Book review – The Total Money Makeover by Dave Ramsey

This classic book, written in 2003 and then updated after the crash of 2008/2009, often gets disrespected amongst the FIRE community. Many note that the math doesn’t exactly add up on his investment advice, or that his debt snowball isn’t the most efficient way to get rid of debt (see below). My opinion is that the book isn’t written for folks who are in the midst of following the FIRE philosophy; instead, it is written for those who haven’t embraced it yet, and it shows them why many of the tenants we all believe in (eliminate debt, invest, budget, plan, etc.) will help pull folks out of a money spiral and set them on the path to a debt-free, happy life.

Throughout the book are testimonials and stories of various people who started out in bad shape, but are using Dave’s steps to build a better life. Chances are you will see someone who is similar in one of them.

The first chapter of the book details Dave’s personal journey. Many folks don’t know that he and his family went bankrupt about 30 years ago. While he doesn’t go into too many details, it appears he got overextended and couldn’t pay his bills. The timing of it (late 80’s) makes me think it was due to real estate investing – changes in the laws in the late 80’s killed a lot of real estate investors. He does take responsibility for screwing it all up, and having to dig himself out and learn some painful lessons. He relates that he felt he had let his wife and family down, and wasn’t doing his job as a provider.

The next four chapters, he uses to explode a lot of money “myths,” and many of them have been shared on the FIRE blogs for years:

  • College graduates graduating not just with student loan, but with credit card debt
  • Used cars paid for in cash vs. new cars paid with a car loan
  • Get rich quick schemes
  • Cash value life insurance vs Term
  • Keeping up with the Joneses

He then spends the next seven chapters going through his 7-point plan for digging yourself out of the hole and creating a successful financial life.

  1. Create a $1,000 emergency fund. Folks often get into trouble because they don’t have ready cash to deal with life’s emergencys (dryer breaks, car repair, etc.). Dave says do whatever you need to (sell items, 2nd job, etc.) and build up a $1,000 emergency fund. If you have to use it for an emergency (sale at the shoe store is not an emergency) then stop subsequent steps till you rebuild the emergency fund
  2. Get your credit paid off
    1. Cut up all your credit cards (or if you have to have one, freeze it in a block of ice so it will take a while to get it).
    2. Now that you won’t be adding to your debts, figure out all your debt, and rank order them in quantity owed, from small to large. Example would be $1,800 in credit cards, $9,000 for car loan, $30,000 in student loan debt, and $150,000 for home.
    3. Figure out what the minimal payments are for all of them, and make sure you pay the minimum for all of them regularly from now on. If necessary, sell items (car, exercise equipment, etc.) or take a 2nd job to help with this
    4. Now take any excess money and put all of it to paying down your smallest bill. Not the one with the highest interest rate, but the smallest amount owed. Note: this is where many FIRE folks have issue with Dave. If you look at the numbers, the smarter play is to pay down the one with the highest interest rate. Psychologically, Dave wants people to get early wins, so they pay off the smaller ones first, and start eliminating debt accounts as soon as possible.
    5. Once you get rid of a debt account (i.e. the first credit card) take that money and immediately apply it to the next debt, along with that debt’s minimum payment. This starts Dave’s “Debt Snowball” where you keep feeding the money into each account as you close them up. This accelerates over time and gets the debt paid off. Again, this has shown to be successful with normal folks, though FIRE people may not choose to follow, because they are already paying off debts.
  3. Finish the emergency Fund. As you get your debts paid off, you eventually may end up with only the home loan left. Rather than going whole hog paying that down, Dave suggests you build your emergency fund up higher with the money you used to pay down your credit card, car and other loan payments. He typically recommends 3-6 months in the fund, in something that is fairly easy to liquidate (savings account, short term notes/bonds, etc.)
  4. Maximize retirement spending. Now with debt eliminated (except for home) and emergency fund fully funded, you want to maximize any retirement spending you have. Max out the 401K, and any IRA you can (in US). Dave suggestion, like so many others, is a minimum of 15 percent should go into saving for retirement, and he does emphasize  Index funds. Again, many FIRE folks are saving significantly more than that (30%, 45%, 55%, etc.). Again, the book is written more for folks just starting on the journey.
  5. College funding for the kids. An important item of note here. Make sure you are fully funding your own retirement before you begin saving for kid’s college. If worse comes to worse, the kids can pay for their own, but you need to save for retirement now. Dave isn’t a fan of student loans, he wants folks to pay cash for college, and/or have the kids work jobs to pay for it. He hates having folks graduate with a mountain of debt hanging over their heads
  6. Pay off the home mortgage: If everything else is funded sufficiently, then put extra money towards the home mortgage to pay that off and become truly debt free. One thing most FIRE folks can agree with Dave Ramsey on is that, when you are debt free, it is a truly liberating experience! It also dramatically increases your chances of retiring early.
  7. Build wealth like crazy: Here is the final step on the journey, and the one most in line with FIRE folks. If you have no debt, are fully funding and investing for retirement, then push additional funds into investments, build them up, and enjoy life. Which is what many of us are either doing or planning to do.

While I don’t think this book is good for folks who are already on their financial independence journey, I do believe its good for folks who are just starting, or as a gift from one of us to explain to others how to get started on their own move towards independence.

I would rate it 3.5 out of 5, mostly because it doesn’t apply as much to FIRE folks.



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