The Total Money Makeover: Classic Edition

by Dave Ramsey

  David (age 30) and

  Tayelor (age 25) Jarrett

  Technical Support Rep/Small Business

  Owner; Clinical Assistant

  Vince called my radio show with a problem that has become a trend. Vince signed up for multiple cards during his sophomore year at college to get the free campus T-shirt. He wasn’t going to use the cards unless there was an emergency, but there was an “emergency” every week, and soon he was $15,000 in debt. He couldn’t make the payments, so he quit school to get a job. The problem was, without his degree, his earnings were minimal. Worse than that, he also had $27,000 in student loans. Student loans aren’t payable while you are in school, but when you leave school by graduating or quitting, the payments begin. Vince was one scared twenty-one-year-old with $42,000 in debt, but making only $15,000 per year. What’s scary is that Vince is “normal.”

  The reason why lenders market so aggressively to teens is brand loyalty. The lenders’ studies have found that we consumers are very loyal to the first bank that certifies our adulthood by issuing us plastic. When I am doing an appearance and cutting up credit cards, the emotional attachment many people have to the first card they got in college is amazing. They clutch it like it is an old friend. Brand loyalty is real.

  Several thousand schools across America are using our high school curriculum called “Foundations in Personal Finance.” The results have been staggering. Teens latch on to The Total Money Makeover before they need one. A recent graduate of the program, fifteen-year-old Chelsea, said, “I think this class has totally changed my life. Whenever I see someone using a credit card, I think, Whoa! How could they do that to their life? I always thought you had to have credit-card payments, house payments, and car payments. Now I realize you don’t have to.” Very cool, Chelsea.

  Kid Branding

  You have to start teaching kids early because “kid branding” is now commonplace. When my son was eleven years old, I looked at the back of a box of Raisin Bran and read “Visa . . . the official card of Whoville . . . from How the Grinch Stole Christmas.” I was not the target of this ad; my kid was. Lenders are teaching kids earlier and earlier their message of reliance on plastic. A few years back Mattel put out “Cool Shopping Barbie,” which was sponsored by MasterCard. Of course, this “cool” babe had her own MasterCard. When she scanned her card, the cash register said, “Credit approved.” There was so much consumer backlash that Mattel pulled the product. A few years ago Mattel came out with the “Barbie Cash Register,” and apparently this lady does a lot of shopping. The register comes with its own American Express card. Why are these companies selling to our small children? Kid branding intends to influence card choices later in life. This is immoral.

  Again, we decided to combat kid branding with our own antidote. Financial Peace Jr. is a collection of aids to help parents teach their children (ages three to twelve) about money. Of course, you can teach the principles without the kit, but either way, they need to learn them. In my home, we used the same techniques to teach our kids four things to do with money. We wanted to create teachable moments so that the kid branding would be counteracted by common sense. We taught our kids to work—not like being at some boot camp, but that doing chores equals money. Our kids were on commission, not allowance. Work and get paid; don’t work and don’t get paid. It’s just like the real world. Our children put their newly earned money in envelopes labeled Save, Spend, and Give. When a child learns to work, save, spend, and give under a mature parent’s direction, the child can avoid the messages that say a credit card equals prosperity.

  MYTH: Debt consolidation saves interest, and you have one smaller payment.

  TRUTH: Debt consolidation is dangerous because you treat only the symptom.

  Debt CONsolidation—it’s nothing more than a con because you think you’ve done something about the debt problem. The debt is still there, as are the habits that caused it; you just moved it! You can’t borrow your way out of debt. You can’t get out of a hole by digging out the bottom. Larry Burkett said debt is not the problem; it is the symptom. I feel debt is the symptom of overspending and undersaving.

  A friend of mine works for a debt-consolidation firm whose internal statistics estimate that 78 percent of the time, after someone consolidates his credit-card debt, the debt grows back. Why? Because he still doesn’t have a game plan to either pay cash or not buy at all, and hasn’t saved for “unexpected events,” which will also become debt.

  Debt consolidation seems appealing because there is a lower interest rate on some of the debt and a lower payment. In almost every case we review, though, we find that the lower payment exists not because the rate is actually lower but because the term is extended. If you stay in debt longer, you get a lower payment. If you stay in debt longer, you pay the lender more, which is why they are in the business of debt consolidation. The answer is not the interest rate; the answer is a Total Money Makeover.

  MYTH: Borrowing more than my home’s value is wise because I’ll restructure my debt.

  TRUTH: You are stuck in the house, which is really dumb.

  On today’s radio show I took a call from a desperate man facing bankruptcy. He had borrowed $42,000 on a second mortgage, a home equity loan. Dan’s existing balance on his first mortgage was $110,000, making his total new mortgage debt $152,000. Dan’s home was worth $125,000, so he owed $27,000 more on his home than it was worth. He lost his job two months ago and luckily has just found a job in another state, but he can’t sell his home. He had the same job for sixteen years and thought he had security, but now, just a few months later, he is “in the soup.”

  My suggestion to Dan was that he call the second mortgage rip-off lender and get an acknowledgment of the truth, that there really isn’t any collateral for the loan. They wouldn’t foreclose in a hundred years, but they will sue him when the first mortgage company forecloses. So, after asking the second lender to release the lien for whatever proceeds above the first mortgage come from a sale, Dan will sign a note and make payments on the rest. Dan will have payments for years to come on a second mortgage for a home he no longer owns, but like most folks, his second mortgage was to pay off (move) debt he already had on credit cards, medical bills, and other life issues. Today, with a job in another state, Dan would rather have all his old debt back and his home where he could sell it easily.

  MYTH: If no one used debt, our economy would collapse.

  TRUTH: Nope, it would prosper.

  The occasional economics teacher feels the need to pose this ridiculous scenario. My dream is to get as many Americans as possible out of debt with a Total Money Makeover. Unfortunately, I could sell ten million books, and there would still be seven billion credit-card offers per year, so there is no danger of my working myself out of a job. The best weight-loss program in the world can never ensure there will be no fat Americans; after all, there are too many McDonald’s.

  However, let’s pretend for the fun of it. What if every single American stopped using debt of any kind in one year? The economy would collapse. What if every single American stopped using debt of any kind over the next fifty years, a gradual TOTAL Money Makeover? The economy would prosper, although banks and other lenders would suffer. Do I see tears anywhere? What would people do if they didn’t have any payments? They would save and they would spend, not support banks. Spending by debt-free people would support and prosper the economy. The economy would be much more stable without the tidal waves caused by “consumer confidence” or the lack thereof. (Consumer confidence is that thing economists use to measure how much you will overspend due to your being giddy about how great the economy is, never taking into consideration that you are going deeply into debt. If the consumer were out of debt and living within his means, the confidence he would have would be well-founded.) Saving and investing would cause wealth to be built at an unprecedented level, which would create more stability and spending. Giving would increase, and many social problems would be privatized; thus, the gove
rnment could get out of the welfare business. Then taxes could come down, and we would have even more wealth. As that great philosopher Austin Powers said, “Capitalism, yeah, baby!” Ahhhh, capitalism is cool. Those who are worried about polarization, the widening gap between the haves and the have-nots, need not look to government to solve the problem; just call for a national Total Money Makeover.

  Debt Is Not a Tool

  Are you beginning to understand that debt is NOT a tool? This myth and all its little sub-myths have been spread far and wide. Always keep in mind the idea that if you tell a lie often enough, loud enough, and long enough, the myth becomes accepted as a fact. Repetition, volume, and longevity will twist and turn a myth, a lie, into a commonly accepted way of doing things. No more. Debt is not a tool; it is a method to make banks wealthy, not you. The borrower truly is slave to the lender.

  Your largest wealth-building asset is your income. When you tie up your income, you lose. When you invest your income, you become wealthy and can do anything you want.

  How much could you give every month, save every month, and spend every month if you had no payments? Your income is your greatest wealth-building tool, not debt. Your Total Money Makeover begins with a permanently changed view of the Debt Myths.

  4

  Money Myths: The (Non) Secrets of the Rich

  Most Money Myths have to do with a lie about a shortcut or a lie about safety. We yearn to become healthy, wealthy, and wise with no effort and with no risk, but it will never happen. Why else is the lottery so successful in pulling in millions of dollars? Why do people stay in jobs they hate, seeking false security? The Total Money Makeover mentality is to live like no one else so later we can live like no one else. A price has to be paid, and there are no shortcuts. While no one goes looking for needless pain, risk, or sacrifice, when something sounds too good to be true, it is. The myths in this chapter are rooted in two basic problems. First is risk denial, thinking total safety is possible and likely. Second is easy wealth, or looking for the magic key to open the treasure chest.

  Risk Denial

  Risk denial takes several forms in the world of money. Sometimes risk denial is a kind of laziness, when we don’t want to take the energy to realize that energy is needed to win. Other times risk denial is a kind of surrender in which we settle for a bad solution because we are so beat down or beat up that we wave the white flag and do something stupid. At still other times, risk denial can have an active component when we search for a false security that simply doesn’t exist. This is the risk denial of someone who keeps a job he or she hates for fourteen years because the company is “secure,” only to find life turned upside down by a layoff when the “secure” company files for bankruptcy. Money denial always involves an illusion, followed by disillusionment.

  Quick, Easy Money

  The second underlying problem is the quest for easy wealth. Quick, easy money is one of the oldest lies, or myths, in the book of the human race. A shortcut, a microwave dinner, instant coffee, and lottery millionaires are things we wish would give us high quality, but they never do. The secrets of the rich don’t exist, because the principles aren’t a secret. There is no magic key, and if you are looking for one, you’ve set yourself up for pain and the loss of money. One of my pastors says that living right is not complicated; it may be difficult, but it is not complicated. Living right financially is the same way—it is not complicated; it may be difficult, but it is not complicated.

  Myth vs. Truth

  In addition to Debt Myths, we must dispel several other Money Myths as part of your Total Money Makeover. Most of these Money Myths are rooted in the problems we have already discussed: denial and/or a shortcut mentality.

  MYTH: Everything will be fine when I retire. I know I’m not saving yet, but it will be okay.

  TRUTH: The cavalry isn’t coming.

  How can I put this delicately? There is no shining knight headed your way on a white horse to save the day. Wake up! This is the real world where sad old people eat Alpo! Please don’t be under the illusion that this government, one that is so inept and dim-witted with money, is going to take great care of you in your golden years. That is your job! This is an emergency! The house is on fire! You have to save. You have to invest in your future. You won’t be FINE! Do you get the picture?

  We live in the land of plenty, and that has until recently lulled a large percentage of Americans to sleep, thinking everything will be “okay.” Things won’t be okay unless you make them that way. Your destiny and your dignity are up to you. You are in charge of your retirement. We’ll talk about how to take charge of it later in the book, but for now, you’d better be 100 percent convinced that this area deserves your full attention right now—not tomorrow or pretty soon. Personally, I don’t want to work at McDonald’s when I retire—unless it’s the one I own on St. Thomas in the U.S. Virgin Islands.

  MYTH: Gold is a good investment and will cover me if the economy collapses.

  TRUTH: Gold has a poor track record and isn’t used when an economy collapses.

  Gold has been sold as a stable investment that everyone should own. Conventional wisdom intones, “Since the beginning of time, gold has been the standard that man has used to exchange goods and services.” After making that pitch, the mythsayer will follow up with the statement that in a failed economy, gold is the only thing that will retain its value. “You will have what everyone wants” is how the pitch continues. After hearing these pitches, people buy gold as an investment under the illusion of false security, or risk denial.

  The truth is that gold is a lousy investment with a long track record of mediocrity. The average rates of return tracked as far back as Napoleon are around 2 percent gain per year. In recent history, gold has a fifty-year track record of around 4.4 percent, about the same as inflation and just above savings accounts. During that same time frame, you would have made around 12 percent in a good growth-stock mutual fund. During those fifty years, though, there has been incredible volatility and tons of risk.

  While gold has done very well since 2001, this is the only period in history that it has seen great rates of return. And most of those returns are based on the doomsayer emotions brought on by 9/11 and the recession of 2008–09.

  It is also important to remember that gold is not used when economies fail. History shows that when an economy completely collapses, the first thing that appears is a black-market barter system in which people trade items for other items or services. In a primitive culture, items of utility often become the medium of exchange, and the same is temporarily true in a failed economy. A skill, a pair of blue jeans, or a tank of gas becomes very valuable, but not gold coins or nuggets. Usually a new government rises from the ashes, and new paper money or coinage is established. Gold will, at best, play a minor role, and the gold investor will be left with the sick feeling that real estate, canned soup, or knowledge would have been a better hedge against a failed economy.

  MYTH: I can get rich quickly and easily if I join these groups, buy this DVD set, and work three hours a week.

  TRUTH: No one develops and makes a six-figure income on three hours a week.

  I received an e-mail recently from a gentleman offering me a 500-to-1 return on my money. He stated that he has become so enthused about the prospects of this “investment” that he has gotten several of his friends in the deal with him. (Oh no.) He didn’t have a lot of time in his busy schedule, but he would make time if I would meet with him. No thanks. I don’t know what this is, but I know it is a scam. I am not cynical, but I do know investments. Odds of 500 to 1 don’t come through, and I won’t waste my time discussing them or trying to find the flaw in the logic. It is a scam, period. Run as fast as you can to get away from these people!

  As a younger man I often fell prey to this type of garbage. Later, I used to have meetings with these guys to try to find the flaw. Now I just shake my head—because I know he is heading for pain and loss, and so are his friends.

  Ha
ve you seen the midnight infomercials about ordering the DVD set with the “secrets” so that “you too” can become wildly wealthy by buying nothing-down real estate or by learning the hidden formula to success in the stock market? Small-business ideas abound, such as getting rich at home by stuffing envelopes and doing medical billings. Be realistic. Envelopes are stuffed by machines at a rate of thousands a minute and at a cost of tenths of a penny; they are not stuffed by a stay-at-home mom trying to supplement the family income! One person in every thousand who attempts the oversold, overdone medical-billing concept does so at a profit. The legitimate, profitable medical biller is usually someone who came from the medical industry, not someone who got ripped off taking a weekend course. Don’t fall for this!

  Real estate can be purchased for nothing down, but then you owe so much on it that there is no cash flow. You have to “feed” it every month. I bought foreclosure and bankruptcy real estate for years and know it can be done, but the players with cash are the ones who win. The good deals are one in two hundred if you are experienced and very good at the business; I worked sixty hours a week, and it took me years to get to a six-figure income in real estate.

  The stock market attracts the brightest business minds on the planet. These mega-nerds study, track, chart, eat, and breathe the stock market, and have for generations. Still, every other year a book or con artist comes out claiming to have “discovered” little-known keys, patterns, or trends that will “make you rich.” The Beardstown Ladies published a New York Times bestseller about their cute little quilting group who started investing and discovered how to get unbelievable returns. As it turns out, the whole thing was a fraud; they never got those reported returns, and the publisher got sued. Another book was published on the Dogs of the Dow, showing a little-known pattern about buying the worst stocks on the Dow Jones Industrial Average to gain wealth. As it turns out, the author wrote another book about how to invest in bonds after he had discovered his formula didn’t work.