In The Total Money Makeover, Ramsay outlines how ordinary Americans can get rid of their debt and build wealth. Stating that personal finance is 20% head knowledge and 80% personal behavior, Ramsay believes that being debt-free and rich is not as difficult as most people believe and should be a goal of everyone.  

 

In the first few chapters of the book, Ramsay discusses different myths surrounding money and debt. In these chapters, Ramsay addresses such myths as, “You need a credit card to build credit,” “Debt is a tool to create prosperity” and “Leasing cars is what sophisticated people do.” 

 

While dealing with the latter myth, Ramsay writes:

 

Shouldn’t you lease or rent things that go down in value? Not necessarily, and the math doesn’t work on a car, for sure. Follow me through this example: If you rent (lease) a car with a value of $22,000 for three years, and when you turn it in at the end of that three year lease the car is worth $10,000, someone has to cover the $12,000 losss. You’re not stupid, so you know that General Motors, Ford, Chrysler, or any of the other auto giants aren’t going to put together a plan to lose money. Your fleece/lease payment is designed to cover the loss in value ($12,000 spread over 36 months is equal to $333 per month), plus provide profit (the interest you pay).

 

Where did you get a deal in that? You didn’t! On top of that, there is the charge of 10 to 17 cents per mile for going over the allotted miles and the penalties everyone turning in a lease has experienced for “excessive wear and tear,” which takes into account every little nick, dent, carpet tear, smudge or smell. You end up writing a large check just to walk away after renting your car. 

 

After Ramsay is finished dealing with an assortment of such myths, he starts with the essence of his book: how people can become debt-free and build wealth. Ramsay emphatically believes the first two steps in this process for the individual or family is to stop using credit and creating a budget (and sticking to it). If one doesn’t have the money to purchase the product or service outright, Ramsay thinks people should save up their pennies and dollars until they do. This step is essential to Ramsay’s money makeover plan and the rest of the book is built around this and other behavior modifications. 

 

For the budget, Ramsay recommends using an envelope system. In this system the allotted cash is placed in labeled envelopes at the beginning in each month. When the envelope is empty no more money can be spent on the item until the next month. Ramsay admits the system is simple, but he also knows it will work. Using statistics and studies to back up his claim, Ramsay explains that psychologically it is much easier to overspend when using a credit card instead of cash. 

 

As for sticking to a written budget, Ramsay writes:

 

The dreaded B word enters the picture here. You must set up a budget, a written budget, every month. This is a book about a process that will enable you to win with your money, a process that others have completed successfully, and I assure you that virtually none of the thousands of winners I have seen did so without a written budget. 

 

After the credit cards are forsaken and a written budget is made, Ramsay outlines his proven plan to financial success which is the essence of the book:

 

1)      Save $1,000 Cash as a Starter Emergency Fund – Ramsay is a firm believer in the rainy day fund. When life happens, we need to be ready and, without using credit cards, this is the way to catch the little things life throws at us.

 

2)      Pay Off Debt – Ramsay recommends listing all debts (excluding the mortgage) on a paper from the least to the greatest. He then states one should make minimum payments on all of them except the smallest debt which should be attacked with reckless abandon until it is paid off. Then one should move to the next smallest debt and repeat the process. During this phase, Ramsay recommends trimming all of the excess from your budget until you are completely debt-free. He even suggests taking part-time second jobs or overtime for a period until a family is debt-free. 

 

3)      Finish the Emergency Fund – When the big stuff happens, Ramsay states, you can’t depend on credit cards. Instead, build up the emergency fund to cover three to six months of expenses.

 

4)      Invest for Retirement – After you’re debt free and have an emergency fund ready to cover any unpleasant surprises, start saving for retirement. Ramsay recommends setting aside 15% of your income for retirement. He evaluates a lot of different options concerning this point and lists the pros and cons for each. 

 

5)      Pay off the Home – A t this stage, Ramsay urges his readers to start making extra payments toward their house. If someone can pay off their home early they free up a huge portion of their income that can now be spent in a variety of ways.

 

6)      Build Wealth – When people reach this stage of building wealth, Ramsay states there are three ways to spend your money: a) have fun; 2) invest; and 3) give.   

 

In this clip, Ramsay succinctly summarizes his plan:

 

What to like:   Throughout the book there are worksheets and lists to help the reader organize assets, debts and income and to crunch numbers. For those incompetent at math, these sheets can really help. 

 

Interspersed throughout the book are inspirational true stories, mostly in the forms of letters to Dave, by those who have used his advice to get out of debt and build wealth. Most of these stories are truly incredible. Reading about families who have climbed out of more debt than me on less of an income actually did motivate me a bit. The stories also helped the book read better by putting stories about real people behind the numbers.

 

What not to like: Some examples Ramsay used were a bit unrealistic in today’s world. For example, in hypothetical situations he kept using the example of a $130,000 dollar mortgage. Well, I don’t know where Dave lives, but in most cities around America you can’t buy a trailer home for that price, much less a single resident dwelling. Also, some of his advice is a bit unorthodox and doesn’t make sense mathematically. For instance, instead of paying off one’s debts from smallest to greatest, why doesn’t he recommend paying them off from highest interest rate to lowest? Ramsay states the reason why he recommends his way is purely psychological – so his readers can quickly see the progress they make and stick with the plan. I understand his reasoning but high interest rates can kill that progress. If one is truly motivated to get out of debt I would definitely recommend paying off debts from highest interest rate to lowest. 

 

Memorable Excerpt: “Only the strong can help the weak, and that is true of money, too. A toddler is not allowed to carry a newborn; only adults who have the muscular strength to ensure safety should carry babies. If you want to help someone, many times you can’t do so without money. The Bible states that pure religion is actually helping the poor, not theorizing over why they are poor (see James 1:27). Margaret Thatcher said, “No one would have remembered the good Samaritan if he hadn’t had money.” The good Samaritan had a good heart and a heavy enough purse to pay an innkeeper to help take care of the injured man. Money was involved. Money was at its best that day. Money gives power to good intentions. That’s why I’m unashamedly in favor of building wealth.”