The Total Money Makeover Summary (The 7 Baby Steps)

➤ The Total Money Makeover Short Summary

The Total Money Makeover summary offers a transformative financial guide to liberate yourself from the burden of debt and pave the way to a secure financial future.

In seven comprehensive steps, this book empowers you to break free from the cycle of debt and embark on a journey toward financial prosperity.

While numerous books promise the path to millionaire status, many overlook the pressing issue that plagues most of us: financial struggle, often compounded by debt. It’s a reality for many individuals, and it’s time to confront it.

If you’re like many who have been imprudent with money, you’re not alone; the author himself has faced similar challenges. He understands the allure of instant gratification and the ease of accumulating debt.

But if you genuinely aspire to lead a content and rewarding life, perpetually living on borrowed funds is not a sustainable solution.

Enter Dave Ramsey, the beacon of hope for those seeking financial redemption. “The Total Money Makeover” stands as a beacon of financial wisdom, boasting an impressive track record with over 5 million copies sold since its 2003 release.

Ready to embark on your financial journey towards a brighter future? Here are the 7 baby steps to set you on the right path:

➤ The Total Money Makeover Full Summary

The Story

Do you consider yourself financially secure? Many of us feel a sense of comfort in our financial situations, even though a bit of extra income is always welcome. You might have a steady job, a car, and a home, which can create the illusion that financial troubles are distant concerns.

However, the truth is that financial insecurity may be lurking closer than you think.

Imagine a sudden job loss: How prepared would you be to handle your bills? The reality is, financial security is often more fragile than it appears.

Consider the case of Sarah, a client of the author. Sarah and her husband, with a combined annual income of over $75,000 and minimal debts, felt financially comfortable. This confidence led them to take out a substantial mortgage on their home.

But is that a secure position to be in? Can they truly afford it?

Then, unexpectedly, Sarah lost her job, which paid $45,000 per year. Suddenly, they found themselves facing the possibility of foreclosure on their home.

Sarah’s story illustrates how unforeseen financial setbacks can swiftly put us in dire straits. So, what can we do to avoid such unpleasant surprises? It’s crucial to take proactive steps before it’s too late and make changes now.

It’s tempting to believe that there’s no urgency, that you can continue as you are until circumstances demand a shift. However, this approach is irresponsible. Financial challenges can quietly sneak up on you, catching you off guard and leading to trouble.

Think of it like the classic tale of the frog in a pot of water: As the water slowly heats up, the frog doesn’t realize the danger until it’s too late.

Right now, your financial security could be gradually slipping away, and you might not even be aware of it.

It’s time to take action.

In today’s modern world, we are constantly bombarded with messages urging us to acquire things – a house, a car, a gigantic TV, you name it. And how are we expected to finance these must-have items? The answer: through credit.

Debt has become an integral part of our contemporary lifestyle, making it difficult to envision a life without it. Chances are, you’re carrying a significant amount of debt yourself, whether it’s in the form of student loans, a mortgage, credit card balances, or car payments.

In fact, debt has become so ingrained in our society that one of the author’s clients was comfortable with a staggering $72,000 in debt on a rental property and an additional $35,000 in credit card and student loan debt.

Despite its prevalence, it’s crucial to understand that debt is not a pathway to financial happiness; instead, it often leads straight to financial hardship.

Consider one of the most common forms of debt: credit card debt. Credit cards, with their seemingly limitless spending power, can give users a sense of financial freedom. However, in the long run, they can seriously undermine our financial well-being.

Surprisingly, 69 percent of individuals who file for bankruptcy attribute it to credit card debt, according to the American Bankruptcy Institute.

What’s intriguing is that while many people use debt to create the appearance of wealth, genuinely wealthy individuals tend to steer clear of it.

In fact, 75 percent of individuals on the Forbes 400 list believe that the most effective way to amass wealth is by remaining debt-free. Furthermore, some of the most prosperous companies, including Walgreen’s, Cisco, and Harley-Davidson, operate entirely without debt.

If these companies and individuals can achieve success without the burden of debt, isn’t it possible for us to do the same?

Step 1: Save $1,000 for your starter emergency fund

So far, we’ve clearly seen that attempting to spend our way to success using credit is not the path to financial security. But what steps can we take to change our financial situation?

It all begins with crafting a systematic plan that outlines the path to financial well-being. While you recognize the need for a financial transformation, it’s important to understand that you can’t change everything at once. Instead, the wisest approach is to take it slow, one small step at a time.

Consider this: if you were tasked with eating an elephant, you wouldn’t attempt to devour it in one go. You’d start with perhaps a foot per day, gradually working your way through the trunk and the body, taking small bites until the task is complete.

Likewise, when it comes to your finances, adopting a gradual approach is key. Trying to tackle multiple financial areas simultaneously, such as your mortgage, credit card debt, and 401(k), will only dilute your efforts and likely lead to failure. So, take it slow and focus on 7 manageable steps.

But where should you begin? The initial stride in your Total Money Makeover is to establish a starter emergency fund – a sum of $1,000 set aside for unexpected rainy days.

According to Money Magazine, approximately 78 percent of us will encounter a significant negative life event, such as an unforeseen pregnancy or car trouble, within any given ten-year period. Being prepared for such situations is crucial.

While $1,000 may not cover all emergencies, it serves as a valuable starting point and reduces the likelihood of resorting to debt.

Remember, this fund should be reserved exclusively for emergencies, and if you ever need to dip into it, make it a priority to replenish it as soon as possible.

Step 2: Pay off all debt (except the house) using the debt snowball

Once you’ve established your starter emergency fund, you’re well on your way to reshaping your financial landscape. It’s now time to address your debts, which is the second step in the Total Money Makeover.

This step involves creating a debt snowball, a strategy akin to rolling a small snowball that gradually grows into a substantial snow boulder. The same principle applies to paying off your debts, and here’s how it works:

Start by listing all your debts in descending order of size, from the smallest ones like your phone bill to the largest, such as your hefty mortgage. It’s time to get serious about eliminating them, beginning with the smallest debt. As you watch these minor debts disappear, you’ll gain the motivation and momentum needed to tackle the larger, more challenging ones.

Once you’ve set your debt snowball in motion, it’s time to refocus on your emergency fund.

Step 3: Save 3–6 months of expenses in a fully funded emergency fund

Step three involves expanding your emergency fund to the point where it could cover your living expenses for a period of three to six months.

Naturally, everyone’s spending needs differ, so this figure isn’t fixed. Typically, it falls within the range of $5,000 to $25,000. To make it more concrete, if your family’s monthly income is $3,000, strive to save at least $10,000 or more.

Now, imagine you’ve achieved this goal, and your emergency fund has grown substantially. This newfound financial cushion instills confidence and empowers you to continue your journey toward financial freedom.

If, during the process of paying off your debts, you ever need to tap into some or even all of your savings and retirement funds, your substantial emergency fund will have you covered for up to half a year. This security enables you to move forward in life with a sense of assurance and peace of mind.

Step 4: Invest 15% of your household income in retirement

Many of us worry about having enough money for a comfortable retirement. We ask ourselves, “Will we be financially secure in our golden years?” To address these concerns, let’s explore step four of the Total Money Makeover:

To ensure a dignified and secure retirement, it’s important to invest 15 percent of your income. This might sound like a lot, but there are good reasons for doing so.

Firstly, relying solely on government pension plans during retirement can lead to an uncomfortable life. By the time you retire, government support may not be sufficient. It’s wise to plan for your own financial security.

While it may be tempting to save less for retirement and focus on other financial goals like your children’s college fund or paying off your mortgage quickly, remember that your kids’ degrees won’t cover your living expenses after retirement. Many retirees own their homes but struggle due to a lack of disposable income.

Once you commit to saving 15 percent of your income, it’s essential to know where to invest it. The author recommends mutual funds for the best returns.

Historically, the stock market has provided an average return of just under 12 percent. Mutual funds take advantage of this trend, making them an excellent choice for long-term investment. Look for funds with a strong track record of winning for more than five years, preferably over ten. Diversify your investments across various funds to maximize profitability.

Here’s a helpful rule of thumb: allocate 25 percent to growth and income (or blue-chip) funds, 25 percent to growth (or equity) funds, 25 percent to international funds, and the remaining 25 percent to aggressive funds, which carry more risk but offer higher potential returns.

Step 5: Save for your children’s college fund

Many parents aspire to send their children to college, and some are willing to take on debt to fulfill this dream. However, as we’ve emphasized before, avoiding debt is crucial. Financing college through loans is not a sustainable option.

College loans can burden your child for a long time. The current generation of students, often called “generation debt,” graduates with an average of $25,000 to $27,000 in debt, and this financial burden persists.

So, how should you plan for your child’s college education?

One approach is to secure scholarships or save enough money in cash to cover the costs. But there’s another effective method: utilizing an Education Savings Account (ESA) and investing in a growth-stock mutual fund.

For instance, if you invest $2,000 annually in a prepaid tuition plan, starting from your child’s birth until their eighteenth birthday, you’ll accumulate $72,000 for tuition. However, if you opt for an ESA funded by mutual funds (with an average return of 12 percent), you’ll have $126,000 available for education and living expenses.

The best part is that, as long as you use this account for educational expenses, the money remains tax-free.

Yet, it’s essential to consider whether a college degree is the right investment for your child. In his book “Emotional Intelligence,” Daniel Goleman notes that only 15 percent of success can be attributed to training and education. The remaining 85 percent is influenced by qualities like attitude, perseverance, diligence, and vision.

These qualities can lead to greater success in life than simply possessing a degree.

So, does your child need to attend college? If doing so means accumulating debt, then it may not be the best path forward.

Step 6. Pay off your home early

Mortgages can feel like a never-ending commitment, often spanning decades. Step six of the Total Money Makeover focuses on paying off your mortgage as quickly as possible. This step is the final hurdle for many on their journey to financial fitness, and once achieved, it leaves you completely debt-free.

However, there are potential pitfalls that could hinder your progress, and it’s crucial to avoid them.

Some may suggest borrowing money against your home, capitalizing on low interest rates, and investing those funds in the stock market. But this advice can be risky. Let’s consider a hypothetical scenario: borrowing $100,000 against your home at an 8% interest rate and investing it in stocks with a 12% return.

It may seem profitable, with a potential $12,000 in profit. However, after accounting for mortgage interest (around $8,000), you’re left with only about $4,000. This doesn’t factor in taxes and fees associated with stock market investments, ultimately leaving you with a meager $1,000. The risk might not be worth the reward.

Another misconception is taking out a 30-year mortgage with the intention of paying it back in 15 years. Unexpected expenses, like high heating bills or unexpected medical costs, can easily derail this plan. Unless legally obligated, very few people make the extra payments required to achieve this goal.

Opting for a shorter mortgage term, such as a 15-year mortgage instead of a 30-year one at 7%, could save you $150,000 over the mortgage’s duration. Imagine the possibilities with those savings.

Step 7. Build wealth and give

Congratulations! You’re now on the verge of achieving financial fitness, with just one final step to go.

Once you’ve eliminated your debts and started saving for the future, it’s time to focus on building your wealth.

Surround yourself with experts like tax advisors, CPAs, and estate-planning attorneys. They can provide you with valuable advice on managing your finances.

Stay committed to your financial plan, even as you age and market fluctuations may tempt you to react hastily. Remember that short-term market blips are insignificant compared to the long-term growth trend.

Financial fitness doesn’t mean living frugally all the time. You can enjoy your money when you have the means to do so.

Having fun is an essential part of the Total Money Makeover. If you can afford a $30,000 watch, a $50,000 car, or a $700,000 home, go for it. Just make sure it fits within your financial means.

Additionally, consider the joy of giving. Being generous with your money can be as rewarding as spending it. However, remember that you need to have enough before you can give.

Congratulations on completing your journey to financial freedom! Now, you can enjoy a life of comfort, happiness, and security.

➤ The Total Money Makeover Quotes

➤ Final thoughts

In summary, Dave Ramsey offers a powerful roadmap to financial fitness through seven practical steps.

Here’s what we’ve learned in this The Total Money Makeover summary:

• Financial security is often illusory, and living debt-free is key to financial success.
• Avoid comparing yourself to peers who may appear financially secure but are actually buried in debt.
• Debt is a constant drain on your finances, growing over time and hindering your financial progress.
• Start by building a $1,000 emergency fund, even if you already have some savings.

• Prioritize building a solid emergency fund to cover three to six months of expenses.
• Invest 15% of your income for a dignified and secure retirement.
• Consider using mutual funds for long-term investments to benefit from the stock market’s historical returns.
• Fund your child’s education wisely, avoiding unnecessary debt through tools like Education Savings Accounts (ESAs).

• Remember that success is not solely determined by a college degree; character traits like attitude, perseverance, diligence, and vision play a significant role.
• Aim to pay off your mortgage as soon as possible to achieve debt-free living.
• Surround yourself with financial experts and stick to your plan as you grow older.
• Enjoy your money responsibly, spending within your means and considering the joy of giving when you can.

In conclusion, this The Total Money Makeover summary provides a clear and actionable guide to achieving financial freedom and security. It’s recommended for individuals of all ages, especially those facing financial challenges, seeking to build wealth, or looking to secure their retirement.

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