  My updated spreadsheet:Percentages
  14. Next, we’ll want to enter formulas for calculating how much you *actually* spent.  In cell F8, type =SUM(F4:F7)  At the end of the month, after you go line by line in your cash flow plan and enter how much you have to your diocese, your parish, and so on, cell F8 will tell you how much you actually gave to charity.  Do this for each category in your spreadsheet.
  15. Finally, add up how much you actually spent for the entire month.  In cell F56, type =SUM(F8,F14,F18,F24,F28,F36,F40,F43,F49,F53)  Note that the cells in this formula are the summations of each category.  If you added an item or took an item away, you’ll need to adjust your formula accordingly.  My finished cash flow plan looks like this:8

Your cash flow plan will be a work in progress, especially for the first few months that you practice using it.  You’ll find categories to add, items to add, and things to rename.  Good luck!

Cash Flow Planning

I took Dave Ramsey’s Financial Peace University (FPU) course last fall and learned quite a bit.  I entered the class not expecting to learn too much but came out surprised with the many fresh ideas Dave gave me.

One of my favorite lessons focused on cash flow planning.  Cash flow planning allows you to plan where your income (in flow) is spent (out flow).  Rather than following a “spend as you go” strategy, cash flow planning provides you a plan for the month ahead so you can consciously decide where your money will be spent.  This plan gives you visibility into what you truly *need*, what you *want*, and where you are wasting money.

Creating and Following a Cash Flow Plan

To create a cash flow plan, you can use plain old pen and paper or, what I choose to do, use a spreadsheet.  A spreadsheet lets me make easy comparisons month to month, use formulas to avoid math errors, and is just plain convenient.  Start by listing your take home income at the top of the spreadsheet.  Then list categories (like Saving and Philanthropy) and, within these categories, more specific entries (like House Fund, Roth IRA, Catholic Charities, Church):

Allocate every penny of your income to a category.  This will result in the total spent amount equaling your take home pay.  After following the plan for a month or two, you’ll see where you should plan to spend more or spend less.  Initially, I found following the plan very challenging but have grown to like the plan, especially since my most recent vacation was fully funded :)  Here is a link to my Cash Flow Plan in Excel 2010 format.

Pay Yourself More and the Credit Card Companies Less

The most significant benefit cash flow planning has brought to my financial situation is that of facilitating paying myself first.  Paying yourself first is the practice of taking money out of your paycheck as soon as you receive it and placing the money in savings and/or investing the money.  Ideally, you should set up an automated transfer where a given amount is transferred to your savings or brokerage accounts at the beginning of each month.  Having set up an automated transfer, I fill out my savings column without fail and avoid the “I forgot to make the transfer at the start of the month and now I don’t have any money left” excuse.  Paying yourself first takes money from a location where it’s easily spendable and puts it in a savings or brokerage account where impulse spending cannot easily reach.  Also, once you determine a suitable amount to put away, you’ll find that you won’t miss the money.

Another benefit of cash flow planning I’ve experienced is that of saving up for big ticket items (think vacations, car insurance payments due twice a year, etc.) in advance rather than putting them on a credit card and paying off the balance later.  Prior to attending FPU, I was in a cycle of putting large expenses on my credit card, paying the balance off over the course of a few months, then finding myself at square one when another large expense came up.  Cash flow planning allows you to save small amounts each month for upcoming expenses so you’re not put in the position of having to draw from savings or rely on credit cards when large expenses arise.  By eliminating credit card payments, you can then flow this cash into more worthwhile pursuits (saving, investing, vacation fund, etc.).

Get Started

Dave Ramsey’s web site has a great monthly cash flow plan and even includes Dave’s recommendations regarding how much of your pay check you should allocate to various categories:  http://www.daveramsey.com/media/pdf/fpu_monthly_cash_flow_plan_forms.pdf.  If you don’t already follow a monthly cash flow plan, I highly recommend creating one and being disciplined about following it.  You’ll minimize unplanned spending and put your money to better use.