The Total Money Makeover by Dave Ramsey is the book that got me started on my financial journey. When I moved to Houston, my roommate had an audio version of this book, and we listened to portions of this book multiple times in early 2011. We never got past the sections of the book talking about debt, because my roommate only wanted to focus on the parts of the book that we were focusing on. The introduction of this book began a financial journey for myself to get out of debt.
Dave Ramsey does a great job of explaining debt and terms in an interesting way and the best aspect of this book is that it gets you motivated to get out of debt. His best chapter is chapter 3. In chapter 3, he talks about debt myths. I enjoyed this chapter, because he talked about a lot of the things that I had used and he explains them in great detail. He talks about the negatives of rent-to-own, car payments, car leases and many more. This chapter gets you motivated to get rid of the debt.
The main meat of the book is when Dave talks about his seven baby steps. He calls them baby steps, because he compares getting out of debt to eating an elephant. The only way to eat an elephant is one bite at a time. Similarly, the only way to get out of debt is one step at a time. Dave has seven baby steps and explains each baby step in depth.
Baby Step 1
Build a starter emergency fund. This emergency fund is used whenever unexpected expenses come up during the getting out of debt process. This account can be no more than $1,000.
Baby Step 2
Use the debt snowball to get out of debt. The debt snowball is when you place all debts in order from least to greatest in value and pay them off with gazelle intensity.
Baby Step 3
Build up a 3-6 month emergency fund. After getting out of debt, Dave wants to make sure that everyone has built up enough savings to handle any emergency. This account should be 3-6 months worth of expenses. The amount of months depends on job stability and how many incomes in the house.
Baby Step 4
Invest 15% of income into retirement. This step is important, because it allows you to start investing for the future, when you can retire. He suggests investing first into to accounts with company matches, then into Roth IRAs, then 401Ks and finally IRAs.
Baby Step 5
Invest in college fund. There is no amount or percent placed on this step, because all people are at different steps in their lives and some people may need to put more in college funds depending on how soon their children will be attending college.
Baby Step 6
Pay off the house early. Dave has you completing steps 4, 5 and 6 together. Any extra money on top of retirement investing, and kids college fund goes to paying off the house early. Getting the house paid off gets you out of debt and allows to put the mortgage payment towards saving and investing.
Baby Step 7
Invest and give. In this step, you have no debt and can do whatever you want with money. This allows you to invest as much money as possible and give money away to people in need.
My wife and I have been following the baby steps since the day that we got married. Even before we got married, I had a $1,000 emergency fund and paid off 4 debts. After marriage we used the baby steps to help us pay off our debts. When we got married, we had four debts to pay off. The debts are listed in the chart below.
We started marital bliss with $44,867.64 in total debts. We followed the baby steps and paid down debts from smallest to largest value, with exception to the student loans. The student loans were placed at the end of the debt snowball, because I would receive teacher loan forgiveness in two years. So, we started the snowball by paying off my car in July of 2013 and we paid off Helzberg Diamonds in December of 2013. The chart below shows the debts left at the end of 2013.
By the end of 2013, we had paid off $18,276 in debts. We were on a role and decided to knock off my wife’s car on January 31, 2014. This left us with only the student loan. It has been sitting there until this year, when I am applying for loan forgiveness. So, currently my wife and I are still not out of debt, but we should be soon depending on the loan forgiveness. I showed you our example of paying off debts, because I think it is important to show real life examples of how people get out of debt. My wife and I are living proof that the baby steps work.
The Total Money Makeover was a great resource for my wife and I, and I have currently listened to the book four times since I purchased it. I would recommend this book to anyone who needs help with finances. It is a book of great motivation and will definitely change your heart about buying lots of crap. You just learn that you don’t need everything, because financial security is better than stuff anyway. Stuff just collects dust, but money is always working for you.
Below, you will find two links to the Total Money Makeover. The first link is for the book version and the second link is for the audiobook version.