Dave Ramsey’s Total Money Makeover
Here it is. The promised review. This book can be life-changing, if you let it and if you commit. I am personally going to follow his advice, as much as I can. (Unfortunately, like many personal finance books, blogs, etc, he assumes that most people make about $50,000 or more a year and that their house costs 50% or less of their income every month. Not realistic for my situation.) I want to get out of debt and Alann and I were discussing the best way, if I should use my savings or not, etc etc. This book gives the answers.
Now, apparently, the first version of this book is different from the updated version. I read the updated version. I read the review at “The Simple Dollar” for the earlier version and his sections didn’t match up with what I actually read. I say get the updated version if you can, because it sounds more easily read.
First, he goes through some myths about money that most people hold. I admit, I have fallen prey to some of them also. It is interesting to read through them, and the reasons that he gives for their fallacy. Then, come the baby steps. (Don’t be fooled. These steps take a long time, but he focuses on one portion of finances at a time.)
1) Save $1000. This is your “baby” emergency fund. Basically, it functions to keep you from whipping out the credit card when say, you need to replace your windshield. If you have more than $1000 already saved, he advocates putting everything but $1000 towards your debt. This might hurt. I have only recently been able to start saving, a mere $30 a month, and it hurts to give it all away.
2) Debt Snowball!!! Basically, line up your debts in order from least owed to most owed. Include everything you owe but the house- the CCs, the cars, student loans, the dryer, everything. Now, get everything current (if you are late on payments.) Then start the snowball. Put absolutely every dollar you can find on that first debt, the one with the least amount owed. Maybe you can pay it off in a month or two if you can cut extras out of your life. Cut everything extra out, tv you don’t watch, fancy coffee, buy generic foods, everything you can do to cut your expenses. Maybe get a second job, maybe sell a bunch of useless stuff- cds, dvds, furniture, clothes, etc. He also advocates selling a car if you owe WAY more than is reasonable (read his book to find out.) Put all the money from these activities to the debt you are currently working on. Make sure you keep making all the minimums on the others. Once you pay off one debt, put everything you were putting on that debt onto the next one, and so on and so forth. If you have a lot of debt, this might mean that eventually you are paying $1000 or more per month on one debt. (I wish I was that lucky to have that much extra money. Maybe I am just not trying hard enough.) He says this will take most people 18-24 months, if you actually work hard at it. If you do some calculations, and it looks like it will take longer than that, then you have to do some things differently. Google snowball calculators, you will find one. Or email me and I will send you the one my mom gave me. It’s pretty cool.
3) Save 3-6 months of expenses. This is your emergency fund. If you lose your job, get hurt, etc, that’s what this is for. Not for the big screen tv you’ve always wanted. How much to save really depends on your situation. Single, no kids, high demand job, 3 months is probably okay. Married, 10 kids, wife doesn’t work, you better save 6 months or more. I am way excited for this step. I have been reading a lot about savings, emergency funds, etc, and I am convinced that I need one. We are so vulnerable, especially with the house payment so much of our income. Even just trying to contemplate having a baby while I was at Granite with no maternity leave was very daunting. We were figuring we needed $5000 or so just so that I could take the whole FMLA 12 weeks off work. That is a daunting number to save when you owe that much. So I am very excited to have no debt and be able to have the money if we need it.
4) Save 15% of income for retirement. Obviously, take a 401k match, then fill your Roth IRA (tax free at retirement) then max the 401k, to get to 15%.
5) Save for College. This is where I don’t quite agree fully. He says you should totally fund your children’s education, even if they want to become doctors and that means 12 years of school. According to The millionaire next door, children who go to college fully funded end up turning out worse than those who have to work for it. They become high consumers, don’t learn to budget or live frugally, etc. I like a different option. I can’t remember where it came from, but basically, you save for 4 years at a state school. If the kid wants to go somewhere fancier or for longer, they pay for it, get scholarships, get loans, etc. The basic idea is that yes, they can get a good education for free, but they still need to work for it because if they don’t want to pay for it themselves, they will finish in 4 years instead of 5 or 6 or 7 or 10.
6) Pay off your home. This makes perfect sense to me. Save for retirement, save for college, then accelerate your house payments. I try to pay a little extra every month. I basically round up. The payment is supposed to be $792 or something, I pay $800 even. It makes accounting easier, and every bit goes to principle, so in the long run, it helps me out. I don’t understand the people that have no retirement savings, no college savings, and yet pay $$$ extra on their home every month. I worry about if we will have enough for retirement and if we will be able to have college savings for our kids, and we don’t have kids and are nowhere NEAR retirement age.
7) Build wealth, and GIVE. He says that statistically, wealthy people are happier when they give to charitable causes.
He says that people who are REALLY dedicated, “gazelle-intense” (his phrase), can reach this point just 7 years after they start the TOTAL MONEY MAKEOVER (HIS CAPITALIZATION). Do I believe we will be completely debt-free including our home in 7 years? On my salary (mostly), with Alann in school full-time for part of this, and starting a family (someday)? How about a big fat NO. But I do believe we can try, and living as closely to these principles as possible gives us direction. Knowing what we are going for and trying for it are better than just blindly stumbling. And we aren’t too bad off. I think. I hope.