The Total Money Make Over - Book Notes

Dave Ramsey’s The Total Money Make Over follows 7 (6 immediatley important) ‘baby steps’ that help people bust debt, save for their future and prosper. There really isn’t much more to it than that. Since my summaries usually focus more on capturing the essence of a book in a way that is personally useful. i.e I write them for me - I won’t spend too much time talking about how i felt about the book.

In short, I thought the book was very readable, obviosly written for a broader audience. This isn’t necessarily a bad thing. It feels like 50% of the book is dedicated to convincing the reader that debt is bad. I get it, for many people this is a big mindshift, whether you agree with it or not. The book is littered with testimonials, some are interesting but many are repetitive. It goes without saying that Ramsey has plenty of social proof.

The Total Money Make Over 7 ‘Baby Steps’

The book follows a 7 step process, a bit like a 12 step program. Again, I get why the book spent so much time convincing the reader that they have a problem, because this is typically one of the most important steps in a 12 step program.

The steps are as follows:

• #1 Save $1000 Fast
• #2 The Debt Snowbal
• #3 Finish the emergency fund
• #4 maximise retirement investing
• #5 College Funding
• #6 Pay off the Home Mortgage
• #7 Build Wealth Like Crazy

#1 Save $1000 Fast!

==Baby Step One: Save $1,000 Cash for Your Starter Emergency Fund==. It is going to rain. You need a rainy day fund. You need an umbrella. Money magazine says that 78 percent of us will have a major negative event in a given ten-year period of time. The job is downsized, right-sized, reorganized, or you just plain get fired. There’s an unexpected pregnancy: “We weren’t going to have kids yet/another one.” Car blows up. Transmission goes out. You bury a loved one. Grown kids move home again. Life happens, so be ready. This is not a surprise. You need an emergency fund, an old-fashioned Grandma’s rainy day fund. Sometimes people tell me I should be more positive. Well, I am positive; it is going to rain, so you need a rainy day fund. Now, obviously, $1,000 isn’t going to catch all these big things, but it will catch the little ones until the emergency fund is fully funded. (Pg. 98)

Ramsey’s first step in the Total Money Make over is to save $1000 fast. For all you south Africans out there you can probably safely convert this to ~ R20 000 and perhaps even downgrade it to R10 000.

So, why $1000? The argument is that many people (American’s in this case) are living not just paycheck-to-paycheck, but beyond that. They are funding everyday expenses on their credit cards with credit card debt of $20 000 or more being the norm.

The $1000 buffer allows you to prepare of unexpected curveballs that life throws without having to go further into debt. This step is a foundation for the next step: ‘The Debt Snow Ball’.

Before you save $1000, you need to do a few things:

1. Have a monthly budget. (pg 91. “you must set up a budget, a written budget, every month.” )
2. Agree on the budget with your spouse. (Pg. 96)

Lastly, like [[James Clear]] suggests in [[📕Atomic Habits]], make it difficult to access your emergency fund. Ramsey tells a story about a woman that framed $1000 behind her coats in her closest.

#2 The Debt Snowball

This step, as the name implies aims to destroy all debt as quickly as possible.

The first and most important consideration is staying current with your your debtors. As the saying goes: “If you’re in a hole already, stop digging.”.

Secondly Ramsey prescribes listing all debts smallest to largest. For many people the smallest debt will be a clothing or store account, or maybe a credit card.

The snow ball implies gradually increasing momentum, and that’s why debts are listing smallest to largest. The first debt paid off, the smallest, get’s the dopamine going, making the motivation to pay the subsequent debts more compelling.

How to snowball the snowball according to Ramsey:

The major elements of making the debt snowball work are:

• Using a budget
• Getting current before you start
• Smallest-to-largest payoff (no cheating)
• Sacrifice
• Focused intensity. Total, sold-out, focused intensity is possibly the most important.

There are some exceptions to the Debt Snowball, one of which I was almost too eager to do myself - paying off my rental properties.

The only other larger debts to delay are mortgages on rental proper-ties. Stop buying more rental property, but hold that debt until later. After your home mortgage is paid off in a later Baby Step, you should snowball your rental mortgages. (pg. 123)

#3 3 - 6 Months of Income Saved

I don’t really have anything to say here, it’s self explanatory. Here is what Ramsey says:

Baby Step Three (Save Three to Six Months of Expenses in a Fully Funded Emergency Fund, in around eighteen to twenty months. When you reach this step, you have $1,000 cash and no debt except your home mortgage.

And Ramsey on what an emergency is really:

So, what is an emergency, anyway? An emergency is something you had no way of knowing was coming, something that has a major impact on you and your family if you don’t cover it. Emergencies include paying the deductible on medical, homeowner’s, or car insurance after an accident; a job loss or cutback; medical bills resulting from an accident or unforeseen medical problem; or a blown transmission or engine in a car that you need to function. All of these are emergencies.

#4 Retirement

Ramsey advocates for allocating 15% of gross income to retirement savings, a proportion that may initially appear substantial to individuals living paycheck to paycheck. However, considering that debt has been eliminated, and 3 - 6 months of savings - the margin for saving in their income will be greatly increased.

The rule is simple: invest 15 percent of before-tax gross income annually toward retirement. (pg. 144)

So, what should you invest in? According to Ramsey:

Growth-stock mutual funds are what I recommend investing in for the long term. (pg. 145)

#5 University

The Total Money make over is definitely aimed at Americans, but 80% of the advice in the book is applicable globally. This chapter fit into the the other 20%. As South Africans we are very blessed that ‘college’ or university tuition is relatively affordable. A student can get a decent a degree at UNISA for roughly R20 000 at the time of writing. Furthermore households that earn less than R20 000 per month are able to apply for University funding through NSFAS.

That being said, perhaps you’re an individual that is not willing to send your kids to UNISA and earn more than R20 000 per month in your household. The University of Cape Town is widely regarding to be one of the most expensive universities in South Africa. With Degrees like the BCom around 98k per year. This is excluding additional costs like Board & Lodging, Textbooks, extracurriculars etc. For simplicity sake consider R98k per year.

If you saved R1200 per month for 15 years it’d look something like this:

The point being that the power of compound interest is a power tool in the hand of the person that knows how to wield it.

#6 Pay off the Home Loan

Ramsey is definitely not against owning a home. In fact as far as I can see a home loan is the only kind of debt that Ramsey would consider tolerable within his frame work.

I want you to own a home because homes are a good investment, The fastest way to become a homeowner is through a Total Money Makeover while renting the cheapest thing you can suffer through. (pg. 58)

According to Ramsey, if you absolutely must take out a loan, then stick to a 15 year fixed interest loan. Then, ensure that once you have completed the other baby steps, to pay this loan of as aggressively as possible.

#7 Build Wealth Like Crazy

The last and final step, a step that you should never complete is to build wealth, be generous and have fun.

After years of studying, teaching, and even preaching on this subject across America, I can find only three good uses for money. Money is good for FUN. Money is good to INVEST. And money is good to GIVE.

And that’s it, that’s the total Money Make Over. Ramsey does suggest that if you’re looking for more in-depth and practical advice regarding finances then you should check out his other resources.

Notes

58 I - Homes as an investment

I want you to own a home because homes are a good investment, The fastest way to become a homeowner is through a Total Money Makeover while renting the cheapest thing you can suffer through. The purchase of a trailer is not a shortcut but a setback on the path to owning real estate that goes up in value. If the typical consumer considering buying your home can walk up and tell it was ever a trailer in any form, your home will go down, not up, in value.

79 FR - [[📕 The Millionaire Next Door]]

91 K - Create a monthly budget

You must set up a budget, a written budget, every month.

96 I - Agree on the budget with your spouse

If you’re married, agree on the budget with your spouse.

98 K - Baby step #1 Save $1000 (R20 000)

==Baby Step One: Save $1,000 Cash for Your Starter Emergency Fund==. It is going to rain. You need a rainy day fund. You need an umbrella. Money magazine says that 78 percent of us will have a major negative event in a given ten-year period of time. The job is downsized, right-sized, reorganized, or you just plain get fired. There’s an unexpected pregnancy: “We weren’t going to have kids yet/another one.” Car blows up. Transmission goes out. You bury a loved one. Grown kids move home again. Life happens, so be ready. This is not a surprise. You need an emergency fund, an old-fashioned Grandma’s rainy day fund. Sometimes people tell me I should be more positive. Well, I am positive; it is going to rain, so you need a rainy day fund. Now, obviously, $1,000 isn’t going to catch all these big things, but it will catch the little ones until the emergency fund is fully funded.

102 I - Return to step #1 if actual emergency arises and takes your emergency fun below $1000.

stop Step Two and return to Step One until the full $1,000 is replenished

107 K - Pay off all debt, the debt Snow ball.

Baby Step Two: Pay Off All Debt (Except the House) Using the Debt Snowball List all your debts except your home. we will get to it in another step. List all of your debts even loans from Mom and Dad or medical debts that have zero interest

112 K - the elements of a debt snow ball.

The major elements of making the debt snowball work are using a budget, getting current before you start, smallest-to-largest payoff (no cheating), sacrifice, and focused intensity. Total, sold-our, focused intensity is possibly the most important.

122 k - Rental properties and the debt snow ball

The only other larger debts to delay are mortgages on rental proper-ties. Stop buying more rental property, but hold that debt until later. After your home mortgage is paid off in a later Baby Step, you should snowball your rental mortgages.

123 K - List of exclusion for baby step #2

Other than the home mortgage, larger second mortgages, business loans, and rental mortgages are the only things that aren’t paid off in Baby Step Two (Pay Off All Debt (Except the House) Using the Debt Snowball).

124 K - Baby step #3 3 - 6 months of expenses or income saved.

Baby Step Three (Save Three to Six Months of Expenses in a Fully Funded Emergency Fund, in around eighteen to twenty months. When you reach this step, you have $1,000 cash and no debt except your home mortgage.

126 I - What counts as an emergency?

So, what is an emergency, anyway? An emergency is something you had no way of knowing was coming, something that has a major impact on you and your family if you don’t cover it. Emergencies include paying the deductible on medical, homeowner’s, or car insurance after an accident; a job loss or cutback; medical bills resulting from an accident or unforeseen medical problem; or a blown transmission or engine in a car that you need to function. All of these are emergencies.

138 I - Step 1 & 2 typically take 24 to 30 months

Getting to the end of this step if you are gazelle-intense takes the typical family twenty-four to thirty months.

143 K - step #4 retirement

Baby Step Four: Invest 15 Percent of Your Income in Retirement.

144 I - How much to invest in retirement?

The rule is simple: invest 15 percent of before-tax gross income annually toward retirement.

145 I - what to invest in for retirement?

Growth-stock mutual funds are what I recommend investing in for the long term.

145 FR - [[📕 Financial Peace]]

180 q - it takes on average 7 years to complete the 6 step process.

Our observation of families who stay gazelle-intense is that they pay off the mortgage about seven years from the date they declared war on the culture, from the date they decided to have a Total Money Makeover.

183 K - #7 Fun, invest and giving

After years of studying, teaching, and even preaching on this subject across America, I can find only three good uses for money. Money is good for FUN. Money is good to INVEST. And money is good to GIVE.