The Total Money Makeover – The Fundamentals

I would venture to guess that you won’t find a personal finance focused website out there that doesn’t include a post (or twenty) referencing Dave Ramsey – financial guru extraordinaire.   Mr. Ramsey’s personal finance empire includes a radio show, numerous books, a website, Financial Peace University, cds, DVDs, software, and countless other products and resources designed to assist Joe Consumer improve his/her financial health.

In my opinion, the reason for Dave’s tremendous success and popularity is the accessibility of his personal finance approach and the common sense approach he takes in addressing the steps necessary to achieve financial freedom.  Quite simply – Mr. Ramsey’s approach flat out works.

My favorite Dave Ramsey product is his book The Total Money Makeover : in my mind a MUST have for anybody interested in taking the first steps towards improving his or her financial health.  Your mission, should you choose to accept it, is to visit your local library tomorrow and check out The Total Money Makeover and spend the next week reading it from cover to cover.  Two suggestions before you begin: don’t dismiss the simplicity of Dave’s recommendations and if you’re not religiously inclined be willing to look pass the biblical overtones.  I still remember the first time I read this book – it wasn’t particularly brilliant writing and Mr. Ramsey didn’t strike me as some financial Rain Man, but The Total Money Makeover was profound.  Profound in its simplicity!

The basis of Dave’s message is best articulated by what he refers to as “The Seven Baby Steps”.  If you’re like I was a few years ago, it’s not that your some monetary stooge hell bent on destroying yourself one careless financial move at a time, but rather somebody that never took the time to develop a coherent approach to your personal finances.  And really, can you blame folks like us?  Like many of you I spent years and years in school, learned trigonometry, read some Shakespeare, displayed my athletic prowess in gym class, took four years of a foreign language, entered a spelling bee or two, and accumulated a few diplomas along the way.  But nowhere in the process did I encounter anything resembling an education in money management.

Enter the “The Seven Baby Steps” – an everyman’s guide to the financial fitness class that ought to be mandatory in classrooms around the country.  So here they are, direct from Mr. Ramsey’s website – (please note – this does not excuse you from going out tomorrow and getting your hands on a copy of The Total Money Makeover).

Baby Step 1 Baby Step 1

$1,000 to start an Emergency Fund

An emergency fund is for those unexpected events in life that you can’t plan for: the loss of a job, an unexpected pregnancy, a faulty car transmission, and the list goes on and on. It’s not a matter of if these events will happen; it’s simply a matter of when they will happen.

Baby Step 2 Baby Step 2

Pay off all debt using the Debt Snowball

List your debts, excluding the house, in order. The smallest balance should be your number one priority. Don’t worry about interest rates unless two debts have similar payoffs. If that’s the case, then list the higher interest rate debt first.

Baby Step 3 Baby Step 3

3 to 6 months of expenses in savings

Once you complete the first two baby steps, you will have built serious momentum. But don’t start throwing all your “extra” money into investments quite yet. It’s time to build your full emergency fund.

Baby Step 4 Baby Step 4

Invest 15% of household income into Roth IRAs and pre-tax retirement

When you reach this step, you’ll have no payments-except the house-and a fully funded emergency fund. Now it’s time to get serious about building wealth.

Baby Step 5 Baby Step 5

College funding for children

By this point, you should have already started Baby Step 4-investing 15% of your income-before saving for college. Whether you are saving for you or your child to go to college, you need to start now. (TDS NOTE: I blasphemously refuse to acknowledge this step – see my post “Don’t Pay for your Child’s College Education” to learn why)

Baby Step 6

Pay off home early

Now it’s time to begin chunking all of your extra money toward the mortgage. You are getting closer to realizing the dream of a life with no house payments.

Baby Step 7 Baby Step 7

Build wealth and give!

It’s time to build wealth and give like never before. Leave an inheritance for future generations, and bless others now with your excess. It’s really the only way to live!

Let me know what you think after reading The Total Money Makeover.  Are Mr. Ramsey and and his financial advice all they’re cracked up to me?  Does his message warrant the countless posts just like this that you’ll stumble across in personal finance blogs the world wide web over?