The Total Money Makeover: A Proven Plan for Financial Fitness

by Dave Ramsey

John Maxwell has the best quote on budgeting I have ever heard. I wish I had said it: “A budget is people telling their money where to go instead of wondering where it went.” You have to make your money behave, and a written plan is the whip and chair for the money

MYTH: The debt-management companies on TV, like AmeriDebt, will save me.

TRUTH: You may get out of debt, but only with your credit trashed.

Companies like AmeriDebt and Consumer Credit Counseling Services can help you get better interest rates and lower payments, but at a price. When you use one of these companies and then try to get a conventional, FHA, or VA loan, you will be treated the same as if you had filed a Chapter 13 Bankruptcy. Mortgage underwriting guidelines for traditional mortgages will consider your credit trashed, so don’t do it.

MYTH: I can buy a kit to clean up my credit, and all my past misdeeds will be washed away.

TRUTH: Only inaccuracies can be cleaned from credit reports, so this is a scam.

Bad credit drops off your credit report after seven years unless you have a Chapter 7 Bankruptcy, which stays on for ten years.

I am not against the enjoyment of money. What I am against is spending money when you do not have money to begin with.

MYTH: My divorce decree says my spouse has to pay the debt, so I don’t.

TRUTH: Divorce decrees do not have the power to take your name off credit cards and mortgages, so if your spouse doesn’t pay, be ready to. You still owe the debt.

If you are going to leave a marriage, make sure that all debts are refinanced out of your name or force the sale of the item. Don’t have the attitude: “I don’t want to make him sell his truck.” If you are that much in love, don’t get divorced; but if you are walking away, make it a complete, clean break even though it’s painful now.

MYTH: That collector was so helpful; he really likes me.

TRUTH: Collectors are not your friends.

MYTH: I’ll just file bankruptcy and start over; it seems so easy.

TRUTH: Bankruptcy is a gut-wrenching, life-changing event that causes lifelong damage.

MYTH: I can’t use cash because it is dangerous; I might get robbed. TRUTH: You are being robbed every day by not using the power of cash.

MYTH: I can’t afford insurance.

TRUTH: Some insurance you can’t afford to be without.

This year they got term life insurance and a Medical Savings Account health-insurance policy. “Good

MYTH: If I do a will, I might die.

TRUTH: You are going to die—so do it with a will.

Whole Life insurance is a horrible product. Why would you pay someone interest on your own savings? That’s backward, and it does not make you smart.

Those of us who have been knocked around by life know that we must find the problems or obstacles and plan a way over them, through them, or around them.

According to the Census Bureau, the average family in America makes right at $50,000. Even if they never get a raise, the average family will make over $2 million in a working lifetime!

We graduate from school, go out into the world, and get a financial master’s degree in D.U.M.B.

During our lifetimes Americans average $2 million, yet we graduate from high school, college, or even graduate school and can’t spell financial.

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Dr. Tom Stanley wrote a wonderful book in the ’90s that you should read entitled The Millionaire Next Door.

Stanley found that most millionaires don’t have those things. He found the typical millionaire lives in a middle-class home, drives a two-year-old or older paid-for car, and buys blue jeans at Wal-Mart. In short, Stanley found that the typical millionaire found infinitely more motivation from the goal of financial security than from what friends and family thought.

First, of course, we like our nice houses and nice cars, and selling them would be painful. Second, we don’t want to admit to everyone we have impressed that we are fakes. Yes, when you buy a big pile of stuff with no money and lots of debt, you are a financial fake.

The Bible states, “Godliness with contentment is great gain” (1 Tim. 6:6 NKJV).

“Which of you, intending to build a tower, does not sit down first and count the cost, whether he has enough to finish it” (Luke 14:28 NKJV).

Many of you reading this are convinced that you could become wealthy if you could get out of debt. The problem now is that you are feeling more and more trapped by the debt.

Remember the Albert Einstein quote from earlier in the book? “Great spirits have often encountered violent opposition from weak minds.”

Proverbs 6:1 and 5 (loosely Dave-paraphrased) says, “If you have signed surety, my son, [surety is Bible talk for debt] . . . deliver yourself like the bird from the hand of the fowler and the gazelle from the hand of the hunter.”

Before using the emergency fund, back up from the situation and calm down. Sharon and I would never use the emergency fund without first discussing it and being in agreement. We also would never use the emergency fund without sleeping on the decision and praying about it. Our agreement, our prayer, and our cooling-off period all help us determine if this decision is a rationalization, a reaction, or a real emergency.

The month after we paid off the debt, I was laid off again. But this time we were in a completely different place than before. The financial worries and strains were nonexistent. There is a sense of peace that surpasses all understanding, and until you have experienced it for yourself, you can’t even imagine its amazing power.

This fund is for actual protection and for peace of mind, so the spouse who wants this fund to be higher wins.

According to a study by the Employee Benefit Research Institute, 70 percent of Americans say they are not where they need to be with retirement savings, and more than 40 percent have never even tried to calculate how much money they need to save in order to retire with dignity. Not only have we not done anything about retiring with dignity; we have lost hope that it is even possible.

By the same token, do not use your potential Social Security benefits in your calculations. I don’t count on an inept government for my dignity at retirement, and you shouldn’t either.

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

The Total Money Makeover is not an investment textbook, so if you need more detailed information, check out our class, Financial Peace University, or my first book, Financial Peace. My personal retirement funds and my kids’ college funds are invested the way I teach in The Total Money Makeover.

I select mutual funds that have had a good track record of winning for more than five years, preferably for more than ten years. I don’t look at their one-year or three-year track records because I think long term. I spread my retirement, investing evenly across four types of funds. Growth and Income funds get 25 percent of my investment. (They are sometimes called Large Cap or Blue Chip funds.) Growth funds get 25 percent of my investment. (They are sometimes called Mid Cap or Equity funds; an S&P Index fund would also qualify.) International funds get 25 percent of my investment. (They are sometimes called Foreign or Overseas funds.) Aggressive Growth funds get the last 25 percent of my investment. (They are sometimes called Small Cap or Emerging Market funds.) For a full discussion of what mutual funds are and why I use this mix, go to daveramsey.com/mutual-funds and visit MyTotalMoneyMakeover.com.

You are secure and will leave a nice inheritance when you can live off of 8 percent of your nest egg per year. If you make 12 percent on your money average and inflation steals 4 percent, 8 percent is a dream number. If you make 12 percent and only pull out 8 percent, you grow your nest egg by 4 percent per year. That 4 percent keeps your nest egg, and therefore your income, ahead of inflation ’til death do you part. You get a cost-of-living raise from your nest egg every year.

Gayle asked me one day if it was too late for her to start saving. Gayle wasn’t twenty-seven like Joe and Suzy. She was fifty-seven years old, but with her attitude you would have thought this lady was 107. Harold Fisher had a much better outlook at age one hundred than Gayle did at age fifty-seven. Life had dealt her some blows and had knocked most of the hope out of her. A Total Money Makeover is not a magic show. You start where you are, and you do the steps. These steps work if you are twenty-seven or fifty-seven, and they don’t change. Gayle might be starting the retirement investing step at sixty that Joe and Suzy start at thirty years old. Gayle was unwise to enter her sixties without an emergency fund and with credit-card debt and a car payment. She, like all of us, couldn’t save when she has debt and no umbrella for when it rains. Would it have been better for Gayle to start when she was twenty-seven or even forty-seven? Obviously. But once she was done with the pity party, she still needed to start with Baby Step One and follow The Total Money Makeover step-by-step to put herself in the best position possible.

Your Total Money Makeover and the stage your investments are in are similar. Push with gazelle intensity to bloom, but know that as long as you take the progressive steps, you are winning.

College degrees do not ensure jobs. College degrees certainly don’t ensure success. College degrees do not ensure wealth.

Because we have turned a college degree into some kind of “genie in a bottle” formula to help us magically win at life, we go to amazingly stupid extremes to get one.

The average student paid $5,000 more per year to live and eat off-campus than to live in the dorm and eat cafeteria food. The student loans that they “had to have” or they wouldn’t be able to go to college weren’t for college at all. The student loans, on average, paid for an off-campus standard of living, and no debt was needed to get the degree, only to look good while getting the degree.

The College Savings Foundation found that 35 percent of Americans with kids don’t save a dime toward college. According to a 2011 study by SallieMae, only 14 percent of families use college savings funds like ESAs and 529 plans. That means 86 percent have saved nothing or close to nothing!