I went to the library and checked out his book, The Total Money Makeover.
At 240 pages, the book is an easy read. Ramsey enjoys using metaphors, for example “gazelle intensity” appears dozens of times throughout the book. At times, the writing can be a bit over-the-top, and I’ll just go ahead and say it: cliche.
His motto, “If you will live like no one else, later you can live like no one else” appears at the bottom of each page.
Essentially, he encourages you to make drastic financial changes now so that your future will be better.
For the first hundred or so pages, Ramsey debunks money myths. Sprinkled throughout the book are testimonials of people who have put the Total Money Makeover to use.
On page 93, we reach his first baby step: Save $1,000 fast.
This $1,000 is supposed to be the start of your emergency fund. Assuming you are current on all debt payments, Ramsey wants you to get $1,000 and put it where you can easily access it if a real emergency pops up–but only an emergency.
What constitutes an emergency?
“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.” (Ramsey p. 136 )
For us, we will use our emergency fund if:
-we need it for an insurance deductible ($500 for car or renter’s)
-we need a necessary car repair (need to buy a new tire, or fix something not covered under warranty)
-we have a medical expense that can’t be paid via health insurance or our flexible spending account
-we need to make emergency travel plans (not a pleasure trip, mind you)
-we need to cover basic living expenses if we lose income
That’s all I can think of for now. Our fund will sit in an account with ING Direct and grow a small bit of interest. Having it there really does give me a good peace of mind.
Baby Step 2: The Debt Snowball
Once the starter emergency fund is in place, he advises you to put all of your efforts toward eliminating your debt (except for your house).
“List your debts in order with the smallest payoff or balance first,” he advises in a worksheet on page 112.
Ramsey says that “paying the little debts off first gives you quick feedback, and you are more likely to stay with the plan.”
While I understand his logic, that positive feedback will serve as encouragement, I have to disagree with him on this one.
He says, “If you were so fabulous with math, you wouldn’t have debt, so try this my way” (Ramsey p. 114). Uh, not quite.
If I have $500 in credit card debt on a card with 16% interest, and $1,000 in credit card debt on a card with 22% interest, he would want me to tackle the $500 first, since I would be able to pay that off more quickly.
However, in the long run, I’d be paying more in interest by allowing the debt at 22% interest to grow.
Instead, when we were paying off our credit cards, we tackled the highest interest rate first. We were able to stick with it until the end.
Ultimately, you need to choose the method that will work best for you. If you want instant gratification, go ahead ahead and pay your smallest balance off. But, if you want to save more money, stay motivated and focused and pay off the debt with the highest interest rate.
Baby Step 3 is to finish adding to your emergency fund.
He advises 3-6 months in an emergency fund, which seems to be the industry standard.
This is supposed to cover your living expenses in the event you lose your income. Assuming you lose your income (heaven forbid) the emergency fund should cover your rent or mortgage, insurance payments, grocery costs, electric bill…basically your essentials.
It’s a good idea to look at your budget and determine your necessary monthly expenses. Multiply that number by 3-6 (depending on how many months of emergency money you want) and come up with a tangible goal amount. Once you reach that goal, examine that figure on a regular basis (say every 6 months or so) to make sure your emergency fund will still keep you afloat through an emergency.
Baby Step 4 is to maximize retirement investing.
More specifically, invest 15 percent of your income to retirement. He advises 15 percent so that you’ll still have money left over to save for college and paying off your home, and not less so that you’ll end up saving enough.
He says to ignore company matches in that 15 percent, and to invest 15 percent of your gross income. Also, we’re supposed to ignore any Social Security benefit we might receive. I’m fine with that–I have no idea if Social Security will pay me anything in uh…45 or so years.
Once you’re investing for your retirement, Ramsey suggests starting a college fund for yourself or your children.
I agree that saving for retirement should come before saving for college. You aren’t doing your children any favors if you pay for their college expenses, but don’t have enough to retire on. Remember, kids can get scholarships for school. You don’t get scholarships for retirement. Sorry.
The next step: Pay off the home mortgage
That’s an exciting step to reach. We don’t even have a mortgage, so that’s not doable right now. Once we get a sizable down payment (we’re aiming for at least 20 percent to avoid PMI), we’ll get a 15-year fixed mortgage, and shoot for paying it off faster.
Once you have your debts paid, emergency fund well-established, college savings under control, and your mortgage paid, Ramsey wants you to “build wealth like crazy.”
Essentially, that’s the last step. Go get ’em!
Check out this book if you’re in debt and want a perspective on a way out. The book offers plenty of life examples and simple steps you can take to eliminate debt for good.
Have you read The Total Money Makeover? What did you think?