I just finished reading Dave Ramsey’s The Total Money Makeover and I have to say, it was better than I expected. It’s more than a how-to book. It’s a book that gives you an action plan along with motivational success stories from people who have followed the plan and come out on the other side as winners with money.
The first half of the book focuses on honestly assessing where you’re at with money, dispelling some of the common money myths, and challenging the stereotypical beliefs of what a wealthy person looks like.
The second half of the book lays out Dave Ramsey’s plan: The Baby Steps. A plan that he admits comes from the 1980s Bill Murray movie called What About Bob? (Which, by the way, is one of my favorite comedies of all time) The steps Mr. Ramsey outlines for becoming wealthy are in fact small, bite-sized steps designed to change your behavior. The steps are not a get-rich-quick scheme, but a get-rich-slow plan. To use a weight loss metaphor (which Mr. Ramsey sprinkles liberally throughout the book), instead of opting for the magic pill of gastric bypass surgery, the Baby Steps direct you to struggle and suffer to realize change. If you opt for the quick fix, you miss the behavior change and it’s easy to fall right back into old habits.
There’s lot’s to like about the Mr. Ramsey’s financial principles:
- Pay off all consumer debt smallest amount to largest.
- Build an emergency fund of 3-6 months of expenses or around $10k.
- Save 15% of your income for retirement.
- Start a college savings account if you have kids.
- Pay off your mortgage if you own a home.
- Once you’re wealthy, be healthy with money – have fun with some, invest some, and give some.
There are, however, a few quibbles I have with Mr. Ramsey. For one thing, he advocates getting off credit cards completely. For some that have a true addiction to cards, shredding the plastic might be the a necessity. But, I think for most people, credit cards are useful tools that provide an added element of convenience and security over say cash or debit cards.
The other area in which Mr. Ramsey seems a little off-target is investing. He encourages his readers to invest in growth stock mutual funds that have at least a 12% return and at least a ten year track record. The ten year track record is a good quality in a mutual fund and a 12% return isn’t all that unreasonable since, as Mr. Ramsey points out, “the S&P 500 has averaged 11.67 percent per year for the last eighty plus years…” The problem though is he encourages finding mutual funds that beat this S&P average return. I think you’d be better off buying the average and sticking with cheap, low-risk index mutual funds.
Bottom line, The Total Money Makeover is one of the most complete and easy to understand personal finance guides that I’ve read. While I have a couple minor disagreements, the overall plan seems sound. It’s a book for anyone starting from square one who needs some motivation and a plan of attack. It’s also a book for anyone who might be pretty good with money and just needs some fine-tuning If you complete the marathon that is Dave Ramsey’s seven Baby Steps, I have little doubt that your behavior will change and you’ll become wealthy for life.