The Total Money Makeover: Classic Edition

by Dave Ramsey

  It is really hard to sell books and DVDs that teach the necessity of lots of hard work, living on less than you make, getting out of debt, and living on a plan, but I’m trying—because it’s the only way that will work. Meanwhile, the sooner you understand that no one gets rich quick by using secret information, the better.

  MYTH: Cash Value life insurance, like Whole Life, will help me retire wealthy.

  TRUTH: Cash Value life insurance is one of the worst financial products available.

  Sadly, more than two-thirds of the life insurance policies sold today are Cash Value policies. A Cash Value policy is an insurance product that packages insurance and savings together. Do not invest money in life insurance; the returns are horrible. Your insurance person will show you wonderful projections, but none of these policies perform as projected.

  Let’s look at an example. If a thirty-year-old man has $100 per month to spend on life insurance and shops the top five Cash Value companies, he will find he can purchase an average of $125,000 in insurance for his family. The pitch is to get a policy that will build up savings for retirement, which is what a Cash Value policy does. However, if this same guy purchases twenty-year level term insurance with coverage of $125,000, the cost will be only $7 per month, not $100. Wow. If he goes with the Cash Value option, the other $93 per month should be in savings, right? Well, not really; you see, there are expenses. Expenses? How much? All of the $93 per month disappears in commissions and expenses for the first three years; after that, the return will average 2.6 percent per year for Whole Life, 4.2 percent for Universal Life, and 7.4 percent for the new-and-improved Variable Life policy that includes mutual funds. These statistics are from Consumer Reports, Consumer Federation of America, Kiplinger’s Personal Finance, and Fortune magazine, so these are the real numbers. Additionally, a recent article in National Underwriter, The Industry Mouthpiece, showed charts of returns from fourteen national companies. The returns they show average only 6.29 percent over twenty years. Either way, this product is a really bad idea!

  Worse yet, with Whole Life and Universal Life, the savings you finally build up after being ripped off for years don’t go to your family upon your death; the only benefit paid to your family is the face value of the policy, $125,000 in our example. The truth is that you would be better off getting a $7 term policy and putting the extra $93 in a cookie jar! At least after three years you would have $3,000, and when you died your family would get your savings.

  As you continue in this book and learn how to have a Total Money Makeover, you will begin investing well. Then, when you are fifty-seven and the kids are grown and gone, the house is paid for, and you have $700,000 in mutual funds, you’ll become self-insured. That means when your twenty-year term is up, you shouldn’t need life insurance at all—because with no kids to feed, no house payment, and $700,000, your spouse will just have to suffer through if you die without insurance.

  MYTH: Playing the lottery and other forms of gambling will make you rich.

  TRUTH: The lottery is a tax on the poor and on people who can’t do math.

  One day I was in a lottery state for a speaking engagement. I went into the gas station to pay for my fill-up and saw a line of people. For a moment I thought I was going to have to stand in line to pay for my gas, before I realized that the line was for purchasing lottery tickets. Have you ever seen those lines? Next time you do, look at the people in the line. Darryl and his other brother Darryl. These are not rich people, and these are not smart people. The lottery is a tax on poor people and on people who can’t do math. Rich people and smart people would be in the line if the lottery were a real wealth-building tool, but the truth is that the lottery is a rip-off instituted by our government. This is not a moral position; it is a mathematical, statistical fact. Studies show that the zip codes that spend four times what anyone else does on lottery tickets are those in lower-income parts of town. The lottery, or gambling of any kind, offers false hope, not a ticket out. A Total Money Makeover offers hope because it works. Remember, I have been broke twice in my life, but never poor; poor is a state of mind.

  Gambling represents false hope and denial. Energy, thrift, and diligence are how wealth is built, not dumb luck.

  MYTH: Mobile homes, or trailers, will allow me to own something instead of renting, and that will help me become wealthy.

  TRUTH: Trailers go down in value rapidly, making your chances for wealth building less than if you had rented.

  Trailers go down in value rapidly. People who buy a $25,000 double-wide home will in five years owe $22,000 on a trailer worth $8,000. Financially, it’s like living in your new car. If I were to suggest you invest $25,000 into a mutual fund with a proven track record of dropping to $8,000 in just five years, you would look at me as if I had lost my mind. I am not above living in a mobile home. I have lived in worse. I just know mobile homes are lousy places to put money. Please don’t kid yourself on this. If it walks like a duck and quacks like a duck, it is a duck. Call it “manufactured housing,” put it on a permanent foundation, add lots of improvements around the yard, and it is still a trailer when you are ready to sell it.

  I want you to own a home because homes are a good investment. The fastest way to become a homeowner is through a Total Money Makeover while renting the cheapest thing you can suffer through. The purchase of a trailer is not a shortcut but a setback on the path to owning real estate that goes up in value. If the typical consumer considering buying your home can walk up and tell it was ever a trailer in any form, your home will go down, not up, in value.

  MYTH: Prepaying my funeral or my kids’ college expenses is a good way to invest and protect myself against inflation.

  TRUTH: Plans for prepaid funerals and college expenses give low rates of return and put money in the other guy’s pocket.

  The only exception to the “no trailers” rule is Ron’s plan. Ron graduated from Financial Peace University and was on track for a Total Money Makeover. Ron and his wife prayerfully decided to sell their nice $120,000 home on which they owed only $50,000. They bought a small farm and a very used $3,000 trailer. With no payments and an income of $85,000, they saved and built a very nice, paid-for $250,000 home in just a couple of years. The appraisal was $250,000, but since they paid cash for the land, they got a bargain. Also, as a contractor Ron built the home for pennies on the dollar, so it didn’t take them long to finish paying for the home. They sold the $3,000 trailer for $3,200; after all, $3,000 trailers have lost about all their value, so the sale comes down to negotiating.

  When you prepay something, your return on investment (interest) is the amount the item will go up in value before you use it. In other words, by prepaying, you avoid the price increases, and that is your return. Prepaying items is like investing at the item’s inflation rate. For example, prepaying college tuition will save you the amount tuition goes up between the time you lock in and the time your child begins his college education. The average inflation rate for tuition nationally is about 8 percent, so prepaying tuition is like investing money at 8 percent. That is not bad, but mutual funds will average about 12 percent over a long period of time, and you can save for college tax-FREE. (More about college saving later in your Total Money Makeover.)

  The same concept is true for prepaid burial plans. If you have gone through the gut-wrenching exercise of selecting a casket, burial plot, and so on in the middle of grief, you don’t want loved ones to experience the same. Preplanning the details of your funeral is wise, but prepaying is unwise. Sara’s mom died suddenly, and the grief was overwhelming. In the midst of that pain, Sara felt they made unwise purchases as part of the funeral arrangements, and she vowed not to leave her family in the same predicament. So Sara, age thirty-nine, paid $3,500 for a prepaid funeral. Again, it is wise to preplan, not to prepay. Why? If she were to invest $3,500 in a mutual fund averaging 12 percent, upon an average death age of seventy-eight, Sara’s mutual fund would be worth $368,500! I think Sara could be buried for that, with
a little left over, unless, of course, she is King Tut!

  MYTH: I don’t have time to work on a budget, retirement plan, or estate plan.

  TRUTH: You don’t have time not to.

  Most people concentrate on the urgent in our culture. We worry about our health and focus on our money only after they’re gone. Dr. Stephen Covey’s book The Seven Habits of Highly Effective People examines this problem. Dr. Covey says one of the habits of highly effective people is that they begin with the end in mind. Wandering through life aimlessly will bring you much frustration.

  Covey says to divide activities into four quadrants. Two of the quadrants are Important/Urgent and Important/Not Urgent. The other two are Not Important, so let’s skip those. We take care of the Urgent/Important stuff, but what is Important/Not Urgent in a Total Money Makeover is planning. You can pay the electric bill or sit in the dark, but if you don’t do a monthly spending plan, there is no apparent immediate damage.

  John Maxwell has the best quote on budgeting I have ever heard. I wish I had said it: “A budget is people telling their money where to go instead of wondering where it went.” You have to make your money behave, and a written plan is the whip and chair for the money tamer.

  Earl Nightingale, motivational legend, said that most people spend more time picking out a suit of clothes than planning their careers or even their retirements. What if your life depended on how you managed your 401(k) or whether you started your Roth IRA today? Actually, it does—because the quality of your life at retirement depends on your becoming an expert in money management today.

  Estate planning is never urgent until someone dies. You must think long term to win with money, and that includes thinking all the way through death. More on this later, but just remember, everyone must budget, plan retirement, and do estate planning—everyone.

  MYTH: The debt-management companies on TV, like AmeriDebt, will save me.

  TRUTH: You may get out of debt, but only with your credit trashed.

  Debt-management companies are springing up everywhere. These companies “manage” your debt by taking one monthly payment from you and distributing the money among your creditors, with whom they’ve often worked out lower payments and lower interest. This is not a loan, as with debt consolidation. Sometimes people get the two confused. Both are bad, but we have already covered the debt consolidation loans. However, because America needs a Total Money Makeover, the debt-management business has become one of the fastest-growing industries today. Companies like AmeriDebt and Consumer Credit Counseling Services can help you get better interest rates and lower payments, but at a price. When you use one of these companies and then try to get a conventional, FHA, or VA loan, you will be treated the same as if you had filed a Chapter 13 Bankruptcy. Mortgage underwriting guidelines for traditional mortgages will consider your credit trashed, so don’t do it.

  Another problem with debt management by someone else is that your habits don’t change. You can’t have someone lose weight for you; you have to change your exercise and diet habits. Handling money is the same way; you have to change your behavior. Turning all your problems over to someone else treats the symptom, not the problem.

  Our firm does financial counseling and trains counselors around the nation for referrals. We will not handle your money for you. We lead you into a mandatory Total Money Makeover. We are not babysitters. We have had thousands of clients over the years who have gone to debt-management companies for help. When the clerk taking the order couldn’t make the person’s life fit their cookie-cutter computer program, the customer was advised to file for bankruptcy. After we met with them, it was obvious that the customer wasn’t bankrupt; they just needed radical surgery. Don’t take bankruptcy advice from debt-management companies; you likely aren’t bankrupt.

  Of the debt-management companies, Consumer Credit is the best. They do the most thorough job, some branches actually educate, and they are the most powerful in the renegotiation of your debt. You still destroy your credit by using them, though, so don’t do it; but if I absolutely can’t talk you out of it, they are the one to use. The worst abuser in this industry has now been put out of business. AmeriDebt was started by Andris Pukke, who, prior to beginning this business, pled guilty to federal charges of defrauding customers in a debt-consolidation loan scam. In spite of this, AmeriDebt grew to revenues of $40 million and spent $15 million per year getting you to use their services. They were so blatant in their misleading of consumers that the Federal Trade Commission (FTC) finally stepped in and shut them down. The FTC says hidden fees and deceptive practices took over $170 million out of Americans’ pockets. In the largest case of this type ever, the FTC took a $170 million judgment against AmeriDebt, who is now in bankruptcy. Andris Pukke is court-ordered to give up $35 million in personal assets to settle with consumers. There are truly sharks out there.

  MYTH: I can buy a kit to clean up my credit, and all my past misdeeds will be washed away.

  TRUTH: Only inaccuracies can be cleaned from credit reports, so this is a scam.

  The Federal Fair Credit Reporting Act dictates how consumers and creditors interact with the credit bureaus. Bad credit drops off your credit report after seven years unless you have a Chapter 7 Bankruptcy, which stays on for ten years. Your credit report is your financial reputation, and you can’t have anything taken off your report unless the item is inaccurate. If you have an inaccuracy that needs to be removed, you need to write a letter pointing out the error and ask them to correct this error right away. Accurate bad credit stays unless you lie. Lying for the purpose of getting money is fraud. Don’t do it.

  Credit-repair companies are largely scams. The Federal Trade Commission regularly conducts raids to close down these fraudulent companies. I have had many callers on my radio show who purchased a $300 kit to “clean” their credit. Sometimes the kit tells you to dispute all bad credit and ask to have it removed even if the item is reported accurately. Don’t do that. The worst idea the kits push is to get a new Social Security number. By getting a second identity, you get a brand-new credit report, and lenders will never know about your past misdeeds. This is fraud, and if you do this, you will go to jail. Do not pass go; go directly to jail—fraud. You are lying to get a loan, which is not credit cleanup, and this is criminal.

  DAVE RANTS . . .

  I am not against the enjoyment of money. What I am against is spending money when you do not have money to begin with.

  Clean your credit with a Total Money Makeover. I will show you how to live under control and pay cash for stuff so you don’t need credit, and over time your credit will clean itself.

  MYTH: My divorce decree says my spouse has to pay the debt, so I don’t.

  TRUTH: Divorce decrees do not have the power to take your name off credit cards and mortgages, so if your spouse doesn’t pay, be ready to. You still owe the debt.

  Divorce happens a lot, and it is truly sad. Divorce means we split up everything, including the debts; however, the debts are not easily split. If your name is on a debt, you are liable to pay it, and your credit is affected if you don’t. A divorce court does not have the power to take your name off a debt. The divorce judge only has the power to tell your spouse to pay it for you. If your spouse doesn’t pay, you can tell the judge, but you are still liable. A lender who doesn’t get paid will correctly report bad credit on all parties to the loan, including you. A lender who doesn’t get paid can correctly sue the parties to the loan, including you.

  If your ex-husband keeps his truck that you both signed for and then doesn’t make the payments, your credit is damaged, the truck gets repo’ed, and you will get sued for the balance. If you quitclaim-deed your ownership in the family home to your ex-wife as part of the settlement, you will find yourself in a mess. A quitclaim deed is the easy way to give up ownership in your home. If she doesn’t pay on time, your credit is trashed; if she gets foreclosed on, so have you. Even if she pays perfectly on the home or he does on the truck, you will find t
hat you have trouble buying the next home because you have too much debt.

  If you are going to leave a marriage, make sure that all debts are refinanced out of your name or force the sale of the item. Don’t have the attitude: “I don’t want to make him sell his truck.” If you are that much in love, don’t get divorced; but if you are walking away, make it a complete, clean break even though it’s painful now. I have counseled thousands of people who were broken financially by ex-spouses and bad advice from a divorce attorney. So sell the house or refinance it as part of the divorce, period. The only other option is mega-risk, and you can count on heartache and even more anger coming your way.

  MYTH: That collector was so helpful; he really likes me.

  TRUTH: Collectors are not your friends.

  There are a few good collectors, very few. Almost every time a collector is “understanding,” or wants to “be your friend,” there is a reason: to get you to pay your bill. The other technique is to be mean and nasty, and you may find your new “friend” using all kinds of bullying tactics once you have a “relationship.”

  Your Total Money Makeover will cause you to pay your debts. I want you to pay what you owe, but collectors are not your friends. Credit-card collectors are the worst, for they will lie, cheat, and steal—and that is just before breakfast. You can tell if a credit-card collector is lying by looking to see if his lips are moving. Any deal, special plan, or settlement you make with collectors must be in writing BEFORE you send them money. Otherwise, you will find that you don’t have a deal, that they lied. Never allow collectors electronic access to your checking account, and never send postdated checks. They will abuse you if you give them this power, and there will be nothing you can do, because you owe them money. Clear?