Debt

My parents have been going to this finance class on Wednesday nights at a Presbyterian church in Manteca. They wanted us to join them for it but it's $100 and however many nights of a commitment and we just decided not to. However this week it was bring a friend night so we decided, why not, it's just one night and it will be fun to have a double date with my parents.

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The class is by Dave Ramsey. He has a radio show, a couple books and a program (manual, Cd's, DVDs, website resources) for how to get out of debt. This particular lesson was about the myths that are spread around in society today and he was straitening them out with the truths.

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Some of the myth's were about car financing. He said on his radio show that the answer to half of the people that call in is to sell their car. Why pay so many hundred a month when you could just have an older car for a couple years while you save up for a nicer one? The money your spending on your car payment could go towards paying down your debt and once you are debt free there are a million things to do with that money, guilt free.

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He also talked a lot about how the credit card companies are REALLY good at what they are doing. He said it is kinda fascinating in an evil way. But they know just how to make you beg for money. They will send you and your grandma and your dog (really, he had proof of an offer that went to this guys dog that had been dead for 4 years) an offer that says, "You may be approved for up to $100,000!" So you go to the bank or go online and apply (beg) to be approved.

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He said that in our great grandparents generation, it was a sin to buy with credit. It was frowned upon. Sears, JCPenny and Ford would not allow credit options in the early 1900's. He said those company's started offering credit after their original founders had passed away because they had been so against it.

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Another myth was about the lottery. He said the truth is it is just a tax on the poor and the people who can't do math. If someone spends $50 a month on lottery tickets, they expect to win something. But if they were to put that $50 a month in a mutual savings account then including interest and all that you will be a millionaire within your lifetime. (I can't remember exactly how many years he said for it to get there but it is true)

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Another myth was that 30 year mortgages are good. Typically we sign up for them thinking, "Oh I will pay it off sooner than that. I'll make extra payments and it will be fine." But life happens and that extra payment is the first to go. But if you sign up for a 15 year mortgage it only adds a few hundred to your payments but it will save you over $100,000 in interest.

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There was about 10-15 myths but I can't remember all of them. I do remember the last one but I will save that for the end. He also talked about how he took a finance class in college from a professor who was broke just like everyone else. He said, "That's like taking shop from a guy with no fingers." Obviously they don't practice what they preach right? Or they don't even know what to preach because they don't live it.

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He said if you want to be a finance major, study Proverbs. He said he reads a Proverb every night and one night he came across Proverbs 6:1-7. I just looked it up and it must be a little different in his scriptures versus our King James version. But from his opinion it is talking about if you are in debt your stupid and you need to deliver yourself from the hunter like a gazelle from the cheetah or a bird from the falcon.

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He said when he came across that he was confused, what does a gazelle and a bird have to do with debt. But the very next night he was flipping through the TV and stopped on the discovery channel. (Not sure how much is true or if he was just dramatizing his story) but he proceeded to show a clip of a cheetah approaching a mom and a baby gazelle in a flat plain. The gazelle started running long before the cheetah was close (they have a cheetah sensor) and they were pretty fast. I mean the cheetah is supposed to be the fastest animal around and this gazelle was faster. The cheetah decided to go after the little one thinking he could get him. But that little guy ran and ran and eventually the cheetah gave up.

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He was relating the cheetah to the debtors and the gazelle to the few of us willing to run away. He said the little one was a college student because more college kids quit school because of debt rather than academic failure.

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He said some of us pray at night saying, "Jesus I am so in debt, I don't know what I'm gonna do, Please help me Jesus, Help me." Then the next day you go out to the mailbox and get a credit card offer and say, "Thank you Jesus." When we really should say... "CHEETAH!!!!!!!!!!!!!" and run away as fast as we can.

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But like he said, the credit card company's really know what they are doing. Then he told another story about how cow's are tied at the rodeo and how the cowboy lets it run and then ropes it's neck and it falls on it's back and the cowboy jumps on it and ties it's feet. He said, The girls can't do this because cow's are just too big, so they do the same thing with a goat.

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His children wanted to do it too. So he bought them a goat. They named it Practice because they were using it to practice. So they would open the gate and let Practice run and they would follow behind on the horse, rope it, flip it and tie it. They did it about 15 times a day for the whole summer. Practice got to a point where he would come to the clearing where they usually flipped him and he would just lay down and wait. He had done it so many times that he didn't want to fight it anymore.

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We do the same thing with debt. We just give in thinking it's the only way. "You'll always have a car payment" some people say. Or "Everyone else does it, that's just the way it is." But there is another way. If you just run as fast as the gazelle and get away from the cheetah, or run past that clearing where you always get stuck then you might be able to make it.

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The last myth he stated was that Debt is a Tool to get ahead. The truth is that you are a slave to the master(card) and until you get free you will always be tied up and limited in your abilities. You have to figure out what everyone else is doing, and do the exact opposite. If everyone is financing cars, then you pay cash. If everyone is getting a 30 year mortgage, you get one for 15. If everyone is making minimum payments on their credit card, you pay more.

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For Dave Ramsey's program the first baby step is to get $1000 in the bank for emergencies then cut up your credit cards. The second baby step is to pay off your debt in what he referred to as the debt snowball. It is the same format the church recommends. Where you line up all your debts from smallest to largest then you pay off the smallest (he recommends with a garage sale) and then once that is paid off you put what you were paying to that one and add it to your payment for the next smallest one. Once that is paid off you take what you were paying for the first 2 and add it to the 3rd debt. And so on down the list.

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He said it takes the average person 2 years to get out of debt using this method but it does depend on the size of your debt. And he recommends you put a "Gazelle effort" into it which means cutting other things out and putting everything you have (aside from the mandatory bills) into paying off that debt as quickly as possible. If you cut out the fast food trips or going to the movies or buying new clothes or another pair of shoes or another video game. Whatever your weakness may be, give it up for awhile and you apply that money to whatever debt you are tackling at the time then you will be debt free in less than the average person and when you have freed up all of that money that was going towards paying off debt then you will be able to eat out every day and see a movie whenever you want and buy as many clothes and video games because you will have the extra cash to do it.

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Speaking of cash, he made a good point about it. They did a study on peoples brains when they spend money. If they use cash, it registers as pain in their head and they usually thought twice about what they were buying. If you use a debit card it registered as less pain but you are still associating it with cash sitting in a bank. But when you use credit, the pain was substantially less. Interesting huh?

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He said using cash hurts because you know you will never see it again. It hurts to say goodbye to a Benjamin ($100 bill). But don't we always say, "No pain, no gain." If using cash is going to make you think twice about what you are buying then I think we should always use cash. Which also means you have to have it in hand and if you have cash in your hand then your bills are already paid right???? (at least that's how it should be)

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So if everyone is charging things then you should pay cash and if everyone is in debt then you should get out of debt. Most people just work one job and go play after work. If you take a year or so and get an extra part time job to pay off your debt that means working harder than normal for a little while then when your debt is paid off you will have more money and more time to play harder than most people. So if you work like no one does now, then later you will be able to work like no one else. (meaning less hours to pay your bills.)

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Also if you take your extra cash flow and invest it wisely then you can have your money working for you instead of you working for your money. Also, we know you can't dig your way out of a hole. You have to climb.

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If you live like no one else does now, then later you will be able to live like no one else.

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Get out of Debt!!!

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Obviously I am just like the broke finance professor and I need to listen to what I am preaching and follow it as well. But I thought this would be useful information to share even before I have lived it. I hope some of you will join us in cutting credit cards and participating (with a gazelle effort) in the debt snowball payoff.