The Total Money Makeover: Classic Edition

by Dave Ramsey

  When it got bad, they would break the logjam by throwing dynamite into the middle of the logs that were blocking the progress. As you can imagine, this created a dramatic effect. When the dynamite blew, logs and pieces of logs would fly into the air. After working so hard to cut the trees, some of them were a total loss. They had to blow up some of the timber to get the rest of the crop to market. That’s the sacrifice the situation required. Sometimes that is what you have to do with the stopped-up budget. You have to dynamite it. You have to get radical to get the money flowing again.

  One way to do that is to sell something. You could sell lots of little stuff at a garage sale, sell a seldom-used item on the Internet, or sell a precious item through the classifieds. Get gazelle-intense and sell so much stuff that the kids are afraid they are next. Sell things that make your broke friends question your sanity. If your budget is stopped-up and your Debt Snowball won’t roll on its own, you are going to have to get radical.

  In watching heroes across the nation get out of debt with gazelle intensity, believe me, I have seen them sell things. One lady sold 350 goldfish from her pond for a dollar apiece. Men have sold their Harleys, boats, knife collections, or baseball cards. Ladies have sold precious things like nonfamily antiques (keep the heirlooms because you can’t get them back) or a personal car they thought was necessary to life on the planet. I don’t recommend selling your home unless you have payments above 45 percent of your monthly take-home pay. Usually, the home isn’t the problem. I do recommend that most people sell the car with the most debt on it. A good rule of thumb on items (except the house) is this: if you can’t be debt-free on it (not counting the home) in eighteen to twenty months, sell it. If you have a car or a boat that you can’t pay off in eighteen to twenty months, sell it. It is just a car; dynamite the logjam! I used to love my car, too, but I found keeping that huge debt while trying to get out of debt was like running a race wearing ankle weights. Get a Total Money Makeover, so later you can drive anything you want and pay cash for it. When it comes to that debt-ridden item, you may have to make the decision to live like no one else; but remember, later you will be living, or driving, like no one else.

  My wife and I considered credit cards to be just a way of life. It seemed “normal” to simply throw down the cards for everyday items. Vacation rentals, gas, clothes, food—you name it, we paid for it with plastic. Eventually, all of those charges started piling up. It was a gradual and steady accumulation of debt that just kept growing and growing. It was like a snowball that was chasing us instead of us pushing it. All this time I had left my wife to handle the money and didn’t give it a second thought, which wasn’t fair to her. The next thing we knew, we were $30,000 in debt and in need of a Total Money Makeover.

  We had four credit cards with different balances totaling around $25,000. The other $5,000 we owed to the IRS. That was really scary. Needless to say, we attacked the IRS debt first and furiously knocked it out in just three months. Once we were current with all of our payments, we started attacking the credit-card debt. We threw every spare dime we could at it. Today we are debt-free except for the house, and we are building our three- to six-month emergency fund.

  It was definitely hard learning how to say “NO!” to ourselves. For the first time as a couple, we knew we had to make a budget and really stick to it. It wasn’t as easy as it sounds, but the payoff has been immeasurable. Once we got used to this lifestyle, everything just seemed to be less stressful. We found contentment and became happier than we had ever been.

  I know now that this debt was as much my fault as it was my wife’s. Just because we agreed she’d be “in charge of the checkbook” didn’t let me off the hook. I realize now that it was wrong to leave her to handle all the financial responsibilities. If a spouse has been keeping financial secrets, it’s definitely for the best to get them out in the open. It’s the only way these problems can get solved. There may be some anger at first and even some feelings of betrayal. Nevertheless, a marriage can only improve with unobstructed communication. The key is to hang on to each other and enjoy the ride out of the mess that you BOTH created.

  Jeff (age 41) and

  Teresa (age 41) Eller

  Owner of a dump-truck company;

  Medical Manager

  The number of people I talk to about this who will not throw dynamite into their logjam to get the money flowing makes me sad. They can see that the logs will never get to market, they will never have wealth, but they just can’t stand the thought of blowing up a few of them so the rest will get down the river. Translation: “I love my stupid car more than the idea of becoming wealthy enough to give cars away.” Don’t make that mistake.

  There is another method of breaking your logjam that the lumber-jacks didn’t have available to them. More water would have pushed the logs around that corner, too, if they could have flooded the river. I may be stretching this metaphor, but more income will also break up your logjam; it will push the Snowball. If your budget is too tight to get the Debt Snowball rolling, you need to do something to increase income. Selling debt-ridden items lowers the outgo, and selling other items temporarily increases your income. Likewise, working extra hours can increase income in order to increase the speed of debt repayment.

  I don’t like the idea of working one hundred hours per week, but sometimes extreme situations require extreme solutions. Temporarily, just for a manageable period of time, the extra job or overtime may be your solution. I met Randy while doing a book signing in a major city. Randy was two months from being debt-free. He was twenty-six years old and had paid off $78,000 in debt in twenty-one months. He sold a car and worked ten hours a day, seven days a week. Randy was not a doctor or a lawyer; he was a plumber. Some lawyers would argue that plumbers make more than they do, and in some cases they might be right. Randy’s one-man plumbing company had prospered. He had already worked that morning before coming with his wife and little girl to the bookstore. His wife smiled as she looked at her husband with deep respect and told me she hadn’t seen him much this last year, but it was going to be worth it soon. Can you imagine the pressure that young marriage must have been under with $78,000 in debt? Now they were almost free.

  Randy got radical. He used income to bust the logjam. He promised me he was going to slow down as soon as the debt was paid so he could spend time with his wife and little girl. Now they will be able to go places as a family and do things their debt would never have allowed them to do.

  I picked up a pizza one night, and as the guy behind the counter started walking toward his car with a stack of pizzas to be delivered, he saw me and stopped. Smiling, he said, “Hey, Dave, I’m here because of you. Only three more months, and I’m debt-free!” This was not some seventeen-year-old teenager; this was a dad, a thirty-five-year-old guy who wanted to be free.

  There is a young single guy who works on my team. He is gazelle-intense about becoming debt-free. He works here until 5:30 every day, and he smiles as he leaves to work for UPS for another four or five hours virtually every night.

  Why are these guys all smiling? They work hard and unbelievable extra hours, so why would they smile? They smile because they have caught the vision, the vision of living like no one else so later they can live like no one else.

  DAVE RANTS . . .

  Bad Idea: Separate Checking Accounts

  Here’s the deal. When you get married, you become a team. The pastor at your wedding wasn’t joking when he said, “And now you are one.” It’s called unity. The old marriage vows say, “Unto thee I pledge all my worldly goods.” In other words, “I’m all in,” so combine the checking accounts.

  It’s hard to have unity when you separate your bank accounts. When his money is over here, and her money is over there, it’s easy to live in your own little financial world instead of working as a team.

  When you do your spending together, it’s about “our” money. We have an income and we have expenses and we have goals. So when you’re both in agre
ement on where the money is going, then you’ve taken a major step to being on the same page in your marriage, and you will create awesome levels of communication.

  This all boils down to trust. Do you trust your spouse or not? I’ve heard from people who keep separate bank accounts just in case their spouse leaves them. Well, why on earth would you marry someone you can’t trust? And if that’s really the case, then you need marriage counseling, not separate bank accounts!

  Your spouse isn’t your roommate, and this isn’t a joint business venture. It’s a marriage! You don’t run your household and your life separately. Your job is to love each other well, and that includes having shared financial goals—which is hard to do when you have separate accounts.

  What About Saving for Retirement While the Snowball’s Rolling?

  Matt asked me on the radio show about another subject people have trouble with on Baby Step Two. Matt wanted to know if he should stop his 401(k) contributions to get his Debt Snowball moving. He really didn’t want to stop contributing, especially the first 3 percent because his company matches that 100 percent. I am a math nerd, and I know the 100 percent match is sweet, but I have seen something more powerful—focused intensity. If you are going to be gazelle-intense and do everything in your power to become debt-free very quickly, then stop your retirement plan contributions, even if your company matches them. The power of focus and quick wins is more important in the long term to your Total Money Makeover than is the match. This is only for people who have already pulled out all the stops and are ready for “anything goes” to become debt-free quickly.

  If you are radically gazelle-intense, the speed of your debt freedom will enable you to return to that 401(k) with the match in just a matter of months. Imagine how much you’ll be able to contribute without payments. The average person who throws the dynamite and is gazelle-intense will be debt-free except for his or her home in eighteen months. Some take longer and others less, depending on debt, income, and savings at the time they start their Total Money Makeover. If for some reason you are stuck in an extremely deep hole, you may want to continue doing some retirement saving. An extremely deep hole is NOT defined by your unwillingness to apply yourself.

  An extremely deep hole is not Phil’s situation. Phil makes $120,000 per year and has $70,000 of debt, $32,000 of which is on one car. Sell the car and amputate the lifestyle, Phil. Phil should be debt-free in nine months, no excuses and no prisoners. An extremely deep hole is Tammy’s situation. Tammy has $74,000 in student loans with another $15,000 in credit-card debt. Tammy is a single mom with three children and has an income of $24,000 per year. It is going to take Tammy a few years to work her Debt Snowball. She will figure a way through it, but her situation is one of the very rare exceptions; she should keep contributing to the 401(k) with the match.

  When You Have to Dip into the Emergency Fund

  Penny’s air conditioner went out in the dead of summer. The repairs were $650, which she took from her emergency fund. “Thank goodness that $1,000 was there,” she said with a sigh. Now what does she do? The Debt Snowball, or stop and go back to Baby Step One (save $1,000)? Penny needs to put the Debt Snowball temporarily on hold. She will continue to make minimum payments and go back to the first step until she gets back up to $1,000 in her emergency fund. If she doesn’t, soon she will have nothing in savings, and when the alternator on the car goes out, she will reopen some credit-card account. The same applies to you. If you use the emergency fund, return to Baby Step One until you have re-funded your beginner emergency fund; then move right back to your Debt Snowball, Baby Step Two.

  Second Mortgages, Business Debt, and Rental Property Mortgages

  Because of debt-consolidation loans and other mistakes, many people have a home equity loan or some kind of large second mortgage. What should be done with this loan? Is it put in the Debt Snowball, or just called a mortgage and not dealt with at this step? It will be paid off; it is just a matter of at which step. Generally speaking, if your second mortgage is more than 50 percent of your gross annual income, you should not put it in the Debt Snowball. We will get to it later. If you make $40,000 per year and have a $15,000 second mortgage, you should put it in the Debt Snowball. Let’s just take care of it now. But if you have a $35,000 second mortgage and make $40,000, you will get to it in another step. By the way, you should consider refinancing your first and second mortgages together if you can lower both interest rates. Then put the total on a fifteen-year mortgage, or the remaining years of your current first mortgage, which-ever is less (e.g., if you have twelve years remaining on your first mortgage at 9 percent interest, refinance the first and second mortgages together into a new first at 6 percent over twelve years or less).

  Many small-business owners have debt and want to know how to handle that debt in the Debt Snowball. Most small-business debt is personally guaranteed, which means it is really personal debt. If you have a small-business loan of $15,000 at the bank or have borrowed on your credit cards for business, this is personal debt. Treat small-business debt like any other kind of debt. List it with all your other debts, smallest to largest, in the Debt Snowball. If your business debt is larger than half your gross annual income or half your home mortgage, hold the payoff on that size debt until later. Smaller and medium-sized debts are what we want to pay off at this step.

  The only other larger debts to delay are mortgages on rental properties. Stop buying more rental property, but hold that debt until later. After your home mortgage is paid off in a later Baby Step, you should Snowball your rental mortgages. List the rental debts smallest to largest, and concentrate all your focus on the smallest until paid. Then work your way through the rest. If you own several, or even just one, rental property, you should consider selling some or all to get the money to pay off the ones you keep or pay off other debt listed in the Debt Snowball. Having $40,000 in credit-card debt and a rental with $40,000 equity doesn’t make sense. You wouldn’t borrow $40,000 on credit cards to buy a rental, I hope. So why would you keep the situation described here, which has the same effect?

  Other than the home mortgage, larger second mortgages, business loans, and rental mortgages are the only things that aren’t paid off in Baby Step Two (Start the Debt Snowball). With gazelle-intensity, great focus, extreme sacrifice, selling things, and working extra, we clear all debt. Again, if you are fired up, normally this will happen within eighteen to twenty months. Some will get out of debt sooner, and some will get out in a slightly longer period of time. If your Snowball is scheduled to run longer, never fear; it may not take as long as the math seems to indicate. Many people find a way to shorten the time with sheer intensity, and God tends to pour blessings on people going in a direction He wants them to go. It is as if you are walking or running at a fast pace, and a moving sidewalk suddenly appears below you to carry you faster than your own effort would.

  The Debt Snowball is very possibly the most important step in your Total Money Makeover for two reasons. One, you free up your most powerful wealth-building tool, your income, during this step. Two, you take on the entire American culture by declaring war on debt. By paying off your debt, you make a statement about your stance on the issue of debt. By paying off your debt, you show that The Total Money Makeover of your heart has occurred, paving the way for a Total Money Makeover of your actual wealth.

  8

  Finish the Emergency Fund: Kick Murphy Out

  Close your eyes and think about what it will be like when you reach this Baby Step. Most gazelle-intense participants in a Total Money Makeover will arrive at the beginning of Baby Step Three in around eighteen to twenty months. When you reach this step, you have $1,000 cash and no debt except your home mortgage. You have pushed with such focused intensity that the ball is now rolling, and you have momentum on your side. Again, close your eyes and breathe in. Think about what it will feel like when you are debt-free except for the house and have $1,000 cash. Did I see you smiling?

  You are beginning to see th
e power of being in control of your largest wealth-building tool, your income. Now that you don’t have any payments except the house, Baby Step Three should come quickly.

  Baby Step Three: Finish the Emergency Fund

  A fully funded emergency fund covers three to six months of expenses. What would it take for you to live three to six months if you lost your income? Financial planners and financial counselors like myself have used this rule of thumb for years, and it has served my Total Money Makeover participants well. You start the emergency fund with $1,000, but a fully funded emergency fund will usually range from $5,000 to $25,000. The typical family that can make it on $3,000 per month might have a $10,000 emergency fund as a minimum. What would it feel like to have no payments but the house, and $10,000 in savings for when it rains?

  Remember what we said about emergencies a couple of chapters back? It will rain; you need an umbrella. Don’t forget, Money magazine says that 78 percent of us will have a major unexpected event within the next ten years. When the big stuff happens, like the job layoff or the blown car engine, you can’t depend on credit cards. If you use debt to cover emergencies, you have backtracked again. A well-designed Total Money Makeover will walk you out of debt forever. A strong foundation in your financial house includes the big savings account, which will be used just for emergencies.