Dave Ramsey is a polarizing figure. Some people love him and swear by his advice and others think he’s a hack. Which one is he? Unfortunately that’s a question only you can answer but hopefully I will provide you with enough information about his flagship book to make your own decision.

The problem with personal finance is that there are multiple solutions to any one problem. If you think it’s simply about math, you’re wrong. Someone in credit card debt understands that when you use your credit card and don’t pay your entire bill, you’ll go into debt. They aren’t stupid, they know how interest works, but there is a non-math reason why they’re in debt.

If you had to boil down the book into a single sentence, then I’d say that Dave Ramsey’s Total Money Makeover is a book that gives you a good framework to get yourself out of debt and back on solid financial footing.

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Every year, hundreds of personal finance books are published. Every year, personal finance bloggers, experts, and columnists always refer back to a handful of books that have stood the test of time. Many bloggers are fans of Your Money or Your Life and the Richest Man in Babylon, many investors call The Intelligent Investor their Bible, and lots of people look up to the books of Suze Orman, Dave Ramsey, and Robert Kiyosaki.

I want to know, what is your favorite personal finance book ever? It can be the book that has had the most impact on your life, the book that you most enjoy reading, or the book you’d most likely recommend to a friend.

I’ve listed my must read personal finance books and even written one sentence summaries of ten personal finance books, but have I ever told you my absolute favorite?

The Motley Fool’s Money Guide by Selena Maranjian. As they say, you never forget your first. This book was the first personal finance book I ever read, back in 2003 when I started my first job, and it gave me all the tools to help me succeed. The best thing about the book was how broad it was. It gave me a sense of the landscape and enough of a vocabulary that I could learn anything Maranjian missed by researching it on my own. Is it the best book? That I can’t say, but I do know it’s my favorite.

So what’s yours?

If you talked to me three or four years ago and asked me about my approach to personal finance, I would’ve told you that you should always pick the mathematically optimal path and try to adhere to it as much as possible. I was fortunate enough to have the discipline, a credit to my parents, to almost always be able to follow what I believed was the optimal path. I didn’t have any credit card debt, I contributed as much as I could to my Roth IRA and my 401(k)’s, and I worked hard at my job.

However, in the last few years, I’ve come to recognize that it isn’t the path that you take that’s important, but how quickly you can achieve your goals. The fastest way for you to reach your goals may not come from going the best way. When climbing a mountain, a seasoned climber can scale rock faces while the novice sticks to the paths. The optimal path is by climbing the rocky walls, but a novice might make it up a few handholds before they gave up.

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If there’s nothing else you learn about personal finance, remember that it’s more about psychology than it is about numbers. You don’t go over your credit limit because you don’t know how to add, you go over because you either don’t know you’re that close or you don’t care. You don’t go into debt because you weren’t capable of doing the math that showed that you were spending more than you earned. In the end, it’s mostly psychology and I talk about some different “games” or tricks you can use to help you be more responsible.

I added three markers in the video for the points where I talk about Dave Ramsey’s Debt Snowball, the 100 Boxes, and the Zero Spend Days. It’ll help if you want to skip certain parts.

Finally, my apologies for sounding all stuffed up, the allergy season is in full force in Maryland and the Loratadine I’ve been taking doesn’t seem to be cutting it.

One of Dave Ramsey’s most popular ideas is that of a debt snowball. The idea is that you pay off your smallest debts first, then roll that debt’s monthly payment into the next smallest. When the next smallest is paid off, you roll the two former payments into the next smallest debt.The snowball grows and grow with each debt that’s repaid.

Here’s a real life example in case that general one was unclear. Here are your three debts and minimum payments:

• $10,000 @ 20% APY, $500 minimum monthly payment
• $4,000 @ 10%, $200 minimum monthly payment
• $1,500 @ 12.5%, $75 minimum monthly payment

The debt snowball method states that you should put all extra debt payments towards the $1,500 balance. When you finally pay off that debt, your new payment schedule should look like this:

• $10,000 @ 20% APY, $500 minimum monthly payment
• $4,000 @ 10%, $200 minimum monthly payment + $75
• $1,500 @ 12.5%, $75 minimum monthly payment

Why is that brilliant? From a strictly mathematical point of view, it’s a bad plan. It’s bad because you’re paying off a 12.5% APY interest debt when you have a 20% APY interest debt staring you in the face. You save more in interest payments if you pay towards the 20% APY debt first.

However, that ignores human psychology. Big mistake.

It’s well known that children aged up to about 7 (the end of Piaget’s pre-operational stage) believe that taller, skinnier objects are “bigger” than shorter, fatter objects (they lack Piaget’s concept of conservation). Ask them to tell you which glass is bigger, a tall skinny glass or a short fat glass, and the taller skinnier one looks larger. It’s not much of a stretch that on an unconscious level this may still apply. The debt snowball method plays on that psychology by making your debt seem shorter and fatter. Two debts may seem less than three, though the two debts are “fatter.”

It also affects your motivation and feelings of success. Drawing a line through one of your debts is a very powerful motivator. It inherently builds on that success by rolling your now unnecessary minimum payment into your next debt. You knock out a few early quicker wins (smaller debts) and that enables you to push onward towards the larger, harder ones. Progress is crucial in motivation, everyone is cognitively aware of that.

Dave Ramsey might not be giving you the mathematically correct plan but he also knows that personal finance is as much about psychology as it is about math.

And if you’re not Dave Ramsey’d out, my friend Pinyo has a very descriptive post about Dave Ramsey’s Baby Steps.

(Photo: redjar)

The paradox of choice is that the more options we are given for a particular choice, the less likely we are able to make a choice. Penelope Trunk discussed it in her article about taking a job, any job and references Dan Ariely, an MIT behavioral economist, and his book Predictably Irrational. In the book, Ariely discusses a study about how people ended up buying more jam when given six potential samples versus twenty four. Twenty four potential samples was simply too much and people ended up not deciding, even though they had more information.

How does this apply to banks and credit cards? Too much information paralyzes us. It paralyzes me. In the case of jams, there’s no pain in not buying a particular flavor. In the case of credit card debt, there’s a significant pain in not paying down a card. With a bank, there’s a bit of pain in interest not earned and a bit more if you overdraft because you forgot which account held how much (or you forget how much you need to keep in an account to avoid fees because you have too many accounts). Too much information, like juggling many balls, hampers our ability to make good decisions and causes us unnecessary pain.

The solution is the simplify your finances.

If you have credit card debt, pay down the smallest amounts first. This may sound similar to Dave Ramsey’s Snowball technique and that’s because it is. However, rather than focusing on the psychological benefits (yay! another debt conquered! let’s get the next one!), I argue that removing one headache from your life, even if it’s not the most financially distracting one, is beneficial. Next, try to consolidate bigger debts into as few accounts as possible without sacrificing the interest rate. By not sacrificing the interest rate, I mean don’t consolidate lower interest cards to higher interest cards (which sounds obvious but sometimes we make mistakes). The number of credit cards offer zero fee 0% balance transfers are dwindling but they often have a fee transfer cap that could be to your benefit.

With banks, don’t keep accounts you no longer need. I kept an old employer’s credit union account open for a year and a half and it cost me $20. I had transferred money into that account from my Emigrant Direct account and written a check. The check didn’t get cashed for several weeks and before it could be cashed, I went into my account and saw some money sitting around. Not remembering why the funds were there earning a low interest rate, I transferred them back and got dinged with an NSF. While I was able to get the NSF removed, it was entirely my mistake but caused by keeping an account I didn’t need or use anymore. There are no negative credit impacts of closing bank accounts, so close the ones you don’t need anymore and drop juggling that ball.

Simplify your life and reduce the number of things your brain has to manage, you’ll be happier and richer for it.

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On a happier note, my post on the Top 5 Online Banks made it into this week’s Carnival of Personal Finance hosted by Canadian Dream.

“I usually keep my card wrapped in a picture of my children to remind me of why I shouldn’t spend … ”
                                             – Trent of The Simple Dollar

If you think money is about dollar and cents and things you can hold in your house or your hand, you’re wrong. Personal finance may seem like it’s all about the numbers, where you have to spend less than you earn, where you have to save up an emergency fund, where you have to invest in the stock market and get your 10% return; but the truth of the matter is that personal finance is more about psychology than it is about mathematics. Everyone knows that you have to spend less than you earn, no one is so disconnected or so poorly educated that they don’t realize how basic math works. It’s like physical fitness, we all know what we’re supposed to do, we just have difficulty remember to do it.

Trent made the above quoted statement in response to my post about how you should write your goals on your credit cards. My tip was a simple reminder, his was a simple reminder packed with the power of psychology. You can easily write the goal on your credit card and then dismiss it when you need to spend. Dismissing a picture of your children, the reason you live, breathe, and work every single day… dismissing that would take a Herculean effort. But it works. Trent knows he shouldn’t splurge on food or kitchen tools or video games, JD knows he shouldn’t splurge on comic books, and I know I shouldn’t splurge on vacations. Slap a picture on it, of either your kids or your cats, and it drives that point home like a jackhammer.

If you think Dave Ramsey Is Bad At Math, you’re not alone. You’re also right. Dave Ramsey’s Snowball debt busting methodology is mathematically suboptimal. For those unfamiliar with it, you essentially pay off your smaller debt amounts first, then roll those payments into larger and larger debts. The payments “snowball” and you are also rewarded with positive feelings about knocking out the smaller debts. It’s suboptimal because you would save more money by paying off the highest interest rate debts first, but you lose the psychological benefit of kicking one of those debts in the butt. While suboptimal mathematically, for many it is the optimal solution because it helps them overcome their debt. It may not be smart math, but it’s smart psychology.

The next time you have difficulty with something personal finance, be it spending less than you earn or saving towards something, try some psychological tricks and you may find that it works out better in the long run.

After a long long break, I’m bringing back the PFBlogger Spotlight series with an interview with Mrs. Micah of Mrs. Micah: Finance for a Freelance Life. Mrs. Micah is one of the younger personal finance bloggers out there (writing that just made me realize I’m on the backside of my 20s!), 22 and a recent college graduate and follows her personal finance life. It’s very much in the same way I started blogging, I was 23, a recent college graduate, and I too “discovered the personal finance blogging community who have been very supportive.” (though three years ago the community was much smaller than it is now) Anyway, via email I had a chance to ask her a few questions and she happy to oblige.

jim:	Hi Mrs. Micah, could you tell us a little about yourself?
Mrs. Micah:	Let’s see. I graduated last May (07) with a BA in English. Everyone says not to major in English, but I found it a very rewarding experience. It helped polish my writing and the major was so comparatively light that I was able to take a lot of other classes and get a well-rounded experience. I even took a personal finance class! In my free time, I like to read and sew. I particularly like making quilts, whether for myself, for friends, or for charitable groups. I finally gave in to peer pressure and have started reading the Harry Potter series. Lots of fun and it’s great not to have to wait until the next one comes out.
jim:	What motivated you to begin blogging and how long have you been doing it?
Mrs. Micah:	I’ve had this blog for about 5 months now. Blogging itself—well, I’ve been doing that off an on for the last 6 years or more. I love to write and engage in conversations with others, which is what first attracted me to blogging itself. This is the first time I’ve blogged on something other than “life.” I discovered personal finance blogging just after my honeymoon, when I was coming face to face with the realities of life on our own and with our debt load. While my husband’s loans are deferred because he’s still in school, that $100k+ will be coming due in the future. I began reading blogs and soon started blogging myself. It was a way to keep myself accountable and to converse with others in similar spots. Tricia at Blogging Away Debt was my initial inspiration. The timing explains the “Mrs. Micah.” I was just married and quite twitterpated.
jim:	When you got married, how did you two handle your finances?
Mrs. Micah:	For the wedding? Our parents paid for it and I worked (with a lot of help from my mom and mom-in-law) to make it beautiful and frugal. I made the dress (no biggie, actually, I’m a seamstress), we had a lunch reception and no limo or videographer. I picked the most inexpensive but beautiful lilies I could for the boutonnières and carried Queen Anne’s Lace and Baby’s Breath in my bouquet. Micah provided emotional support when I’d become overwhelmed in planning. If you mean right after we got married: I asked Micah if he was ok with me figuring out budgets, shopping lists, debt repayment, etc. I was just getting into personal finance blogging and had taken a personal finance class my last semester in college. We discuss spending trends and any big-ticket purchases to make sure we’re on track. And I tell him a lot of things I’m doing—I try to teach him the new things I’m learning. He says he likes to listen because I get so excited about it.
jim:	What makes your particular perspective unique?
Mrs. Micah:	Probably my age. I don’t know if I’m the youngest PF blogger out there, but I’m certainly one of them. I’ve also been told that my writing is very upbeat and optimistic.
jim:	How about your favorite personal finance book?
Mrs. Micah:	I think Dave Ramsey’s Total Money Makeover made the biggest impression on me. I’m not a Ramseyite, but I think he does a nice job of setting out the basics. I like his idea of attacking debt, though I disagree with the order of his snowball (I’m a math-type and like the idea of highest interest first). Jean Chatzky’s You Don’t Have to Be Rich was very encouraging, too. I don’t think we’ll ever be pulling in 6-figure incomes (which is ok), but it’s nice to know that the money management principles were doing really do have a payoff. And the Shopaholic series by Sophie Kinsella makes me feel better about my debt. At least it’s “honest” debt gotten for an education, not for a new pair of shoes. The books also squash my any shopping desires I have. (Though sometimes I wish I could wear the debt, but I tell myself that its benefits will come in long-term financial rewards. Plus, I know Micah’s meant to be a professor.)
jim:	Which of your posts do you think all your readers shouldn’t miss?
Mrs. Micah:	Preparing Financially for a Career Change, Part 1, Preparing Financially for a Career Change, Part 2, Overcoming Impostor Syndrome for Financial Success, Best PF practices of the year! (and they should contribute if they’ve got ideas!), [and finally], not personal finance, but I think this one is very important: Another PSA: Newborn Hearing Screening.
jim:	What’s the biggest financial “mistake” you’ve ever made? (or regret you have)
Mrs. Micah:	My biggest regret is not take my finances as seriously earlier. I’ve always been a pretty cautious spender, but I’m sure I could have done better.
jim:	What do you mean by “not taking your finances seriously?” What would you have done differently if you could go back in time and warn yourself?
Mrs. Micah:	I’d like to tell myself when I was first working (14) that there was no rush to spend. Suddenly having a paycheck meant I could finally afford DVDs or books, but I bought a lot of little things I at first that I didn’t use. In my teen years, I did an excellent job saving up for a violin and a trip to Europe. I think in the former case, I would have reminded myself that I didn’t need to buy the most expensive violin I could afford (though my violin has a lovely sound!) and maybe spent a bit more time shopping around. I don’t think I have any regrets about the trip to Europe.
jim:	What’s the best financial decision you’ve ever made?
Mrs. Micah:	Paying off our credit card all at once. When I married Micah, he had a credit card debt of just under $1000 at 29.9% interest. I decided to use my savings to wipe that out.
jim:	What is your favorite personal finance blog and why?
Mrs. Micah:	Oh dear. That’s like asking me my favorite book. Probably Paid Twice. She’s got a very engaging, story-like style so you feel you’re going right along with her life. I read and comment there so much I feel like a fan girl.
jim:	What do you hope to accomplish in the next year?
Mrs. Micah:	I hope to bring my earnings from my jobs and my freelancing up to $2500/month after taxes by the end of the year. That will give us $500 or more (of my income alone) to throw at debt or put into savings. And we can use all of Micah’s for it. That would be very exciting. I also hope to grow my blog and start reaching an even younger audience (college-aged). And I have a semi-secret project I’m working on, we’ll see how that goes.
jim:	If your blog ended today, how would you like people to remember it?
Mrs. Micah:	I’d want people to remember the spirit of optimism and possibility.
jim:	To what do you attribute your upbeat personality and optimism?
Mrs. Micah:	Counterintuitively, I think part of it comes from my depression. Before the depression, I always had a lot of energy and was naturally, well, talkative is a nice way of putting it. In writing, I’m trying to reclaim some that energy, to encourage myself even as I encourage others. There are days when I feel like I can’t take it anymore, and sitting down, figuring out how to take some control over my life, and writing positively about it is very therapeutic. Personal finance is a great way to start feeling some control.
jim:	Lastly, what’s something no one else in the blogging world knows about you?
Mrs. Micah:	I sleep with a teddy bear named Dashell. If he’s not there, I have a really hard time falling asleep….
jim:	Thanks so much for taking the time to answer all my questions, I hope you and Dashell and Mr. Micah have a great weekend
Mrs. Micah:	Thanks, Jim, I’m sure we will.

Go check out Mrs. Micah… right now!