Along with Your Money or Your Life, The Total Money Makeover really had a lasting impact on my life. I have been a fan of Dave Ramsey for as long as I can remember listening to talk radio. As a matter of fact, I listened to Dave before he was a national celebrity, before the 60 Minutes interview, before the book deals, before the Oprah appearances, and before the show on Fox Business Channel.
My wife and I attended one of his live events a few years ago, and I credit it with finally getting her on board with out financial turnaround. Last week I reread The Total Money Makeover for the first time in a long time, and have provided a detailed review below.
Chapters 1-5: Debunking Financial Myths
In Denial. The number one reason people refuse to change is because the refuse to accept they are in trouble to begin with. Even those with just a small amount of debt refuse to accept they are in debt and work to kill off what they owe. Instead, they just kind of wander along through life with no goals of ever improving their financial lives.
Debt Myths. Thanks to a billion dollar banking and credit industry we have been sold on the idea that debt is normal. “Everyone has to have a car payment” and “you can’t buy a house without a mortgage” are commonly accepted ideas regarding debt. It’s Dave Ramsey’s assertion that we don’t have to live with debt, we simply need to deny ourselves life’s latest toys and save for those that we do want to buy. The bumper sticker on my old truck best sums up this section of the book: “Debt is normal. Be weird.”
Money Myths. This section reminds me of the old phrase, “Money is not the root of all evil, the love of money is the root of all evil.” In other words, money is not the answer to all life’s problems, but it can make life easier if we use it wisely.
Financial Ignorance. Our public education system has done a particularly poor job of giving our youth a solid financial footing before setting them out in the real world. Unless these kids have financially-savvy parents they grow up ignorant on how to manage their finances. I was in this category – though I wouldn’t call myself ignorant, just confused. I sort of floundered throughout my 20’s when I could have been building a fabulous foundation for my family.
Got to Keep Up With the Joneses. Financial peer pressure is a net worth killer. We spend more time, money and energy trying to keep up with others than we do appreciating what we have. This is particularly true of young people. As you get older, you start to develop an “I don’t really care what other people think” attitude. This is the attitude that sets you free, financially. Quit trying to keep up with the Joneses – they’re broke, too!
Remaining Chapters: The Baby Steps
The remainder of The Total Money Makeover outlines Dave Ramsey’s plan for making over your finances in seven “baby steps.” The “baby steps” theme comes from that old Bill Murray movie, What About Bob. Remember, his therapist (Richard Dreyfus) convinces him to take “baby steps” to break through his paralyzing fear of the world. Ramsey’s baby steps start with saving a beginner emergency fund and end with investing for wealth. Here’s more on the baby steps:
- Save $1,000 in a Beginner Emergency Fund. Until you put some separation between you and the financial cliff you’ve been dangling over the last several years you will never succeed, financially. $1,000 isn’t a lot of money these days, but it is enough to cover most car repairs and replace broken appliances. This baby emergency fund should be kept ultra-liquid, and easily accessible. A good place to start is at your local bank account or credit union. Do not “invest” this money; this fund is for emergencies only.
- Develop a Debt Snowball. Forgetting interest rates and annual fees for a moment, Ramsey advocates lining up your debts smallest to largest. Make minimum payments on all the debts, and attack the little one with every extra dollar you can squeeze from your budget. When that smallest debt is paid off move on to the next one, combining that debt’s minimum payment with the amount you were paying on the first debt, plus any extra you can squeeze from the monthly budget. In this way, each time you move up a debt your “snowball” gets larger and larger. By the end of the your debt snowball plan you could be making monthly payment well in excess of $1,000 a month towards a car payment or large credit card balance.
- Save 3-6 Months of Expenses in an Emergency Fund. Now it’s time to beef up the emergency fund you started in Baby Step 1. Calculate 3-6 months of expenses (not income) and use that as your savings goal. If you are single, or married with only one income, lean towards the 6-month figure. For most families their goal amount should be around $10,000 in a high-yielding savings account. *Note, step 3b is to begin saving for a large purchase, such as a down payment for a home or to upgrade a car with cash. This should only be started after you have a fully-funded emergency fund in place.
- Save 15% of Your Income for Retirement. If you suspended retirement contributions to get to this point, now is the time to restart those contributions. If you have an employer-sponsored plan such as a 401k that offers a match, invest up to the matching percentage, but no further. Any amount above that, up to 15% of your income, save in a Roth IRA.
- Save for the Kid’s College. It’s important to note that this step comes after saving for your own retirement. Many parents, with good intentions, put saving for their kids’ college funds ahead of their own financial goals. This is a bad idea. They don’t offer grants or work-study programs to pay for your retirement. If you are without savings for college, there are alternative ways to fund an education. Ramsey sort of hedges here – citing that kids tend to get more out of their education if they pay for it themselves. Then again, he confesses that it is a noble goal to pay for your kid’s education. Since I personally took the student loan route, and lived to regret it, I will try to find a way to cover most of my children’s education expenses. Part time jobs aren’t all bad though, and if they develop an expensive taste for clothes or toys in college they can get a job and pay for those themselves.
- Pay Off Your Mortgage Early. This is one of the most controversial steps because most financial experts will tell you that money spent reducing a mortgage could earn you a much better rate in the market. Maybe, but Dave Ramsey isn’t all about math. His specialty is personal finance. Without a mortgage payment, and no other debts, you can become very wealthy, very fast. Paying off all debt, including mortgages, eliminates a large amount of risk from our lives. If you are thinking of buying a house consider a 100% down plan – paying for the entire purchase with cash. If you must finance the deal, consider a 15-year, fixed rate mortgage and then work to pay it off even earlier.
- Invest for Wealth. The final step in your total money makeover is to invest all remaining income for wealth. Without any debt payments, a large percentage of your income (your best wealth-building tool) can be invested above retirement account savings.
As I mentioned in the introduction, I credit this book with really getting my financial life turned around. I’m one of those people who loves to do things in steps. I attack many problems this way, and developing a game plan around The Total Money Makeover’s baby steps is a great way to turn around your finances. I highly recommend this book as one of my top three favorite financial books of all time.