How Megan McArdle became a (financial) convert
Megan McArdle has written an article about Christian financial guru Dave Ramsey. I grew up surrounded by disciples of Ramsey (and similar teachers such as Larry Burkett), so it was interesting to read McArdle’s impression after attending a half-day seminar by Ramsey, and trying out his principles (together with her fiancee) prior to writing the article. She had the following to say about it on her blog:
What did we think? Well, that’s in the article. But the upshot is, we’re sticking with the program, though the part where we pay off all our outstanding debt is on hold while we save for our wedding. I’d never done a detailed budget before, much less written it down, and forced myself to stick to it by doling out all the payments in cash.
It sounds unbearably tedious. But it’s actually incredibly freeing. I have never before felt like I had total control over my money. And given all the economic gyrations, it would be awfully nice to know that I was on the road to a paid off house, and could cut my expenses to the bare bones if needed.
My wife and I attended a Crown Financial seminar at the strong recommendation of her pastor before we got married, and I would strongly recommend such a seminar for any engaged couple. Although the only debt we had was student loans and my mortgage, the discipline of creating and sticking to a detailed budget has helped us to avoid or mitigate the money arguments which are commonplace among couples.
I found this paragraph in the article particularly profound:
Debt magnifies our fortunes, whichever way they’re going. When incomes are rising, debt helps us live even better. When incomes are falling, fixed debt payments can push us into the abyss. If you have substantial assets, you can lose a lot more than your sterling FICO score in a bankruptcy, and bankruptcy makes it hard to save, or start over. Even if you don’t go bankrupt, debt payments make it difficult for you to accumulate wealth, or to take the kind of risks that can make your life better, like switching jobs, starting a business, or getting married. And of course, if everyone takes on too much leverage at once, the whole system can collapse.
McArdle and her fiancee have gone even further than my wife and I in adopting the Ramsey system, eschewing credit cards in favor of the “Grandma Plan”–withdrawing cash from the bank each month and keeping it in envelopes for each category of spending. Personally, I value the convenience and security of using a credit card for medium-sized purchases, but I still track all my spending against my budget in an Excel spreadsheet, and never purchase anything I won’t pay off when the monthly credit card statement arrives. However, as McArdle notes, the “Grandma Plan” is a powerful antidote against impulse spending.
The entire article is worth reading, and I wish Megan and her fiancee the very best in their marriage.
6 Responses to “How Megan McArdle became a (financial) convert”
It seems that the “Grandma Plan” is really only useful as a means for monitoring spending. I don’t see why keeping a detailed record of your spending in a spreadsheet couldn’t be equally valuable.
Also, once you have the discipline part down and never carry a balance,credit cards become a less cumbersome cash equivalent. When you’re a “deadbeat” card holder, you get all kinds of rewards like cash back on purchases. Why not earn money on buying groceries? Add to that the interest your money earns in the bank instead of in an envelope in your desk and I don’t see how this isn’t a clearly preferable option. I know this isn’t how most people use credit cards, though.
I agree with you completely on using credit cards as a cash equivalent–and that most people don’t use them this way, but use them instead as a payment-deferring method.
As far as the “Grandma Plan,” I think it could actually help any shopper avoid impulse buys. It really is a lot easier psychologically to add an item to the list of things you’re going to swipe that credit card for, than it is to pull an extra $20 out of your wallet.
In the most extreme case, if you only take enough cash with you to buy the things you are planning to buy, you won’t be able to make that impulse buy at all. You’ll have to get it on your next trip, and by then you’ll have had time to decide whether it’s really worth it.
Nice article. Thanks for the link. I appreciate Joscelynn’s comments on using credit cards for the rewards. That’s OK as far as it goes, I guess. It does bother me, on the other hand , that every time I make a cash or debit card purchase I subsidize the use (and rewards) of my fellow credit card using customers. You see, the credit card companies have made it essentially impossible for businesses to charge credit card users more than their cash customers, even though businesses get charged 2% of every credit card purchase. It’s in the contracts (http://www.creditmattersblog.com/2009/05/paying-with-cash-could-soon-pay-off.html).
I realize that people who read this blog tend to lean pretty far right and probably wouldn’t agree with me on this, but personally I would love it if the federal government would step into this situation and forbid credit card companies from mandating that businesses not charge differentially for customers who insist on using credit. Why should I be stuck paying more to subsidize other people’s irresponsible behavior? Why aren’t small business owners free to pass on to customer’s credit card fees? I believe the reason is that credit card companies form an oligopoly. It’s not really a free market. Under such conditions the government should stand up for the interests of ordinary customers and small businesses.
Eric Schubert
Chattanooga, TN
Oops, bad link. Let me try again:
http://www.creditmattersblog.com/2009/05/paying-with-cash-could-soon-pay-off.html
Eric Schubert
Chattanooga, TN
Some places do try to pass on that fee. Those of us who do like Eric and take advantage of the rewards programs that are available typically have a habit of shopping elsewhere, which is the decision the store has made.
Furthermore, it’s not like other varieties of payment are cheap/free either. Check processing fees aren’t zero and taking care of them takes a lot of time at a register. Cash isn’t exactly cheap in terms of time either (think about this…I take a second to swipe my card at a register, how long is spent counting out exact change or dollar bills for the person who pays with cash?)
Further to Balta’s comment: In high school, I worked in retail and I would sometimes be called on to carry cash and checks to the bank. I was paid for that time, and it was time I wasn’t doing other useful things. I’m sure my salary for that time didn’t constitute 2% of each sale, but there was certainly some cost associated with the store accepting cash and checks. Some risk, too: I might have been mugged, or absconded with some of the cash, or simply lost it.
My wife and I are also “deadbeat” credit card users. I rarely carry more than about $10 or $20 in cash and use my credit card for almost everything except veggies at the local farmer’s market (cash only). And yes, I do tend to avoid businesses that won’t take credit cards and would do the same if they charged more the the use of a card. I guess in a truly free market, businesses who want to pass on the cost of credit cards would have to decide if there are more people like Eric Schubert or more people like me and Balta.