Dec 04 2007

My reaction to “The Total Money Makeover”

tmm.jpgBefore I became a blogger, I hadn’t heard of Dave Ramsey. It seems that a lot of people follow his financial advice, so I thought I’d look into his teachings to see what he has to say.

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?



17 Responses to “My reaction to “The Total Money Makeover””

  1. Thanks for the summary – I haven’t read the book, but we are doing most of this! We met with a financial counselor (free because the firm also holds my retirement fund) a few years ago and set some goals. We built up our 3 month emergency fund right away. We never make extra payments on our house (interest rate is 5.25 – so cheap) or my husband’s federal school loans, but we do on our other 2 loans (line of credit used for house renovation, private loan for grad school).
    One of the things that we started doing last month is taking 15% out of each paycheck and putting it in retirement savings. Before, we just told ourselves we were being frugal enough and depositing when we could – ha ha. It feels good to be more precise!
    You’re very thorough, but have you done the math to determine if paying rent until you save a 20% down payment is worth not paying PMI? We always preferred building equity in our house to paying rent.

  2. Been reading your blog for a few days and am loving it. I’ve read and follow Dave Ramsey advice. I agree with his advice to pay down the smallest debt first because if you do what he says and get gazelle intense, you’ll be paying off stuff as fast as you can and won’t be spending that much more on interest. But you’ll be getting the wins you need to keep going for the long hall. Keep up the great blogging…I’m so enjoying it!

  3. We haven’t yet done the math to determine whether putting a 10% down payment instead of a full 20% would be better (to start building equity while paying the PMI).

    We won’t be in a house for awhile. I want to be sure we can fully afford it–paying the mortgage, paying property taxes (ugh), homeowners insurance, and all of the other sneaky bills that come with owning a home.

    In the months and years to come, we’ll definitely crunch numbers to make sure our money is working for us.

  4. I also found out about him from blogging. I like a lot of his advice and while I’m not a Ramseyite, I’m essentially doing a modified money makeover. :)

  5. Yes, I have read it. DH’s parents gave us a copy to use and pass on. I really appreciate all he says and we have goals to work toward it.

    The problem I found with it is that, though the principles are still great, it really only works great for people with debt. DH and I are blessed to have no debt, and with DH working in ministry, (though God provides every step of the way and we have been blessed to see some pay increase this year for the first time) we don’t have much extra at the end of the month.

    We already try (and are getting much better with the help of all you bloggers) to be frugal within our budget, but without the compounding debt payments (growing each time you pay one off and can reassign that money to the next) we don’t have that “extra” money like people who now have $1000 (more or less) that can go toward saving etc when their debt is gone. Don’t misunderstand… I’m not complaining… it is just a lot longer road to get to that emergency fund for 3-6 months when you only have $10-$50 a month left to put toward it.

    Again, please don’t understand us to be lacking in contentment… I love our life and our ministry! But where the book is concerned… it works better for people with debt in the first place!

    Thanks for reviewing it… I recommend it to anyone I meet who could benefit from it!

  6. That’s an excellent point. Sometimes, you do your best to stretch your income–but income is a finite amount and sometimes it’s difficult to increase it.

    All we can hope to do is keep our expenditures as low as possible and save where we can.

    You’re already miles ahead of the game since you don’t have debt! Woo hoo!

    You probably have your savings account in a high-interest savings location, such as with ING. When your money is earning 4% interest or more, it’s at least keeping on par with inflation.

    Finally, I agree–this book is best suited for those with debt (and people who can’t seem to stay out of debt).

  7. Glad you’re a repeat visitor, Dana!

    Some people really do thrive on quicker feedback, like paying off credit cards in a smallest debt to largest debt fashion.

    It really just depends on the individuals paying off the debt, I think. If they can stick with it and stay motivated through the long haul, more power to ’em.

  8. Yes! Read it and loved it. It’s really changing our financial life. (myself and my dh) I wish we had read it sooner.

    My parents used credit cards a TON. I saw more of that way of spending that any other growing up, Maybe they paid it off each month, but that part wasn’t what I witnessed. what I witnessed was the use of plastic. So naturally, I didn’t think twice about it before beginning my own credit card debt. BIG MISTAKE.

    I seriously thank of Dave Ramsey as a blessing. His approach is really helping us We’re still on steps 1 & 2, but we’re doing MUCH better than we were 2 years ago!

    I continue to love your blog. Thanks for all the helpful info and hard work you put into it!
    Oh, and btw, because of your posts on Giant Eagle, I shopped there last week and saved myself nearly $10! THANKS!

  9. Glad to hear your finances are looking up, Sharon!

    Also, thanks for letting me know you appreciate posts on deals at Giant Eagle. I’m not sure how many of this blog’s readers live near a Giant Eagle grocery–so I’ll be sure to post on it from time to time.

  10. Your review of the book is very interesting. Thanks for sharing!

    Dave Ramsey’s books were recommended by a friend just a couple months after we got married. We did as you say and paid off our highest-interest-rate school loan first, and now have only one left, and (most recently!) a mortgage. We had about 10% down on our house (at a 5.6% interest rate, where we can afford payments that will pay it off in 12 years)- which we’ve only been in a month- and chose to save up for the house rather than pay as aggressively as possible on the remaining school loan, because the school loan interest rate is very low, and getting into a house was a priority for us. Also, we went ahead and built up a 3-month emergency fund rather than just relying on the $1000. It gave us more peace of mind. Our emergency fund (also in ING) is a little different than yours in that its purpose is truly for income replacement- we have other funds to pay for car repairs (while not exactly foreseeable, they’re inevitable).

    Our biggest take-away from Dave Ramsey’s book has been going to an all-cash budgeting system. We pay our bills via check or online, but everything else is cash-based, budgeted for and taken out of the bank each paycheck. During a hectic couple paychecks early this year, we went off the cash system and learned our lesson- it really helps to have physical currency to spend, rather than plastic.

  11. Dave Ramsey’s idea of debt snowball really helped me. For us, the highest interest loans were also the biggest. It was so overwhelming to try and pay $16,000 at once. Also, we tended to not be as faithful about putting money towards it when we knew we had so far to go. But once we started knocking off the smaller loans (what? we only need $1000 more? well I can forfeit a nice dinner out for that) we were more motivated. I know logically paying off the higher interest seems better, but I really think in the long run we are actually SAVING money this way, because our loans are being paid off FASTER. Also, by the time we pay off the others, the bigger loans are less and not so scary. I guess it’s all about tricking your mind.

  12. Hey Babychaser, just wanted to let you know that my family is in a similar boat! While we do have debt that we’re paying off, it’s going to be years (school loans and mortgage), so the income going to that isn’t going to be freed up anytime soon. We don’t really have money left over at the end of the month, and sometimes it can be frustrating to read frugal tips and think BUT I am already DOING THAT!! Thanks, Kacie, for the very good tips on your blog – you go beyond the basic tips and that’s why I keep on reading!

    And Kacie, about rent vs. owning a house: my husband and I are landlords and we figure the cost of utilities, maintenance, and taxes into the rent. So our tenants are paying the taxes too. I think renters benefit with the flexibility to change locations so quickly and easily. Also, tenants don’t have the headache and liability of maintenance and repairs. Home ownership is shouldering a big responsibility.

  13. I liked the Total Money Makeover. We also did not start out with any debt except a car loan that is almost paid off. But we didn’t have credit cards, etc. We’re on step 2 (saving the emergency fund) because it took us a while to just get current with our bills!

    Ramsey’s advice for the ‘barely making’ crowd was to get a second job temporarily to get that 3-6 month emergency fund saved up (gazelle intense). We didn’t do that, but took out a loan against our 401(k) – essentially, we are borrowing from ourselves and paying back ourselves with interest, plus we have some money in liquidity for emergencies.
    We did that because a second job was not feasible – my husband’s job doesn’t always work 9-5, and he may have to work through a weekend or a 12 hour day without notice.

  14. Thanks for this book review–I’ve been hearing about him for a few weeks now and was curious. It may be worth checking out of the library for a few pointers! When we had credit card debit, I alway negotiated the interest rates, so that while I paid down the smaller balances first, the larger one was always at a rate less than 5%. If you’ve got a debt that’s going to be sitting there for awhile while you get things under control, it’s alway worth trying to negotiate–banks/creditors would rather have your $$ with a lower interest rate than to have to refi/balance transfer to some other vendor!

  15. Having been a Dave Ramsey fan for over 10 years now, I’ll say that Dave Ramsey on-the-air is much more impressive than he appears in his writing.

    He truly has a gift for cutting to the heart of the matter, for seeing through the same old excuses (and in so many years of talk radio, he’s heard them all.)

    He has an intuitive sense of when to be kind and when to be tough.

    Listening to his common sense advice, repeated and reinterpreted to every caller, has drummed these lessons into my head far better than any of the books.

    Good entertainment, good sense, good radio!

  16. I have always had credit card debt since I’ve been married (15 Years) but I hardly ever pay much in interest. I just transfer it to a different credit card with 0% interest when the interest is about to go up. The disadvantage on this is you have a lot of open credit cards. So you have to make sure you close the accounts you are not using them anymore. But this as saved me thousands in interest. But I am starting to rethink my debt and this year my goal is too eliminate most of my debt and start saving the money first instead of charging it.

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Hey! I'm Kacie, wife to Shane and mother to Jonathan (7), Vivienne (5) and Amelia (2) . I write about my family's finance: how we save money, improve our spending, and plan for the future.

I hope I can inspire and encourage you to improve your situation. See disclosure.

I'm adopting a much slower-paced posting schedule, and treating this as a hobby blog now.

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