The Total Money Makeover by Dave Ramsey was introduced to me by JD Roth’s blog Get Rich Slowly. This is the book that started our journey to becoming debt free and put us on the path to financial independence.
My wife and I read The Total Money Makeover chapter by chapter and discussed everything as we went along. I enjoyed reading it together and then talking about what things we would and would not do. Our journey to becoming debt free was a great accomplishment and really brought us closer together.
So the basic premise and motto of The Total Money Makeover is that “If you will live like no one else, later you can live like no one else”. The book takes you through what Dave calls the 7 Baby Steps. I summarize and give my thoughts below.
Baby Step 1: Save $1,000 Cash as a Starter Emergency Fund
This one is pretty easy to understand, save $1,000 and use it only for a true emergency. I think this is a neat idea. You’ll build it up more later, but this works as a nice way to keep up momentum and keep focus on debt payoff.
Baby Step 2: The Debt Snowball
This step is where you order all your debts from smallest balance to largest, excluding your home mortgage, and then start attacking each one starting with the smallest and working your way down the list. This method is designed to help get some quick wins and build momentum. This is what we used.
Mathematically, this might not be the most optimal, but from a behavioral perspective, it is pure gold. Any strategy not implemented is worthless. I really like the simplicity of the debt snowball and at the end of the day, it worked for us. He has you exclude the home mortgage because you’ll get to that later.
This step cuts all unnecessary expenditures. We didn’t follow that part to a T. We still put something toward retirement accounts and we still took some trips. We were living in Germany at the time, so we knew it was best to take advantage of that because we felt it was a once in a lifetime opportunity – which it was. I’m really glad we did that. We’ll never be childless 20-somethings living in Europe ever again.
Baby Step 3: Finish the Emergency Fund
This step, he tells you to now build up your emergency fund to cover 3 to 6 months of expenses. I’ll talk more about our emergency fund in a later episode, but this is really important and pretty much universally accepted sound bit of advice. Keep this in a savings account that you can access in an emergency. Available credit is NOT an emergency fund.
Baby Step 4: Invest 15% of Your Income in Retirement
This step is exactly what is sounds like. Start putting 15% of your gross income into your retirement accounts and invest in mutual funds. He doesn’t count your company match in this. I think this is a good starting point, but may or may not be the best for your situation long-term.
When you’re just starting out, 15% is a good rule of thumb, but I think you’ll want to revisit this. Dave states in the book that you can “cheat down to 12% or up to 17%” but that you want to keep some money on the table for paying down your home mortgage. Take that for what it’s worth, but getting started investing early is absolutely critical!
Baby Step 5: College Funding
This step may or may not apply to you right now or ever, but I wouldn’t ignore it completely. He’s a big fan of ESA’s or Education Savings Accounts, but I’ll be honest, in my experience these are kind of a hassle to find and get started. He wants you to max those first, then use something like a 529 plan. The 529 plan is the most common option out there. These are not the only ways to save for and fund college, but I’m not going to get into all the different ways you can save for college.
Regardless, it is a personal choice of how much of your children’s college you want to fund. Me personally, I want to provide as much help as I can, but I want my son to have a lot of skin in the game too. There will be some very specific parameters around our monetary assistance for college.
My last note on college savings is that you need to educate yourself on how student aid is calculated. Where the savings is held does have an impact. I’ve included a link to the Student Aid.gov website that explains this. They have a pdf download you can get to get into great detail on how the student aid formula works as well.
Baby Step 6: Pay Off Your Home Mortgage
This step comes under a lot of scrutiny, but I think it is a worthwhile goal. From a financial independence perspective, having your home paid off reduces your annual cost of living quite considerably. Understand when you’re reading this part of the book that interest rates for mortgages and the mortgage industry as a whole have changed considerably over the years. If it makes you feel better to pay off your mortgage early, go for it.
We rent currently, so this isn’t something I have to worry about right now. However, once we do purchase a home again, I’ll do an in-depth analysis of exactly what keeping the mortgage looks like as well as paying it off early. Then we will talk about which makes us feel better. I can almost guarantee that we’ll work to pay the house off as soon as we’re able to. It really does feel better to not have payments and actually own the house.
Baby Step 7: Build Wealth
This step, in Dave’s words, is “To have fun, invest, and give”. I do think it’s instructive that he states that “Wealth is not and escape mechanism,” meaning that your troubles aren’t over. He also talks about reaching his version of the “pinnacle point” which I briefly touched on in episode 8 of the podcast. He defines it as when you can live off your investments.
I honestly get a little bit perplexed with the calculation presented in the book. I think it is misleading. Just know that this is when your money is making more than you could working for your normal or former salary.
Closing Thoughts
Overall, I think every human being should read The Total Money Makeover. I have given this book more than any other book and will continue to do so. It is very clear that Dave Ramsey is an evangelical Christian throughout all of his book and media empire. Don’t let that steer you away from the book if you don’t share his religious beliefs.
I would not use the figures that Dave presents in the book for market returns. There are much more accurate rules of thumb out there. I would say that you should look at a 30-year or longer time horizon for your investments.
With those two caveats, I think that the advice in the book is great and I occasionally revisit the book. It was actually really refreshing to thumb through it preparing for this podcast. I have a lot of fond memories of my wife and I reading that book together and living frugally when we were in Germany together. It was one of the best times of our lives. I hope that if you are starting the journey of paying off debt and getting yourself financially secure that you can make it fun and memorable.
Action Items
- Read The Total Money Makeover. No matter who you are, you can get something out of the book. Even if it is just knowing a different perspective.
- Take action on what you read in the book. Reading a book with actionable advice and not implementing any change is wasting your time.
- Give me a 5- star review.
To contact me, please email podcast@start100k.com.
Now go get started!
Before you go, please remember this information is for educational and informational purposes only. Please seek tax, legal, or investment advice before making any decisions.
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