The Total Money Makeover : A Proven Plan For Financial Success - Dave Ramsey

The Total Money Makeover : A Proven Plan For Financial Success

First look at the person in the mirror

Being totally broke is not fun. There's debt, nothing is stashed away for a rainy day, there's no sense of control over life and living.

You can’t do adult stuff like paying the month's bills and mortgage; feeding the kids, keeping them warm, taking care of them in ill health and sending them off to college; enjoying life, and retiring; without constantly being at the edge of money worries.

Money problems begin with the person in the mirror!

Building wealth is not rocket science. It is 80% behavior and 20% head knowledge. Knowing what to do is not the problem, doing it is. If the person in the mirror can be made to behave, he or she would soon be rich beyond imagination.

You are the problem with your money, and you are the solution to your money problems, not the financial channels or instructional videos on DVDs. If you change the way you behave with and around money, all your money problems would soon be long gone.

Your financial fitness plan is the tool to help you change your behavior around your money, and its costs. If you make the sacrifices you need to make, that most folks are not willing to, you can live later as those folks will never be able to.

The Total Money Makeover is a proven system of guidelines that require sacrifice and discipline. With it, you will be free of all debts, begin saving, and be able to give like never before. It is not a silver bullet to end poverty, it will work, only to the extent that you work in implementing its guidelines.

But it all begins with the person in the mirror.

Rid yourself of all denial

Financial freedom begins with a reset of money-spending patterns, and denial of the need to do so is an obstacle to that.

Denial will make financial fat — big house payments, fat car payments, large student loans, bloated credit cards, zero savings, and no budgets — be “just fine”; until a crisis comes calling. When we lose our health, our fitness or our wealth, we do it one day at a time; without us realizing it. “The worst” is not the enemy of “the best”, “just fine” is.

Financially-fat people have a language that makes them think they are doing “just fine”, that keeps them perpetually in denial, living a lie: “I am credit worthy”, “the banks readily approve my loan requests”, “I pay my credit cards off at the end of every month”, “I can afford the car or furniture if I can afford the payment”; and the like. They keep at this until a crisis — perhaps a health challenge or a job layoff — comes calling, and they realize the need for a change.

Only a few people have the courage to seek change. People resist change because of the pain involved. Then they are forced to change anyway when the pain of their current realities exceed the pain of making the change. Doing the same thing over will give you the same result always. Resist the temptation to remain in the same situation financially. Opt now for the pain of change before the pain of not changing searches you out.

Debt is not a tool

It is in our nature as humans to desire instant gratification of our wants. That is a sign of immaturity. Maturity is when we are able to delay immediate pleasure.

But the culture encourages us to live in the “now”— to “want it now” — as long as we are willing to take on debt. Debt has become the means to have all that we want before we can afford them. Of all the money myths out there, the debt-is-a-tool myth is the biggest. It’s been loudly repeated several times over and for long enough that society has simply accepted it as the truth. Debt is now sold so aggressively that it is now part of the culture. There are some $928 billion in credit card debts. We cannot wrap our minds around doing a big item purchase like a house or car without debt. We don’t know what it is like to have no payments.

Our view of debt is a major barrier to the financial freedom we seek. Over several generations, vested interests have sold our forebears and us on several debt myths. We need to rid ourselves of these myths to achieve financial fitness.

One myth says that debt is a tool to create personal wealth and that the wealthy often leveraged on debt to build their wealth. This is not true. A survey reported that 75% of the Forbes 400 — the 400 richest Americans — affirmed that staying debt-free was the way to build wealth. These 75% all lived on less than they made and spent only when they had cash. They had no payments. Debt is a folly, and businesses that have wisened up to it are taking advantage of a lot of people by selling them on to consumer debt.

And the debt-is-a-tool myth has several sub-myths, all of which can be refuted with a little bit of commonsensical reasoning. Debt is a method the banks use to get rich, not you, the borrower. Debt makes you a slave to the lender. If you want to be rich, your income is the asset you can use. If the major part of your income gets locked down to paying one debt or the other, you are already out of the “getting rich” game. When you invest your income, you can become as rich as you want to. Your income is your greatest wealth-building tool, not debt.

Money myths are exactly what they are

Money myths are another set of myths we need to be rid of on our way to financial fitness. They thrive because they take advantage of two natural human inclinations — a desire to deny risk, leading us to think that there is such a thing as total safety; and the lure of easy wealth, making us think it is possible to be rich without hard work.

Risk denial shows up in several ways, sometimes in our lazy attitude of not realizing that some energy is needed to win in life, and at other times accepting a bad situation because we so beat up. Another way risk denial shows up is when we search for a false sense of security that simply doesn’t exist. A good example is staying on in a job role you don’t like much for several years because the company is “secure”, only to have the rug pulled from beneath your feet by a layoff or bankruptcy of the company.

The lure of easy wealth also contributes to sustaining these money myths. There is no such thing as easy wealth or the secrets of the rich. There are no magic keys. They simply live right financially. It is an uncomplicated thing to do, but it is hard.

Get money-knowledge; refuse to keep up with the Joneses

Ignorance about money is another obstacle that keeps us from being financially fit. Not a lot of people are willing to accept that they are ignorant about money and thus get defensive about it. Being ignorant about money is not the same as being unintelligent. It just means one doesn’t know yet. Ignorance doesn’t mean you are dumb. It just means you’ve never be taught. No one is born financially smart. It is a skill everyone learns like driving, reading, or writing.

By the Census Bureau’s statistic, an average American family earns $50,233 every year, which adds up to about $2 million over a working lifetime. It makes no sense that these families are not taught how to manage this quantum of money.

Accepting that you are ignorant about money is the first step toward overcoming it. Invest in and read a lot of books teaching about money. Attend an occasional seminar. In no time, you will be knowledgeable about money. No one builds wealth by chance, it is built on accurate knowledge of money and its workings.

Keeping up with the Joneses is yet another obstacle to financial fitness. It comes from a need to have the approval of our “crowd” — relatives, friends, work colleagues, and society. It causes us to commit money errors just so we can have an appearance of being rich to our crowd. We should not be motivated in our money choices from what we think our crowd thinks about us. Rather, we should find motivation for our money choices in our desire to be financially secure. Millionaires have no need for approval or respect from others based on what they owned, as Dr. Tom Stanley found out and wrote in his book, The Millionaire Next Door.

For us to have a money breakthrough then, we need a radical change in our quest for approval, which has us buying things with money we don’t have. We need to immune ourselves from the peer pressure that keeps pushing us towards errors. Stop keeping up with the Joneses. The Joneses are broke.

Baby Step One: Build a $1,000 emergency fund

Baby steps are a secret in your quest for financial fitness. If you want to get anywhere, have a go at it one tiny step at a time.

Baby steps help you focus. Try to do everything at once — fund your 401K, increase the payment on your house by $50, and add an extra $5 on the credit card — will spread your efforts too thin; and you get nothing done. It will get you frustrated and you will end up abandoning your financial fitness plan altogether. Focus on only one step in the journey, at any particular time, and things will happen. You will be marking off items on your checklist as “done.” There will be energy for the next baby step.

Baby steps also help you prioritize. Each baby step is an important part of the overall financial fitness plan. Each builds on the other. If one is missing, the plan falls apart. So, for the financial fitness plan to work, one baby step has to be worked on at a time, in the right order, to the exclusion of all others. It requires patience on your part because there will be a natural tendency to take shortcuts to take care of “pressing needs.” The whole plan will fall apart if you do shortcuts.

You need a written budget, done at the beginning of every month. You have to channel your money towards specific ends or it leaves you in a haste. Your written budget is your money goals for the month. Without it, you won’t achieve anything financial in that month.

Do zero-based budgeting. Tie every dollar of your income to one of your month’s bills, savings, or debts. Do this on paper. Make sure no single income dollar is left over. Do this even if you earn an irregular income; there is a planning sheet to help you with this.

Share the budget with your spouse so both of you agree to it. Once you and your spouse agree to the budget, implement it to the letter. Don’t deviate from it, except in an emergency. In the case of an emergency, you and your spouse should adjust the budget and balance it again.

Prioritize all items in your budget. If there are payments, be current with all your creditors. If you are far behind in your payments, focus on life’s necessities — food, housing, clothing, utilities, and transportation — first, before turning your attention to your debts. Once the budget is done, proceed to baby step one — save $1,000 cash as a starter emergency fund.

Life will happen, so prepare for it. According to the Money Magazine, 78% of everyone will deal with a major “cash-intensive” event in any ten-year period of time — a layoff, an unexpected pregnancy, a failed car transmission, or the death of a loved one; etcetera. $1,000 will probably not cover the cost of a major “cash-intensive” event, but it will cover for the little ones until the emergency fund is fully funded. Keep the emergency fund strictly for your life’s emergencies. Stow it away in a Savings account. Don’t spend it impulsively on line items that belong in your budget — Christmas, car repairs, or new clothes for your children. Those are not emergencies. They become emergencies because of poor planning. Keep your emergency fund liquid always. This means you should replace any part of it that you spend as soon as it is practicable. Without fail.

Your emergency fund will keep you off new debt so you can focus on paying off the old ones. That’s its purpose.

Baby Step Two: Use the debt snowball to become debt-free except for your home

Getting out of all debts, except for your mortgage, is the next baby step on your journey to financial fitness. It is the toughest. It requires the most effort and the most sacrifice. It requires that you focus with intensity.

Your income is your most important tool for wealth-building. Every other thing — ideas, strategies, goals, visions, focus, and the like all center around your income. You need to take control of as much of your income as is possible. This happens when you are debt-free. So, your debt is the enemy of your wealth-building efforts. Investing $1,995 every month in a mutual fund for 28 years instead of using it for payments will result in you having a $5.5 million cash pile at the end of those 28 years.

Focus on paying off your debts, except your mortgage, so you can have more control over your wealth-building tool: your income. Do this with a debt snowball. It works by listing all of your debts except your mortgage payment in order, beginning with the smallest payoffs. There’s a designated form, “Countdown to Freedom”, downloadable from the author’s website, that you can use for this. The big idea is to pay off the little debts first, so you can have immediate positive feedback on your efforts and enough energy to stay the course. As you pay off the smallest debts first, also pay up the minimum required, if any, to remain current on the large debts.

Every time you pay off a debt, rewrite the remaining debts in a fresh form, so you have visual evidence of how close you are getting to financial freedom. Also, you do not, ever, want to borrow again.

Stick to paying off the smallest debts first, except in an emergency, such as a pending remittance to the IRS or when the risk of foreclosure is real. Paying off the smallest debts will give you quick wins and help you along on your behavior modification path. Quick wins will fire up your motivation to the stratosphere.

Baby Step Three: Finish the Emergency fund

You’ve paid off all your debts except for your mortgage. You have $1,000 cash set aside as your emergency fund. You have almost total control over your income. You are ready for baby step three: fully funding your emergency fund.

A fully-funded emergency fund is enough money for you and yours to live on for six months if you have no income during that time. It will range between $5,000 and $25,000. Work out your figure, dependent on your current living circumstances and work towards building your stash.

Be very clear about what you term an emergency. It is an event that “happens on you” and whose negative impact will be major if you don’t pony up the funds to resolve it. Good examples are deductibles on a medical bill or a homeowner’s or car insurance after an accident, a job loss or a medical emergency. Your emergency fund, fully-built, is your risk-management tool. It will protect you from life’s storms and give you peace of mind. It will keep every new problem from becoming a debt. It will turn potential life-altering events such as these into mere inconveniences.

Lastly, keep your emergency funds liquid, that is, in cash, so that it is readily accessible without incurring penalties.

Baby Step Four: Invest 15% of your income in retirement

Investing for your retirement is the next baby step on your way to financial fitness. Retirement means you are financially secure and have choices available to you: work, write a book, raise your grandchildren; etcetera. At this stage, your money works harder than you and yields returns.

70% of all Americans do not believe they will be able to retire with dignity, according to a Bankrate.com survey. You want to be part of the remaining 30% by investing with the long-term goal of attaining financial security.

So put in 15% of your before-tax gross income in retirement savings. You will still have enough of your income left to save up for your kids’ college education and to pay off the mortgage. Also, compound interest will ensure that your retirement funds grow.

Place your retirement funds in growth-stock mutual funds which return an average of 12% every year in 15 years or more. Select a mutual fund that has a good track record with this timeframe. Once you locate one, spread your investment across several kinds of funds. The author, for instance, places 25% of his retirement savings in each of Growth and Income, Mid Cap or Equity, International or Foreign, and SmallCap or Emerging Market funds. How you spread is a function of your investment goals and your appetite for risk.

Consider a Roth IRA as part of your investment strategy. You are allowed to invest as much as $5,000 a year and it grows tax-free. If you put in $3,000 every year for thirty years, your $90,000 investment will yield you $873,000 cash tax-free at the age of 65. So any serious retirement investment plan should have a Roth IRA in the mix.

Baby Step Four will not get you rich in any quick time, but it shows that systematic, consistent investing is the way to build wealth.

Baby Step Five: Save for college

College education for your kids is important. It will enable them to start their adult lives and careers on a solid footing. Do this right, and you will be able to send your kids off to college debt-free.

There are several college-degree myths that you need to rid your mind of so you can set realistic college education goals for your child. A college education will not guarantee your child a job, success, or wealth. It is only when your child mixes the education with attitude, character, perseverance, vision, diligence and hard work that he or she will have a good job, success and wealth. According to the book by Daniel Goleman, Emotional Intelligence, only 15% of all success can be attributed to training and knowledge. So college education is no genie in the bottle.

Find out what the college you attended costs to attend today. Check out the big state schools in your area as well as the small state schools in your neighborhood. What do they cost? It is only in a few areas of study and careers that the college your child attends would matter. Pedigree is overrated. There is no need for you to take on debt just so you can pay off a $75,000 tuition for a prestigious college. Have your kid go to a state school you can pay for out-of-pocket, debt-free.

Invest the money you are setting aside for your kids’ education in an Educational Savings Account and have the funds placed in a growth-stock mutual fund. It grows tax-free when used for higher education. If you invest $2,000 ($166.67/month) from the day your child was born to when he or she clocks eighteen years, you will have $126,000 tax-free for him or her to attend any college he or she wants.

Baby Step Six: Pay off your home mortgage

At this point in time, you are debt-free except for your mortgage, you have three to six months of expenses — between $10,000 and $25,000 set aside for emergencies, 15% of your pre-tax gross income is going into your retirement savings and you have something invested for your kids’ college education.

Congratulations, because you are now in the top 5 to 10 percent of all wealthy Americans because you have some wealth, a plan and your life are under control. Now is the time to not settle for “the good.” Go, instead, for “the best.” Be completely debt-free by paying off your home mortgage.

Use every dollar you can find in your budget above living, retirement, and college savings to make extra payments on your home. Until you pay it all off.

Paying off your mortgage will take you seven years on the average. At its end, you will be completely debt-free. You will have absolutely no payments.

Baby Step Seven: Build wealth

Finally, you are on the last baby step. That places you in the top 2 percent of all wealthy Americans. You are totally debt-free — no house payment, no car payment, no card payments. You live on a budget, agreed to with your spouse; if you are married. You have a retirement plan going. If you have kids, they are well on their way to a college education you will pay for out-of-pocket.

You have lived like no one else, so now you will be able to live like no one else. Sweat and sacrifice brought you here, you have reclaimed control of your life and your most powerful tool for building wealth — your income. It is time to build your wealth. But first, some caveats.

Wealth will not answer all your life’s questions or make it free of troubles. Wealth is an incredible responsibility, not an escape mechanism. For your newfound wealth, you have one of three things to do with it — have some fun, invest some, or give some away. Imagine you had $18 million that took you 40 years to acquire. Which of these three options would you do?

In fact, you should do all three.

Have some fun. Buy the brand new $50,000 car. Buy yourself a $700,000 home. There is nothing financially or morally wrong with a luxury purchase so long as you have worked hard for it and the purchase as a percentage of your wealth is equal to what most people would spend buying a happy meal. Take your family, even the extended ones, on cruises. Buy large diamonds, if you so desire. Travel, if that’s what catches your fancy. Buy designer apparel. Your money position will be hardly affected when you do these things, so have fun.

Keep investing, too. That’s what got you here in the first place. As your investment grows, you know you are still winning. The fun thing about investing at this stage is that you are wealthy enough to ride out the market’s fluctuations and make good returns. So stay in the markets for the long term. Keep your investments simple. Manage your own money. This is one reason celebrities and professional athletes lose their wealth. They let others make the call on their money. You might consider putting together a team of advisors but make the final call yours. Your advisory team should have an estate-planning attorney, a CPA or tax expert, an insurance professional, an investment professional, and a good realtor. Watch out for conflicts of interests among your team of advisors.

Give. Offer the people around you helping hands. You will find it fulfilling.

This last baby step will lead you to your “pinnacle point” — the point at which your money works harder than you. You become wealthy officially because your money makes more than you do. You are able to live comfortably on your investment income. You are financially secure.

Conclusion

Seven “Baby Steps” or guidelines to set you free from debt's trap and make you wealthy beyond your imagination.

It all begins with the person in the mirror taking these seven “baby steps” in order, and then there is a Total Money Makeover.

Just as author Dave Ramsey has made clear, through the several testimonies by everyday folks who began the Total Money Makeover challenge and made a success of it, you can too!

It is not going to be easy, as it is not a get-rich-quick scheme.

So, are you good to go?

Try this
• What is your Total Money Makeover plan? What is your proven plan for financial fitness to get rid of your debts and build wealth in the next ten years? Create the plan in your journal, and share it with your spouse. Can two of you take this challenge?
• Go to the author's website, DaveRamsey.com and download the budgeting forms freely available there. Use these budgeting forms to document your ten-year financial fitness plan.
• What are the seven "baby steps" in the Total Money Makeover? What is the significance of each step? What milestones let you know that you have accomplished each step?
• Pitch the Total Money Makeover to a relative, friend, neighbor or colleague. Were you able to pitch with confidence?