Total Money Makeover was a total money surprise for me. I thought that I understood debt and credit, but I was floored by the principles practiced and recommended by the book’s author, Dave Ramsey. In fact, I put the book down at page 48 with one thought on my mind:
“Man was I stupid.”
After this stark realization, I picked the book back up again and noticed the words: “always keep in mind that if you tell a lie often enough, loud enough and long enough, the myth becomes accepted as fact.”
This is when I realized that the decisions that I had accepted as fact were all myths. It was time to get out of denial and start really working towards debt relief. So here goes. Below are my top five financial mistakes to date.
Mistake #1: Debt consolidation saves interest and you have one smaller payment. True, but most people used credit in the first place because they could not afford to pay cash for their purchase. Continuing this type of behavior will just lead to more debt. “You can’t have someone lose weight for you; you have to change your diet and exercise habits. Handling money is the same way; you have to change your behavior.” Debt consolidation treats the symptoms only.
Mistake #2: Acquire a credit card to help build your credit. This may be helpful when purchasing a home, but if you are an over spender, like me, then you will probably just end up with more debt. Save enough cash towards the purchase of your new home and you can purchase it with a zero credit score.
Mistake #3: Credit cards are more secure than debit cards. Unbeknownst to me, your debit card can be just as secure as your credit card. When you choose the credit option you have all the protections that come with traditional credit cards. “Visa’s zero liability policy covers all Visa credit and debit card transactions processed over the Visa network” (Visa).
Mistake #4: Cash Value Life Insurance Policies are a good way to save money by grouping insurance and savings together. Turns out, this policy is not so good because the returns they show average only 6.29% over twenty years.
Mistake #5: “Same as Cash” promotions allow me to use someone else’s money for free. This is only true for 12% of these contract holders. “Nationally, 88% of these contracts convert to debt….and they back-charge you to the date of purchase.”
So how do we reverse engineer our thinking and stop letting debt rule our lives? What specific steps must we take to give ourselves an opportunity to be wealthy? I offer you five rules that Ramsey has used to help tens of thousands of people get out of debt:
- Start an emergency fund of $1,000 ASAP! Might sound a little odd, but Ramsey’s rational is that before we even get started on the wealth path we should stockpile for a rainy day so that once we begin the all-out assault on our debt we can avoid the inevitable setback. “Money magazine says that 78 percent of us will have a major negative event in a given 10-year period of time.”
- Create a debt snowball by first listing all of your debt (except for your home) from least to greatest. Make minimum payments on all of these accounts except for the least expensive. Pay the minimum on the least expensive as well plus as much discretionary income as possible. If you have an extra $100 remaining each month and the least expensive account you have has a minimum payment of $50 you will pay $150 per month on this account until it is paid off completely. Then move on to the second most expensive account you have and begin paying its minimum balance plus $150 per month. Continue “snowballing” your debt until you are debt free EXCEPT for your home, if you own one.
- Finish the emergency fund. “A Country Financial Security Index survey found that 49 percent of Americans could cover less than one month’s expenses if they lost their income.” That being said, after you are fully out of debt, fully funding your emergency fund for three to six months should be no issue.
- Save for a home if you don’t currently own. Remember, you are completely out of debt, have an emergency fund and your blood pressure is down at least 20 points and you are feeling great. Congratulations, it’s time to buy!
5) Invest 15% of your income in Retirement. There are some cases where you may want to invest more, but for most of us, 15% is the magic number.
I’ve just given you the big takeaways from this book, but I would suggest you purchase your own if you are serious about getting out of debt. Not only will you be able to reference the steps I have shared in greater detail, but you will also be able to read some motivational and compelling success stories. Stories from real, hardworking, intelligent people who just needed a plan. Total Money Makeover is that plan. In just 18-20 months you can be debt free and headed to wealth building.
“If you will live like no one else, later you can live like no one else.” Dave Ramsey