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.

 

Kevin

Book Review – Work Less, Live More by Bob Clyatt

Bob Clyatt wrote this book in 2007 to detail his journey through early retirement (at age 42) back to semi-retirement. His definition of “semi-retirement” seems to be in line with a lot of FIRE writers – a part time or temp position that allows you to earn additional hours performing work that you generally enjoy. He is another individual who achieved financial independence, but after retiring early, he found that his worry about money and his desires to stay involved led him back to the work world – but only partially.

 

The books starts out with working on the “whys” of early/semi-retirement (stale work, new ideas, etc.) and then goes into how to prepare for it. He covers some of the difficult steps of moving from work to semi-retirement. A significant portion of the book is dedicated to setting your spending plan and living beneath your means (determining annual spending, retiring outside the US, etc.)

 

He then goes into investing strategies for the semi-retired, including portfolio theory, rational investing and rebalancing. He provides concrete examples of various portfolios, based on the individuals he interviewed. He also discusses the 4% safe withdrawal rate, and provides backup for the data and results.

 

Finally, he goes through other aspects of early/semi-retirement. He talks about the advantages of part-time/temp work, volunteer work, health care, etc. In the end, he urges everyone to take simple steps to make their life well-lived.

 

One of the best parts of the books  are the numerous resources, links and web pages  for the various topics covered. It is here where the  book really proves its value, and it becomes a good read for those of us seeking financial independence and an early or semi-retirement.

Rating 4 stars out of 5

Financial Independence Reading List

Here are the books (physical and electronic) that I’ve managed to accumulate over the last 15 years, as I’ve made my way towards Financial Independence.

In the months ahead I hope to be able to give book reviews on them and other books, so you can have some idea of their potential use for you.

Area Title Author
Business Street Smarts Brody and Burlingham
Business The $100 Startup Chris Guillebeau
Financial Planning Fast Forward MBA in Financial Planning Eugene McCarthy
Financial Planning I will teach you to be Rich Ramit Sethi
Financial Planning Multiple Streams of Income Robert Allen
Financial Planning The fast forward MBA in Finance John Tracy
Financial Planning The Simple Dollar Trent Hamm
Financial Planning The Total Money Makeover Dave Ramsey
Financial Planning Your Money: The missing Manual J.D. Roth
Frugality Living Large in our Little House Kerri Fivecoat-Campbell
Frugality Scratch Beginnings Adam Shepard
Frugality The Autobiography of Benjamin Franklin Benjamin Franklin
Frugality The Millionaire Next Door Stanley and Danko
Investments A Random walk down Wall Street Buron Malkiel
Investments Fail-Safe Investing Harry Browne
Investments Safe Money in Tough Times Jonathon Pond
Investments The Intelligent Investor Benjamin Graham
Investments The little book of Value Investing Christopher Browne
Investments Value Investing for Dummies Janey Haley
Investments Yes, you can be a successful Income Investor Ben Stein and Phil DeMuth
Investments Yes, you can get a financial life Ben Stein and Phil DeMuth
Investments Yes, you can supercahrge your Portfolio Ben Stein and Phil DeMuth
Philosophy A place of my own Michael Pollan
Philosophy Chop Wood, Carry Water Rick Fields
Philosophy How to win friends and Influence People Dale Carnegie
Philosophy Life 101 Peter Wallace
Philosophy Shop Class as Soulcraft Matthew Crawford
Philosophy The Four Hour Workweek Tim Ferriss
Philosophy The Right Way to Hire Financial Help Charles Jaffe
Philosophy Think and Grow Rich Napoleon Hill
Philosophy What color is your Parachute Richard Bolles
Retirement Retire Early and Live Well Gillette Edmunds
Retirement The WSJ Complete Retirement Guidebook Ruffenach & Greene
Retirement Work Less, Live More Bob Clyatt
Retirement Yes, you can still retire comfortably Ben Stein and Phil DeMuth

 

 

Book Review – Retire Early and Live Well by Gillette Edmunds

This book could be classified as one of the earliest FIRE books I have seen. Written in 1999 (right before the dot com crash), the author details how he retired from financial journalism in 1981 at the age of 29, with a wife, two kids, and $500K in investments. In his first year, he suffered through a serious market downturn, and then the “flash crash” of 1987. Still he and his family were able to survive and prosper, and then participate in the great investment boom of the 80’s and 90’s. When he wrote the book in 1999, he had managed to triple his investments while living off them.

 

The first part of the book covers how to determine if you can retire today. He goes through the process of determining your current living standard, tax multipliers, future spending and debt. He provides a chapter on the issues that might pop up with an early retirement (emotional issues, fee based investment advisors, life expectancy, etc.) In the end, he provides a formula for determining whether you can retire now, or how much more you need to save before you can, including suggestions on speeding up the process. It’s a good first start.

 

The second part of the book assumes you are ready to retire early, and works on how to set up your investments to supply you with the funds you need for the long term. He doesn’t assume a “4% rule” (it may not have been completely accepted in 1999) so his process is more along the lines of:

  • You need $60,000/yr. to live, including taxes
  • You have $1,000,000 in investments
  • You assume a 3% inflation rate
  • Thus you need investments that make 9% return historically (6% for your $60,000/yr. plus 3% to offset inflation)
  • Design your asset mix to make an average of 9%

 

This is a key plus for this book versus many other investment manuals. Most information available concentrates on the “accumulation” phase of life, where you are building your wealth. Very few cover what to do once you have achieved financial independence and just want to live off it.

 

Mr. Edmunds then takes the time to explain each of the asset classes, their strengths and weaknesses, and how they fit in with a retirement portfolio. One of the more interesting points he has in when talking about real estate. For most folks, they think of getting real estate with no money down or with 20% down payment at most – using leverage to maximize gains. What the book points out, though, is that you are now retired and don’t need to increase wealth; you need to generate cash flow. Thus, Mr. Edmunds suggests purchasing real estate with 50% down and 50% leverage, so that the property generates a good 10%+ case flow from day 1 (instead of waiting years). This fly’s in the face of current real estate planning, but it does have merit!

 

Edmund suggests you figure out the investment return you need, and then create a portfolio of 3-5 different asset classes that don’t move in sync with each other (ex. US Bonds and foreign stocks often vary year to year in returns). He provided what the average returns were for each of these asset classes are, based on the longest studies he had available at that time (1999). He does caution not to use the returns from 1984-1999 as he recognized they were an anomaly.

 

In the final part of the book, Edmunds helps you design your retirement portfolio. Here is his chart and a corresponding list of Vanguard Index funds and their returns over the last ten years (in case you want to do comparisons). You will note to start that his returns are higher for most items vs the last ten years (especially for bonds):

No Description Book Return 10yr return Vanguard
1 Emerging Markets 14% 2.42% VEMAX
2 US Small Company 12% 8.01% VSMAX
3 US Large Company 10% 7.30% VLCAX
4 Foreign Company 10% 5.68% VTIAX 5 year
5 US Real Estate 10% 5.00% VGSLX
6 US Oil & Gas 8% 1.26% VGENX
7 Corporate Bond 7% 5.75% VICSX As of 3/2010
8 Foreign Bond 7% 4.50% VTIAX as of 11/2010
9 Treasury Bond 6% 6.79% VLGSX as of 3/2010
10 Municipal Bond 5% 2.59% VTEAX as of 8/2015
11 Money Market/CDs 4% 0.76% VMMXX
12 Treasury Bills 3% 0.68% VMFXX
13 Gold 3% -5.62% VGPMX

 

 

Using his format, if you wanted to get a 9% return for the situation above, you could go with:

  • 40% Large Company stocks @10% return = 4%
  • 35% Foreign Company stocks @10% return = 3.5%
  • 25% Treasury Bonds @6% return = 1.5%
  • Total of 9% return, on average

 

I think the process has merit, but I’d like to see more studies post-1999 on long-term returns.

 

The epilogue of the book is possibly the most useful part for those of us retiring early. In it, Mr. Edmunds details his story and “How to live through a crash without putting a bullet through your head.” He had many ups and downs, made some mistakes, but eventually came out alright (even today, he is doing well, 35 years after retiring at 29). He talks about steps to take when the market is crashing, life planning for after retirement, and what lessons he has learned. If nothing else, look at it for this chapter.

 

Overall, I think it is an excellent book, though some of the percentages might be dated. Grade 4 stars out of 5

 

Mr. 39 months

Book Review – Complete Retirement Guidebook by Wall Street Journal

This is a pretty good book for those people who are preparing to retire or achieve financial independence in the next 5 years. Written in 2007, it doesn’t have as many charts and equations as many “retirement” books, but it does include a great number of web links, and great advice on the social side of preparing for and moving into retirement.

One of the things I liked about it was that, instead of going through the numbers, the book first emphasizes creating the lifestyle you want to retire to. It is here in the first quarter of the book where it really shines out versus other books I’ve reviewed.

It first asks what I think is a key question you need to consider when pursuing financial independence. How do I want to spend my time in retirement? From there is goes on to offer advice on working (or not), volunteering, relocation and fitness/health. In each of these areas, the book provides a lot of useful links and places to seek additional guidance, while covering (in broad strokes) many of the key issues you need to consider. Just reading this first part will definitely leave you with a lot of questions you will need to answer before you can proceed.

The second part of the book covers “Money Mechanics” and provides much of the same information that many retirement books provide (saving for retirement, budgeting, social security, estate planning, etc.). Again, each chapter provides plenty of links and useful information, as well as charts and forms to fill out to determine the optimum way to handle your finances.

Finally, the book ends with some excellent success stories of recent retirees – how they set themselves up for success and what their new lives are like. It’s a great way to end the book with some motivation.

Overall, I think its an excellent book that should be part of anyone’s study who is thinking of moving on shortly. Grade 4 stars out of 5

 

Mr. 39 months

 

 

 

 

 

 

 

Book Review: $100 Startup by Chris Guillebeau

Chris is an entrepreneur and author, who spends the majority of his time traveling the world, interviewing other entrepreneurs, and hosting the World Domination Summit (a gathering of creative people).

 The book was published in 2012, and contains stories from over 50 different entrepreneurs, as we learn their startup lessons. The key lesson that Chris tries to get across is that you don’t need large sums of money to get started and you don’t need to turn your startup into a giant, multi-billion dollar enterprise. Most of the people in the book are satisfied with smaller operations (often 1-person), which fulfills their needs and allows them to pursue the work and lifestyle which they want.

 The first part of the book covers basic stories of people who became entrepreneurs. It covers how individuals got their ideas, how they worked to make get the business off the ground, and some of the ways they found to succeed. One of the key points that Chris emphasizes in the book is the idea of value – how you need to provide value to potential clients in order to succeed.

 The second part of the book goes into more details of how to start and succeed in your small business. It talks about simple, one-page business plans, startup/launches, and using everything possible to self-promote the business. It also has some interesting ideas on how to fundraise (including the story of how one business got started with a car loan when the owners couldn’t get a business loan).

 The final part of the book covers some steps you can take in order to grow your business and take it to the next level. He talks about leverage, how to franchise, and getting as big as you want (but no bigger). He finishes up with a chapter on “what happens if you fail” in which he talks about several entrepreneurs who failed their first and even second time before finally making it. The key is to persevere.

 A lot of the items covered have been dealt with before, and his writing tends to gloss over many of the details the reader might wish were covered in more depth. Overall, I’d give the book 3 stars out of 5