Book Review: Dave Ramsey’s The Total Money Makeover
Published on - February 26th, 2008 (by J.D. Roth) Dave Ramsey changed my 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 2-1/2 years, I paid off the big debts, too.
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 of The Total Money Makeover is the book’s motto:
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. To me, 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. Here’s Ramsey’s plan:
Step one: 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 I thought I could skip this step. It only took a couple of setbacks for me to realize the wisdom of setting this money aside. If you have a cash cushion, life’s mishaps won’t force you deeper into debt. You’re able to recover more quickly.
Step two: Start the debt snowball
Once you’ve built some savings, it’s time to tackle your debt. You do this with the debt snowball. Here’s how it works:
- List your non-mortgage debts from lowest balance to highest balance.
- Pay the minimum payment on all debts except the one with the smallest balance.
- Throw every penny you can find at the smallest debt.
- 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 three: Finish the emergency fund
Your $1,000 emergency fund was only a start — after you’ve eliminated 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.
(This is the step I’m on now. I have a couple thousand dollars saved. My goal is to set aside $10,000 by the end of 2008. Because I’ll soon be writing full-time, I’m actually hoping to save $20,000, but that may be a bit of a stretch.)
Step four: Invest 15% 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 that 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% of your income into mutual funds. He recommends diversifying evenly among several broad categories of funds. Invest anywhere you have an employer match first, and then put money into a Roth IRA. Put the rest of the 15% wherever it makes the most sense.
Step five: 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. My favorite piece of advice, however, is to seek scholarships. One of my best friends is a financial aid counselor at a major university. He says that it’s mind-boggling how much scholarship money goes unclaimed every year. The students who know this are able to fund most of their education through scholarships.
Step six: 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 my recent article on prepaying your mortgage.)
Step seven: Build wealth
If you’ve done all these things — eliminated debt, built emergency savings, invested 15% 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 I agree with most of Ramsey’s philosophy, some of his advice rubs me the wrong way. For example, Ramsey advises readers to avoid debt altogether — no credit cards, even after you’ve paid off your mortgage. 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”. This is 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.
Highly recommended
When I first read the testimonials in The Total Money Makeover, they reminded me of late-night infomercials. “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 now, three years later, I could write one of those testimonials myself. (Heck — this entire review is one big testimonial.)
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.
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.
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One time the FICO score can matter is if you invest in real estate — for instance if you buy a property to rent out. I don’t know what Ramsey’s take on this is, but a savvy buyer who puts in the time to understand the business can do well.
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I give Dave Ramsey credit for this – he has found a way to market himself and his ‘money makeover’ plan successfully to a wide range of people. The guy comes across as being very genuine and likable, it works great for him. He gets praised a lot because he gets a lot of publicity and has a lot of outlets for his plans, but the reality is his plan has some areas that are obsolete.
Here are my suggestions on order of attack when getting your finances together.
1. Start with an emergency fund (needs to be at least a month’s salary), but place into a money market account.
2. Pay off high interest ‘bad’ debt (credit cards).
3. Get the max company match you can get from your employer. Between your 401K’s and Roth IRA, plan on investing at least $5K per year.
4. Invest 10% of your salary or more into an early retirement account. Invest in index and mutual funds.
5. Pay off long-term ‘good debt’ (mortgage, school loans).
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I have been married for 20 years and we have never had a joint account, or even considered one. I have endured people’s horrified responses to this for the whole 20 yrs and NEVER understood it. We use trust and transparency in the place of a joint account. Even without those, how long before you would know that the rent hasn’t been paid and so what difference would the name/s on the check make?
My spouse and I aren’t the same nationality, and we have separate passports. We don’t have the same blood type either, so we don’t use the same tube if one of us gives or receives blood. Still the marriage has held.
We have no debt, substantial retirement w/matching through our respective employers, 50K in a CD plus a little piece of land owned outright. Oh yeah, and we’re not Christian either. (Which tracks with all the statistics about who gets divorced more than anybody.)
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The biggest issue I have with DR is how he says you can pull 8% out of you investments when you retire. I have not found one study to indicate that much and the most popular one states a 4% rate of withdrawal to avoid out living your money.
Plus I am not comfortable with using a 12% return on my investments, that is high.
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I do like most of what he has to say… I don’t agree with everything, but at least it is one more voice out there telling people to get out of debt.
I liked the book (read a library copy), and his show can be fun to listen to too. But ultimately you do have to pick a plan that you can stick with and do the work that works for you.
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Like you need a 106th comment! But Ramsey has been important to me. I don’t agree with all statements though.
-Canceling your cards can whack your FICO
-Debt consolidation isn’t bad if it saves money
-Your initial Emergency fund, IMHO should be about equal to your highest Ninja Bill over the last 2-years
-Travel on a debit card is horrible for your account. Hotels will put a $500 hold on the acount to make sure that you don’t take off on them. This hold is an arbitrary amount taken off at an arbitrary time and led to me bouncing checks. Have one card for travel. Luckily I have a business travel card.
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Great to read your beautiful post,
I had gain & in facts practise some of the tips given ,
Its so kind to share your knowledge ,
Good Luck ,
Tracy Ho
wisdomgettingloaded
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In response to RacerX. I now have a credit card that I use for business travel because I don’t want to wait to be reimbursed by my company. However, I did a lot of travel last year using only my debit card and never had a problem with a hotel or a rental company putting a ‘hold’ on my funds. I was told a couple of times by my secretary that the rental car company did require a $300 ‘hold’ but it never came about and I followed up by reviewing my checking account and check card ‘holds’.
My husband, on the other hand, got dinged with a bunch of overdraft fees when he rented a tool with his debit card and the rental company put a ‘hold’ on about $500. Thankfully, Wachovia refunded the multiple $35 overdraft fees on his account.
Also, I canceled both my BOA and CITI credit cards and a Home Depot credit card last year and my FICO score remained above 800. The BOA card dated back to 1998.
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Wow, I never expected this discussion to still be going today; that’s very cool! A couple of things that haven’t been addressed yet:
@Brian (#76): The problem with your scenario is that you’re assuming the emergency is a one-time expense. I’m a computer programmer, which means I’m well acquainted with layoffs. The three to six months of expenses is not there just to cushion a one-time catastrophe, it’s to save you if you lose your source of income. If you’re carrying debt when this happens, you’re going to burn through your savings more quickly.
@Steve (#84): You’re dead on when you take issue with Dave’s advice to stop saving for retirement while you work the snowball. He’s said on the radio program a number of times that advice is only good if you intend to do the 80-hour a week, beans & rice version of the program. If you’re not up for jumping in whole hog and killing the debt super-fast, then delaying your retirement spending is indeed bad advice.
@Faculties (#101): Dave loves real estate; it’s how he made his fortune. From his Wikipedia article:
“At the age of 26, through his brokerage firm, Ramsey Investments, Inc., he had built a rental real estate portfolio worth more than $4 million. He became one of Tennessee’s youngest brokers to be admitted to the Graduate Realtors Institute. Ramsey’s debt-fueled success soon came to an end as the Tax Reform Act of 1986 began to negatively impact the real estate business. One of Ramsey’s largest investors was sold to a larger bank, who began to take a harder look at Ramsey’s borrowing habits. The bank demanded he pay $1.2 million worth of short-term notes within 90 days, forcing him to file bankruptcy.”
Dave encourages people to get into investment real estate, but advises them to do it on a cash only basis, and only if you have no debt.
@Everyone arguing cash vs. credit cards: Dave frequently cites a study that says people spend more per purchase with plastic than they do with cash. I was hesitant to mention this without having seen the study myself. Fortunately, I found a page where someone else felt the same and had done the legwork:
http://poorerthanyou.com/2007/10/12/do-we-spend-more-when-we-use-swipe-plastic/
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I thought I’d chime in on a few comments I have read:
1. Credit as a “tool”: Dave is writing and speaking to millions of Americans who are addicted to credit. They have bought shoes, groceries, vacations, and movie tickets on plastic and paid 2-3 times what they cost in interest. He is teaching them to end that habit and never go back by destroying the credit cards. This is sound advice, and is the exact same advice that any decent counselor would give someone coming off an addiction. Let’s take the case of a salesperson who is a recovering alcoholic. There is no question that going drinking with his clients will give him an entry point into selling potential business, while refraining from alcohol may put him at a disadvantage to they other salesmen who takes the same client partying. No counselor on the planet would argue that in this case alcohol is a good “tool” for him to use to increase business. A good counselor would tell him to flee from scenarios that would lead him back into the temptation of drinking. If you have overspent on credit cards in the past, you are fooling yourself if you think you can’t be caught in that trap again. Telling someone who just fought through the pain of paying off years of wasteful spending (an addiction) to keep credit cards – only use them wisely – is exactly like telling someone who is 6 months removed from alcholism to drink responsibly. NO! DON’T DRINK AGAIN! IT’S DANGEROUS!
2. How to handle large purchases without a credit card: Sure, banks put limits on debit cards in order to protect the consumer. However, both banks I use will temporarily or permanently increase the daily approval amount with a simple phone call or letter. I have purchased thousands of dollars of merchandise – including large ticket items with my debit card and never had a problem.
3. Someone made a comment about it being impractical in our society to not have debt. I would agree if your concept of making it in society involves getting what you want, when you want it. I just bought a 2006 Honda Accord and paid $21K for it. The car I was driving was a 1994 Honda Accord with 207K miles, cracked leather, non-working door locks, rust spots on the hood, and embarrassing noises from the broken antenna whenever I turn the car off. I drove that car from when I started getting out of debt in October 2003 to February 2008 when I had 1)paid off my debt except the house, 2)established an $18K emergency fund, 3)set up 15% savings for retirement and 4) contribute $150/month for each of my 3 children into a college fund and 5)saved $21K CASH to pay for the $21K car. As for my 1994 Honda: I sold it for $1,500. If I can drive it, so could you. Don’t whine that you “need” to go into debt to buy a $10-20K car. Buy a $1,500 car and be embarrassed for a few months (or years) while you save money to buy a more expensive car.
4. Questions on student loans and downpayments on the house: Dave’s approach is that all debt except your house is eliminated AND 3-6 month emergency fund is established before saving for a house or retirement. Student loans would be eliminated first. The thing he stresses, though, is that intense focus is required. A disbursed beam of light from a flashlight can shine light on something, but a highly concentrated beam of light like a laser can cut through metal. His point is that every dollar you can scrape together should be used to eliminate consumer debt as rapidly as humanly possible – extra jobs, yard sales, Ebay, etc. can speed that process along. Then you’ll have much more money to quickly save for a house or retirement or whatever else you want to buy.
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Dave wrote: [Ramsey] frequently cites a study that says people spend more per purchase with plastic than they do with cash. I was hesitant to mention this without having seen the study myself.
Yes, this meshes with what I’ve heard, too. I believe it’s probably true. This is one reason I do not use my credit card for things like comic books and videogames. I use it just for utilities, gasoline, and other expenses I would make anyhow.
Thanks for linking to that article, by the way. It’s great. It’s been a while since I linked to Stephanie’s site, and this will give me a chance to do so again…
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@Dave,
We share the same profession, so I completely understand where you’re coming from. My point is that in my scenarios listed–debt is only used as a system to temporarily (often, in my case, for a few hours) to earn a reward. In either scenario, the money is already spent so it has no impact.
Regardless of how it’s spent, the money is spent in my scenarios–and you’re no better off one way than the other.
Using debt properly is not a bad thing–the bad thing is irresponsibly CARRYING debt.
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@ baked nudel: I, too, had some trouble figuring out where the extra money to pay down the debts was supposed to come from. The book should go into more detail about taking on a second or part-time job. As I remember, only one testimonial mentioned that the husband delivered pizzas in the evening. Also, although I enjoyed the book overall and have incorporated some of its principles into my personal debt-repayment plan, I don’t think there were enough testimonials for people who don’t have any big-ticket items to sell. For instance, I own my car outright, and there is no public transportation in my city that would get me to my job every day. I rent a small apartment and obviously own no rental property or boats or anything of that nature mentioned in the book. I have been selling some of my CDs and DVDs and while that adds to my “snowflaking,” it doesn’t allow me to make huge payments on my credit card.
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Stephen – I think the alcoholic analogy only goes so far. I also think that people can drink too much or drive drunk without being alcoholics. Sometimes the problem isn’t addiction, it’s irresponsibility.
If someone really feels that they can’t handle credit, that is their choice. But I’ve had too many friends saying “I can’t handle credit” when they mean “I am too lazy to track my spending and too irresponsible to set limits on myself.” And guess what? They STILL overspend. They STILL end up living paycheck to paycheck with no buffer when they get laid off. They’re just self-righteous about not using credit cards. I don’t exactly see the benefit here.
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Just adding on the the testimonials: while I’m okay with cash, Ramsey convinced me to become much better with it. Reading TTMM helped me pay off a $14,000 outstanding college loan, create a budget, and begin building savings for the future.
His advocacy of personal responsibility is refreshing, smart, and what drew me to his theories in the first place. I understand why people might react strongly to his beliefs and/or money advice, but really – there are no bells and whistles here. It’s hard work and behavioral change. Grouped with The Tightwad Gazette and Your Money or Your Life, it’s the holy trinity of personal finance.
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@stephen:
“Don’t whine that you “need” to go into debt to buy a $10-20K car. Buy a $1,500 car and be embarrassed for a few months (or years) while you save money to buy a more expensive car.”
umm, i’m pretty sure this was directed at me. and i’ll just say that i am currently driving a car made in 1989 that we purchased for $600 cash last year and stuck some money in it for parts. so get off your high horse already.
i seriously don’t understand why people don’t see this is not my situation i’m talking about. i’m talking about the vast majority of people who don’t know diddly about cars and would probably end up buying a car that had 1000 miles worth of engine life left if all they had to spend was $600.
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JenK Says:
“I think the alcoholic analogy only goes so far. I also think that people can drink too much or drive drunk without being alcoholics. Sometimes the problem isn’t addiction, it’s irresponsibility.”
I agree that irresponsible behavior does not necessarily indicate an addiction. However, $20K in credit card debt and only being able to make the minimum payment is an addiction. Each person must decide for themselves whether they are addicted (isn’t that the first step?), but some people need help admitting they have a problem. Telling someone in this situation that “credit cards can be a good financial tool” because you can conveniently book a vacation or earn awards points is not doing them a favor. Telling them to get out of debt and develop a responsible financial plan is doing them a favor, and that is what Dave Ramsey does in this book.
leigh Says: “umm, i’m pretty sure this was directed at me. and i’ll just say that i am currently driving a car made in 1989 that we purchased for $600 cash last year and stuck some money in it for parts. so get off your high horse already.”
I did not mean to imply it was you who were whining, so I apologize for that. I, too, was referring to the majority of people who are irresponsible with credit. I have friends who have traded in their car at the first sign of trouble and bought expensive new cars on credit, because “they needed a reliable car”. NO, NO, NO!!! What they need is an emergency fund, so they can repair their car when needed, instead of resorting to consumer debt every time their peace of mind is threatened. Fear drives us to do stupid stuff, and having cash on hand to handle emergencies reduces fear. I can only speak from my own experience, having made many stupid financial mistakes in the past.
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Steve – a 4% withdrawal rate is a “safe” withdrawal rate where you are unlikely to eat into the principal. If you don’t care about preserving the principal, you can draw much more assuming an average life expectancy.
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@stephen at al: I must have missed the part where the anti-credit-card folks were qualifying their statements to say that the “no credit card” dictum was only for those who were in a deep hole and digging out, per DR. It sure sounded like most of the arguments were: “I don’t care who you are! Noone should have credit cards! There are NO good reasons to use credit cards.” That’s what I was responding to. As a person with pretty good financial control, I find credit cards a valuable tool for managing my money.
Now, ask me whether keeping chocolate in my house is a good idea, and I’ll have a very different answer for you! Your compulsions may vary!
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The debt snowball is a good tactic, just don’t feel like you have to be locked into either Ramsey’s “lowest-balance first” approach or the alternative “highest-interest-rate first” approach. A hybrid solution may be better:
Pay off some of your low-balance debts first, for the psychological boost. Then, after you have some “quick wins” (to quote Ramsey) under your belt, switch to attacking the highest-interest debts. Best of both worlds!
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Haven’t yet seen this mentioned: using a credit card is a benefit for us. A safety benefit. My husband works in a bad neighborhood. (He’s trying to make a difference through public service, so leaving the job isn’t going to happen.) It would be downright stupid for him to be carrying cash around on his person–even just enough for a grocery order or a tank of gas. Plus, having to run home for money first every time he needed to do an errand would be ridiculous.
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I posted a review of Financial Peace by Dave Ramsey yesterday. I haven’t read total money makeover, but the steps between the two appear to be the same. I thought it was a great book and am following it to try and organize my own finances.
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@stephen, re #117, when I was $20K in debt and could only make minimum payments, I’m afraid that stopping credit card use did nothing to solve the problem. I tried it and I was still treading water.
BUT: Moving to a cheaper apartment that was cheaper to heat, selling unneeded furniture, eating out less, buying less stuff (no room) and getting ORGANIZED enough to not lose bills, balance my checkbook regularly, track every dime I spent, and so on – THAT let me make more than minimum payments. Making more than minimum payments let me get out of debt and build an emergency fund.
Sure, credit cards may be toxic for some. But it is SOOOOO not a substitute for spending less, you know?
@TosaJen in #119, wow, you’re great
For that matter, I guess I missed where JD said in the review that Dave Ramsey’s book is only applicable to people who have huge credit card debt. Here I was thinking that building an emergency fund, saving for retirement, paying off the house, etc was actually useful for EVERYONE …. 
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Re #123, maybe I am just jaded and old.
Not using credit can remove temptation to easily borrow from a faceless corp (instead of momma or sweetie or buddy). It can help to focus one’s mind on “only spend what I earn”, or on the immediate checking account. But I still see it as the lazy way out because it’s what I tried instead of doing the REAL work I needed to do of learning to be grown-up and manage money responsibly.
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#94, I too am in the same boat, paying a mortgage one a home i know I wont live in forever. BUT, my mortgage is 6%, and my current interest rate for my savings is 3.5%, so when I throw an extra 1,000 or so against the mortgage principal, I am gaining 2.5% (the 6% i would have paid in interest for the extra $1000 that would have sat in my 3.5% savings account. Now, when i sell my home for 200k, and only owe 80k on it, I can take a huge piece of that 120k and put towards a new home, without touching my savings.
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I’m new to your site, but since I keep seeing Dave Ramsey pop-up, I decided to go to the library today to check this book out. The main branch of my library (the one closest to my house) has two copies, both checked out and one with a 6 person waiting list! The other only had a 1 person waiting list, so now I’m the 2nd in line to get it. Now I have to read it, since it’s proving difficult to get!
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I really like this book. Sadly, I gave my wife’s copy of it away to the library, thinking it was just another “get rich by thinking about it” book.
ugh. The mistakes we make. . .
pennywise-poundfoolish.typepad.com
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[...] Get Rich Slowly reviews The Total Money Makeover. [...]
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On the credit card issue, think about this. Why is it such big business? Because the vast majority of people can’t “master the card” and banks are banking on it.
Sure, some people can master it for a period of time, I did for several years, but then emergencies hit (and they WILL hit). The card is too tempting, and boom, debt problems. Like any system, there are ways to work it, but as with gambling, the odds always favor the house.
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Let me first say that I have loved reading this forum and will try to get the TMMO book as soon as possible and read it. My problem is a bit different and I am hoping for some advice from all who can help. My husband was an executive in a Fortune 500 company and recently abandoned me with 2 small children (5 and 3) in favor of drugs (we are not divorced. I am hoping he will hit rock bottom some day and get help and be back again with us). Needless to say, I found out too late that he had spent nearly 130K (in credit card loans, cash advances, our entire savings, our children’s education fund and loans against his car and 401K). I suspect the amount may be more than what I am aware of.
Luckily I was just an authorized user on all his credit cards and my name is not on the home loan either. The first thing I did was to dis-associate myself from all his credit cards and joint accounts. I tried moving some money into an account (not under my name) for the kids and have invested in short term CDs. All I have left is a about 10K in my savings account. I had to leave the house with our belongings and kids since I could not find a job (I have not worked in 7 years) for 3 months (although I kept paying the mortgage out of savings) and could not afford to dip into my savings anymore. I know the house will end up in foreclosure. We are currently living with relatives.
My question is: I am almost 42 years old, and am afraid that I dont have much time to build up any sort of reasonable wealth for my retirement (since I am responsible for putting my kids through college as well). I know I must find a job first and my starting salary wont be much, given the 7 year break I’ve had from work, even though I am highly qualified with post graduate degrees. I want to buy a house for my children to grow up in. I dont see much need for a credit card but I have 2 just in my own name that I spend on (no more than 50 dollars each) and immediately pay the balance. I really don’t know where to start, how much to save and where to invest. I am ashamed to say, I trusted my husband so much with the finances that I never bothered to question him or learn anything about smart financial planning. Can you suggest what I should be doing, if lets say I bring in 45K a year (pre-tax) as my starting salary? And how I can save the most so I dont waste money on rent but save for a down payment? Please pardon me if I sound stupid…I guess depression and helplessness make people sound like me sometimes.
Thank you in advance.
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Dear Worried,
I am very sorry to hear you are going through this terrible ordeal. It may not mean much now, but the first thing that comes to mind is that you are fortunate things are not much worse. What I mean is that because you are not liable for the mortgage or his credit cards, you have a leg up on other people in your situation. It is also good that you have some savings: $10K is nothing to sneeze at.
First, let’s look at the short term:
1) You may look into welfare, WIC, and other social programs to assist you during the transition. This is hard for many people: pride really gets in the way. But remember that your household paid plenty of good taxes in previous years to fund these programs, so you are just as entitled to them as anyone.
2) Next, take ANY job you can find to get you started. Again, pride is the enemy: you wrote that you “couldn’t find a job”, but I guarantee that between 7-11, Wal-Mart, McDonald’s, etc., someone will hire you. Usually when someone says this, what they mean is they couldn’t find a job they wanted or that made enough money. But remember, some is better than none! Unfortunately, in your situation what you want is essentially irrelevant: what you need is all that matters, and that is income. And who knows, a job like this may be a spring board to great things. You could move into management or find a corporate position with the company.
3) Never pay a dime of something with his name on it again (future reconciliations not included). No more mortgage payments out of your money: I know you already said you moved out, but he will quickly become desperate and unpredictable, and you will be his lifeline. You may even seriously consider a restraining order until he has himself back under control.
4) Conserve cash. Don’t think about accumulation or investing right now: those are not your priorities. You need to use your money to take care of you and the kids. You need to conserve every dollar to that goal and that goal alone. Shop at Goodwill, clip coupons, buy generic. If you can move in with family, I would recommend that while you get your life back in order. Even if it means moving, it may be a good thing to get away. It sounds like the only real thing keeping you there is the past.
So now let’s look at the long term.
1) Do not rush into debt! Rent may feel like a waste, but don’t feel obligated to buy a house as soon as possible. The last thing you need is an anchor of debt around your neck dragging you further into the abyss. Renting is better than owing.
2) Ramsey would tell you that it is a myth that parents are obligated to pay for their children. I completely understand his logic, but as a parent I also understand the intense drive to provide as much as possible for our kids. If you read his book, you’ll see that he has a place in his program (The Baby Steps) for saving for college. This comes after being debt free (except for the house), having an emergency fund, and saving for retirement. Yes: after saving for retirement! Your first obligation is to ensure your own future, then you can try to help with theirs.
2) Retirement. With an interest rate of 8%, you need approximately $500K invested to pull out $40K per year to live on. The current Roth IRA contribution is $5K per year, which at 12% growth would take 22 years to reach $500K. That means that if you started next year, at 43, you’d still be able to retire at 65. If you double that to $10K per year (401K matching funds could help), you would hit the 500K in 17 years, but at the original 22 years you would have over a million! Welcome to the miracle of compound interest.
Now, I know that sounds like a lot, especially while trying to raise two small children, but if you make 45K, here is how it breaks down: as a single mother of 2, your taxes are going to be relatively low, so let’s say you take home 36K (20% taxes). That is $3,000 per month take home pay.
- less $750 for home and utilities (25%)
= 2,250
- less $400 for groceries
= 1,850
- less other necessities like insurance, gas, etc., say another 25% (&750)
= 1,100
To save $5K per year, you need to set aside $417 per month. Obviously, 10K would be 834. Ramsey says 15%, which would be $540 per month. For now we’ll stick with that.
= $560.
After all that you still have almost $600 per month for everything else, some of which could be down payment or education savings, but more likely will be used for things like soccer camp and new shoes.
What you do NOT see above is leeway for DEBT: things such as a car payment, credit card bills, or other such “temptations” will seriously thwart your effort. There will not be a lot of eating out, going to the movies, or vacations. The only way you can save at an adequate rate is if you have every dollar of your own at your disposal.
You are in a tough situation, but it can be done, especially since you are beginning from a position of relative strength. My typical disclaimer is this: the overall program is simple, but certainly not easy. This will take a lot of forethought and planning backed up by tremendous discipline and self control. By all means, go to the library and check out TTMM, and ask lots of questions. This place is full of good advice. Most of all, have faith and patience.
Peace,
Joel
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@worried sick
I am so sorry that you and your children have to go through this. I agree with Joel in that it can get a lot worse than this, though. I think that if you can follow his advice, and also not let yourself get overwhelmed with what is going on (a big deal and something that’s paralysed me for years) then you will be on solid footing.
regarding college for your kids, I don’t think that you should worry too much about that. School will make them more marketable (depending upon the degree) but the best thing that you can do for your kids is to teach them the value of a working hard and working smart (there’s a difference!), to look out for their family and themselves, and to learn to take unexpected opportunities.
I am sure that you, your husband and your kids will come through this tough time in fine shape, as long as you take it one day at a time and set yourself up for success from here on out.
Good luck
Zach
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[...] the book as your first snowflake!). I think that Get Rich Slowly has a nice synopsis of the book here if you want to get the basic idea before investing your time reading the whole [...]
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Dave Ramsey has been a great source of inspiration for both my wife and I. We love him and what he does for people. However, everything practical you could get from him is through his book, Total Money Makeover. All his other books, programs, seminars, classes and website subscriptions are a waste of time and money – that is unless you like being told the same things over and over again. Also, if you’re not religious, don’t bother with Financial Peace University, not only because of the repetitiveness but because it concludes with a nice sentimental and a very evangelical sermon. I didn’t expect to attend church when I signed up for that one.
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I’ve been trying to do TMMO for over a year now. Both of us getting laid off and living off savings and UI was an eye-opener for us. We are now pretty much die-hard TMMOs. Our difference is that we’re building our emergency fund while paying off debt simply because we had a tiny bit left once we found jobs again (and none too soon!). So we’re adding $250 a month to the fund and putting $50 towards debt along with the minimums. Not what Dave says, but it’s our mindset. By the time we get the fund funded, we’ll have one credit card paid off and we can start really throwing some money at the debt. I look to be debt free except for the mortgage in March 2010.
We ahve found that when our co-workers find out we’re doing ‘Dave,’ they get interested and want to know more. In this economy, we’re learning how we got into this fix in the first place.
As for the saving for the down payment/cash to buy a house, his book has step 3 1/2: after funding the emergency fund fully, and if not a homeowner, he says use snowball $ to save for house. At this point, snowball $ should be nice chunk of change and saving 20%plus would take no more than a couple years at worst. And this is the market to be doing that in for sure. Then baby step 4 is actually paying off the house…
Once you are debt free, 15% of income is really a drop in the bucket. We plan on saving through Roth’s, 401ks and when we’ve maxxed contributions, throw what’s left into a high yield savings account. We want to retire in 13 years, I feel confident we’re on track.
Dave is not for everyone. It wasn’t for us last year, either. But living the life of worry and fear wasn’t for us either, so now we’re gung ho. It took a crisis to open our eyes. I hope it doesn’t do that for everyone else, no matter how you reduce your debt.
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Hi Kym,
I think you have hit on something very important: for most people, there has to be some event or “ah-ha!” moment to make them willing to commit to such a plan. I know we certainly had ours. I am fond of saying “I didn’t hit rock bottom, but I could reach down and touch it!”
There were three things I wanted to comment on from your post.
First, I think it is great that you can look so far ahead. Knowing and accepting that you will be working at this for years in advance is a very positive step. Keep the Intensity!
Second, just to be clear, you mentioned that paying off the house is step 4, but step 4 is saving for retirement:
1) $1,000 baby emergency fund
2) Debt Snowball
3) Fully funded emergency fund
4) Saving for Retirement
5) Saving for College
6) Paying off the mortgage early
7) Investing and Wealth Building
Just in case there are any readers who are not familiar with Ramsey’s plan of attack.
Third, I definitely appreciate the idea of funding the emergency fund earlier. The question always comes up about what you would do in cases of extreme emergency during the Debt Snowball. The answer is you stop the Snowball and use those funds for the emergency. You can always return to paying debts later. By delaying your debt repayment (in order to save now), you are paying more in interest and also delaying the realization of your income’s true power. I’m not saying it won’t work, and it sounds like it may be the best emotional decision for you, I’m just playing devil’s advocate.
Great stuff – congratulations on turning the corner.
Peace,
Joel
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The ‘get out of debt’ advertising bait is just the tip of the iceberg of his overall product/philosophy.
The foundation of Dave’s product philosophy is anti-usury. If you go a little beyond Dave’s show, Dave reminds us how the US and Christian culture used to include the distain of usury practices. It’s why Dave wants us to get out of debt and *stay* out of debt…thus, there is no such thing as “good debt”.
This anti-usury belief is one of the reasons that Dave doesn’t prioritize high-interest debts over the debt balance. He doesn’t want us to just get out of debt via the best mathematical formula. He wants us to get in the habit of NOT owing money to anyone. Thus, you start out with a list of organizations you owe to…and one by one, you eliminate those organizations…and the fastest way to see that list shrink is to pay off smallest to largest (albeit his method, usually is the fastest and least expensive way to get out of debt because it includes emotional, life, and account fluxuating/penalty variables).
At one point all the major religions were anti-usury. Today, only Islam has the courage to continue to preach that belief. I believe that Dave is trying to resurrect that belief both in the Christian culture and in the US culture.
Now I perfectly understand that Dave might not fit the description of the ‘perfect’ Christion…but (1) other than Christ, who does; (2) resurrecting this belief in the Christian/US/world culture is far too important to be intolerant of Dave. No matter how you slice Dave, he simply is not that bad of a Christian…besides you aren’t really supposed to be judging him.
The Dave Ramsey show is really part of a serious movement to create strong empowered people…mostly Christian…that can have enormous impact on this modern world. Dave speaks of not only getting out of debt, not only of becoming wealthy, but how important it is to pass on this wealth and wisdom to children. Generational wealth in benevolent families/organizations used to be a Christian goal…to offset the generational wealth in non-benevolent families/organizations. That is why Dave has written several children books that establish an anti-usury/Christian belief about managing money at a young age.
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dave ramsey, Where do you begin? I had read almost every book on finance. I used detailed spreadsheets, planned, and really thought I was doing things right. Then I picked up dave’s book. As I read it I thought this isn’t rocket science. I know alot of this stuff, just not like this… A light came on. It has made a huge difference in my life. In just 6 months I have paid off 20000.00 of debt and am much less stressed, because I now have a plan that really works. If you need the peace- read ramsey!
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We followed Dave Ramsey’s principles long before we new of Dave no debebt emrgecysavings to get us through at least one year or one midsized disaster, and a modest retirement savings in a 401k; but where do we go from here where do we invest in todays financal turmoil?
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There are a couple people who asked where the extra money to pay off debt was supposed to come from…uhh…it’s called cutting expenses.
Here is my story:
My finace and I are both early in our careers and make 50k each a year (me 27k her 23k). I got Dave’s book from my Mom who listens to him on the radio. From December 07′ to December 08′ we’ve done the following:
1) Paid of $6,000 in credit card debt
2) Saved $5,000 (2.5k Savings, 2.5k Stocks/Mutual Funds)
3) Started 401ks (each over $1k now)
4) Both our credit scores broke the 800 “barrier”
Now our money works for us instead of the other way around.
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Take what you can from this clown and leave the rest. Seems to me Dave does not like people that do not believe his way. I can tell by his tone toward a Jewish guy that called about his daughters Bat Mitzvah. Dave was all businesslike wiht no sense of humor . He did not even wish the guy to have a great Bat Mitzvah for his family. Disgusting really. I listen to him during work because it gets me thru the day .. but it is very repetitive. Still waiting to him , to say just once HAPPY HANUKA . I am an atheist and I will never give 10 percent money to a church . I would give to other charities but not a church.
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You know, Dave apparently has made a lot of difference to a lot of people on here.
So he includes his worldview in his teachings….and the atheists and the Christians and all the others who write on here pretty much agree with most of what he teaches about finances. You ALL live out of your religious or non-religious world view.
So, say you are an atheist or a Christian or an agnostic or…whatever…but don’t criticize Dave for including his Jesus talk. Some of you who talk from an atheist view want no criticism for that, so give him the same respect in return.
In other words, its okay to recognize the difference, without giving negative criticism to his beliefs. If you called on his show, he would NOT criticize ANY of you for having agnostic or atheistic views…he would seek to help you with your debt problems!!! The truth of his financial steps works because it is truth, not because his listeners are Christians of not.
Hey, no need to criticize his Christian world view being reflected in his writings. If you had written this book from your atheistic views or agnostic views, and you stuff worked, people are going to focus on the information that works rather than giving judgements about the non-religious nature of the author.
Save the anti-church, anti-God, anti-Christian discussions for a place where they belong…a discussion board about religion. I don’t believe the topic of this discussion board is Dave Ramsey’s religious beliefs…I think it is about the concepts of getting out of debt and building financial freedom and wealth.
Please note, tithing to a church and believing in Jesus Christ are not part of his Baby Steps. These principles are universally applicable to financial freedom.
Stay on the subject.
Just a note from a pastor who has read excellent financial comments on here from the Christians and the atheists and everyone in between. Good discussion.
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Dave’s plan changed my life. I went from having $14,400+ in student loan debt in January 2008 to being debt free, having a six-month cash cushion, and funding my Roth IRA (maxed out) for the first time ever!
I disagee with Dave on a few points. But I don’t need to agree with everything he says. He’s a great guy, and his program is awesome and effective.
I didn’t even buy his book. I learned about him when I browsed his book in Borders. I then Googled his name and found his website and radio show archive. The rest is history…
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BTW. I’m not a Christian (no religious affiliation actually), but I’m pretty opened minded.
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For one, his book doesn’t talk much about religion. I’ve read it four times. Also, his book is very easy to read and understand. No big words or him trying to make himself sound intelligent. He cuts right to the point.
For those of us who didn’t learn about money/credit as kids and are in over their head with debt (like me), it’s a God-send. I’m in stage two, and one year from now (August 13, 2010, to be exact), I should be making my last credit payment, which totaled over $16k. Both cars are paid for and the only other debt I’ll have is the mortgage and HEL. Once my retirement and college savings kick in (two kids), I’ll be on my way to pay off that HEL, and then our mortgage.
Thanks Dave.
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I just got done reading Dave Ramseys book and I am very excited. I have always done a budget, but I was missing something there, “had to learn to tell the hubby no!” Instead of taking a previous payment and adding it to the current one, I would just pay a little extra. The debt would get paid off, but not very fast. Now, I have the missing steps I needed for a long time. I can hardly wait to see in 1 year how much I have paid off. WOOOHOOOO! Now I know I can live debt free and go back to the way I use to be, pay everything in cash!
love the book!
I honestly think that these same principles ought to be taught in High School, so our kids don’t end up swimming in debt!
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