Total money makeover book summary
The total money makeover book summary
Managing your personal finances is one of the more crucial responsibilities an adult undertakes. Yet, it is one of the subjects nobody really “learns” about. We’re all excited about our first, very own credit card we got in an amazing offer at the freshman fair. Before long, we’ve graduated and completed the rite of passage of being knee deep in debt — both student and card. Next, we get a car loan. Then, we mortgage a house. In a never ending cycle, we just loan it all out, seldom thinking about the seemingly distant future when we’ll have to return the money to the banks. Why do we do so? Because that’s what we’ve seen our parents do.
I’d like to recommend this book to anyone who’s in college, or in the early years of their career. It’s a very good primer for anyone who wants to take responsibility for their financial lives. Read on for the main lessons of the book
Dave Ramsey tackles the problem at its very core — our attitude towards debt. The book tries to follow a no-nonsense way of teaching us personal finance; that is to say, it leaves out the complex theories and formulas. Instead, Dave uses anecdotes and very simple mathematics to get his points across.
The first quarter of the book is devoted to convincing us with data from the USA, showing how ugly the debt picture is, and what a beautiful picture it could have been otherwise. It also busts common money myths — credit is good, debt is normal, budgeting is unnecessary, loans are unavoidable, debt consolidation and so on. The data and trends are quite easy to follow, and even though some of it may be outdated, the central claim seems to be largely relevant as of today. Understand that we have to take personal responsibility for our own problems, next find out the habits and the myths that are deterring us from doing a good job at it. “ Dave Ramsey says financial freedom is 80% behavior and 20% knowledge which is so important, and he emphasizes this by pointing out there are a lot of broke finance professionals.” “That we need to keep up with the Joneses
Once you’re convinced that a financial makeover is necessary, Dave prescribes 7 “Baby Steps” — breaking down your long journey to financial freedom into achievable chunks. Now cut up your plastic, become a debt hater and read on.
Baby Step #1: Create an Emergency Fund of $1000This one seems like a no-brainer, yet most of us are thoroughly under-prepared for an accident in our lives. Even small inconveniences like our car breaking down may have us run out of money and pull out our credit cards. Get this done ASAP. Keep this fund liquidated in cash, easily accessible, yet not vulnerable to temptations. Framing 10 $100 bills and writing “Break only in case of emergency” sounds like a fantastic idea.
Baby Step #2: Start a Debt Snowball, beginning with your smallest debtThis baby step plays well with the human psychology. The positive feedback that we get by gamifying the process and achieving milestones keeps you going. That’s why we forget interest rates and start with the smallest debts first. Once the smallest is done, start with the second smallest, and always increase the amount you pay per month. This will eventually lead to you paying off all your debts.
This step does sound very difficult and indeed might take a few years to pull off, but the tenacity pays off. By the time you’re done with baby step 2, you’ll be debt free and that will feel amazing. An important thing to note, however, is that we should be done with our monthly budget by now. This will also help us analyze where most of our money is going, and where we can skim off some fat.
This step does sound very difficult and indeed might take a few years to pull off, but the tenacity pays off. By the time you’re done with baby step 2, you’ll be debt free and that will feel amazing. An important thing to note, however, is that we should be done with our monthly budget by now. This will also help us analyze where most of our money is going, and where we can skim off some fat.
Baby Step #3: Grow your emergency fund until it covers your expenses for at least three months.The budget done latest by the last step will be fundamental to this step. Here we save up from 3 to 6 months worth of expenses needed for a passable life-style. This is to act as a buffer against renewed debt incurred in the event of unfortunate layoffs, financial crisis, or even emergencies. By the end of this step, you’ll have roughly $10,000 lying around in your bank account. This will make life a lot more stress-free while you recoup.
NOTE: At any point in time, if you’ve violated a baby step, go back and refinish it. For example, if you’re in step 2 and had to suddenly use the $1000 from step 1 for a real emergency, keep step 2 in halt as you top up the grand.
Baby Step #4: What to invest inThis is a very common question among people who’ve never invested in anything, myself included. Dave tries to show you that you don’t need big money to start investing towards big money. His investing strategy is geared towards newbies and can seem pretty boring. He suggests putting 15% of your income towards retirement, only recommending mutual funds and Roth IRA’s. Dave’s principle — KISS (Keep It Simple Stupid) — is reflected here, as well as the entire book.
Baby Step #5: Should your kid go to college? If so, how can you pay for it without debt?Let’s face it. College is very expensive, especially if you’re going abroad to study like I did. Ramsey is, you guessed it, against student loans. He suggests paying for it yourself, or look into work-study programs and scholarships. Sometimes all you have to do is apply!
Baby Step #6: Kicking your mortgage in the buttOnce the retirement and college tuition savings are off the list, Ramsey suggests you make extra payments towards your mortgage.
Baby Step #7: How to spend and give away the extra money you’ve earned so ambitiouslyThis is perhaps the most philosophical part of the book, and I love it! Ramsey believes money is for living a comfortable life, and philanthropy. He makes it very clear that money is not the goal; the real reason we should gain wealth is so that we can help others.
Closing ThoughtsThe problem with the book, however, is that Dave seems to be tooting his own horn too much. Don’t get me wrong, Dave is qualified to talk about the subject — he has his own popular radio show on the subject, and he’s helped millions of people through Financial Peace University. He’s been on the deep end personally, and he’s made it out big too. But talking about these way too often just disturbs the flow of ideas, at least that’s what I think personally.
I have a similar problem with the stories, even though it’s a bit more understandable. The book is full of inspiring letters sent to Dave by people who were successful using the program. Yes, they are inspiring, and at times necessary to keep you interested in the topic. It still ruins the flow of the book, and I found myself skipping over most.
Personally I find his anti-credit card views a bit extreme. Yes, credit cards can be the cause of financial trouble for many, but it can also be a way of saving lots if used responsibly.
Lastly, even though some of the concepts here like taxes, retirement plans and loans are specific to America, i think the ideas are quite transferable to other parts of the world.
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Book link:- https://amzn.to/36e7JSF