"The Total Money Makeover" (chapter 13 and recommendation)

It has been fun to re-read Dave Ramsey's The Total Money Makeover. This makes four times through the book for me, and I get excited every time I read it. Each time I read the baby steps, and see them build, I want even more to be debt free. It is going to be a great day! We have a goal in place, and we are doing all we can to reach it!

The final chapter is very brief, only covering 5 pages. It is meant to put the teachings found in the book into their proper place. Ramsey mentions Proverbs 10:15, which teach that a rich man's wealth can become his walled city. He goes on to simply remind us that, even if we become debt-free and have millions of dollars to our name, that's not the most important thing. I couldn't agree more!

If you haven't been able to tell, I highly recommend reading and applying this book. I have tried to mention a few things in the book with which I do not agree, but there simply are not many! Ramsey makes the process logical, focused, and--when done as a family--fun.

If you wish to order a copy of this great book, click on the link below.

To read any of the chapter reviews in this series, click on the appropriate link:

An Overview

Chapters on "Attitude"

Chapter 1 (The Total Money Makeover Challenge)

Chapter 2 (Denial: I'm Not That Out of Shape)

Chapter 3 (Debt Myths: Debt is [Not] a Tool)

Chapter 4 (Money Myths: The [Non]Secrets of the Rich)

Chapter 5 (Two More Hurdles: Ignorance and Keeping Up with the Joneses)

Chapters on "Action" (the Baby Steps)

Chapter 6 (Save $1,000 Fast: Walk Before You Run)

Chapter 7 (The Debt Snowball: Lose Weight Fast, Really)

Chapter 8 (Finish the Emergency Fund: Kick Murphy Out)

Chapter 9 (Maximize Retirement Investing: Be Financially Healthy for Life)

Chapter 10 (College Funding: Make Sure the Kids are Fit Too)

Chapter 11 (Pay Off the Home Mortgage: Be Ultrafit)

Chapter 12 (Build Wealth Like Crazy: Arnold Schwarzedollar, Mr. Universe of Money)

I hope this series has been helpful and has helped you think about your financial situation. The next book I will review will deal specifically with giving.

"The Total Money Makeover" (chapter 12)

Before really getting into the seventh (and final) baby step itself, the chapter begins by asking a very important question: "Why do you want to have a Total Money Makeover, anyway?" In other words, now that you have no debt (including the mortgage) and you have a fully-funded emergency fund and you have retirement savings and the kids' college is taken care of.......

what now?

Ramsey suggests that we do three things with the money: have fun, invest, and give.

Of course, as Christians, giving should come first. Now that we have achieved a level of financial security that so few ever do, should we not use that as a grand opportunity to give like we've never given before? While the Lord and His work should be first in our giving no matter our financial situation, when we reach this stage, we should truly seek to "ramp up" our giving. Sadly, many Christians do achieve this level and then just spend the money on more "stuff" for themselves. Remember the words of the Bible? "From everyone who has been given much, much will be required" (Luke 12:48).

But, we should also continue investing. Why? Because at this point our investments are still quite small--for retirement's sake. I love to work, but I would also like to know that, when I retire, I can live off my investments and also beat inflation. So, we need to continue to put money away in investments for retirement. Ramsey suggests continuing to put away at least 15%. (Pages 207-212 have a good discussion as to why this point is important.)

Finally, we should have some fun. I think far too many people have too much "fun" when they reach this stage, but we should have some! You have sacrificed very hard to get to this point. Now you can enjoy it. Take your spouse out for an all-out dinner at one of those "chez" restaurants. Buy something you've always wanted. If you want, buy another house (for cash!!!) as an investment or as a rental. The possibilities are great to think about!

Lest you think the book is over, though, Ramsey adds a 13th chapter to "sum up" the book.

However, when you make it to this point, it's time to give like you've never given before...

...and enjoy the fruits of your labor some, too.

"The Total Money Makeover" (chapter 11)

While it is just coincidence, it is odd that the chapter on home mortgages is "chapter 11." So many people default on home loans every year. The numbers are staggering.



While I am certainly no expert on buying a house (I've bought a grand total of...1), I do know a couple of simple facts that one needs to keep in mind when purchasing.

• Don't buy too much house! Many people decide that, since they have 2 kids, they need a four- or five-bedroom house. Then we make sure it's in an upscale neighborhood. Then we make sure we can just move in without having to fix anything. Before you know it, you have a house that it too big and you simply cannot afford the mortgage!


• Figure out the actual cost of owning a home. It's not only the mortgage. If you are paying for the house, you are also paying for all maintanance; and taxes; and lawn care; and additions; and.... well, you get the idea. So many people think, "We can afford $700 a month for a house," and so they get a house that has a mortgage of $700 each month. When the pipes bust, or the lawn needs to be mowed, where's the money going to come from?

Why all this real estate talk? Because the sixth baby step, and the focus of chapter 11, is Pay Off the Home Mortgage.

If you've been following this series, you'll remember that baby step 2 required you to pay off every debt, except the mortgage. Now it's time to rid yourself of that debt, too.

Many people think it is a good idea to keep a mortgage because you get tax help. While that is true to some degree, the tax help is not as big a deal as having no house payment!

If you have a home with a payment of around $900, and the interest portion is $830 per month, you have paid around $10,000 in interest that year, which creates a tax deduction. If, instead, you have a debt-free home, you would in fact lose the tax deduction, so the myth says keep your home mortgaged because of tax advantages.

This situation is one more opportunity to discover if your CPA can add. If you do not have a $10,000 tax deduction and you are in a 30 percent [tax] bracket, you will have to pay $3,000 in taxes on that $10,000. According to the myth, we should send $10,000 in interest to the bank so we don't have to send $3,000 in taxes to the IRS. Personally, I think I will live debt-free and not make a $10,000 trade for $3,000. (page 187)

It is also true that houses--nearly every time--are a great investment. But, if you pay six-figures worth of interest, you have lost much, if not all, the "investment" part of the house.

Of course, paying off your mortgage early will require a great amount of discipline and (here's that word again) focus. But, keep in mind that you have no other debt and you are also no longer feeding your emergency fund--it's fully funded.

You also have your retirement building, and your children's college fund is building (and, depending on how young your kids are, you may build it all the way and be able to "add on" that money to paying off the house!).

So, how do you pay off that major amount of money?

STEP 1: Get a 15-year fixed rate mortgage that equals no more than 25% of your take-home pay. Note a couple of things from this recommendation:

• 15-years. The most common type of mortgage is 30 years. Yes, a 15-year mortgage is more expensive per month, but the amount it saves is amazing. On page 191 of the book, Ramsey illustrates with a $110,000 mortgage at 7%. If it were a 30-year fixed, it would cost about $732/month and you would pay a total of $263,520 over the 30 years. However, if it were a 15-year fixed, you would pay a total of just $117,840 (over $85,000 less), and it would only cost you $256 per month more ($988).


• Fixed-rate. Mortgage rates move up an down, and sometimes quite dramatically. Many people got ARMs a few years ago and are now wishing they hadn't. They have two choices: pay the new, much higher, payment or pay a large fee to refinance. Even if you go with a 30-year, get it at a fixed rate!


• No more than 25% of your take-home pay. I would like it to be more like 20%, just to give some wiggle-room. Especially if you are building up a college fund (or funds!), you simply cannot afford more house than that. One thing Dave doesn't spend much time in the book on, but that he mentions often on his radio show, is that it you need to make a down-payment of at least 20% (and more is always better). The more you pay down, the bigger (and, presumably, nicer) house you can own for this percentage of your income.

STEP 2: Pay off the mortgage faster than 15 years. Attack the mortgage with the same intensity with which you attacked that debt. Squeeze out every extra penny to put on the mortgage. People who truly follow Dave's plan say it takes about 7 or 8 years to pay off a mortgage...

...and then???

...can you imagine???

ABSOLUTELY NO MORE PAYMENTS!!!

"The Total Money Makeover" (chapter 10)

If you have been reading this series from the beginning, this is the step where many of us start to worry a bit. I know what you are thinking: "How can I worry? I've got an emergency fund in place and I'm automatically saving for retirement!"

It's because the kids are getting older and college is--last time I checked--not getting any cheaper!

In chapter 10, "College Funding: Make Sure the Kids are Fit Too," Dave discusses how to pay for college. At the outset, let me say that I agree with his premise (no debt), but I do not agree with everything he teaches in this chapter. You'll see why soon.

The first part of the chapter deals with the basics of college. Why do we want our kids to go? Simply put, an education is one of the best investments anyone ever makes. I know men and women who didn't go to college and make a tremendous amount of money. But, I know many more who did go and are making great amounts of money. As you well know, many employers are now requiring a college education.

College is fun, but Dave teaches--and I agree--that our kids need to understand the real purpose for their attendance in those classes. They are not going to school to learn how to party, meet girls/guys and live off-campus. They are going to school to get an education and learn better how to work.

Most people think that, to attend college, you have to have student loans. Dave's plan wants us to think otherwise. How can we send our kids to college debt-free? Here are a few suggestions from the book:

1. Start young. As soon as you reach this baby step, no matter how young the kids are (if you have kids), start a college fund. If you don't have kids, start a fund the day they are born!


2. Contribute to the fund automatically and take advantage of tax shelters. The point of this article is not to discuss specific plans, but 529s are a popular choice, and provide tax advantages.


3. Teach your kids to work and to pay for part of their education. My parents did this with my sister and me. We didn't have to pay for our entire education, but we did have to pay for part of it. This gives the student a sense of importance and responsibility. He/she is less likely to waste money when it's his/her own!


4. Work on scholarships...over and over and over. Get as many as possible. Dave loves to talk about how to get lists of unclaimed scholarships. While those are great (and should be explored), I like to urge young people to start applying for scholarships well before their Senior year of high school. Build them up. Apply for as many as you can.


5. Live in the dorm, not off campus. Many students get deeper into debt because they are living off campus in high-rent apartments and eating out every night. That's not the purpose of school!!!

The final way Dave suggests going to college debt-free is to only attend community colleges and state schools. He strongly suggests staying away from private institutions. Obviously, I disagree with this, seeing as how I sent to a private university--and did so without student loans.

It's not easy to do, but you can even pay for a school like Freed-Hardeman (where all four writers of this blog went to college) if you will plan ahead. And, as much as you are going to hate this sentence, student loan debt is not the worst kind you can have. If you use the loans to pay for school (and not for pizza and off-campus living) and if you use it for a solid Christian education, it's worth it.

Use the points listed above, but, if you want to attend a school like FHU, do it. Go as debt-free as possible, but don't miss out on the opportunity to meet Christian friends in a great environment. That's an eternal investment!

But, if you will plan ahead, you can even go somewhere like that without one dollar of student loan debt when you graduate.

And then? Step 6.

"The Total Money Makeover" (chapter 9)

It's an amazing concept, when you stop and think about it. If you follow Dave Ramsey's plan and work hard, this is the step where you get to breathe a little easier. Think about it: you have gotten completely out of debt (except the mortgage) and you also have a great buffer against "life" with your fully-funded emergency fund.

I'm not there yet, but I think about it every day. What a great day!

As I've said in this book review series, and as Dave says in the book (several times), this isn't some "get rich quick" scheme. This system takes time, dedication and great focus. But, when you get to this point, you begin to see the system really working for you. No more interest payments (except the mortgage). Life's financial problems taken care of. And now...?

Baby step four: Invest 15 Percent of Your Income in Retirement.

How can you afford 15%? That depends. I think that's a great number to shoot for, but Dave teaches tithing. While many teach that as well, I think we should aim for giving more than just 10% to the Lord. If you are giving more than 10%, you might have trouble attaining the 15% level at first.

However, you also now have no payments! You are not sending money to GMC or MasterCard or...well...anyone else! You have now freed up all that money you were sending to your creditors.

15% seems like an aggressive number, but, sadly, many of us are not starting at 18 years old. We have fought for several years to get out of debt and, now, we need to "ramp up" the number a bit, so we can make up for lost time.

So, when I get to this step, where do I put the money? As with other things, Dave has a simple rule. First, he teaches that we need to get a good financial planner; one who has the "heart of a teacher." If you don't understand the investment, don't make it. If your planner is calling all the time asking you to move your money, it's time to change advisers. Get a good planner and stick with him or her.

On page 157 of the book, Ramsey gives a "Reader's Digest" version of where you and your planner need to put your money:

I select mutual funds that have had a good track record of winning for more than five years, preferably for more than ten years. I don't look at their one-year or three-year track records because I think long-term. 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; and 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.)

There is far more in this chapter, but this system does two things:

1. First it puts money into retirement automatically. If you work for a company that allows you to put money in before you see it, take advantage of that. Set up the system and put the money in. Every month.


2. The system also diversifies the money enough to where you can feel safe. You may want to select individual stocks or another type of fund, but Ramsey (and I) would recommend only doing that above and beyond these investments--and only when you finish steps 5 and 6, as well. In other words, if you want to speculate a bit, that's okay, but wait until you actually have money you can afford to lose. Even at this baby step, you're not there...yet.

15% for the rest of your life will add up quickly. Compound interest is a beautiful thing. Are you beginning to see how Ramsey's plan, combined with a great amount of focus, will pay off? Near the end of the chapter, Ramsey writes:

After completing this step, you have no debt, except the house, around $10,000 cash for emergencies, and you are taking steps to make sure you will retire with dignity. I think I see a smile broadening. (page 166)

"The Total Money Makeover" (chapter 8)

Much of what is said in chapter 8 is similar to chapter 6, and for good reason. The eighth chapter of The Total Money Makeover discusses the third baby step.

Remember, if you are going to follow Dave Ramsey's baby step system exactly, you must have steps one ($1000 emergency fund) and two (out of debt except the mortgage) completely finished. Ramsey is a firm believer in total focus, so you must have these two steps completely finished before moving on to step 3.

Step 3 is "Finish the Emergency Fund."

Now, what is meant by "finish"? For most people, especially with families, Ramsey recommends having 3 to 6 months of essential expenses in that emergency fund. If you are single, or if you don't own your home, you might only need 2-3 months, but, personally, I like the idea of having at least 3 months no matter what your life situation.

A couple of points about this baby step:

1. As we said in baby step 1, put your money in a place where you can get to it in an emergency, but only in an emergency. Obviously, if you are pleased with where your $1000 starter fund is, you can just build that account.

2. To get an idea of how much money you will need, you need to go through your budget and figure out what you have to pay each month in essential payments. Obviously, the house payment or rent is essential. You will also need to eat in an emergency, but you won't need to eat out! You'll need enough for the electric bill, but not the cable bill--you'll turn off your cable in an emergency (won't you?).

3. Finally, why is this such a big part of a financial plan? It is simply because emergencies are what, many times, wreck the financial plans of those who are really trying to "get ahead." They pay off their debt, but then they start spending the extra money they have. Then a child has to go to the hospital. Or dad is laid off. Or mom finds out she has to have some serious medical tests run. Or the car absolutely falls apart. And what do we pay those expenses with? If there is no emergency fund, we go back into debt. With a fully-funded emergency fund, we can handle even large emergencies without going back into debt.

For many people, this baby step is as important as any other. With several thousand dollars lying around for emergencies, we can sleep at night. Even if Murphy's Law comes into effect in our house, we can pay her to leave!

The Total Money Makeover (chapter 7)

This 7th chapter is the one that contains the principles which have made Dave Ramsey as famous as he is. His disdain for debt is probably the number one reason why people listen to his show and read his books. Simply put, people are in debt, so they listen to Ramsey for help.

Chapter seven, "The Debt Snowball: Lose Weight Fast, Really," outlines how to finally pay off all those nagging debts that continue to strain your budget and, in turn, your life.

One of the key words in the chapter title is "fast." Ramsey, over and over, suggests doing anything legal and moral to get out of debt. Paying interest is a killer, financially, so the faster one is out of making payments, the better off he or she is in the long run. If it takes selling stuff, do that. If it means cutting way back on certain "extras" (like cable or internet), do it. If it means taking a 2nd or even a 3rd job, take that step. The idea is that, if you are willing to make those sacrifices now so you can remove the debt quickly, you can then begin to enjoy more things. It doesn't mean you don't still sacrifice (especially when it comes to paying off the mortgate); it just means you don't have to cut back to nothing once you are out of debt.

How long this step takes is really dependant upon two factors: (1) how much debt you have, and (2) how disciplined you are to pay off those debts.

So, baby step #2 is Start the Debt Snowball. Before giving the facts of how it works, let's define what we are paying off.

Anything and everything that we owe, except the mortgage. That means those medical bills with 0% interest. It means the $75 we owe to our sister. It means the car payment. It means the home equity loan and the 2nd mortgage. It means credit cards, store/charge cards and bills that are overdue. Everything that is not your regular mortgage (if you have one) goes on this list. Then, you start paying them off. How?

1. List everything (as we just mentioned) that is debt.


2. Organize those debts from the smallest amount you owe to the largest. We are not worried about interest rates unless they are totally outrageous (like from a PayDay loan).


3. Make and stick to a budget that, simply put, has almost no "extras." Your focus should not be on what movie is playing this weekend, it should be on getting out of debt!


4. Stay current on bills in your budget. Cut up credit cards. In other words, don't add any more debt!


5. Using your budget, put every extra penny on your smallest debt, while paying minimums on everything else. Here's a brief example of what a list might look like: ($75 owed to sister--pay $75 this month; $450 owed to hospital--minimum payment of $65; $875 owed to MasterCard--minimum payment of $35; $9875 owed to GMC--payment of $278/month; $35000 for home equity line of credit--payment of $410/month).


6. Once you have a debt paid off, cancel the account (if necessary). Make sure you get something in writing saying that the amount owed is $0 and the account is closed.


7. Take what you were paying on that smallest debt, and add it to the next smallest debt. In our example from above, the smallest debt would be eliminated in the first month, so that $75 would now be added to the $65 (for a total of $140) to be paid to the hospital. When that is paid, take the $140 (from both debts) and add it to the $35 for Mastercard. From this small example, it is easy to see how the "snowball effect" works!


8. Repeat this process until all debts are eliminated.

This step may take you a long time to finish, but the feeling is amazing. We are getting closer every day to being debt free, and it is a joy to watch those "amount owed" lines keep getting smaller!