Total Money Makeover
“The love of money, not money, is the root of all evil”. So how do you have a healthier relationship with money? Find out below.
This book is based on learned experience: In his mid-twenties, Dave became a millionaire through real estate, but his money was out of control.
Eventually, he went broke.
To slowly rebuild his wealth, Dave took a hard look in the mirror. He realised that his problems began and ended with him.
Maybe you feel helpless about your situation now, but it’s not impossible to turn things around.
Ultimately, winning at money is 80% action and 20% knowledge.
Knowing what to do is only part of the equation; your action are what will take you far.
Take responsibility. It is 100% your decision to change your life.
The Total Money Makeover is based on the motto, “If you live like no one else, later you can live like no one else.”
That means that if you make the sacrifices most people aren’t willing to make, later you will be able to live like they will never be able to.
However, before you even attempt a Total Money Makeover, you need to do what Dave did and take a hard look in the mirror.
Chances are, what’s holding you back from financial health is yourself.
That said, here are the 5 major obstacles keeping you from being financially healthy:
Obstacle 1: Denial: “I Don’t Have a Problem”
Denial will lead to financial mediocrity or even a major crisis.
If you put a frog in room-temperature water, he will swim around happily and even when you gradually turn the water up to boiling, the frog will not sense the change until it’s too late.
You can lose your wealth gradually, one day at a time – and you don’t realise it until you’re in a deep hole that’s hard to get out of.
Getting financially fit is like getting physically fit.
Step one, realise you’re out of shape.
Step two, identify the obstacles to getting back into shape so you can begin to make the changes you need to get to where you want to be.
Obstacle 2: Debt Myths: “Debt Helps You”
By the time he was 26, Dave held real estate worth over $4 million – but he was drowning in debt. Within three years, he was sued, foreclosed on, and, with a brand-new baby and a toddler, bankrupt.
Losing everything drove him to learn how to to actually handle his money, and on that journey he realised that we have been sold on the widespread lie that debt can help you.
Car payments, mortgages, student loans, credit card debt. So many of us think that these are just a way of life. But debt brings risk, not prosperity.
Dave believes that contrary to popular belief, you can't use debt to build wealth.
Maybe you think that the wealthy use debt to their advantage.
In reality, 75% of the Forbes 400 believe that staying debt-free is the best way to build wealth.
Get rid of your credit card. Buy a good used car instead of a brand new one.
Do whatever it takes to make sure that you’re only buying things with the money you have now.
Because the bottomline is that businesses will take advantage of the consumer with debt.
Debt is not a tool.
It makes banks money, not you.
Obstacle 3: Money Myths
There are 2 problems you have to overcome: believing in false security, and believing in quick and easy money.
Just because you’re getting by now, doesn’t mean you can survive a storm.
The Total Money Makeover helps you create more space and freedom in your budget for the hard times, but there’s another important part: insurance.
Steve and Sandy were a young couple who listened to Dave’s radio program and on his advice, bought a term life insurance and a Medical Savings Account health-insurance policy.
Later, Steve received news that he had an inoperable brain cancer.
Their insurance saved them over $100,000 in bills – they would have been in serious trouble if they didn’t have it.
You’ll be tempted to be cheap on insurance but the insurance you need to have are: auto insurance, homeowner insurance, life insurance, long-term disability, health insurance, and long-term care insurance.
As for quick and easy money, you’re not going to get rich by joining that group, buying that DVD set, or working three hours a week.
Odds are, the email you got offering a 500-to-1 return on an investment is too good to be true, a scam preying on those who would fall for false hope.
It’s not complicated to get financially healthy, but there is no shortcut: you have to plan, save, invest, and commit.
Obstacle 4: Ignorance
Chances are, you didn’t have a class on personal finance in school. That’s a shame because we go to school to learn how to get a job; and then once we start earning, we have no idea what to do with that money.
But you don’t have to have a degree in finance to get good at managing your money.
Walter and Stephanie, a couple in their late 40s, had no clue about where their money was going.
It was only after Stephanie caught an episode of The Dave Ramsey Show that they began to learn Dave’s principles.
Debt-free with extra money saved, their family life was changed because they were willing to learn — even their kids are learning to give, save, and spend wisely.
Everyone starts out ignorant, but now is the time to show that you want to learn about money.
Commit to reading a book about it every year, listening to podcasts, or going to a seminar once in a while. Whatever you do, don’t stay ignorant.
Obstacle 5: Keeping up with the Joneses
When he went broke, Dave still managed to keep his Jaguar by refinancing it again and again- once he even got a friend to cosign his loan.
The car deteriorated until the main seal on the oil pan cracked, causing oil to burn. Because he couldn’t afford the $1700 needed to repair it, he drove around with billows of smoke behind him from the burning oil coming out of the back of his engine.
Eventually, his friend got tired of making his payments, and the bank threatened to take the car if he didn’t sell it – which he did.
Later, he managed to pay his friend and the bank back.
He knew that he could have avoided the humiliating process if he wasn’t so concerned with wanting people to be impressed with his success.
Contrary to what people think, most millionaires are more concerned with financial security than with outward approval like the fancy cars, the big house, designer clothes, etc.
If you’re more concerned with keeping up the appearance of wealth while you’re drowning in bills, then you’ve got your priorities wrong.
Know that it might take a few years until you get to the last step – but once you get there, the freedom you will feel will be worth it.
These are called Baby Steps because you will have to learn to walk before you can run.
If you try to do everything at once, progress will be slower and you will get frustrated with yourself.
The key is focused intensity.
With that said, let's go through the 7 baby steps to a total money makeover.
Step 1: Save $1000 Fast
The last thing you want to do is get into more debt during an emergency.
What Dave found is that people would stop their Total Money Makeover because of an emergency – their car would break down, and their $300 repair bill would have to go on their credit card since they didn’t have an emergency fund.
Then comes the guilt and discouragement, and then they would lose momentum on their debt-reduction process altogether.
That’s why the first step is to build an emergency fund as quickly as possible. Don’t rely on your credit card to bail yourself out in times of crisis. Do whatever it takes: work extra hours, have a garage sale, whatever.
Keep this money in a convenient place, but not where you’ll be tempted to spend it. Don't put it in a checking account or an investment. This emergency fund will give you some buffer against the elements.
Step 2: Pay off your debt snowball
It’s easy to build your wealth when you don’t have any debt, so get rid of it.
The debt snowball method involves two steps: listing all your debts in order of smallest balance to largest (except your home), then start paying off in that order.
Getting some quick wins will get the snowball rolling and give you the momentum to keep going.
To make this step work, you need a budget, you need to sacrifice, and you need focused intensity.
Stop borrowing, and only spend what you can afford.
Yes, it will require a lot of resolve; but as the saying goes, “you can’t get out of a hole by digging out the bottom.”
This is as much of a mindset overhaul as a money one. Having focused intensity means telling yourself, “To the exclusion of virtually everything else, I’m getting out of debt!” It means knowing where you’re going, and doing whatever it takes to get there.
According to Dave,
the average person can get debt-free (except for their home) in 18 months if they have focused intensity.
Maybe this means selling your car, or working overtime for a few months.
Not counting your home, if you can’t be debt-free on an item in 18-20 months, sell it.
Unless you have payments above 45% of your monthly take home pay, don’t sell your house because the house is usually not the problem.
Getting rid of your debt would free up your income, which is your most powerful wealth-building tool.
So unless you’re in a deep hole and you would need a few years to work off your debt, you should do as much as possible to get debt-free.
Lastly, if you use your $1000 emergency fund during this process, make sure to replenish it before getting back to your debt snowball.
Step 3: Finish the emergency fund
The next step is to get back to building your emergency fund.
78% of us will have a major unexpected event within the next 10 years
You need to prepare for it so that if, say, you lose your job, you can bounce back relatively quickly.
A full emergency fund covers 3-6 months of expenses ($5-25k). Customize your emergency fund to your situation.
For example, if you have a steady long-term job, maybe 3 months of expenses would be enough in your fund.
Get real clear on what is an emergency to you and your family. Emergencies can include medical bills, paying insurance deductibles after an accident, a blown car engine, and so on.
Don’t dip into your emergency fund for something that you should be saving up to buy.
Keep your emergency fund liquid, not in a unit trust* or fixed deposit that would incur penalty charges if you cash out early.
A way to go about it is to put it in a Money Market account with check-writing abilities and no penalties.
The priority here isn’t to make you money; that’ll be the next step.
Keep in mind that an emergency fund is for actual emergencies but it also for your peace of mind.
Having it in place will save you from significant stress in the future.
Step 4: Invest 15% of your income in retirement
This next step is to help you get financially healthy for the rest of your life.
It’s not enough to live debt-free for now. Most people today are not setting aside enough for their retirement fund.
Don’t be like them; whatever age you are at, if you have done the first three steps, it’s time to put 15% of your gross income into smart investments.
The 15% you invest should take advantage of any tax advantages you can get.
For Malaysians who are employed, don't count employer contribution to your EPF in this 15%.
Along with retirement funds, an important part of this step is to invest in growth-stock unit trusts, which throughout history have averaged just below 12% returns.*
Dave spreads his retirement investing evenly across 4 types: growth and income funds (large cap/ blue chip funds); growth funds (mid cap or equity funds; S&P index fund); international funds (foreign/overseas funds), and aggressive growth funds (small cap/ emerging market funds).
Select unit trusts / mutual funds that have a good track record of winning for more than 5-10 years.*
Unit trusts go up and down in value in the short term, so we’re looking at long-term investing here.
This step should ensure that once you retire, you can live comfortably off 8% of your retirement fund every year.
Step 5: Save for your child's university
The sequence of these steps is intentional.
If you save for college before your emergency fund, you’ll dip into the university fund when you get laid off or if you’re hit with an unexpected expense.
But now, you’re debt-free (except for the house), you’ve got around $10,000 in savings, and you’ve set yourself up for a great retirement.
It’s time to talk education. A university degree doesn’t ensure a solid job or success, but almost everyone would agree that education is important to get ahead.
Two rules in this step: pay cash; and if you have the cash or scholarship, go.
Whether it’s for you or your children, avoid student loans. Don’t buy into the myth that you can’t be a student without loans.
Start saving, do your research on costs and scholarships available, and make plans to avoid borrowing.
If you don’t have enough in your budget, don’t panic! With whatever you have been able to save, all your kids will have to do is make a few lifestyle adjustments or do some part-time work — and learn some good lessons along the way.
Step 6: Pay off your home mortgage
It’s not about self-control and total discipline, it’s about putting systems in place so that you can succeed and make smart decisions.
It’s the same with your mortgage.
Dave recommends that you pay for your house with 100% cash from the get go.
If that’s not possible, make sure that you never take more than a 15 year fixed-rate loan for your house, and that your payments are less than 25% of your take-home pay.
Don’t take a 30-year mortgage; sure, it stretches out the payments, but you’ll find other ways to spend that money in the meantime.
Imagine what it will feel like to have your mortgage paid off. And if you’re thinking of keeping a low-rate mortgage so you can invest at a higher rate, don’t. After you pay taxes on your investment returns, and factor in the additional risk that a mortgage debt brings, it's not worth it.
Getting debt-free as quickly as possible will benefit you in the long run.
Step 7: Build wealth like crazy
"The love of money, not money, is the root of all evil."
Now that you’re debt-free and have financial freedom, you can build your wealth until you reach your Pinnacle Point, where your money makes more than you do.
You are wealthy when you can live on your investment income and coast!
At this point, there are 3 good uses for your money: fun, to invest, and to give.
For fun.
You can afford to have fun because it’ll hardly make a dent in your money position.
Take that vacation, buy that expensive watch – use your money guilt-free, because you’ve earned it.
To invest.
If you’re just beginning, keep your investments simple and long-term: with unit trusts / mutual funds and real estate.
Get the advice of professionals you trust, but always manage your own money and make your own decisions.
It’s useful to have a good estate-planning attorney, a CPA or tax expert, an insurance pro, an investment pro, and a good realtor.
To give.
Fun and investing will lose their appeal after a while on the Pinnacle Point.
To be able to give your money away to those who need it will be the biggest reward of the entire journey.
If money gives you the power to help others, what’s the point of hoarding it for yourself?
Total Money Makeover Recap
In this summary we've covered a lot of information. So here's a quick recap of it all:
There are 5 major obstacles keeping you from being financially healthy:
- Denial: “I Don’t Have a Problem” – You can lose your wealth gradually, one day at a time – and you don’t realise it until you’re in a deep hole that’s hard to get out of.
- Debt Myths: “Debt Helps You” – you can't use debt to build wealth.
- Money Myths – Just because you’re getting by now, doesn’t mean you can survive a storm. So make sure you buy your insurance (if you're afraid of being taken advantage of, here's a video we did to show you how to cut your premiums by 50%+)
- Ignorance – you don’t have to have a degree in finance to get good at managing your money.
- Keeping up with the Joneses – most millionaires are more concerned with financial security than with outward approval like the fancy cars, the big house, designer clothes, etc.
There are also 7 baby steps to a total money makeover:
- Save $1000 Fast – The last thing you want to do is get into more debt during an emergency.
- Pay off your debt snowball – It’s easy to build your wealth when you don’t have any debt, so get rid of it.
- Finish the emergency fund – A full emergency fund covers 3-6 months of expenses
- Invest 15% of your income in retirement – Most people today are not setting aside enough for their retirement fund.
- Save for your child's university – Two rules in this step: pay cash; and if you have the cash or scholarship, go.
- Pay off your home mortgage – make sure that you never take more than a 15 year fixed-rate loan for your house, and that your payments are less than 25% of your take-home pay.
- Build wealth like crazy -You are wealthy when you can live on your investment income and coast!
“If you live like no one else, later you can live like no one else.”
Change is hard, but don’t wait until the pain of staying where you are becomes unbearable.
Instead take the 7 baby steps now and you'll be surprise how soon it will be before you have a total money makeover.
Our Thoughts at More Money Malaysia
The Total Money Makeover is for those who are more prone to overspending or those who are deathly afraid of risks.
While many of the ideas that Dave Ramsey talks about will get you to live a comfortable life, we feel like it's not a life that you would have wanted as a child.
That's not to say that we disagree with his advice.
In fact, we agree that paying off any debt is of utmost importance.
Not only would you have a lot less emotional stress on yourself, but from an investment perspective, not paying the 20%+ in interest on credit card debt is a much higher return than any investment you can make.
We also agree with having an emergency fund.
Once again, it gives you a peace of mind to know that you're going to be okay if something were to happen.
Yes, that money won't make you money, but there's way more to life than just money.
Where our ideals start to go their separate ways is when it comes to steps 4 to 7.
We believe they are all important, but the approach would be very different.
Firstly, we suggest going through a financial roadmap session to find out how much you actually need to make and invest in order to create the life you want.
Once you have that information, it's a lot easier to see what needs to be done so you can prioritize the things that really matter to you.
Once you have your own personalized financial roadmap, it's time to focus on building your income.
We believe that you are being undervalued, that you can be making a lot more money if you wanted. So we would suggest you focus on growing your skills to offer even more value (which will inevitably bring you more money).
We will then look at what investments you should be making in order to help you reach the rest of your goals.
So if paying for your child's education is the most important thing to you, we will make it a priority.
Or if giving back is part of you, we can make it happen right away.
Action Steps.
Here are the 4 steps Malaysians can take now based off this book.
Step 1: Stop the compulsive spending.
We cannot make any steps towards your future if you are a slave to your impulses.
If you cannot make the change yourself, go through AKPK, Malaysia's official program to help people get out of debt.
Step 2: Use the snowball method to pay off your debt.
Although Dave suggested to save $1000 first, we believe if you really needed that money for something, you can always get the money through your credit card.
Otherwise, you might as well have that money pay pay off as much of your credit card as possible.
Step 3: Build 6 month's worth of expenses.
Now that your debt has been paid off, it's time to make sure you never have to go into it again.
Build out the 6 month reserve so you can use that money for any emergencies.
Step 4: Go through a Financial Roadmap session.
Get yourself a customized path to reach all the goals you have so that you know exactly what you will need to make and invest to get there.