The Total Money Makeover: A Proven Plan for Financial Fitness by Dave Ramsey Reviewed

I have spent most of my life watching my parents go through financial troubles even to the point of bankruptcy. Even though they have a healthy income for the average American I still grew up believing that we were always tight on money and never understood why that was. I hated asking my parents for money when I needed it because I always felt guilty knowing that we were always living on a financial tight rope. Growing up watching my parents was a motivator for me to succeed in school. The end goal that I had in mind was to get a career that paid more than what my parents were making.  

It wasn’t until I met my mother in-law who lives comfortably off of a teacher’s salary that I finally started realizing that an above average income doesn’t necessarily mean that you can be financially free. This realization made me start to seek out ways to be in control of my finances rather than live in fear of it. I stumbled on Dave Ramsey’s book The Total Money Makeover: A Proven Plan for Financial Fitness when I was shopping on Amazon.Com looking for a Personal Finance textbook that I needed for one of my college classes I had that semester. I pay attention to reviews on products before I buy anything online and I was surprised to see that even though there are a million different books written on the same subject, you can’t find many that have 600+ reviews and rates 4.5 stars out of 5.

When my book arrived I was pleasantly surprised to find out that the book contained some extremely helpful tips with a real world approach, great examples, and no extra fluff. Dave Ramsey does not sugar coat his ideas which is great for people like me who like to get to the point of the matter. I highly recommend purchasing his book, or borrowing it from a friend or from your local library but I wanted to just summarize one of his ideas that really left an impression on me.

 In Dave Ramsey’s book he talks about taking baby steps to reach financial freedom or financial fitness, and applying the same principles as if you were on a workout regimen. He uses the example of a 350 pound person attempting to run a marathon. This person cannot start their training by weighing 350 pounds and attempting to run 10 miles on the first day. They would have a heart attack or become extremely discouraged and probably never return to their training. If this 350 pound person had started in baby steps by walking around the block to lose weight, adjust their eating habits, develop muscle tone, and then they can finally start training for the marathon. This would be a much more effective method of reaching their goals.

Dave Ramsey’s baby steps in his book to reach financial fitness must be followed in this particular order:

1)      Before you start to pay off your debts you have to set up a $1000 emergency savings fund. This fund is supposed to be relatively accessible in times of an emergency, and it can only be used for emergencies such as medical expenses, funerals, car engine failure etc. He uses the example of Christmas. Christmas time is not an emergency this is something that you can budget for. An emergency is something that needs to be paid immediately and it has not been budgeted for. You must have your $1000 emergency fund set-up in order to continue to the next step. If you ever have an emergency come up and you need to dip into these funds you have to stop where ever you are in the next steps and return to this Step 1 to replenish your emergency fund immediately.

Ramsey’s reasoning behind having a $1000 emergency fund before you do anything else is because you have to have confidence that you have the money available to you in case of an emergency before you put money towards debt. The idea is that an emergency can mean living where is paying off your debt will not affect you life or death wise. $1000 is just a starter-kit, but it should be enough to catch some of the more immediate problems that come your way for the first few months.

2)      The Debt Snowball is the second step in the book. This step requires you to list all of your debts with the smallest balance on the top and your largest balance on the bottom. Do not factor in APR or terms unless the balances are similar. Do not factor in a mortgage payment if you have one. Mortgages will be discussed in a later step.

The idea is that you should be paying the minimums on all of your debts, but you should be putting more focus on paying off the first debt with the smallest balance. After the first debt is taken care of you can put those payments towards the second debt. Eventually all the payments will start to compound on each other allowing you to pay your debts off faster.

The idea behind this is that if you keep throwing money at multiple items at once this will take you forever to pay off, plus your accrue more interest on all of your debts. Using the snowball method will help you to magnify your efforts in a much shorter amount of time. Remember that if an emergency comes up you need to start paying your minimum payments again until you can replenish your emergency funds from Step 1.

3)      Create a complete emergency fund. This emergency fund is very similar to the $1000 emergency starter-kit in step 1, but the difference is that this full emergency fund should be equal to the amount of money it would take for you and your family (if you have one) to survive for 3-6 months. Remember that at this step you should have already paid off all of your debts (except for your mortgage if you have one). You should also have $1000 already in this fund from your starter emergency kit in Step 1. The following steps can be done simultaneously…

4) This next step focuses on your retirement. Do not factor in Social Security benefits because we just don’t know if this service will actually be available or not in the future. If it is not available then you will be well prepared. If it is available then more power to you. Dave Ramsey recommends putting away 15% of your annual income into a retirement account. Ramsey discusses this topic in more detail in his other book Financial Peace.

5) After establishing your retirement account you can then focus on college savings for your kids (if you plan on having any, or already do). Ramsey advises to never put college savings before retirement because college does not guarantee anything, and college does not guarantee you will have food to eat when you are retired.

6) You can now put more focus into paying off your mortgage. One great point that Dave Ramsey points out is that a huge misconception to people is that they should pay their mortgage off before worrying about retirement. Especially if retirement is a long ways off. He mentions that this is never a good idea because there are too many cases where people who are retired no longer have money so they wind up selling their house to survive.

7) Step 7 is to build wealth. What do you do with this wealth? Have fun, invest, and give. As long as you are living within what you can actually afford he recommends that you do all three things.

I know that these steps were brief, but I highly recommend getting your hands on Dave Ramsey’s book. He discusses these items in more detail with more informative additions to explain why he outlines his steps the way he does.