PDF Summary:The Total Money Makeover, by Dave Ramsey
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1-Page PDF Summary of The Total Money Makeover
How you handle your finances determines whether you succeed in life. In the Total Money Makeover, radio talk show host and author Dave Ramsey lays out simple steps for freeing yourself from debt and setting yourself up for success: following a monthly budget, buying only what you can afford, eliminating consumer debt, saving for emergencies, investing for retirement and your kids’ college education, and paying off your mortgage. Intended for everyone—from high earners to people thousands of dollars in debt—Ramsey’s common-sense principles put you in control of your money and your life.
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Do whatever you can to round up $1,000: cut your spending, work extra hours, or sell something (by having a yard sale, for example). Most people can find the money in less than a month, but if you can’t, sell more or take on an extra job.
When you get $1,000, stash it where it’s accessible in an emergency but not so easy to grab that you’ll be tempted to spend it for non-emergencies (for instance, by keeping it in your sock drawer).
Step #2: The Debt Snowball
You need to get rid of debt to get control of your income and put it to work for you. The debt snowball method is the way to pay off debt. There are two steps:
1) List your debts in order, from the one with the smallest balance to largest. Exclude only your mortgage, which will be addressed in another step.
2) Each month, apply every extra dollar you have after basic expenses toward paying the smallest debt until it’s paid off. Make the minimum payments to stay current on the other debts on the list.
After the smallest debt is paid, apply the payment you had been making on it, plus any additional money you have, toward paying off the next smallest debt. When the second debt is paid off, apply the payment amounts from the first two debts, plus any other money you can find, to the third debt on your list, and so on.
Each time you pay off a debt, you increase the amount you can pay on the next one—your payments continue to snowball until your debts are paid off.
Step #3: Boost Your Emergency Fund
The next step is boosting your emergency fund to give yourself a cushion against life-disrupting problems like a job loss or medical bills.
You need an emergency fund large enough to cover three to six months of expenses, enabling you to manage for up to half a year without an income. In one survey, 49% said they couldn’t cover even a month’s expenses if they lost their income. To make sure you’re not in this situation, the amount in your emergency fund should be between $5,000 and $25,000.
As noted in step #1 (create a $1,000 emergency fund), your emergency fund must be in the form of cash and easily accessible. A great option is a money market account with no penalties, and on which you can write checks.
Step #4: Save for Retirement
The next step is building your wealth by investing for retirement—it’s the key to being financially fit for life.
Invest 15% of your gross annual income for retirement, and make compounding interest work for you. When calculating your 15%, base it on your gross annual income before taxes. Exclude any company 401(k) match, as well as potential Social Security benefits. You can’t count on the government coming to your aid in future years—it’s your job to provide now for your future needs.
The best way to build your wealth over time is to invest in growth-stock mutual funds. Mutual funds go up and down in value in the short term, but over the long term (more than five years), they provide an average 12% annual return on investment.
Choose mutual funds with a record of growth for more than five years, preferably 10. Spread your investment dollars over four types of funds:
- Growth and Income (25%), also called large cap or blue chip funds
- Growth funds (25%), also called mid cap or equity funds
- International funds (25%)
- Aggressive growth (25%), also called small cap or emerging market funds
When deciding where to invest first:
- Start with your company 401(k) plan if the company provides a match.
- After that, fund two Roth IRAs. You and your spouse can each invest up to $5,000 a year in a Roth IRA and it grows tax-free. Investing $3,000 a year from age 35 to 65 will give you $873,000 tax-free at age 65—for a $90,000 investment.
Step #5: Save for College
While most people think college is important, most don’t save for their children’s college education, and they end up taking out huge loans (which people think is “normal”).
Save for college and pay cash. The most effective vehicles for saving for college are an ESA (Educational Savings Account), which is like an IRA for education, and a state 529 plan.
College tuition increases faster than inflation, at about 8% versus 4%, so when you save for college, you need to factor in tuition inflation. There are tuition prepayment plans, but they just break even with inflation.
You can do much better with an ESA funded in a growth-stock mutual fund—like an IRA, it will grow tax-free. Here’s how it compares to a prepaid tuition plan:
- If you invest $2,000 a year from your child’s birth through age 18 in a prepaid plan, you’d have $72,000 for tuition.
- An ESA in mutual funds returning 12% would generate $126,000 tax-free. It would take only $166.67 a month to save $2,000 a year, and in 18 years, you’d have enough to send your child to an expensive college. But you could still probably afford a typical college if you started investing when the child turned 8.
If you need more, also consider a state 529 plan, which similarly allows you to invest money tax-free for your child’s education. There are several types of 529 plans—stay away from the “life phase” (poor returns) and the “fixed portfolio” plans (too restrictive). The best option is a “flexible” plan that allows you to move your investment within a family of funds to get better performance.
Step #6: Pay Off Your Mortgage
At this point in your Total Money Makeover, you’re nearly debt-free, you have an emergency fund covering three to six months of expenses, you’re investing 15% of your income, and you’re saving for your kids’ college education. Your next step is to pay off your mortgage and become 100% debt-free.
Most people believe that paying off a mortgage, especially early, is next to impossible. But numerous Total Money Makeover adherents do it. For three to five years, they live differently from everyone else—sacrificing by spending less and working extra hours to pay off their mortgage. Then they continue to live differently from everyone else by being debt-free.
The biggest myth about home-buying is that you need a mortgage in the first place—that it’s the only way to pay for a home. There’s another way: paying 100% down. Paying cash for a home is possible if you save enough, long enough.
That said, if you choose to take out a mortgage, follow these two rules:
- Stick with a 15-year, fixed-term mortgage (not 30 years, which keeps you in debt too long and costs you too much in interest).
- Don’t commit to payments that exceed 25% of your monthly take-home pay.
This is the only kind of debt acceptable in the Total Money Makeover, but you should pay it off early at this point in the program.
Step #7: Enjoy Your Money
Completing six Total Money Makeover steps puts you in rare company—among the 2% of Americans who are debt-free. Because you’re debt-free, live on a budget, and have money for emergencies, you’re in control of your income and are building wealth. The only remaining question is what to do with your discretionary income.
There are three purposes for money:
- Having fun
- Growing your nest egg
- Giving
You should do all three of these things. Achieving financial fitness is like achieving physical fitness. You didn’t put in the work just to look good. Now you get to use your financial muscle:
- Have fun: If you want something and can afford it, by all means, indulge yourself—you’ve earned it. Up to this point in the Total Money Makeover, you’ve sacrificed by paying off debt and saving for the future—and like a kid who’s behaved so he can have ice cream later, you deserve a reward.
- Grow your nest egg: At this step, you need to keep growing your wealth. While your nest egg may be substantial, if it’s under $10 million, continue to keep your investing simple. You’ll eventually reach a turning point where your money is, in effect, working more than you are—that is, when you can live on your investment income. To determine whether you’re ready, multiply your total investments by .08, and if you can live on that amount annually, don’t be afraid to start drawing on your nest egg at up to 8% a year.
- Give: This may be the most rewarding thing you can do with money. You don’t have to be rich to help people, but you can often do more with money. Wealth gives good intentions greater impact; it also gives you the opportunity to help on a large scale.
A Life Makeover
By now you can see that the Total Money Makeover is about more than money—it makes you face up to who you are in the mirror. Because personal finance is 80% behavior and 20% knowledge, you’ll either have the courage and determination to remake your life—or continue to be miserable.
Based on the experience of countless people who followed the steps in this book, you should have hope that you can overcome money problems, live free of debt, and build wealth. It starts with applying common-sense principles. Anyone can do it, however financially dire their circumstances—even you.
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PDF Summary Introduction
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In How the Mighty Fall, Jim Collins writes that the first stage of business failure is a feeling of invincibility that leads to taking risks. For an individual, the risks could be buying on credit and not saving because you’re confident your job is secure or because others are doing it. But overspending, whether it feels “safe” or not, is still foolish. As Ramsey puts it, a turkey may fly in a tornado (people may succeed at doing foolish things in special situations), but that doesn’t mean turkeys can really fly.
Your financial principles will determine whether you succeed in life. If you build a house based on unsound principles, it eventually will fail. The Total Money Makeover principles are sound and, therefore, work in both good and bad times.
PDF Summary Chapter 1: The Makeover Challenge
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Two Money Makeover converts, Mark and Kari, struggled with student loans, a car lease, credit card debt, and a big mortgage, but undertook this book’s challenge and, in a six-month period, paid off $57,000 and donated $7,000 to their church. The key was transitioning from credit to cash, then realistically assessing their income and choosing to start living below their means. The payoff was peace of mind and the control they gained from being debt-free.
Stories like these appear throughout the book as encouragement and evidence that the program works. However, remember that the Total Money Makeover works only to the extent that you apply it.
The fix for your financial situation isn’t a bigger salary, a windfall, or a better job, but acknowledging your bad decisions are your own fault and changing your behavior. This book lays out what you need to do, but only you can do it.
PDF Summary Chapter 2: Obstacle #1—Denial
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Sara and John got such a wake-up call. They felt financially secure with two incomes totaling $75,000 and “typical” debts of student loans, a car loan, and $5,000 owed on credit cards. So they built a new home, but shortly after they moved in, Sara was laid off. Upon losing half their income, they couldn’t deny their financial state and were forced to change their spending habits.
2) Choose to change: The alternative to waiting for a crisis is to look in the mirror, acknowledge your reality, and choose to change. Hopefully, this book will motivate you to want better-than-average financial health and to meet the makeover challenge.
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Learn more about our summaries →PDF Summary Chapter 3: Obstacle #2—Myths About Debt
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However, debt doesn’t usually make you more prosperous. It creates risk that, over time, builds and erases any initial advantage.
If you want to be wealthy, you should do what wealthy people do instead of believing myths pushed by lenders. Three-quarters of the Forbes 400 wealthiest people in America told pollsters that the best way to build wealth is to stay out of debt. Millionaires live below their means and pay cash.
Three of the biggest lenders at the time this book was written—Sears, JCPenney, and Ford—were founded by people who actually opposed debt. For example, Henry Ford thought debt was a lazy way to get things; his view was so strongly held that his company didn’t offer financing until a decade after GM did. Today, credit is one of Ford’s (and any car company’s) biggest profit generators.
Myth #2: You’re Just “Helping Out”
Many people think they’re helping friends or relatives by loaning them money. But a loan will be a barrier in your relationship because it creates a power dynamic where the borrower is the slave of the lender.
If you’re the borrower, the loan can create resentment or shame if you can’t pay it back. If you’re the lender, you’ll be...
PDF Summary Chapter 4: Obstacle #3—Myths About Money
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But its track record over time is mediocre. Going back to Napoleon’s era, gold has shown average gains of only about 2% a year. In the last 55 years, gains have averaged 4.4%, comparable to inflation and savings accounts. In contrast, you could get a 12% return over time with a growth-stock mutual fund. Gold has done well since 2001 due to predictions of doom about 9/11 and the 2008-2009 recession—but that’s been its only spike in history.
As for gold being valuable in an economic crisis, history shows that people turn in such instances to trading useful items and skills, not buying with gold nuggets or coins.
Myth #4: Cash value life insurance or whole life insurance are good ways to save.
Cash value policies (including whole life, universal life, and various combinations) constitute more than two-thirds of the life insurance policies being sold today. This is unfortunate because these policies, which combine insurance with saving and supposedly grow in value, are terrible investments.
They generate extremely low returns; while sellers have charts showing a growth trend, the policies seldom deliver as promised. For the first three years, the bulk of your monthly...
PDF Summary Chapter 5: Two More Challenges
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Professor Tom Stanley studied the lifestyles of millionaires in the 1990s. He writes in The Millionaire Next Door that, contrary to what most people think, the typical millionaire lives modestly in a middle-class home, drives a used car paid for with cash, and buys clothing from discount stores.
Unlike those who spend to keep up with the Joneses, wealthy people don’t strive for approval, but for financial security, by living below their means so they can grow their wealth. (Shortform note: Read our summary of The Millionaire Next Door here.)
In contrast, because of debt, average people often have a negative net worth. It’s hard to change when you like your nice things and you don’t want to admit to yourself or others that you’re broke.
The Total Money Makeover requires giving up the drive for approval and undergoing a change of heart about how you view spending and debt. For example, it might require that you stand up to your family and reject the tradition of going into debt to buy a Christmas gift for each extended family member.
In addition, **you need to recognize your weak spot, where you...
PDF Summary Chapter 6: Makeover Step #1—Create an Emergency Fund
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Here are the basic steps to get started:
- Each month, draw up a new budget for the next month. If you’re married, sit down with your spouse to do this. Conflict over money is the No. 1 reason for divorce in the U.S. Often this is due to different personalities and money management styles. The way to prevent conflict is to let differences complement each other and work together each month to establish shared money goals.
- List the month’s bills, savings, and debts, then list and allocate every dollar of your income (think of this as spending the money on paper before the month starts). This process is referred to as zero-based budgeting: monthly income minus expenses equals zero. If you have variable income because of commissions or self-employment, use this budget form.
- Once both partners agree on a budget, pledge not to do anything with your money that isn’t prescribed by the written plan. You can’t get control of your spending without working together. If something unexpected comes up—for instance, your car needs...
PDF Summary Chapter 7: Step #2—The Debt Snowball
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After the smallest debt is paid, apply the payment you had been making on it, plus any additional money you have, toward paying off the next smallest debt. When the second debt is paid off, apply the payment amounts from the first two debts, plus any other money you can find, to the third debt on your list, and so on.
Each time you pay off a debt, you increase the amount you can pay on the next one—your payments continue to snowball until your debts are paid off.
Starting with the smallest debts gives you some quick wins to motivate you, and by the time you get to the largest payments, such as car payments and student loans, you’re in a position to pay over $1,000 a month. You’ll soon be debt-free except for your mortgage.
Success Stories
Eliminating debt totaling tens of thousands of dollars is daunting, but with concerted effort, it can be done. Here are a few examples from people who applied the Total Money Makeover process:
- Steve and Amanda, a couple in their early 30s, used the debt snowball over 35 months to eliminate a six-figure debt, including $60,000 in student loan debt, $35,000 in credit card debt, plus loans on two new cars and a mortgage. Steps...
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PDF Summary Chapter 8: Step #3—Boost Your Emergency Fund
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Where to Put the Money
As noted in step #1 (create a $1,000 emergency fund), your emergency fund must be in the form of cash and easily accessible without any penalties.
The point isn’t investing the money to earn interest, it’s keeping it available and safe—so don’t put it someplace hard to tap into, like a mutual fund. A great option is a money market account with no penalties, and on which you can write checks. Your money will earn a little interest there but again, that’s not the objective.
As you change the way you handle money through the Total Money Makeover process, you’ll find yourself using your emergency fund less, for two reasons:
- Your monthly budget will be healthier and able to handle most things that come up.
- As you become more financially fit in general, your finances will be less easily upended. Problems that used to throw you for a loop are just inconveniences.
Aside: Don’t buy a home until you’ve completed this step of the money makeover; too many people buy a home before they’re ready financially (with no other debt and a full emergency fund). Further, you should save first (maybe years) for a substantial down payment or a cash...
PDF Summary Chapter 9: Step #4—Save for Retirement
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At this point in the Total Money Makeover, don’t be tempted to save more than 15%, because you still need to save for your kids’ college education and pay off your home mortgage early. Also, don’t opt to save less and prioritize the kids’ college education or paying off the house—your children’s degrees won’t pay your retirement expenses, and it’s better to have a retirement fund at age 75 than a house but no money to live on.
When calculating your 15%, base it on your gross annual income. Exclude any company 401(k) match, as well as potential Social Security benefits. You can’t count on the government coming to your aid in future years—it’s your job to plan now for your future needs.
Invest in Mutual Funds
The best way to build your wealth over time is to invest in growth-stock mutual funds. (Shortform note: a mutual fund is a portfolio of stocks, bonds, and other securities managed by a professional. Individual investors can buy into it.)
Mutual funds go up and down in value in the short term, but over the long term (more than five years), they provide an average 12% return on investment.
While this book isn’t a detailed investment guide, Ramsey recommends the...
PDF Summary Chapter 10: Step #5—Save for College
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- Pay cash: Don’t take out loans for college; there are ways to fund college without loans. We’ve come to accept student loans as normal, believing that you can’t go to college without loans. Students today graduate with an average $25,000 to 27,000 in loan debt. Once you have college loans, they’re difficult to get rid of, so don’t get started with them.
- Control college expenses: Too many student loans are used to pay for an expensive off-campus standard of living. It’s usually more economical to live on campus and eat in the cafeteria.
How to Save for College
While most people think college is important, most don’t save for their children’s college education. Only 14% use college savings funds (ESAs) or 529 plans, meaning that an overwhelming majority are saving little or nothing.
People often can’t save because of credit card debt, car loans, and mortgages. They don’t plan their spending with a monthly budget and lack a fund for emergencies. To be able to save for college, you need to complete the first four Total Money Makeover steps as a foundation.
ESAs and 529s
**The most effective vehicles for saving for college are an ESA (Educational...
PDF Summary Chapter 11: Step #6—Pay Off Your Mortgage
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- Don’t commit to payments that exceed 25% of your monthly take-home pay.
This is the only kind of debt acceptable in the Total Money Makeover, but you should pay it off early as part of the program.
Deals to Avoid
More people would be able to pay off their mortgages if they hadn’t locked themselves into bad deals. Here are the typical mistakes people make:
1) Taking out a 30-year mortgage and promising yourself you’ll pay it off within 15 years. You just want to give yourself a cushion in case something comes up.
The truth is, things always come up—there’s always an extra bill to pay that keeps you from making the extra mortgage payment. Few people, unless they’re completing a Total Money Makeover, systematically pay extra on their mortgage. You’re unlikely to be the exception.
A 15-year mortgage saves you a ton of money on interest, plus it saves 15 years of being in debt with a 30-year mortgage. For example, at 7% interest (typical at the time this book was written), you’d pay almost $150,000 less in interest with a 15-year mortgage, compared to 30 years, on a $250,000 house with a $25,000 down payment.
If you have a good interest rate, there’s no need to...
PDF Summary Chapter 12: Step #7—Enjoy Your Money
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Always manage your own money and stay on top of what it’s doing—but create a team of advisors to guide you when necessary. Look for teachers, not experts or people who try to take over your finances. You might include, for example, an estate planning attorney, a CPA, an insurance professional, a Realtor, and a financial planner. Also be aware of whether the advisor will profit from the advice she gives you.
You’ll reach a turning point, where your money is, in effect, working more than you are—that is, when you can live on your investment income. To determine whether you’re there, multiply your total investments by .08 and if you can live on that amount annually, don’t be afraid to start drawing on your nest egg at up to 8% a year. Enjoy the fruits of your labor!
Give
Giving may be the most rewarding thing you can do with money. You don’t have to be rich to help people, but you can often do more when you have money. The biblical story of the Good Samaritan is an example: When the wealthy Samaritan came upon a robbery victim lying along a road, he not only treated the man’s injuries, but he also took him to an inn and paid for a room, so he could rest until he...
PDF Summary Chapter 13: Live Differently From Everyone Else
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A Life Makeover
By now, you can see that the Total Money Makeover is about more than money; it makes you face up to who you are in the mirror. Because personal finance is 80% behavior and 20% knowledge, you’ll either remake your life—or continue to be miserable.
Based on the experience of tens of thousands of people who followed the steps in this book, you should have hope that you can overcome money problems and live free of debt, break the cycle of debt in your family by not passing on debt to your children, have a secure retirement, and give to others.
It starts with applying common-sense principles. Anyone can do it, however financially dire their circumstances—even you.