TwosWrite things down

Total Money Makeover by Dave Ramsey

Total Money Makeover by Dave Ramsey

by Parker · 257 things on Twos

A Proven Plan for Financial Fitness
Introduction
Personal finance is 80 percent behavior and only 20 percent head knowledge.
To change your money thing, you have to change.
“To avoid criticism say nothing, do nothing, and be nothing.” - Aristotle
“Those convinced against their will are of the same opinion still.”
Ignorance is not lack of intelligence; it is simply “not knowing.”
Flying Turkeys and Skinny Dipping
We live in a cause-and-effect world. What you sow, you will reap.
“A man with an experience is not at the mercy of a man with an opinion.”
The first lesson of this economic storm is that your financial process and principles must work in good times and in bad times—otherwise, they don’t work.
If you have a bad map, you will be late for—or completely miss—the party.
The principles that you build your life on will determine your level of success. If you plan your marriage around a bad map, or bad set of assumptions, then it will likely fail. If you have all the good intentions in the world, but build your financial house on bad ideas, it will fall.
Overspending that doesn’t feel like overspending because things are going well is still overspending.
Using debt to invest in real estate or the stock market and the hope of a quick return will cause you to go broke the minute the market turns.
Chasing the next get-rich-quick scam, like the lottery, or investing in gold, will always bring you pain.
Hiring someone else—like some debt-settlement company—to fix your life virtually never works.
Chapter 1: The Total Money Makeover Challenge
Winning at money is 80 percent behavior and 20 percent head knowledge. What to do isn’t the problem; doing it is. Most of us know what to do, but we just don’t do it. If I can control the guy in the mirror, I can be skinny and rich.
These people have sacrificed for a short period of time so they will never have to sacrifice again.
90% of people in our culture buy things they can’t afford.
If you will live like no one else, later you can live like no one else.
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.
Some of you are so immature that you are unwilling to delay pleasure for a greater result.
Early on in our marriage, we decided that Kari would stay home with our children rather than working outside the home. This decision has perhaps disadvantaged us financially at times, but it has been the best choice for our family in many other regards.
Honestly assess your earning capacity and live below your means. Be in control of your own destiny and your own happiness!
Savings without a mission is garbage. Your money needs to work for you, not lie around.
Chapter 2: Denial: I'm Not That Out of Shape
90 percent of solving a problem is realizing there is one.
For your own good, for the good of your family and your future, grow a backbone. When something is wrong, stand up and say it is wrong, and don’t back down.
You have to see the need to make dramatic changes.
W e can lose our health, our fitness, and our wealth The enemy of “the best” is not “the worst.” The enemy of “the best” is “just fine.”gradually, one day at a time.
88% of graduating college seniors have credit-card debt—before they even have a job!
Change is painful. Few people have the courage to seek out change. Most people won’t change until the pain of where they are exceeds the pain of change.
You are where you are right now financially as a sum total of the decisions you’ve made to this point.
Chapter 3: Debt Myths: Debt Is (Not) a Tool
It is human nature to want it and want it now; it is also a sign of immaturity. Being willing to delay pleasure for a greater result is a sign of maturity.
Debt adds considerable risk, most often doesn’t bring prosperity, and isn’t used by wealthy people nearly as much as we are led to believe.
Debt brings on enough risk to offset any advantage that could be gained through leverage of debt.
Proverbs 22:7: “The rich rules over the poor, and the borrower is slave to the lender”
“There is no shortcut to anyplace worth going.” - Beverly Sills
Lotto and Powerball are a tax on the poor and people who can’t do math.
If you are living in the bondage of debt, you’re not living.
The best way to build wealth is to become and stay debt-free.
I have met with thousands of millionaires in my years as a financial counselor, and I have never met one who said he made it all with Discover Card bonus points. They all lived on less than they made and spent only when they had cash. No payments.
If I loan money to a friend or relative, the relationship will be strained or destroyed. The only relationship that would be enhanced is the kind resulting from one party being the master and the other party a servant.
We continue to believe the myth that a loan to a loved one is a blessing. It isn’t; it is a curse. Don’t put that burden on any relationship you care about.
The lender requires a cosigner because there is a very high statistical chance that the applicant won’t pay. So why do we appoint ourselves as the generous, all-knowing, benevolent helper to override the judgment of an industry that is foaming at the mouth to lend money.
Proverbs 17:18, “It’s stupid to guarantee someone else’s loan”
Just like trying to bless a loved one with a loan, many people are trying to help by cosigning, and the result is damaged credit and damaged or destroyed relationships.
If you truly want to help someone, give money. If you don’t have it, then don’t sign up to pay it, because you likely will.
That sums up cosigning: broken hearts and broken wallets.
Cash Advance, Payday Loans, Rent-to-Own, Title Pawning, and Tote-the-Note Car Lots are examples of predatory lending are designed to take advantage of lower-income people and benefit only the owners of the companies making the loans.
We buy things we don’t need with money we don’t have in order to impress people we don’t like.
Staying away from car payments by driving reliable used cars is what the average millionaire does; that is how he or she became a millionaire.
If you insist on driving new cars with payments your whole life, you will literally blow a life’s fortune on them. If you are willing to sacrifice for a while, you can have your life’s fortune and drive quality cars. I’d opt for the millionaire’s strategy.
Consumer advocates, noted experts, and a good calculator will confirm that the car lease is the most expensive way to operate a vehicle.
Creating an unneeded business expense for the sake of a tax write-off is bad math.
A new car loses 60 percent of its value in the first four years; that isn’t 0 percent.
The average millionaire drives a two-year-old car with no payments.
You can get a mortgage if you have lived right. You have paid your landlord early or on time for two years. You have been in the same career field for two years. You have a good down payment, which is more than “nothing down.” You have no other credit, good or bad. You are not trying to take too big a loan. A payment that totals 25 percent of take-home pay is conservative and will help you qualify.
Please don’t brag about your FICO score, that makes you look like you love playing kissy face with some bank. Dumb, dumb, dumb.
CardTrak says that 60 percent of people don’t pay off their credit cards every month.
A study of credit card use at McDonald’s found that people spent 47 percent more when using credit instead of cash. It hurts when you spend cash; therefore you spend less.
You are not teaching your sixteen-year-old child to spend responsibly when you give him a credit card.
Debt is not a tool; it is a method to make banks wealthy, not you.
Your largest wealth-building asset is your income. When you tie up your income, you lose. When you invest your income, you become wealthy and can do anything you want.
Chapter 4: Money Myths: The (Non)Secrets of the Rich
You have to save. You have to invest in your future.
Gold has a poor track record and isn’t used when an economy collapses.
Cash Value life insurance is one of the worst financial products available.
Gambling represents false hope and denial. Energy, thrift, and diligence are how wealth is built, not dumb luck.
Trailers go down in value rapidly, making your chances for wealth building less than if you had rented.
We worry about our health and focus on our money only after they’re gone.
Everyone must budget, plan retirement, and do estate planning—everyone.
I am not against the enjoyment of money. What I am against is spending money when you do not have money to begin with.
Credit-repair companies are largely scams.
If you are going to leave a marriage, make sure that all debts are refinanced out of your name or force the sale of the item.
Bankruptcy is listed in the top five life-altering negative events that we can go through, along with divorce, severe illness, disability, and the loss of a loved one.
Types of insurance you must have:
Auto and Homeowner Insurance—Choose higher deductibles in order to save on premiums. With high liability limits, these are the best buys in the insurance world.
Life Insurance—Purchase twenty-year level term insurance equal to about ten times your income. Term insurance is cheap and the only way to go; never use life insurance as a place to save money.
Long-Term Disability—If you are thirty-two years old, you are twelve times more likely to become disabled than to die by age sixty-five. The best place to buy disability insurance is through work at a fraction of the cost. You can usually get coverage that equals from 50 to 70 percent of your income.
Health Insurance—The number-one cause of bankruptcy today is medical bills; number two is credit cards. One way to control costs is to look for large deductibles to lower your premium. The HSA (Health Savings Account) is a great way to save on premiums. The high deductible creates a much lower premium, and this plan allows you to save for medical expenses in a tax-free savings account.
Long-Term Care Insurance—If you are over sixty, buy Long-Term Care insurance to cover in-home care or nursing home care. The average nursing home stay costs $40,000 per year, which will crack and scramble a nest egg in a heartbeat. Dad in the nursing home can use up Mom’s $250,000 savings in just a few short years. Make your parents get it.
You are going to die—so do it with a will.
The proverb says, “A good man leaves an inheritance to his children’s children” (Prov. 13:22 NKJV).
A will is a gift you leave your family or loved ones. It is a gift because it makes the management of your estate very clear and light-years easier.
70% of Americans die without a will.
Chapter 5: Two More Hurdles: Ignorance and Keeping Up with the Joneses
To set out a game plan and not acknowledge the obstacles to that plan would be immature and unrealistic.
We must find the problems or obstacles and plan a way over them, through them, or around them.
“We have met the enemy and he is us.” - Pogo
Hurdle #1: Ignorance: No One Is Born Financially Smart
Ignorance is not lack of intelligence; it is lack of know-how.
Stupid things are always going to be done in families unless the wiser member learns to stand up to the forceful one.
https://www.ramseysolutions.com/
Hurdle #2: Keeping Up with the Joneses: The Joneses Can’t Do Math
The typical millionaire lives in a middle-class home, drives a two-year-old or older paid-for car, and buys blue jeans at W al-Mart.
The typical millionaire found infinitely more motivation from the goal of financial security than from what friends and family thought.
Don’t even consider keeping up with the Joneses. THEY’RE BROKE!
“Godliness with contentment is great gain” (1 Tim. 6:6 NKJV).
Staying away from car payments by driving reliable used cars is what the average millionaire does; that is how he or she became a millionaire.
“Continuing to do the same thing over and over again and expecting a different result is the definition of insanity.”
If you want to be in a different place, you must believe and do things differently. If I want a smaller waist size than fifty-two inches, I must eat and exercise differently. The change will be painful, but the result will be worth it.
Chapter 6: Save $1,000 Fast: Walk Before You Run
We can do anything financially if we do it one little step at a time.
“You can get anywhere if you simply go one step at a time”
The way you eat an elephant is one bite at a time. Find something to do and do that with vigor until it is complete; then and only then do you move to the next step. If you try to do everything at once, you will fail.
The power of focus is that it works. Things happen. You check stuff off your list. Life gives you an “attaboy” in the form of actual visible progress.
You must set up a budget, a written budget, every month.
You have to tell money what to do or it leaves.
“What does it take to succeed on a big scale? A tremendous God-given talent? Inherited wealth? A decade of postgraduate education? Connections? Fortunately for most of us, what it takes is something very simple and accessible: clear, written goals.” - Brian Tracy
A study of Harvard graduates found that after two years, the 3 percent who had written goals achieved more financially than the other 97 percent combined.
Set up a new budget every month. Don’t try to have the perfect budget for the perfect month, because we never have those. Spend every dollar on paper before the month begins. Give every dollar of your income a name before the month begins, which is called a zero-based budget. Income minus outgo equals zero every month. Look at this month’s income and this month’s bills, savings, and debts, and match them up until you have given every income dollar an outgo name.
Income minus outgo equals zero every month.
If you’re married, agree on the budget with your spouse. If you aren’t working together, it is almost impossible to win.
Baby Step One: Save $1,000 Cash as a Starter Emergency Fund
The beginner fund will keep life’s little Murphies from turning into new debt while you work off the old debt. If a real emergency happens, you have to handle it with your emergency fund. No more borrowing! You have to break the cycle.
When you get the $1,000, hide it. You can’t keep the money handy, because it will get spent.
49% of Americans could cover less than one month’s expenses if they lost their income.
What if you are at Baby Step Two in the next chapter, and you use $300 from your emergency fund to fix the alternator? If this happens, stop Step Two and return to Step One until the full $1,000 is replenished. Once your beginner emergency fund is funded again, you can return to Step Two. Otherwise, you will gradually do away with this small buffer and be back to old habits of borrowing to cover real emergencies
Chapter 7: The Debt Snowball: Lose Weight Fast, Really
To build wealth, YOU will have to regain control of your income.
The key to winning any battle is to identify the enemy.
“Great spirits have often encountered violent opposition from weak minds.” - Albert Einstein
Baby Step Two: Start the Debt Snowball
List your debts in order, with the smallest payoff or balance first. Do not be concerned with interest rates or terms unless two debts have similar payoffs, then list the higher-interest-rate debt first. Paying the little debts off first gives you quick feedback, and you are more likely to stay with the plan.
The Debt Snowball method requires you to list all your debts in order of smallest payoff balance to largest. List all your debts except your home; we will get to it in another step. List all of your debts—even loans from Mom and Dad or medical debts that have zero interest. I don’t care if there is interest or not. I don’t care if some have 24 percent interest and others 4 percent. List the debts smallest to largest!
Most people carry a car note for their entire lives, paying about $495 a month. That same amount invested from age 25 to retirement would, on average, amount to more than $6 million by age 65. You do the math!
The reason we list smallest to largest is to have some quick wins. You need quick wins to get fired up. And getting fired up is super-important.
After you list the debts smallest to largest, pay the minimum payment to stay current on all the debts except the smallest. Every dollar you can find from anywhere in your budget goes toward the smallest debt until it is paid. Once the smallest is paid, the payment from that debt, plus any extra “found” money, is added to the next smallest debt. Then, when debt number two is paid off, you take the money that you used to pay on number one and number two and you pay it, plus any found money, on number three. When three is paid, you attack four, and so on. Keep paying minimums on all the debts except the smallest until it is paid. Every time you pay one off, the amount you pay on the next one down increases. All the money from old debts and all the money you can find anywhere goes on the smallest until it is gone. Attack! Every time the Snowball rolls over, it picks up more snow and gets larger, and by the time you get to the bottom, you have an avalanche.
Baby Step Two: Use the Debt Snowball to become debt-free except for your home.
The most important part of this whole process was learning to delay pleasure.
The major elements of making the Debt Snowball work are using a budget, getting current before you start, smallest-to-largest payoff (no cheating), sacrifice, and focused intensity. Total, sold-out, focused intensity is possibly the most important. This means saying to yourself (and meaning it), To the exclusion of virtually everything else, I’m getting out of debt!
Total, sold-out, focused intensity is required to win. Aiming at the goal and nothing else is the only way to win. You have to know where you are going, and by definition know where you aren’t going, or you will never get there.
To the exclusion of virtually everything else, I’m getting out of debt!
The way out of debt is to outmaneuver the enemy and run for your life.
The ability to become debt-free isn’ t contingent upon a certain income. It is all about changing behavior and being intense about getting rid of that nasty debt!
An obvious step to working the Debt Snowball is to stop borrowing. Otherwise, you will just be changing the names of the creditors on your debt list. So you must draw a line in the sand and say, “I will never borrow again.” As soon as you make that statement, there will be a test.
If you think you can get out of debt without huge resolve to stop borrowing, you are wrong. You can’t get out of a hole by digging out the bottom.
Selling debt-ridden items lowers the outgo, and selling other items temporarily increases your income. Likewise, working extra hours can increase income in order to increase the speed of debt repayment.
60% of Americans don’t pay off their credit cards every month.
If you use the emergency fund, return to Baby Step One until you have re-funded your beginner emergency fund, then move right back to your Debt Snowball, Baby Step Two.
God tends to pour blessings on people going in a direction He wants them to go. It is as if you are walking or running at a fast pace, and a moving sidewalk suddenly appears below you to carry you faster than your own effort would.
Chapter 8: Finish the Emergency Fund: Kick Murphy Out
Baby Step Three: Finish the Emergency Fund
A fully funded emergency fund covers three to six months of expenses.
Money magazine says that 78 percent of us will have a major unexpected event within the next ten years.
Beware not to rationalize the use of your emergency fund for something that you should save for and purchase.
Before using the emergency fund, back up from the situation and calm down.
Keep your emergency fund in something that is liquid. Liquid is a money term that means easy to get to with no penalties. If you would hesitate to use the fund because of the penalties you’ll incur to get to it, you have it in the wrong place.
I suggest a Money Market account with no penalties and full checkwriting privileges for your emergency fund.
Of people making less than $35,000 per year, 40 percent said the best way for them to have $500,000 at retirement age is to win the lottery. Your chances of winning the lottery are about 1 in 120 million. You’re 400 times more likely to be struck by lightning.
To make more money, you have to plan to make more money. Some people’s problem is income, not spending.
What used to be a huge, life-altering event will become a mere inconvenience.
Saving for a down payment or cash purchase of a home should occur after becoming debt-free in Step Two and after finishing the emergency fund in Step Three. That makes saving for a down payment Baby Step Three (b). You should save for the home if you have the itch before moving on to the next step.
The good thing about principles is that they make life easy.
Chapter 9: Maximize Retirement Investing: Be Financially Healthy for Life
Gazelle intensity is required to get to the wealth steps, but simple maintenance will keep your money muscles maintained.
Investing for retirement in the context of a Total Money Makeover doesn’t necessarily mean investing to quit your job. If you hate your career path, change it. You should do something with your life that lights your fire and lets you use your gifts. Retirement in America has come to mean “save enough money so I can quit the job I hate.” That is a bad life plan.
“People who retire early, die early.” - Harold Fisher
You must invest now if you want to spend your golden years in dignity.
Baby Step Four: Invest 15 Percent of Y our Income in Retirement
If you buy a $25,000 double-wide home, in five years you will owe $22,000 on a trailer worth $8,000. Financially, it’s like living in your new car. I’m not above living in a mobile home (I’ve lived in worse), but they are lousy places to put money.
The rule is simple: Invest 15 percent of before-tax gross income annually toward retirement.
Those kids’ college degrees won’t feed you at retirement. I don’t recommend paying off the house first because I have counseled too many seventy-five-year-olds with a paid-for house and no money. They end up selling the family home or mortgaging it to eat.
It is your job to take care of you and yours.
Growth-stock mutual funds are lousy short-term investments because they go up and down in value, but they are excellent long-term investments when leaving the money longer than five years.
I spread my retirement, investing evenly across four types of funds. Growth and Income funds get 25 percent of my investment. (They are sometimes called Large Cap or Blue Chip funds.) Growth funds get 25 percent of my investment. (They are sometimes called Mid Cap or Equity funds; an S&P Index fund would also qualify.) International funds get 25 percent of my investment. (They are sometimes called Foreign or Overseas funds.) Aggressive Growth funds get the last 25 percent of my investment. (They are sometimes called Small Cap or Emerging Market funds.)
Always start where you have a match. When your company will give you free money, take it. If your 401k matches the first 3 percent, the 3 percent you put in will be the first 3 percent of your 15 percent invested. If you don’t have a match, or after you have invested through the match, you should next fund Roth IRAs.
If you invest $3,000 per year from age thirty-five to age sixty-five, and your mutual funds average 12 percent, you will have $873,000 tax-FREE at age sixty-five. You have invested only $90,000 (30 years x 3,000); the rest is growth, and you pay no taxes. The Roth IRA is a very important tool in virtually anyone’s Total Money Makeover.
Start with any match you can get, and then fully fund Roth IRAs.
You are secure and will leave a nice inheritance when you can live off of 8 percent of your nest egg per year. If you make 12 percent on your money average and inflation steals 4 percent, 8 percent is a dream number. If you make 12 percent and only pull out 8 percent, you grow your nest egg by 4 percent per year. That 4 percent keeps your nest egg, and therefore your income, ahead of inflation ’til death do you part.
If you can live with dignity on $40,000, you need a nest egg of only $500,000.
Step One:
Annual Income (today) you wish to retire on: $36,000
(Nest egg needed) equals: $36,000 / 0.08 = $450,000
Step Two:
To achieve that nest egg, you will save at 12%, netting 8% after inflation, so we will target that nest egg using 8%.
$450,000 * 0.000436 = $196.20
8% Factors (select the one that matches your age)
Age 25, 40 years to save, .000286 factor
Age 30, 35 years to save, .000436 factor
Age 35, 30 years to save, .000671 factor
Age 40, 25 years to save, .001051 factor
Age 45, 20 years to save, .001698 factor
Age 50, 15 years to save, .002890 factor
Age 55, 10 years to save, .005466 factor
Age 60, 5 years to save, .013610 factor
The past has passed. Start where you are, because that is your only option.
It is never too late to start.
The investing you do systematically and consistently over time will make you wealthy. If you play with this by jumping in and out, always finding something more important than investing, you are doomed to being one of those fifty-four out of one hundred sixty-five-year-olds still working because you have to work. Systematic, consistent investing is the tortoise that beats the hare in the race. When you keep at it, the investing compounds and explodes.
The rose is a rose from the time it is a seed to the time it dies. Within it, at all times, it contains its whole potential. It seems to be constantly in the process of change: Yet at each state, at each moment, it is perfectly all right as it is.
A flower is not better when it blooms than when it is merely a bud; at each stage it is the same thing . . . a flower in the process of expressing its potential.
You are going to win.
Chapter 10: College Funding: Make Sure the Kids Are Fit Too
Only if you mix knowledge with attitude, character, perseverance, vision, diligence, and extreme levels of work will your college degree produce for you.
College degrees do not ensure wealth.
The book Emotional Intelligence discovered that 15 percent of success could be attributed to training and education, while 85 percent was attributed to attitude, perseverance, diligence, and vision.