According to J.D. Roth, Dave Ramsey changed his life:

“In the fall of 2004, I had over $35,000 in consumer debt. I was making a solid middle-class salary, but I lived paycheck to paycheck. My money habits were terrible. When I looked into the future, all I saw were years of toil to pay for the things I’d already purchased.

“Then a friend loaned me a copy of The Total Money Makeover, a book by some guy I’d never heard of named Dave Ramsey.

“I had nothing to lose — I read the book and then followed his plan. I was amazed to find that I had eliminated most of my smaller debts in just six months. Over the next two and a half years, I paid off the big debts too.

New plant emerging from the snow

It’s no wonder Dave Ramsey’s book The Total Money Makeover grabs you from the start. First, he describes the dread of living paycheck to paycheck with mouths to feed, and instantly you can relate. Then you learn about his success, how he lost it all, and the utter resignation of not knowing how to fix it.

And that’s just the first three pages. But just as quickly, he explains what he did as opposed to giving up — and you realize he’s giving you some straight talk, and you just want to hear more.

Live like no one else

Ramsey’s method is not easy. It’s not a get-rich-quick scheme. It requires sacrifice, hard work, and focus. In fact, printed on the bottom of every page is the book’s motto:

“If you will live like no one else, later you can live like no one else.”
Dave Ramsey

Ramsey explains: “If you will make the sacrifices now that most people aren’t willing to make, later on you will be able to live as those folks will never be able to live.” The book is peppered with inspirational testimonials from real people who have taken this philosophy to heart, sacrificing the present for the sake of their future. This is awesome stuff.

At the core of The Total Money Makeover are Ramsey’s seven “baby steps” to financial freedom. By following these in order — and not moving on to the next until the current step is complete — readers gradually progress from debt to wealth. They get rich slowly. In a nutshell, here’s Ramsey’s seven-step plan…

“The Total Money Makeover” seven baby steps

Step 1: Save $1,000 cash as a starter emergency fund

Before you do anything else, says Ramsey, you must save a $1,000 emergency fund. This money is to be used only for emergencies: car repairs, medical bills, etc.

At first you might think you could skip this step. But Ramsey’s correct that even a couple of setbacks could force you deeper into debt. The wisdom of setting this money aside is that, with a cash cushion, life’s mishaps won’t force you into a worse financial condition. In fact, it can help you recover more quickly.

Step 2: Start the debt snowball

Once you’ve built some savings, Ramsey lays out his plan for how to tackle your debt. You do this with the debt snowball. Here’s how it works:

  1. List your non-mortgage debts from lowest balance to highest balance.
  2. Pay the minimum payment on all debts except the one with the smallest balance.
  3. Throw every penny you can find at the smallest debt.
  4. When that debt is gone, do not alter the monthly amount used to pay debts, but pay all you can toward the debt with the next-lowest balance.

This is the most controversial part of Ramsey’s plan. Critics note that it makes more sense to pay off high-interest debt first. Even Ramsey admits that the debt snowball isn’t mathematically optimal. That’s not what it’s about. “The reason we list smallest to largest is to have some quick wins,” Ramsey writes. It’s about behavior modification over math.

Step 3: Finish the emergency fund

The $1,000 emergency fund is only a start. After you eliminate your non-mortgage debt, it’s time for some serious saving. Ramsey’s advice is fairly standard on this point: Accumulate three to six months of living expenses. For most people, that’s $5,000 to $10,000.

The easiest way to do this is to simply take the money you were applying to your debt snowball and convert it into a savings snowball. If you were paying $500 each month toward debt, now throw that money into a high-yield savings account.

Step 4: Invest 15 percent of your income in retirement

While you’re completing the first three steps (especially the first two), Ramsey recommends suspending all investment activity, even if you have a 401(k) with an employer match. He saves investing for last, once good habits have been established. It’s true that you’ll give up a few years of compound returns in your retirement accounts, but that’s okay in the long run, he says. By following the first three steps, you will have developed smart money habits and a strong saving ethic, so it won’t take much effort to catch up.

Now that you’ve paid off your debt and saved for emergencies, Ramsey says to invest 15 percent of your income into mutual funds. He recommends diversifying evenly among several broad categories of funds. Invest anywhere you have an employer match first, of course, and then put money into a Roth IRA. Put the rest of the 15 percent wherever it makes the most sense.

Step 5: Save for college

Once you’ve begun saving for your retirement, you can turn your attention toward your children. Ramsey writes, “Saving for college ensures that a legacy of debt is not handed down your family tree.” Use an Education Savings Account or a 529 plan to save for your children’s college education.

Ramsey also emphasizes that kids can work their way through college in an effort to minimize the loans they need to take out. One of the best pieces of advice, however, is to seek scholarships. The students who know this are able to fund most of their education through scholarships instead of going into debt.

Step 6: Pay off your home mortgage

Once you’ve taken care of everything else, it’s time for a final, giant step. Ramsey advocates prepaying your mortgage. He’s aware of the objections, but he believes it’s a smart step, anyhow. (For more on this subject, see our article on prepaying your mortgage.)

Step 7: Build wealth

If you’ve done all these things — eliminated debt, built emergency savings, invested 15 percent of your income, and paid off your mortgage — you can begin to build some serious wealth, says Ramsey. By following the first few baby steps, you’re far ahead of most Americans. But with the final step, you can enjoy the fruits of your labors. Invest. Give. Have fun. If you want to buy a boat and you’ve completed the “baby steps”, then buy a boat. Just don’t go into debt to do it.

Minor reservations

Though many agree with Ramsey’s philosophy, some of his advice rubs people the wrong way. For example, Ramsey advises readers to avoid debt altogether — no credit cards, even after you’ve paid off your mortgage. For example, J.D. Roth said, “I used to subscribe to this line of thought, but now I recognize that credit cards can be a useful tool, if you have the discipline to pay them off every month.”

Also, Ramsey writes that “separate checking accounts mean one of two things, either ignorance or problems”. J.D. felt this was ludicrous. “Couples should choose a method that works for them, whether that’s joint or separate accounts. Don’t believe there’s only one way to manage household finances,” he said.

Highly recommended

Reading the testimonials in The Total Money Makeover, they might remind you of a late-night infomercial. “After years of making only $48,000 a year, with hard work we paid off $78,000 of debt in twelve months.” Yeah, right. But three years into his own money makeover, even J.D. said that he could easily write one of those testimonials himself.

Ramsey’s advice strikes cynics as simplistic. But his steps work because they are simple, and because they provide tangible results. Your $1,000 emergency fund isn’t just cheap insurance against real life; it’s a visible reminder that you have succeeded, that you can save, that you can be smart with money. The debt snowball is built around quick wins, which give you the confidence to continue.

J.D. Roth’s recommendation

The Total Money Makeover is not for everyone. If you don’t have a problem with money, there’s nothing here for you. If you have a handle on your personal finances, you’re better off reading The Random Walk Guide to Investing [my review] or The Bogleheads’ Guide to Investing.

But if you’re one of the millions who struggles with debt, who can’t seem to escape living paycheck to paycheck, then The Total Money Makeover is a must-read. Your local public library probably has a copy or two. Go borrow it today.”

[Editorial note: We like to give our favorite articles a makeover from time to time too. Hope you like the new look!]

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