Total Money Makeover
The book “Total Money Makeover” by Dave Ramsey was the first personal finance book I’ve read. I bought it via an American book store selling second hand books. The price I paid was 50 cents (way frugal I know!) and it was something like 15 dollars in shipment fees. So for roughly 12 euros nothing could’ve gone wrong right?
And indeed, the book has helped me tremendously on my road to financial independence. However, it also has some downsides that I would like to discuss.
Ramsey’s style is very personal. It is for people in debt, who live pay check to pay check. When reading, you really feel it, you will know what Ramsey means.
His method of baby steps has seven steps, and is not easy for people just starting out. Ramsey acknowledges that, by saying
If you will live like no one else, later you can live like no one elseDave Ramsey
Living like no one else (paying down debt, saving more money) so you can live like no one else (being independent, firing your boss).
Total Money Makeover in 7 steps
Ramsey’s first chapters are about the five difficulties people have to overcome when starting to improve their financial lives. These are denial, debt myths, money myths, ignorance, keeping up with the Joneses.
After discussing these topics, he dives into the seven steps to a healthy financial live.
Step 1 – Save 1,000 USD (or EUR) for Emergencies
This 1,000 euros will be put in a bank account and you will not touch it! You don’t spend it, you don’t invest it. You just let it be available for when emergencies happen.
Wanting a new pair of trousers is not an emergency! The laundry machine suddenly failing is. Your 1,000 euro emergency fund acts as an insurance policy against small financial bad luck and is very important to have.
Whatever you do, make sure you have this fund. If later on in your journey there is an emergency, you can use your emergency fund instead of falling back into debt. And that brings us to step 2.
Step 2 – The Debt Snowball
Everyone knows the strip books, where some character rolls a snowball from a hill, and the snowball becomes bigger and bigger. That’s how Dave Ramsey advises his reader to pay off debt.
Although paying off debt with the highest interest rates first is the most optimal strategy from a mathematical point of view, Ramsey says you have to pay off the smallest balance first. For all your other debts, you will just pay the minimum. Focus all of your energy and money on paying off the smallest loan first.
It should be gone fairly quickly. When it is completely paid off, that’s one payment every month you don’t have to make anymore. Now allocate that freed up money towards the next smallest loan, and so on. The snowball gets bigger and bigger every time you pay off a loan.
This system works off the psychology of seeing results quickly and can be used to pay off debt except for your mortgage. More on the mortgage later.
Step 3 – Increase Your Emergency Fund
The 1,000 euros from step 1 is for beginners. If you arrive at step 3, you will be able to increase your emergency fund since you’ve paid off all your consumer debt and now have money to save every month.
Ramsey advises to build up an amount that is enough to live on for three to six months. In The Netherlands, this is anything in the range of 5,000 to 15,000 euros for most people.
The goal of this step is to make you resilient to any bad luck you can have. There are not many occasions in which a 10,000 euro fund cannot save you.
Step 4 – Save for Retirement
Now that you’ve built your financial house, you can start saving for retirement. Ramsey tells you to put 15% into your pre-tax retirement plan, but since the book is aimed at the American market, things work a little different here.
I would like to add that you could now volunteer to increase your retirement savings, either through your employer or with a personally setup tax advantaged account.
Step 5 – Save for Your Children’s Education
In the US this is very important as education is becoming unaffordable. In Europe, luckily, most universities are still very much affordable, but it never hurts to have some college funds saved up for your kids.
Step 6 – Pay Off Your Mortgage
Of course the assumption here is that you own your home and since Dave Ramsey is really opposed to debt of any kind, in Total Money Makeover he advises people to pay off the mortgage.
Whether that is actually a smart thing to do is up to you, but listening to Dave definitely makes you think about it!
Step 7 – Start Building Wealth
Now that you are debt free, saving for your retirement, and are saving for your children’s future, it is time to build up wealth by investing in both pre-tax and post-tax investment vehicles. It could be stocks or real estate or anything else.
By building wealth like this, you make sure that you can live like no one else.
My Personal Criticism
Because I would like to end on a positive note (as the book is really good!) I will mention the negative thoughts I had while reading Total Money Makeover here first.
First of all, the book relies heavily on anecdotal evidence. After almost every paragraph Ramsey writes, there is a success story of someone that implemented the strategy. While success stories definitely help to make a point, Ramsey uses too much. After a few chapters, I caught myself skipping the anecdotes.
Secondly, the book has quite some Christian tones in it. Ramsey quotes bible verses every 15-20 pages and in my opinion that is simply too much. I’m not opposed to religion, but books like this should be appealing to everyone and not just people from one specific religion. Because I would definitely recommend the book!
I Recommend Total Money Makeover!
Despite the minor irritations described above, I definitely recommends this book. It is a great read for anyone looking to become debt free, or otherwise looking to get started on the path to financial independence. For my more advanced readers, I would skip this book, because it’s meant for beginners.
There is some criticism that the book is too easy. My response to that would be that the system works just because it’s so easy. It means everyone can implement it in their own lives. This was my first book on personal finance, and the simplicity really helped me to get started.
International readers can order the book here:
Dutch readers can order the book here: