I often get asked if I have read money management type books. For example, I have been asked on several occasions if I have read the Total Money Makeover: A Proven Plan for Financial Fitness by Dave Ramsey. So, I decided to read the book and see what everyone is raving about. So, instead of buying the book, I went to the local library and took out the book.
As you can imagine, personal finance isn’t exactly the most entertaining topic for a read. That is especially true when the take away message is to exercise restraint and behave responsibly. Nobody wants to face the fact that we are to blame for our own financial situations. It is far less painful to blame somebody else for the damage we do to ourselves.
Sacrifice today for wealth tomorrow is a commonsense idea. There is no get-rich-quick scheme presented, just old-fashioned wisdom. Essentially, Dave Ramsey advises to turn back the hands of time and handle money the way your grandparent’s generation did, as did the generations before theirs. Generally, don’t spend money that you don’t have. Save for future expenditures. Quit trying to keep up with the Joneses. It’s that simple.
He made it clear that anyone could do it, but they had to be willing to work hard and make some sacrifices. Most importantly, they would have to evaluate their attitudes toward money and be willing to make some changes in their behavior. It is common sense, but how many people have common sense when it comes to money?
Ramsey’s no-debt stance, with the exception being a 15-yer fixed-rate mortgage, is not for everyone. Although I agree that minimizing debt is important, there is a place for using a credit card as a charge card whereby you pay the balance completely off each month. In some cases, you may receive back cash-back and other rewards. Most people are better off avoiding credit cards altogether reducing the temptation to abuse them. In analyzing my habits, I know that I don’t spend more money simply because I charge purchases rather than dropping cash or using my debit card. If fact, I have never used my debit card.
The steps to the Total Money Makeover
- Set up a $1,000 emergency cash fund
- Generally, you sacrifice what you can, Work extra hours, and Sell stuff to get the money.
- Keep as paper bills or in a savings account.
- Don’t put it in checking or any other account or investment.
- Pay off your debt using the Snowball method
- List your debts by smallest to Largest
- Pay them off
- As you pay one debt off carry over the payment to the next largest debt.
- Finish the Emergency Fund
- Must cover 3 – 6 months of living expenses. 3 months if you have a truly steady job, otherwise 6 months.
- $5,000 – $25,000
- Put in Money Market with no penalties and check-writing abilities.
- Invest 15% of Gross Income for Retirement
- Don’t count any company-matched funds.
- Don’t count on Social Security.
- Use these accounts, in this order.
- 401K if company matches
- Roth IRA
- Growth-stock and mutual funds
- 25% large cap
- 25% mid cap
- 25% international
- 25% small/emerging
- Save for College for your kids – use accounts in this order
- Educational Savings Account (ESA) in a growth-stock mutual fund. Keep as paper bills or in a savings account.
- If you want to save more, use a flexible 529 that allows you to choose your funds.
- Pay off your house mortgage
- Don’t spend every extra dollar you have left after setting aside for living, retirement, college, and mortgage.
- Don’t keep a low-rate mortgage just so you can invest at a higher rate. After you pay taxes on your investment returns, and factor in the additional risk that the mortgage debt brings, it’s not worth it. In the long term, you’ll come out ahead by being debt-free.
- Build Wealth
- At this point, you’re completely debt-free.
- The next step is the Pinnacle Point: when your money makes more than you do.
- There are 3 good uses for money.
- Fun – Guilt-free enjoyment, if you can afford it.
- Investing – Think long-term. Don’t try to time the market.
Choose simple mutual funds and debt-free real estate.
- Philanthropy – Giving it away can be the most fun you have with your money.
- Winning at money is 80% behavior and 20% head knowledge.
- “If you will live like no one else, later you can live like no one else.”
- Debt brings risk, not prosperity. You can’t leverage debt to build wealth.
- You don’t need to build credit because you won’t use it if you follow the Total Money Makeover.
- Credit card rewards aren’t worth it. You end up spending more in unnecessary purchases and interest payments than you make back in rewards. No one ever became rich from credit card rewards.
- Choose high deductibles for auto and home insurance.
- Make a will.
- Choose a term policy, not Whole Life or Universal Life insurance.
- Don’t prepay your kids’ college expenses. You’ll make higher returns by putting this money in mutual funds.
- Buy a house for 100% down, or if that’s absolutely not possible, get a 15-year fixed-rate mortgage.
- You don’t have to wait until retirement to do what you love. Get a job that you enjoy.
- A college education improves the quality of your adult life and career. But, it doesn’t ensure a job or success.
- If you have cash or a scholarship, go to college. But pay cash; avoid student loans.
- Don’t get a 30-year mortgage with the intention of paying it off in 15 years. You’ll find other things to spend your money on. Having a 15-year mortgage forces you to pay off your home in 15 years.
- Don’t pay points on your mortgage, since you’re just paying interest up front.
- Your house payment should be less than 25% of your take-home pay.
- Don’t lend to friends. If you must give your friends money, give it as a gift. Loans ruin friendships.
- “Wealth will make you more of what you are”, whether you’re a jerk or a generous person.
- “The love of money, not money, is the root of all evil.” You have a duty to possess wealth to ensure that it’s used properly.
- Recommended percentages for allocating your money
- Charitable Giving 10-15
- Saving 5-10
- Housing 25-35
- Utilities 5-10
- Food 5-15
- Transportation 10-15
- Clothing 2-7
- Medical/Health 5-10
- Personal 5-10
- Recreation 5-10
- Debts 5-10 (less)
Dave Ramsey uses a lot of common sense principles in his book. You will find a lot of self-promotion rhetoric, but that is to be expected. Understanding this and realizing this, the book was a good read nonetheless. I even learned a few things myself.