Week One of Dave Ramsey’s Financial Peace University focuses on one of the most important things you can do to improve your financial health – saving. Saving is important because it forces you to spend less than you earn and change your financial habits in a positive way. Saving also gives you resources to fall back on, changing what would normally be a financial emergency to a financial inconvenience.
Super Saving: Common Sense for Your Dollars and Cents
How and why you should save
The how is a simple concept, even if it isn’t always easy to implement. Making saving a priority and pay yourself first. One way to do that is to set up an automatic withdrawal from your paycheck so it goes straight into your savings account. Dave lists three main reasons for saving: 1) to use as an emergency fund, 2) for making purchases, and 3) for wealth building.
1. Save for a rainy day, because it’s going to rain
One of the focal points of the Super Saving segment was the emergency fund. Dave relates the emergency fund to a rainy day fund – you never know what will happen or when it will happen, but it will.
Dave Ramsey introduces his 7 Baby Steps during the beginning of week 1. The first baby step is to create a $1,000 emergency fund as quickly as possible. The purpose of this is to have a source of savings set aside so you can avoid swiping your credit card or taking on new loans when an unexpected expense arises. Why $1,000? Because $1,000 is an achievable goal for most people and $1,000 is enough to overcome most minor financial emergencies. Having that buffer in the bank also gives you peace of mind.
Dave Ramsey also features Baby Step 3 in this week’s lesson – 3-6 month’s living expenses in savings. This is the king of all emergency funds and can help you deal with almost anything life throws at you – including unemployment, relocating, or the inability to work for a short period of time.
What about Baby Step 2? Dave skips the second baby step in this segment, which is to use a Debt Snowball to get out of debt. This step is examined at greater length in future sessions.
2. Purchases – avoiding debt
Dave gave a great example of how you can save a lot of money by paying cash and avoiding financing. By delaying your purchase you can make money off interest on your savings and probably negotiate a discount (examples he uses involve cars and furniture, both of which are often negotiable, and both of which often have financing options that can be suspect). If you finance the purchase you not only pay the list price, but several hundred, or even thousand dollars in interest payments. No one ever got rich by borrowing.
3. Wealth building – the magic of compound interest
I don’t think anyone is going to get rich from putting money in a savings account right now, not with interest rates hovering where they are (and you can tell this segment was filmed several years ago because DR is quoting interest rates in the 4-6% range!). But savings is a big part of wealth building because it gives you the financial flexibility to make moves and more importantly, avoid taking on debt.
Ramsey went on to give multiple examples of how you can build your wealth and used several eye popping examples of how you could turn a few bucks a day into millions of dollars over time… somewhat like the latte factor. The only negative comment I can make on this section is the examples are too perfect and DR quotes some extreme earnings (such as averaging 12-18% from age 20-75; those returns may or may not be achievable). You can make almost any example work if you play with the math long enough. But I don’t think that is the point. Dave Ramsey is a great speaker and has the ability to entertain, motivate, and make you think.
Thoughts on Week 1
Everyone left class motivated and ready to get started. There is homework for FPU, and this week’s lesson included creating a quickie budget and doing some reading. A more in depth budget lesson is in store in a future lesson; this budget is just to get you started and thinking about cash flow (which is covered in week 3). Stay tuned for more!