Book Review: The Total Money Makeover

Book Review: The Total Money Makeover, by Dave Ramsey

If you have paid any attention to the who’s who of personal finance authors/experts over the years, then you’ve probably heard of Dave Ramsey.  He has been a central figure in the personal finance realm for many years, before the FIRE movement was even a thing.

I’ve read this book many times.  Well, listened to his self-narrated audio version of it many times.  It’s played a key role in shaping my own personal finances, so this is one of the top books I wanted to review on my blog.  

Overview

Dave Ramsey’s book The Total Money Makeover is exactly what it sounds like.  The goal of this book is to get you to think completely differently about money and change virtually all of your money habits and behaviors.

His mantra in the book is, “Live like no one else so one day . . . you can live like no one else.”

He shares his own story of being a young real estate millionaire that built his fortune on a house of cards, which ultimately collapsed and left him broke.  He had to go through his own personal total money makeover before he was able to find success again.  

The outline of the book is what he calls “baby steps” patterned after the 1991 comedy What About Bob? featuring Bill Murray and Richard Dreyfuss.  The idea is that you can get anywhere you want one little baby step at a time.  He outlines the following 7 baby steps to help people achieve their total money makeover:

1. Save $1000 Fast
2. The Debt Snowball
3. Finish the Emergency Fund
4. Maximize Retirement Investing
5. College Funding
6. Pay off the Home Mortgage
7. Build Wealth Like Crazy

While Dave Ramsey covers most of the spectrum of personal finance, the major emphasis of this book is debt reduction, which Dave probably does better than anyone else in my opinion.  He seems to have a special talent for slapping people in the face, waking them up from their financial slumber, and telling them like it is, all the while giving them a plan to set things right.  If you’ve ever listened to his radio show or YouTube clips, you know what I mean.  He’s kind of like the financial Dr. Phil in many ways.

Some people will really be motivated by this approach and style, while others may admittedly be turned off.  But in the end, most of what he says is good sound personal financial advice.

Things I Like

• Dave Ramsey has the right attitude towards debt: treat it like an emergency.  As a society we have become too comfortable with debt.  Debt has been sold to us so aggressively and so often that most of us now feel like having debt is normal and can’t imagine life without it.  One of my favorite quotes from the book is: “Debt is so ingrained into our culture that most Americans can’t even envision a car without a payment, a house without a mortgage, a student without a loan, and credit without a card.”  I don’t think there are many financial figures better for helping people get out of debt than Dave Ramsey.  He not only helps people get out of debt, but also gives them strategies to prevent them from going back into debt in the future.  

• He squashes myths about debt and money that are all too commonly accepted.  These myths include:
  • Debt is a tool and should be used to bring prosperity
  • If I loan money to a friend or relative I am helping them
  • By cosigning a loan I am helping a friend or relative
  • Cash advance, payday loans, rent to own, title pawning, and tote the note car lots are needed to help lower income people get ahead
  • 90 days same as cash equals using other people’s money for free
  • Car payments are a way of life, you’ll always have one 
  • Leasing a car is what sophisticated people do. You should lease things that go down in value and take the tax advantage. 
  • You can get a good deal on a new car at 0% interest
  • You should get a credit card to build credit
  • You need a credit card to rent a car, check into a hotel, or buy online
  • The debit card has more risk than the credit card
  • If you pay off your credit card every month, you get the free use of someone else’s money
  • Make sure your teenager gets a credit card so he or she learns to be responsible with money
  • Debt consolidation saves interest and you have only one smaller payment
  • Borrowing 125% on my home because I will restructure my debt
  • If no one used debt, our economy would collapse
  • Everything will be fine when I retire; I know I’m not saving yet but everything will be OK.
  • Gold is a good investment and will cover me if the economy collapses
  • I can get rich quickly if I join these groups, buy this tape set, and work 3 hours a week.
  • Cash value life insurance, like whole life, will help me retire wealthy.
  • Playing the Lotto, and other forms of gambling, will make you rich.
  • Mobile homes or trailers will allow me to own something instead of renting, and that will help me to become wealthy.
  • Prepaying my funeral or my kid’s college expenses is a good way to invest and protect myself against inflation
  • I don’t have time to work on a budget, a retirement plan, or an estate plan.
  • The debt management companies on TV will save me.
  • I can buy a kit to clean up my credit, and all of my past misdeeds will be washed away.
  • My divorce decree says my spouse has to pay the debt, so I don’t.
  • That collector was so helpful, they really like me.
  • I’ll just file bankruptcy and start over, it seems so easy.
  • I can’t use cash because it is dangerous, I might get robbed.
  • I can’t afford insurance.
  • If I do a will, I might die.
• I’m not going to debunk all of these myths in this review.  I’ll leave that to Dave Ramsey.  But my guess is that as you went through this list there were at least a couple of myths where you said, “Wait a minute, what?”  I know I did.  And if you did, then that is a great reason to read the book.

• You can’t do a review on any book by Dave Ramsey without mentioning the debt snowball.  His plan for getting out of debt is called the debt snowball plan and is quoted by just about every personal finance expert, usually giving him credit for this strategy.  

• These are the basics of the debt snowball plan:
  • List all of your debts from smallest to largest, regardless of the interest rate.  
  • Make the minimum payments on all of these debts with the exception of the smallest debt.  
  • Find every extra dollar you can and throw it at this smallest debt until it is completely paid off.  
  • Now move onto the next smallest debt, using all of the money you were paying towards the first debt PLUS the minimum payment you were already making towards the second debt until the second debt is paid off.  
  • Continue this pattern until all of the debts are completely paid off.  By following this pattern, the amount you are able to apply towards each successive debt increases, just like a snowball rolling down a hill gaining momentum, thus the name.

• What I like about this plan is that it focuses on behavior, not math.  Dave argues that you are in debt due to a behavioral problem, not a math problem, and we need to focus on changing behavior to turn things around, and I tend to agree.  He states that we need get some quick wins to get you moving in the right direction and gain momentum.

• Opponents of the debt snowball plan argue that it is not the most mathematically efficient way to pay off the debts.  They advocate what is called the debt avalanche method.  Here are the details of that approach:
  • List all of your debts in order by interest rate, from the highest to the lowest, regardless of the amount of the debt.
  • Make the minimum payments on all of these debts with the exception of the debt with the highest interest rate.  
  • Find every extra dollar you can and throw it at the debt with the highest interest rate until it is completely paid off.  
  • Now move onto the next highest interest rate debt, using all of the money you were paying towards the first debt PLUS the minimum payment you were already making towards the second debt until the second debt is paid off.  
  • Continue this pattern until all of the debts are completely paid off.  By following this pattern, you are getting rid of the highest interest rate debts first and in the end you will end up paying a smaller total amount than the debt snowball plan.

• It’s hard to argue with the math on this.  However, Dave likens this to a diet.  Few of us are unlikely to stick to a diet if we do everything right for a month and see little change on the scale.  Similarly, if the debts with higher interest have very large amounts, and it takes many months or even years to pay them off, we are much less likely to stick to the plan.  By getting some quick wins with the debt snowball plan, it builds momentum and confidence, making it more likely for people to continue paying off their debts.  What approach do you think would be the best for you?

• Dave Ramsey is vehemently opposed to having a car payment.  He states that taking on a car payment is one of the dumbest things people can do to destroy their chances at building wealth.  For me, this was actually quite surprising.  I will admit that having a car payment was part of my previous financial paradigm.  I always felt like having a car payment was perfectly normal and never really thought twice about it.  Until I read this book.  He argues that for most people, their car payment (or payments) are their largest regular expense outside of their home mortgage, so it steals more money from their income than almost anything else.  The average American car payment is $378 per month over 55 months.  When that car is paid off, most people get a new regular monthly payment because they “need” a new car.  Following this pattern, many Americans keep a car payment for their entire lives.  If you were to invest that amount every month for 40 years, at a 12% return (which I think is overly optimistic, but we’ll run with it), he states you would have more than $4 million.  You can see how this one decision about having a regular car payment or not can make the difference in whether or not you become a millionaire.

• You may have heard the term “gazelle intense” in a podcast or other personal finance post.  This also comes from this book and I think it is a great concept.  Dave references how intense the gazelles in Africa have to be in order to avoid becoming prey to the lions.  He argues that we need to be equally intense when getting out of debt and taking control of our finances.  I agree that if you want to make serious changes in your personal finances, you have to get intense about it.  If you take a ho-hum save a little here, save a little there when I feel like it type attitude, you will never reach your financial goals.  We have to make serious changes in order to see serious results.  

• I like that he advocates for basic insurance needs as part of your financial plan.  After having read many many books and blogs on personal finance, I feel that oftentimes the need for certain types of insurance is overlooked.  The lack of these types of insurance in the event of significant property damage, a serious illness, disability, or death can be financially disastrous.  Thus, any well-rounded sound financial plan should involve some basic types of insurance.  Dave addresses this need and gives examples of when it has saved people.  Step 5 in my FI Step by Step series of posts also discusses this.  

Things I Don’t Like as Much

• Dave Ramsey can be a little in your face and slightly obnoxious (this probably comes out a little more in the self narrated audio book), so if that is something that bothers you, it may be bit of a turnoff.  I personally don’t mind it, but sometimes when I am listening to the audiobook I can see from my wife’s face it is getting a little annoying to her.  

• There are multiple instances in the book where Dave Ramsey states you can reliably get a 12% return by investing in “good growth stock mutual funds.”  Wow, tell me where that is, because I’d like to sink all of my money there.  This has consistently been one of the major criticisms of his program.  He will mention this return as the “average return of the stock market over the last 70 years,” like its not a big deal.  While perhaps true if you look through a certain lens, there are some important caveats to consider.  I think J.L. Collins does a better job of qualifying the 11.9% return he quotes throughout his book, The Simple Path to Wealth, by explaining that it is the average return over the 40 year period from 1975 to 2015 with dividends reinvested and NOT adjusting for inflation.  Adjusting for inflation drops these values closer to the 7-8% range, which is obviously drastically different.  These are key points Dave does not mention and I worry that it dangerously makes people believe it is very easy to get a 12% return on their investments, which is just not the case.

• Dave says you have enough saved for retirement when you can live on 8% of your portfolio.  This is double what many financial experts say when following the 4% rule.  His rationale is if you have invested your money properly and it averages 12% return, you can spend 8% and the 4% will make up for inflation.  Sounds nice and logical, but you should be quick to see the fatal flaw here.  If the market does not return this magical 12%, the plan will quickly deplete your retirement savings over time.   Thus, I would not recommend planning on spending 8% of your investment portfolio annually in retirement.

• There is excessive emphasis on the debt side of things and very little emphasis on how to manage your money after saving enough for retirement and reaching financial independence.  I understand that the target audience and far more Americans are on the debt side of the spectrum, thus the emphasis in the book.  However, it would be nice if we could hear a little more detail on strategies for utilizing your investments as a source of income and associated tax strategies in a book entitled, The Total Money Makeover.

Who Would I Recommend This For?

I personally really like this book. And while I don’t completely agree with everything he says and all of the strategies, I also really like Dave Ramsey and appreciate what he has done to help thousands of people get out of debt and improve their financial lives.

While I think everyone could benefit to some degree from reading this book, this book is probably best for those just starting out on their personal finance journey, especially if they have large amounts of debt. 

This book may be less useful if you don’t have any debt and are focused on growing your investments. 

If you like motivational speakers, I would recommend the audio book version because Dave Ramsey does have that type of effect on most people, thus the success of his radio show and national speaking engagements.

Thanks for reading today and keep heading down the path to FI!

Have you read the book?  What do you think?  Please leave some of your thoughts in the comment section below.