My Notes on “The Total Money Makeover”
By Dave Ramsey
Doesn’t have new information and the author knows it. It’s main value is the simple (although not easy) 7 step plan. It’s a detailed plan to helps you to, slowly but steadily, get out of debt and build wealth by improving your money lifestyle.
My rating: 4/5 · I really liked it · 8 min · September 29, 2016 · Amazon
All your money problems starts with you. The first step is confronting yourself. Consider how you handle relationships, emotional situations, and your spirituality.
Focus on improving your money habits. Great personal finances is 80% behavior and 20% knowledge.
Prefer setting up automatic measures to help you cultivate good money habits and to get rid of the bad ones.
Continuously practice delayed gratification in favor of greater results. Stop wanting to be “normal”. “Normal” people are broke. Stop wanting to impress others, and make your internal desires your primary motivator.
People were running around buying things they couldn’t afford with money they didn’t have to impress people they didn’t even like. — Dave Ramsey
Stop taking personal finance lessons from financial industries, banking industries, and those that profit from their advice. Stop listening to everyone with an opinion, and start listening to actual millionaires.
Start studying about finances now, it’s never too late. Read a couple of finance books every year.
If you’re married, you’re a team. Do everything together, don’t let your spouse do all the work as both of you have to improve your habits.
You can’t afford a new car unless you’re a millionaire and can afford the brutal depreciation just for its smell. The average millionaire drive a reliable used car, less than three years old.
Stop evaluating purchases only for its cost or monthly payment. Start thinking if it adds real value to your life considering all the hidden costs. Costs such as time spend using it, cleaning it, organizing it, storage space used, etc.
Stop trying to impress your broke friends.
Reflect about your weak areas. Figure out the things you admire or envy on others and learn to let them go.
Being a homeowner will make you be good. Rent the cheapest home you can live on, and work towards buying your home.
For car and home insurance, prefer higher deductibles in favor of lower primes.
For health insurance, use a tax-free savings account from a Health Savings Account. Prefer higher deductibles and lower premiums.
For life insurance, purchase 20 year level term insurance equal to about ten times your annual income.
For long term disability insurance, try to get something that covers 50% to 70% of your annual income. The younger you are, the bigger the chance you get disabled instead of dying.
The dignity of your retirement is up to you, not your government, not private institutions, not your family. You.
You will die, so do your job and write a will.
An Actual Personal Finance Plan
Focus on one step at a time, starting from the first. If something happens and you have to use money from a previous step, then do it. But make sure you go back to that step before continuing.
Step 0: Budgets
Stop whining about how difficult budgets are and just do them. It’s harder to retire without money or without good habits, than to build your budgeting habit now.
On the first month, write down everything you spend your money on; from a cup of coffee to your rent.
Each month set up a new written budget based on your spendings from the previous month.
Assign every dollar you receive a category in your budget. Agree on your budget with your spouse if you’re married. You have to work together towards your combined retirement.
Don’t worry about having the perfect budget. You can change the budget as the month goes. Be sure that both agree on the change, and you balance your budget afterwards.
Learn to live with a budget. Be prepared and brave enough to pass on trips or dinners because they aren’t in your current budget.
Learn to wait to have the money before buying. It’s one of the hardest mind shifts you’ll face but the one with the biggest impact in your life.
Don’t be a slave to your money, tell your money what it should do for you.
Step 1: Save $1,000 Cash
Do everything you can to save $1,000 dollars fast. Work extra hours, sell things you’re not using, etc.
It’s healthier to have an emergency fund instead of using the credit card for emergencies. Use this fund to break the cycle of borrowing for those little emergencies.
Once you have the $1,000, hide it. Protect yourself from you. Don’t invest it as it needs to be available, just hide it so you don’t get tempted.
Christmas is not an emergency, it’s always every December 25th. Learn to use your budget and save ahead.
Step 2: Pay All Debts but the House
Average millionaires says that the best way to build wealth is to become and stay debt free.
Improve your spending habits instead of letting others manage your debt.
Start using all your excess to completely pay your smallest debt. Then use all your excess plus the payment of that already paid debt, to pay the next smallest debt. Repeat and enjoy the motivation of having less and less debts.
Steps 0 and 1 are important as they’re the foundation. Without a budget you won’t find money to pay off debts. Without an emergency fund you’ll keep getting yourself into new debts.
If you don’t have too much money left after budgeting, get radical. Sell more stuff. Sell the car if the payment and insurance is too high. Don’t sell your home unless your monthly payment is more than 45% of your whole budget.
You’re only allowed to have your home debt at this step.
Practice delayed gratification and enjoy not having to borrow money. Cut up your credit cards, because you don’t have enough resolve to consciously stop borrowing.
Step 3: Complete the Emergency Fund
Save three to six months of expenses. Three months if both of you work and have stable jobs. Six months if only one works, if any has unsteady jobs, or if you’re a freelancer.
If you’re married, the spouse that needs more months of expenses in the emergency fund wins. This fund is also for more peace of mind.
You don’t want to start borrowing money when you lose your job. Use this fund only for emergencies, for necessary things not planned in your budget.
Avoid using your emergency fund when you deep down know that you should save money first. Saving money will help you prioritize your purchases instead of mindlessly purchasing.
Christmas still isn’t an emergency. Something on sale isn’t an emergency. Fixing your car isn’t an emergency (unless you depend on it for your income).
Don’t invest this new emergency fund. As on step 1, hide it.
Step 4: Invest 15%
Invest 15% of your annually household income before tax towards retirement.
Invest your 15% in the following order:
- First, invest the same amount your company matches on your 401(k).
- Then, fully fund your Roth IRAs.
- Then, go back to 401(k)s, 403(b)s, 457s, or SEPPs.
Remember to study about finances, this includes studying about mutual funds.
Growth-stock mutual funds are excellent investments for more than 5 years. Select mutual funds that have been winning for more than 5 years.
Try to diversify your investments; 25% in growth and income funds, 25% in growth funds, 25% in international funds, and 25% in aggressive growth funds.
Don’t invest money in life insurance. They never perform as projected.
Don’t invest in the lottery tickets. The expected return sucks.
Step 5: College Fund
First, invest in an Educational Savings Account via growth stock mutual funds. They grow tax-free if used on higher education.
Then, invest in a flexible 529 plan. It allows you to move your investments within a family of funds.
Don’t use student loans.
Step 6: Own Your Home
Use everything left after living, investing in retirement, and investing in college towards extra payments on your home.
Remember to delay gratifications towards financial health and wealth.
Tax deductions are a bad business. It’s better to pay taxes over money not spent on interests, than spending on interests and then getting the tax deduction. The amount you have to pay on taxes will be less than the amount you would end up paying in interests.
You don’t have enough discipline. Get a 15-year fixed-rate mortgage loan and never have a payment of over 25% of your take-home pay. It’s the easiest way to pay your mortgage in 15 years or less.
Don’t get Adjustable Rate Mortgages when you are at the bottom of rates. Refinance your mortgage when you calculate you can save on interests.
Step 7: Keep on Going
Keep your investment strategy simple until you have 10 million dollars. Simple mutual funds with a mix of debt-free real estate if you want.
When 8% of your wealth represents your annual expenses, then your money is working harder than you. You are now wealthy.
After you have 10 million dollars, you can get together a team and investing with more complex strategies.
When your wealth is enough so that buying a brand new car feels more like buying a Happy Meal rather than a blood promise with the bank, then by all means buy yourself your new car.
Start giving. You can start giving before, but by know be mature enough to realize that all that wealth only for you might be pointless. Giving money always feels right.
Avoid being ruled by stuff and money. This plan is to get you to financial freedom, not financially dependent on your wealth.
Money isn’t taught in school, college, or work. You are going to leave a huge inheritance to your children. Do your work and teach them accordingly.