Financial Peace by Dave Ramsey

Every Sunday here at Ask Mr. Credit Card.com we review a personal finance book. This week I’m beginning a review of “Financial Peace Revisited” by Dave Ramsey.

This is the second edition of Ramsey’s famous book, and it includes new chapters on marriage, singles, kids, and families.

Chapter 1: The Beginning: A Very Good Place To Start

Ramsey begins by giving us his own back story – the events that led to his successful Financial Peace workshops, seminars and books. As a young man, he was heavily invested in Real Estate, and this is his story.

I had arrived at “financial independence” that mystical place every young entrepreneur wants to reach. If I wanted something, I bought it – no thought required. I had done it honestly, with hard work and intelligence. So what could possibly happen in paradise?

Along with my knack for obtaining bargains, I had another talent. I had an unusual ability to finance everything. If one of my business lines of credit ran low, I would put on my custom suit, get in my Jaguar, and head for the bank. I would make sure to park in front of the manager’s window for a big impression. I had my financial statements, corporate strategy, and tax returns all bound for presentation.

All this pomp and circumstance, combined with the fact that my “deals” always worked and enamored the bankers, and they loved to lend me money.

We had every type of personal line of credit, business lines of credit, and equity lines of credit – and let’s not forget those wonderful gold and platinum cards.

If a banker would dare to indicate that I might have too much debt, I would hunt another source.

I have taken a $20,000 draw on a line of credit in a cashier’s check, walked out of that bank, and into another.

With all the “presentation” explained above and a $20,000 cashier’s check, I would “establish a new relationship”. Which meant I would deposit my borrowed cash into their bank, promise to be a customer, and in return they would give me a new $100,000 line of credit plus every platinum card and personal line of credit they had.

The sarcastic way I am explaining this to you almost makes the process seem immoral. However, we were making money, and we had a bright future, so the banks wanted customers like us.

It’s pretty easy to see why business practices like this got Ramsey into trouble. I’m sure it seemed very normal, and like a good idea at the time, but as Ramsey explains, it did end up being his downfall.

Our largest lender was sold to a larger bank. Neither pomp, nor circumstance nor my name meant anything to the new upper management.

Also, the 1986 tax act began to have it’s negative impact on real estate so all the banks began to get worried.

Upper management decided to “trim back” on real estate lending.
Most of our borrowing was in short-term notes because we resold most of our property for profit. Because we had “open lines of credit” and short term notes, the banks had the right to call (or demand that we pay) most of our debt within 90 days. And that is just what they did. The new management called all my notes.

I had 90 days to find $1.2 million. I paid virtually all of it, but doing so destroyed my business. That action started a chain reaction that ended in my losing everything but my home and the clothes on my back.

I remember the strain on my marriage. I remember the mornings standing in the shower with the water scalding my face and crying like a baby.

I remember the sheriff serving lawsuit papers for default on notes. I remember thinking of suicide, knowing I had a $1 million life insurance policy that would provide for my family better than I was doing.

It took three and a half years for paradise to completely unravel, and for me to end up broke.

That’s a magnificent failure isn’t it? I can’t even imagine living through that, and I’ve been through bankruptcy. Mine was a slow failure too – 4 years of struggling to pay medical debt, and getting further and further behind. Mine was a lot of ignorance – financial and otherwise.

I literally can’t imagine being in Ramsey’s shoes – having worked hard, struggled to build a business, played within the rules, and then to find yourself with nothing when it’s all said and done.

All because of the insidious credit trap – the dark side of easy credit that many of us experience every day, and that largely caused many of the economic problems that we’re all facing.

Is it any wonder Ramsey is so anti-credit? He was royally screwed by his bank because they had overextended credit to him. (Much like the people who have come here and left comments because their credit card companies cut their limits.) It’s not because Ramsey made late payments, or because he didn’t play by the rules – it’s because the bank over extended itself and made a business decision to limit his credit.

Ramsey’s story is a very real warning, especially to those who play the credit game well – the ones who manage their credit, respect it, and use it to further themselves. Always remember that the banks on the other side of the desk have priorities too, and they are rarely going to line up with yours – even if they do choose to lend you their money.

The Ramsey’s finally ended up declaring bankruptcy – but thankfully, their story doesn’t stop there.

Chapter 2: Enough of Anything Is Too Much

Ramsey begins this chapter with a frank look at the challenges facing our nation:

Our nation’s financial situation, with record budget deficits and bank failures, is deplorable. However, the nation’s situation is only a reflection of our own personal inability to “just say no” to ourselves. Our failure to get control of financial matters in our personal lives will have to be rectified before we can demand accountability from elected officials.

Our spoiled Congress is only a reflection of our spoiled selves. The good of our country is overlooked so our pet special-interest groups can be served, just like the good of the family is often overlooked so that Dad or Mom can have that special trinket they must possess.

Well that’s a little preachy I think, I but I agree. Especially with Ramsey’s next statement:

As a people we have forgotten how to delay pleasure. We are living in a society that microwaves everything. We must have it, we must have it now!

That’s one of the truest things I have every heard about today’s way of life. Goals (and financial peace!) take hard work, sacrifice and time. The short and easy path will usually burn you in the long run.

Many of us though, delude ourselves into think that we can just keep running faster and faster. We think that if we stay ahead of the inevitable repercussions, that they will never catch up to us. It just doesn’t work that way.

In the 1950’s you seldom would have heard of a person filing bankruptcy, being foreclosed on, or having his wages garnished for non-payment of debt.

Now, if you live in a middle income neighborhood, out of your closest one hundred neighbors there is at least one house empty from foreclosure, plus one foreclosure underway, and four to seven of your neighbors are more than three months behind on their house payment. In some areas, these numbers are double.

This book was revised in 2003. As shocking as the numbers were then, I have to wonder, what are they now? Does any one know? Please leave a comment if you know the average number of foreclosures per 100 houses?

The American family has especially felt the effects of these changes in our financial philosophy. The very core of the family is dramatically affected by this overing, which creates overborrowing.

Most marriages that fail list financial problems as a contributing factor, if not the main reason for the failure. Marriages of twenty – five years or more are frequently destroyed by foreclosure or bankruptcy. The “stuff” must have owned them, instead of their owning the “stuff.”

I certainly won’t argue that money problems put stress in a marriage. My own marriage was no picnic during all of the financial problems that led up to our bankruptcy.

However, I tend to look at the way money is managed in a marriage as more of an indicator of the marriage’s health. It may be the straw that breaks the camel’s back, but it’s usually just one straw in a heap of issues when things aren’t working out. If the money is being mismanaged, then chances are, other things are being mismanaged too.

What do you think?

That concludes this week’s review of Financial Peace, please check back next Sunday for a quick review of the next two chapters! Grab our free RSS feed so that you don’t miss future updates.

Thanks also go out to these carnivals, for featuring our articles this week:

• The carnival of personal development @ Through the Illusion
• The festival of frugality @ Green Panda Treehouse
• The Carnival of everything money and The money hacks carnival@ The penny daily
• Rich Life Carnival #34 @ Rich Life Equals Better Life
• The carnival of personal finance @ Free Money Finance