Book SummaryThe Total Money Makeover, by Dave Ramsey

1-Page Summary1-Page Book Summary of The Total Money Makeover

To understand why you have money problems—why you’re heavily in debt and can never seem to make ends meet or handle emergencies—look in the mirror. Your financial situation is the result of your behavior, according to radio talk show host and author Dave Ramsey.

In the Total Money Makeover, Ramsey lays out a program for freeing yourself from debt and money worries by changing your behavior: following a monthly budget, buying only what you can afford, eliminating debt, saving for emergencies, and investing. The program is intended for everyone—from high earners to people thousands of dollars in debt.

The Total Money Makeover motto is: live differently from everyone else in the present so you can live differently from everyone else in the future. This means that to live a better life than most people, you need to do what most people won’t do—make sacrifices now in return for the payoff of financial security later.

The fix for your financial situation isn’t a bigger salary, a windfall, or a better job, but acknowledging that your poor financial decisions are your fault and changing your behavior. This book lays out what you need to do, but only you can do it.

Myths About Debt and Money

People who get into financial trouble do so in part because they believe a host of societal myths about debt and money that encourage taking on debt and spending foolishly in order to buy things they can’t afford.

One of the biggest myths is that debt is normal. Debt has become so ingrained in our culture that most people can’t imagine living without it. We don’t know how to get a car, buy a home, or go to college without debt, and most people can’t imagine living without a credit card. Further, financial institutions, stores, and other lenders aggressively push you to borrow because they benefit when you owe them money.

You must reject the view that debt is normal before you can get control of your finances. The central tenet of the Total Money Makeover program is living debt-free and buying only what you can afford (what you can pay for immediately).

The belief that debt is normal and a way to improve your life promotes these myths:

• You need credit cards: People are often advised, particularly when they’re young, to get a credit card to build their credit. But you only need to build credit by borrowing and making loan payments if you want to spend your life making loan payments. In a Total Money Makeover, you won’t use credit, except possibly to pay a mortgage.
• A car payment is normal: Car payments are both foolish and avoidable. They’re most people's biggest monthly outlay except for a mortgage, so they diminish or steal more from your income than any other expense. Over a lifetime of car payments, you’ll literally spend a fortune. Most people start making payments on one car, then continue car payments on successive cars throughout their lives.
• When you don’t have the money, get a quick fix: People who want quick money often turn to payday loans, rent-to-own deals, or “tote the note” car lots—but these are predatory lending schemes intended to exploit low-income people. Other bad ideas are credit repair schemes, debt consolidation, and bankruptcy. They’ll make your financial problems worse.
• You need a 30-year, fixed-term mortgage to buy a house: This type of loan is costly and consigns you to being in debt for much of your life. Better ways are saving your money and paying cash, or getting a 15-year, fixed-term mortgage and paying it off early as part of a Total Money Makeover.

Your Total Money Makeover requires first changing your view of debt, and then getting and staying out of debt.

Two Preliminary Steps

The Total Money Makeover process comprises seven simple steps, referred to in the book as baby steps. No matter how big your financial challenges, you can overcome them by taking each step, one at a time.

It’s important to follow the steps in the prescribed order, because they build on each other, like prerequisites for taking college courses. If you jump ahead to later steps, you’ll fail at them because you haven’t laid the foundation. Just concentrate on one step at a time in sequence. But before you start the sequence, there are two preparatory steps.

Preliminary Step #1: Make a Budget

Create a written budget each month determining where your money will go; if you don’t, it will just disappear without your thinking about it.

Here are the basic steps for creating a budget:

• Each month, draw up a budget for the next month. If you’re married, sit down with your spouse to do this.
• List next 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.
• 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 repairs—hold an emergency meeting and together reallocate and balance the categories so that the month’s income minus expenses still equals zero.

Preliminary Step #2: Catch Up on Loan Payments

Besides creating a monthly budget, get current on all loan and credit card payments. If you’re behind on any payment, you need to catch up. If you’re really behind, pay for your necessities first—food, shelter, and transportation—then catch up on monthly loan payments. You can’t start a Total Money Makeover, which hinges on eliminating debt, until you’re keeping up with your payments.

The Seven Steps

Now you’re ready to begin the process of putting your financial problems behind you by following these steps in sequence:

Step #1: Save $1,000 Cash

**Everyone needs a rainy day fund because it’s guaranteed...

The Total Money Makeover Summary Introduction

To understand why you have money problems—why you’re heavily in debt and can never seem to make ends meet or handle emergencies—look in the mirror. Your financial situation is a result of your behavior, according to radio talk show host and author Dave Ramsey.

In the Total Money Makeover, Ramsey lays out a program for freeing yourself from debt and money worries by changing your behavior: paying with cash only, eliminating debt, saving for emergencies, and investing. The program is intended for everyone—from high earners to people thousands of dollars in debt.

Rather than offering investment advice, original insights, or the “secret” to becoming rich, Ramsey presents common-sense principles assembled in a step-by-step sequence that can change your financial situation...

The Total Money Makeover Summary Chapter 1: The Makeover Challenge

Succeeding with the Total Money Makeover requires first taking responsibility for the financial situation you’re in. You caused it and you can get out of it, if you’re willing to pay the price of work and sacrifice.

Ramsey’s story is an example. He got into a financial hole while in his late twenties by overspending and borrowing, while saving too little. He had borrowed and invested in real estate, even becoming a millionaire. But within three years, he and his family (his wife and two small children) were bankrupt. Feeling overwhelmed and hopeless, he began reading about finance and about how millionaires managed their money, and he realized that his behavior was the real problem. When he took responsibility for his finances, things began turning around.

Your money makeover begins with the same challenge: changing yourself.

If financial success were easy, everyone would be successful. What to do isn’t a mystery:...

The Total Money Makeover Summary Chapter 2: Obstacle #1—Denial

Total Money Makeover success first requires understanding the five obstacles that could hinder you: denial, debt myths, money myths, lack of financial knowledge, and desire for approval. These hurdles stem in large part from what you’ve been taught by society about money. The next few chapters examine each of these obstacles.

The first obstacle is denial. Achieving financial fitness is somewhat like trying to lose weight and improve physical fitness. While this requires intense focus on your goal of resetting your eating or spending habits, you’ll have a tendency initially to downplay just how out of shape you are.

Most people are in denial about the state of their finances. You might tell yourself that maybe things aren’t so bad—maybe you’re no worse off than the average person. The unfortunate truth is that most people have financial problems—that counts as average in today’s society, the way being...

The Total Money Makeover Summary Chapter 3: Obstacle #2—Myths About Debt

The second obstacle to gaining control of your finances is the widespread belief that debt is useful and normal—that everyone has it. In addition to this belief, there are a variety of related myths that encourage different types of borrowing.

You must reject these views of debt before you can get control of your finances. Society encourages us to take on debt starting as young adults and to carry debts throughout our lives. There are several reasons:

• Our culture promotes instant gratification. Although it’s human nature to want things right away, mature people delay short-term satisfaction for a bigger payoff later. But society encourages immaturity by urging you to get what you want now, before you can afford it, by borrowing.
• Financial institutions, stores, and other lenders promote borrowing to get what you want because they benefit when people owe them money.
• Debt has become so ingrained in our thinking that most people believe debt is normal and can’t imagine living without it. We don’t know how to get a car, buy a home, or go to college without debt. Most can’t imagine living without a credit card. (Americans have about $900 billion in...

Shortform Exercise: Change Your Views on Debt

A major obstacle to gaining control of your finances is the widespread belief that debt is useful and normal—and it’s a stepping stone to prosperity. But you’ll never build wealth while a significant part of your income is tied up with making loan payments.

Before reading the preceding chapter, what were your beliefs about debt?

The Total Money Makeover Summary Chapter 4: Obstacle #3—Myths About Money

Like myths about debt, there are myths about getting and handling money. They run counter to the Total Money Makeover principle of effort and sacrifice, of living differently from everyone else now so you can live differently from everyone else in the future. Becoming financially fit has a cost and there aren’t any shortcuts.

Money myths stem from two basic mindsets:

1) Ignoring risks: People who are poor at managing money often ignore the risks of deals that seem attractive on the surface, or they ignore risks of failing to act when they should. There are several reasons:

• They may ignore risks out of laziness—they don’t want to put in the effort of investigating “great deals” for a downside—it’s easier to just believe the seller or lender—or they do so out of greed.
• They’re overwhelmed and just settle for a bad solution.

Regardless of the reason, those who deny a so-called deal’s risks end up disillusioned and worse off financially.

2) Looking for shortcuts: People facing money challenges often look for a shortcut or an easy solution, whether it’s winning the lottery or falling for a TV offer to make quick money or fix debt problems. But shortcuts, like...

The Total Money Makeover Summary Chapter 5: Two More Challenges

Besides the myths about debt and money and denial that you have a money problem, there are two more obstacles to a Total Money Makeover: lack of financial knowledge (ignorance) and peer pressure (overspending to “keep up with the Joneses”).

Obstacle #1: Financial Ignorance

Ignorance about money makes some people defensive, but financial knowledge isn’t something you’re born with—it’s a skill you need to learn, like how to drive a car. If you give the car keys to someone who doesn’t know how to drive, they’re going to crash the car. Trying again harder isn’t the answer—it’s getting proper training. The same is true of money management—people make financial mistakes due to lack of training.

We’re educated in how to earn money, but not in what to do with it. Given that the average family in the U.S. makes over $2 million in a lifetime, high schools and colleges should be teaching personal finance. If you haven’t learned financial management, you still can by doing the following:

• Acknowledge that finance is something you were never taught.
• Read the rest of this book.
• Resolve to learn about handling money.
• Read regularly about financial management and attend...

Shortform Exercise: Identify Your Obstacles

Myths about debt and money, denial that you have a money problem, a lack of financial knowledge (ignorance), and peer pressure (overspending to “keep up with the Joneses”) are obstacles that can keep you from achieving financial fitness.

What are your main obstacles to financial fitness?

The Total Money Makeover Summary Chapter 6: Makeover Step #1—Create an Emergency Fund

Now that you’ve dispensed with the common debt and money myths, you’re almost ready to begin the Total Money Makeover process, which consists of a series of seven simple steps, referred to in the book as baby steps. No matter how big your financial challenges, you can overcome them by taking one small step at a time.

However, it’s important to follow each Total Money Makeover step in the prescribed order, because the steps build on each other. If you jump ahead to later steps, you’ll fail at them because you haven’t laid the foundation. Just concentrate on one step at a time in sequence.

Before starting, however, there are two preliminary steps:

• Write out a monthly budget.
• Get current on all your payments.

Preliminary Step #1: Make a Budget

Create a written budget each month determining where your money will go; if you don’t, it will just disappear without your thinking about it.

Successful people have written goals; simply put, a monthly budget is your money goal. It wouldn’t make sense to build a house without blueprints, nor does it make sense to spend your life’s earnings of $2 million without a plan.

Motivational speaker and author Brian Tracy...

Shortform Exercise: How Can You Save $1,000?

Everyone needs a rainy day fund because financial emergencies will come up, and if you borrow to cover them, you’ll only create worse problems for yourself. You should immediately create a $1,000 emergency fund.

What can you do to save $1,000 (for example, hold a yard sale, stop eating out, carpool to save gas money, work extra hours)?

The Total Money Makeover Summary Chapter 7: Step #2—The Debt Snowball

The big problem with debt is that it ties up your income with making payments, which keeps you from building wealth. You need to get rid of debt so you have control of your income and can put it to work for you.

It’s fairly easy to accumulate wealth when you don’t have car payments, a mortgage, and credit card or medical debt. To see how this works, consider the average person with a $50,000 annual income and the following payments:

• $850 house payment
• $180 car payment
• $165 student loan payment
• $185 credit card debt payment
• $120 other payments

Total: $1,995

But if you invested $1,995 a month in a growth-stock mutual fund, you’d be a millionaire in 15 years; it would grow to $2 million in five more years, to $3 million in three more years, $4 million in two and a half more, and to $5.5 million in two more years—a total of 28 years.

The key is to get out of debt so you can start investing. This is probably the toughest of the money makeover steps—it requires the most effort and sacrifice, plus your relentless, single-minded focus.

The Debt Snowball Process

The debt snowball method is the way to pay off debt. It’s easy to understand, but it takes...

The Total Money Makeover Summary Chapter 8: Step #3—Boost Your Emergency Fund

At this point, you’ve eliminated debt other than your mortgage and have $1,000 cash for emergencies. You’re now in control of your income and have momentum. The next step is boosting your emergency fund to give you a cushion against big, life-disrupting problems like a job loss or medical bills.

Remember, major financial emergencies are inevitable in life, and if you use debt to cover them, you’ll be back to square one. Everyone needs 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.

The amount in your emergency fund should be between $5,000 and $25,000.

For example, a frugal family with expenses of $3,000 a month might keep a minimum of $10,000 in an emergency fund. While $3,000 a month may not seem realistic, keep in mind that when you’ve eliminated debt and have adequate insurance coverage, it’s possible to live on much less than your income.

The exact...

Shortform Exercise: How Much Should You Save for Emergencies?

You should have 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. Depending on your circumstances, your emergency fund should be between $5,000 and $25,000.

Based on your personal circumstances, how much do you need to save for an emergency fund? (Consider factors such as your income, whether or not your income is stable, and whether or not your job is at risk.)

The Total Money Makeover Summary Chapter 9: 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. It requires gazelle intensity to get started, but once your nest egg is established, you can maintain your financial fitness with less effort, like a marathon runner who’s built up her strength through long practice and can run with less effort.

Many people invest in retirement so they can eventually escape a job they hate. But investing for the future in the Total Money Makeover program is more positive; the goal isn’t escape, but achieving financial security so you have choices: to work, write a book, travel, create art, and so on. If you invest wisely earlier in your life, you’ll reach a point where your money starts working more and you can work less, if at all.

Many people are likely to find themselves in a less enviable position. Various surveys on retirement saving have found:

• 70% acknowledge they haven’t saved enough for retirement.
• More than 40% haven’t tried to figure out how much they need for retirement.
• 40% of people making under $35,000 a year say winning the lottery would be the best way to ensure $500,000 at retirement.
• 80% think...

The Total Money Makeover Summary Chapter 10: Step #5—Save for College

People have many erroneous beliefs about a college education, which lead them to make foolish spending decisions to ensure their children get a degree from an expensive college. For instance, many parents believe that:

• College is a guaranteed ticket to success, therefore it’s essential their child get a degree.
• An elite college provides a better education than a non-elite college. A degree from an elite college will open more doors than one from an average school.

But a college degree doesn’t guarantee a job, wealth, or success. Everyone knows a few disillusioned college graduates who can’t get a job. A degree only validates knowledge or indicates you’ve passed certain tests. Knowledge must be combined with other qualities—for instance, character, effort, persistence, creativity, and talent—to create success.

In the book Emotional Intelligence, author Daniel Goleman writes that 15% of success is attributable to education, while 85% stems from attitude, perseverance, diligence, and vision. (Shortform note: Read our summary of Emotional Intelligence here.)

Because of their unrealistic...

The Total Money Makeover Summary Chapter 11: Step #6—Pay Off Your Mortgage

At this point in your Total Money Makeover, you’re nearly debt-free, you’ve saved $10,000+ for emergencies, you’re investing 15% of your income, and you’re saving for your kids’ college education.

Being totally debt-free puts you among the top 10% or 15% of Americans. This accomplishment is like achieving marathoner status as a result of great effort and persistence—but don’t be tempted to rest on your laurels. You can become an ultra-marathoner by completing step #6—paying off your home mortgage and becoming 100% debt-free.

By now you know how to do it. There’s no special formula. Devote every extra dollar you can find, beyond your emergency fund and investments, to paying extra on your mortgage each month until it’s paid off.

Most people believe that paying off a mortgage, especially early, is next to impossible. But numerous Total Money Makeover adherents do just that. For three to five years, they live differently from everyone else—sacrificing to pay off their mortgage. Then they continue to live differently from everyone else by being debt-free.

Most people who start a Total Money Makeover pay off their...

The Total Money Makeover Summary Chapter 12: 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 the reward.

The problem is that most people buy things when they can’t afford them. Many callers to Ramsey’s radio talk show ask if they can afford to buy something major while doing a Total Money Makeover. He always says no, as he expected to do when a caller asked if he should buy a Harley....

Shortform Exercise: How Can You 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.

What’s a cause near and dear to your heart that you would like to help someday?

The Total Money Makeover Summary Chapter 13: Live Differently From Everyone Else

If you follow the Total Money Makeover, you’ll become wealthy within a few decades. While it’s an enormous relief to be out of debt and financially secure, be aware that having wealth can get you into trouble in several ways.

1) You may become overly entranced with it. Money and the stuff it buys won’t bring you happiness. A person obsessed with money is just as enslaved as a person deeply in debt.

2) Wealth will reveal and magnify your true character. If you’re a jerk, money will make you an even bigger jerk. If you’re kind and generous, you’ll be even more so with your wealth. If you feel guilty about having money, your guilt will grow.

It takes spiritual maturity and character to understand that while...