With the holiday season just around the corner, millions of short-on-cash Americans are just weeks away from a credit card charging binge. Dave Ramsey's advice? If you don't have the cash don't spend the money. For most people that's easier said than done, but Ramsey has made a career out of counseling financially challenged people.
You see, Ramsey knows first-hand the crippling effects of unmanageable debt. At the age of 26, having amassed a four million dollar real estate portfolio, his fortunes dramatically changed and he lost everything in a financial free fall that ended in bankruptcy.
Today, approaching 40, Ramsey has taken the lessons he's learned and created a cottage industry. The author of two New York Times best sellers—“Financial Peace” and “How to Have More Than Enough: A Step-by-Step Guide to Creating Abundance”—Ramsey is a financial counselor and host of a nationally syndicated radio show (The Dave Ramsey Show), which reaches more that 1,000,000 listeners daily. He also heads up Finance Peace University, a conference and special events training group that teaches and empowers people to break the debilitating cycle of debt. Ramsey took time out from trying to save the country from financial ruin to speak with Failure from his studio in Nashville, Tennessee.
Reading “Financial Peace,” I was struck by how elementary your lessons are. When it comes to financial issues, is the public's lack of knowledge that profound?
The knowledge level that you need for wealth building is somewhere around seventh-grade math. It's not hard to add and subtract and to understand that if you spend more than you make you're going to be broke all your life and deeply in debt. It's about controlling the character in the mirror. He or she is the problem.
In your opinion, why is it so difficult for people to exercise restraint when it comes to money?
I think it's a combination of three or four variables that have come together to create a disaster. Variable number one is that the credit card has become the most aggressively marketed product in our culture. Nothing is sold with the frequency and intensity that debt is. Then you combine that with a culture that has become increasingly impatient, where we have microwaves outselling Crockpots 20-1. The third variable is that in the last 30 years we have become the most marketed to society in the history of the world. Never has a society been impacted with more images of what we need to have to be happy, complete, competent, or whatever. When you combine that heavy level of marketing with debt, and you mix that with a guy or a gal that is impatient—which is one nice way of saying 'immature'—you've got a mess on your hands. You've got a negative savings rate and you've got record credit card debts and personal bankruptcies on an annual basis.
Has the situation improved or worsened since you began counseling people?
It's worsened. And the denial is deeper. We've got this wonderful, booming economy, but Joe and Suzy are going further in debt and saving less. Joe's got a really nice Porsche and he's got his foot on the floor, heading past the 'road closed' signs, and going over where the bridge is out. Hello!?!
Have you had much success with your concepts abroad?
I haven't really tried, except maybe for Canada. Of course, Canadian folks are very similar. They're a little more conservative, generally speaking, and doing a better job. It's considered a sin to have a mortgage in Canada after you're 40, which is awesome.
What's the most remarkable case of financial ignorance that you've encountered?
After having counseled 10,000 families, I've seen some pretty bizarre stuff. I had a caller on the radio show today with $85,000 in credit card debt and a $100,000 income. I had one right after that with $85,000 in student loans and car loans. It's not unusual to see six-figure credit card debt these days.
What's the best financial move someone can make?
Live on a written monthly plan—a budget. If you do that it will shine a light on your stupidity. You might say, “Well, duh, this credit card thing is not working. Maybe I ought to be saving something. Maybe I can't afford a vacation to Europe this year.” It makes you realize, “If I do this, I can't do that.” There are always trade-offs, and you really need a budget to make some behavioral changes. That's what personal finance is all about.
What's the single worst financial move someone can make?
I think I'll go conceptual with you rather than cite anything specific: It's to assume that you have to have debt to prosper, when in reality it's the inverse. People that prosper don't use debt. Seventy-five percent of the Forbes 400, when asked, “What's the key to building wealth?” said it's getting out of debt and staying out of debt. Old, rich people tell you to get out of debt. Only young, broke finance professors tell you to use debt.
Do different generations handle money differently?
Oh, certainly. There are no mediocre X'ers. They are either total flipping flops that have no clue, or they are really doing a great job. The boomers are all mediocre—they are just languishing in the middle somewhere. They can't seem to get it together to do anything good, but they're not doing badly either. Now the pre-war babies, the people that knew about the Great Depression or actually lived through it, those people are all fanatical savers. The Y'ers—the young 20s right now—are going to be different. The X's and the Y's, there are more of those that believe in UFOs than those that think they're going to get Social Security, and they may be right on both counts. They are more cynical about the government, which is probably more accurate too. They don't have this illusion that John F. Kennedy's Peace Corps is going to walk in and the government is going to take care of them if they're stupid. They don't have any illusions about that so they're saving money. That's really a lot of wisdom for a youngster to do that. Because there's a bunch of hucksters out there in the financial world, that's for sure.
Let's talk about some relatively recent developments. How has the Internet affected the way people handle their finances?
The Internet, if you bother, can be an awesome tool, especially in combination with a simple computer program or two to help you control your budget. Our “Financial Peace” software makes budgeting go very, very quickly. I can hook up online to all my mutual funds and get an instant net worth update on a daily basis.
The bad thing about the Internet is that there's tons of impulse there. There is a percentage of our population—between two and four percent—depending on who you read, who are compulsive shoppers. The fastest growing addiction that affects finance—all addictions affect finances—is bar none, Internet porn. Right behind that is gambling. With the availability and anonymity of the Web, the vices do suck money out of the budget, especially when they move over to the addiction side, and they do pretty quickly in that venue.
So there are a lot of negatives there, but the positives are really cool. When I go shopping for a car now I'm equipped with knowledge. The dealer doesn't wear me out. I can hit 16 Web sites, and find out everything that is going on in the used car market [Ed. note: Dave only buys used cars]. I can check it to see if it's a lemon. I can do everything in 20 minutes, whereas I used to have to shop for weeks to establish a value in my mind for a car. So it really helps the consumer with information when they are making large purchases.
How do you feel about day trading?
I think if you look up “moron” in the dictionary you'll find a day trader's picture next to it. Studies are showing that between 70 and 90 percent of day traders are losing money. They're mainly educated white men who have way too much pride and not enough sense to know that they cannot keep up.
Are you referring to the person who is trading online or to the professional investor who has access to Level II screens?
With Level II screens you're going to get your butt kicked. The stats are there. The only people making money day trading are the firms selling it. Online trades are just about as bad. Buying stocks on a daily or weekly or monthly basis is not a method of wealth building. That's right next to gambling in terms of probability of building wealth. Holding a high quality mutual fund with a 30-year track record, you'll win doing that. But jumping in and out of the market . . . you might as well go play the slots.
Let's talk about credit cards for a moment: With all the frequent flyer miles, savings bonds and other bonuses you can accrue by using credit cards, does it make sense to use them, assuming you have the discipline to pay in full every month?
If you have the discipline to pay in full you must have the cash. Dun & Bradstreet did a little piece of research that is really interesting. It said if you pay cash you spend 12-18 percent less because it hurts. When you go to dinner and you lay down a $50 bill, when they don't bring much back, you realize you bought dinner. When you do that with a credit card, you do not emotionally register the expenditure and tend to spend more. You'll spend more, by far, than you would ever get back in “brownie points.” Most brownie points aren't that usable anyway. I'm on a tube with wings all the time, and I have enough frequent flyer miles to choke a horse, but Jupiter's got to be aligned with Mars to use them. Everyone thinks they are going to beat up Discover card, but 78 percent of the people do not pay their plastic off every month. You cannot play with a multi-billion dollar corporation at their game and think you're gonna win. Play with snakes and you're gonna get bit. I use a Visa debit card when I travel. I use cash for everything else.
Do you allow consumers to buy your products on credit cards?
No. That would be just a little hypocritical wouldn't it?
It sure would be.
Let's talk about bankruptcy. Can you explain the different types?
Basically, there are four. Chapter 12 is a farmer bankruptcy, for large farms and so forth—a very small percentage of bankruptcies. Chapter 11 is a large reorganization, typically of a company. What they do is reorganize and pay their bills slower or pay a smaller percentage of what's owed. Sometimes an individual with a large amount of assets and liabilities can go through an 11. Chapter 13 is the “wage earner plan,” and the way it's advertised on midnight TV, it almost sounds like a debt consolidation loan. Basically, it's a repayment plan of all or some of your debt. And then Chapter 7—which is what most people think of when they say bankruptcy—is a total liquidation. Depending on which state you're in, you may have a personal exemption, usually three or four thousand dollars per person. Plus there's a homestead exemption for a certain amount of equity, except in Texas or Florida where you can keep all your equity. But other than that you wipe out all your creditors completely. You can re-sign for some of the debt, but I never understood that. What's the point of filing bankruptcy?
Probably 80 percent of the bankruptcies that are filed don't have to be. People freak out, get scared, don't know what else to do, don't have anybody to help them. They're getting beat up and abused by credit card collectors. They finally just lose hope, turn belly up and say, “Stab me here.” Then they file the big BK. That's one of the things I do a lot of is bankruptcy avoidance counseling. You have to show folks a step-by-step plan for making it out and show them that there is a light of the end of the tunnel. But you have to change the habits that caused the problem. Debt is really the symptom. The problem is living without a plan, where you end up buying stuff that you can't pay for, or having emergencies for which you have no savings.
What's the downside of filing for bankruptcy?
You owe the money and it's wrong [laughs]. It's a moral issue, number one. Number two, your credit report is damaged for seven years on anything except a chapter 7, which is on there for 10 years. Most people aren't morally ambivalent and think it's just okay to go file. It's psychologically and spiritually traumatic to walk down to court with your hat in your hand and be a pauper and say, “I can't pay my bills.” There's a sense of relief but also a deep sense of shame. It depends on the individual and how much integrity they have as to how much impact it has. It's like saying you can go through a divorce and say there's no effects. Of course there are effects. I'm not going to tell someone to declare bankruptcy. But there are people who are just beaten to a pulp. We'll pick 'em up and help them either way. Been there, done that, got the T-shirt.
In one of your books you say, “All great failures are character failures.” Can you explain that?
I probably should have said character flaws and I guess that may be the same thing. I know for sure that failure—after having done it a few times pretty dramatically—is only when you quit. I am real sure that the gleaming mountain of success is actually a pile of garbage. The trick is to have the overriding character quality of not quitting and learning from it. I've met with multi-millionaires, mega-people all over the place, and I've never met one who never made a mistake.
What is your greatest failure?
Immaturity. I built a house of cards with it. I built a pretty good-sized real estate empire for a little guy in middle class America, and ended up losing it all because I had so much debt and so much short-term debt I thought I was invincible. It was that sense of immaturity and sense of the Midas touch. I thought that nothing bad could ever happen to me—I'm too smart. So a little bit of immaturity mixed with a touch of arrogance [laughs].
I'm struck by how you got your break in radio—you offered to work for free for a month. Is that where most people would have been stopped because of an inability to take a risk?
I think sometimes people are unwilling to try something. When you get the wind knocked out of you it's a little tough to go run back out there and do it again. But that was a fairly small risk because I really wasn't looking for that to be my job. It was just something fun to do and if I could help people it would be great. All of a sudden the thing takes off and Boom!, on the <i>New York Times</i> best-seller list. And that turned into a big deal and of course it has become a big operation with a multi-million dollar income coming into this place and going back out. So it turns out I was a genius, Ha! Ha! Ha! A little luck and a little God was mixed in there.
On a related note, my favorite part of “How to Have More Than Enough” is the elephant story, where the pragmatist realizes that the only thing holding her back in life is fear.
Isn't that great? I wish I had written that. I referenced the pastor I stole it from. That one brings tears to my eyes every time.
Is fear what holds most people back from taking action?
Without a doubt fear drives you to mediocrity. Fear keeps you at a job you hate. Fear keeps you from going and living your dreams.