I discovered The Total Money Makeover after about a year or practising the concepts outlined in The Automatic Millionaire.
Things were going well but I was still missing an element and reading this book helped everything fall into place and set me on a definite path to building true wealth while paying off my debt.
Dave Ramsey’s method is comprised of consistency and perseverance and can be uncomfortable in the onset. However, Dave says –
“If you will make the sacrifices now that most people aren’t willing to make, later on, you will be able to live as those folks will never be able to live.”
At the centre of Dave’s philosophy is what he calls the seven baby steps, which will lead to financial freedom if followed in order.
A Mini Breakdown of Dave Ramsey’s Seven Baby Steps to Financial Freedom
Step 1: Save $1,000 Cash in an Emergency Fund
This emergency fund serves as a buffer for any unexpected expenses such as car repairs, home repairs, etc that could have you reaching for the credit card or bank loans.
It also is a great way to get motivated; the psychology behind it is if you see the tiny amount go up in your account, you will be encouraged to focus and keep going. Once you have this money in your account, you can move on to step 2.
Step 2: Pay Off All Debt with the Debt Snowball
With 1 in place, you can now focus on the heavy and likely long-term part – the bigger debts. The debt snowball requires you to list all your debts from smallest to largest.
At the end of every month, pay off the minimum on each debt then attack the smallest debt with every extra penny you can find in your budget.
When the lowest is paid off, move on to the next lowest debt and follow the same pattern. Dave admits this isn’t mathematically optimal.
However, this step is more about behaviour modification over math. With small wins, you are encouraged to keep going.
Step 3: Finish the Emergency Fund
At this step, you have eliminated all your debt apart from your mortgage and your $1,000 emergency cash is already in place. Now it’s time to start some serious saving.
Dave advises accumulating 3 – 6 months living expenses. For my peace of mind, I saved 8 months of living expenses. You can save less if you’re okay with that but definitely nothing less than 3 months.
By the way, don’t have the emergency fund in a savings account doing nothing. It should be in a high yield vehicle, which you can access easily in the event of an emergency.
Step 4: Invest 15% of Your Income in Retirement
Dave recommends suspending this step while you’re still on step 1 – 3. Once 1 – 3 is complete, you can start putting a minimum 15% of your income into your retirement portfolio. There’s more information about this in Dave’s free investing guide.
Step 5: Save for College
This step ensures that your kids are financially fit too. While saving for retirement, you should also start saving for your kids’ education. Dave proposes several plans that can help with this although I’m sure your local bank also has some other suggestions.
Step 6: Pay Off Your Home Mortgage
This is the final hurdle to building real wealth. Dave recommends attacking the home mortgage with gazelle intensity and paying it off way ahead of time. He explains gazelle intensity HERE.
Step 7: Build Wealth & Give
After baby steps 1 – 6, you can finally have some fun, enjoy all the hard work and live like no one else. You can buy the things you want now.
Of course, common sense dictates you shouldn’t start the debt cycle again by going into debt to have some fun. You should also give back to the world.
The book also has a lot of testimonials from families who have gone through all the baby steps and made it out of debt.
Some people find the concept draconian and have trouble following it. However, you can modify it within reason. For instance, in Step 4, I chose not to suspend retirement contributions while working on 1 – 4.
Instead, I reduced my monthly contribution to the minimum requirement. Step 5 became my travel fund since I don’t have kids.
One thing I have an issue with is Dave’s insistence on getting rid of credit cards. While the logic is sound, I still feel uncomfortable not retaining at least one credit card. I use this card to my advantage for travel rewards and miles, and pay it off every month.
The baby steps are simple and produce tangible results if you follow them in order/without a great deal of variation.
It’s uncomfortable being gazelle intense but think about two to three years of discomfort then freedom forever or no discomfort and debt bondage for the rest of your life. Which would you prefer?
If you’re not in debt currently, the book isn’t relevant to you. If you are in a lot of debt and just can’t figure out how to wade your way through it, this is one of the books to start with.
Have you read The Total Money Makeover? What did you think of it? Add your rating to the votes below.