The Total Money Makeover: Classic Edition

by Dave Ramsey

  After my divorce, I found myself homeless, pregnant, and raising my eighteen-month-old son alone. Plus, I was stuck with all the debt from the failed marriage! I went from two incomes and one child, to one income and two children. I started living off of credit cards out of necessity, racking up piles of debt as I went along. I moved into public housing and lived there for two years, trying to take care of my kids and stay current on the bills.

  It was tough feeling like I couldn’t provide for my family; I wanted more for my children. They have gone without birthday parties and other little things that kids their age have. They have never had a place to call home, and that’s my strongest drive in getting out of debt.

  I know firsthand the importance of an emergency fund. For the first time in my life, I had money in the bank when my truck broke down. I didn’t have to go into debt, and my income wasn’t affected. I just paid the mechanic and refilled my emergency fund as soon as possible. Then I went right back to paying off my debts. It was time-consuming and tedious, but worth it to have the security that the emergency fund provided.

  It hasn’t been easy. Just about every time I’ve gotten within a few dollars of having my emergency fund back in place, something has happened, and I’ve had to use it again. But it is now standard practice to refill my emergency fund whenever I use it—it has saved my family from a lot of hard times and from going further into debt.

  Rebecca Gonzalez (age 28)

  Human Resources Assistant

  I’m going to bang on this drum again because it is vital if your makeover is going to be permanent. The worst time to borrow is when times are bad. If there is a recession and you lose your job (read, “no income”), you don’t want to have a bunch of debt. In a recent Gallup poll, 56 percent of Americans said they would borrow on a credit card if a rainy day came, and it wouldn’t be difficult. I agree it wouldn’t be difficult because credit cards are issued to dogs and dead people every year, but that doesn’t mean it would be smart. What would be difficult is to make the payments and even pay off the debt if you don’t get that new replacement job. A Country Financial Security Index survey found that 49 percent of Americans could cover less than one month’s expenses if they lost their income. Half of this culture has virtually no buffer between them and life. Here comes Murphy! Remember how we discussed that problems seem to be (and I believe actually are) less frequent when you have your fully funded emergency fund? Don’t forget that the emergency fund actually acts as Murphy repellent.

  So, what is an emergency, anyway? An emergency is something you had no way of knowing was coming, something that has a major impact on you and your family if you don’t cover it. Emergencies include paying the deductible on medical, homeowner’s, or car insurance after an accident, a job loss or cutback, medical bills resulting from an accident or unforeseen medical problem, or a blown transmission or engine in a car that you need to function. All of these are emergencies. Something on sale that you “need” is not an emergency. Fixing the boat, unless you live on it, is not an emergency. “I want to start a business” is not an emergency. “I want to buy a car or a leather couch or go to Cancún” is not an emergency. Prom dresses and college tuition are not emergencies. Beware not to rationalize the use of your emergency fund for something that you should save for and purchase. On the other hand, don’t make payments on medical bills after an accident while your emergency fund sits there fully funded. If you’ve gone to the trouble of creating an emergency fund, make sure you are crystal clear on what is and is not an emergency.

  Before using the emergency fund, back up from the situation and calm down. Sharon and I would never use the emergency fund without first discussing it and being in agreement. We also would never use the emergency fund without sleeping on the decision and praying about it. Our agreement, our prayer, and our cooling-off period all help us determine if this decision is a rationalization, a reaction, or a real emergency.

  The Emergency Fund Must Be Easy to Access

  Keep your emergency fund in something that is liquid. Liquid is a money term that means easy to get to with no penalties. If you would hesitate to use the fund because of the penalties you’ll incur to get to it, you have it in the wrong place. I use growth-stock mutual funds for long-term investing, but I would never put my emergency fund there. If my car engine blew, I would be tempted to borrow to fix it rather than cash in my mutual fund because the market is down (we always want to wait on it to go back up). That means I have the emergency fund in the wrong place. Mutual funds are good long-term investments, but because of market fluctuations, you are likely to have an emergency when the market is down—another invitation to Murphy. So keep your emergency fund liquid!

  For the same reason, don’t use Certificates of Deposit for your emergency fund because typically you will be charged a penalty for making an early withdrawal. The exception to this is if you can get some kind of “quick-release” CD that allows one withdrawal during the committed period without penalty. That quick release makes the money available to you without penalty and would make that CD a good emergency fund. Understand, you don’t want to “invest” the emergency fund, just have it someplace safe and easy to get to.

  If you already have emergency-fund money someplace it shouldn’t be, use your head if a true emergency hits you. Christine, a sixty-nine-year-old grandmother, told me she borrowed to fix her transmission because she didn’t want to pay a penalty to cash out her CD. The loan was her “wise” banker’s suggestion, and Christine trusted her banker. The only problem is, even with the penalty, Christine would have been better off to cash out her CD. The repair cost was $3,000. Her CD earned 5 percent, and the penalty for cashing it out early was half the interest. So her banker loaned her $3,000 at 9 percent interest so she wouldn’t lose 2.5 percent in penalties. Doesn’t sound too wise to me. Honestly, it doesn’t sound too ethical to me either. Words are powerful; none of us want to be “penalized.” When emotions took over, Christine trusted instead of thinking and made a bad decision.

  I suggest a Money Market account with no penalties and full check-writing privileges for your emergency fund. We have a large emergency fund for our household in a mutual-fund company Money Market account. Wherever you get your mutual funds, look at the website to find Money Market accounts that pay interest equal to one-year CDs. I haven’t found bank Money Market accounts to be competitive. The FDIC does not insure the mutual-fund Money Market accounts, but I keep mine there anyway because I’ve never known one to fail. Keep in mind that the interest earned is not the main thing. The main thing is that the money is available to cover emergencies. Your wealth building is not going to happen in this account; that will come later, in other places. This account is more like insurance against rainy days than it is investing.

  Sometimes, even after I’ve explained all this, people still ask about savings bonds, bonds, or other “low-risk” investments. They are missing the point. Again, this emergency fund is not for wealth building. You will get other kinds of return on investment from this account, but the purpose of this money is not to make you rich. The mission statement for the emergency fund is to protect you against storms, give you peace of mind, and keep the next problem from becoming debt.

  How Big?

  So, how much money should be in your emergency fund? We said it should be enough to cover three to six months of expenses, but should you go with three months or six months? If you think about the purpose of this fund, it will help you determine what is right for you. The purpose of the fund is to absorb risk, so the more risky your situation, the greater the emergency fund you should have. For example, if you earn straight commission or are self-employed, you should use the six-months rule. If you are single or you are a one-income married household, you should use the six-months rule because a job loss in your situation is a 100 percent cut in household income. If your job situation is unstable or there are chronic medical problems in the family, you, too, should lean toward the six-months rule.


  I grew up in government-assisted housing (the projects) and, for a long time, thought that’s how the remainder of my life was supposed to be lived. However, when I was twenty-four years old, the Lord provided me with a job that challenged me intellectually and continually pushed me to think outside the box. I began to listen to the news and political discussions on the radio, and one day I happened to stumble across a funny white guy named Dave.

  After listening to Dave, it took a few years for my wife and me to get onboard. When we finally did decide to have a Total Money Makeover, the hardest part was getting mad enough to eliminate all our debt at once. We continued to make purchases on our credit card and would find ourselves back at square one. But reality set in once I was laid off from my job. We couldn’t afford to make ends meet. I felt like such a failure because I knew that if I had stuck to Dave’s plan and advice, we would have been in a much better situation.

  After that initial layoff, we struggled for a while until I finally landed a new job. Yet we have become debt-free because we all work together and do our part to assure the financial success of our present and future. The level of accountability that is required is tremendous! We fought a lot at the beginning, but as we’ve worked through things, our communication has become smooth and hassle-free. We have been patient and diligent in our budgeting and are now reaping the benefits!

  Our family is still realizing the full impact of being debt-free. The month after we paid off the debt, I was laid off again. But this time we were in a completely different place than before. The financial worries and strains were nonexistent. There is a sense of peace that surpasses all understanding, and until you have experienced it for yourself, you can’t even imagine its amazing power.

  James (age 32) and

  Tabitha (age 31) Atwood

  Train Conductor; Merchandising

  Coordinator

  If you have a “steady, secure” job where you have been with that company or government agency for fifteen years and everyone is healthy, you could lean toward the three-month rule. A real estate agent should have a six-month fund, and a healthy, tenured teacher who plans to stay at her job long term might keep a three-month fund. Customize your emergency fund to your situation and to how your spouse deals with the feeling of risk. Many times men and ladies deal with this subject differently. This fund is for actual protection and for peace of mind, so the spouse who wants this fund to be higher wins.

  We use three to six months of expenses instead of three to six months of income because the fund is to cover expenses, not replace income. If you become ill or lose a job, you need to keep the lights on and food on the table until things turn around, but you might stop investing, and you’ll definitely stop spending budgeted “blow money” until the rain clears. Of course, when you are just starting your Total Money Makeover, your expenses might equal your income. Later, when you are debt-free, you have all the right insurance in place, and you have large investments, you can survive on much less than your income.

  Use All Available Cash

  In Baby Step Two, I instructed you to use all nonretirement savings and investments to pay down your debt. Clean everything out and become debt-free except for the house. Use all savings and investments that don’t have a penalty for withdrawal, like retirement plans. If you used savings that you had in Baby Step Two (Start the Debt Snowball), you cleaned out even the emergency fund down to Baby Step One (Save $1,000). Now is the time to rebuild your emergency fund by replacing any money you may have used to pay debt. Many times I’ve met someone who, for example, had $6,000 in savings at the bank making 2 percent interest, and $11,000 in credit-card debt. The very thought of using $5,000 of that savings to pay the credit cards partially off is very hard. That $6,000 emergency fund is your security blanket, and fear rises up deep inside when someone like me mentions that you should use that money to Snowball your debt. You are right to feel that fear and to question whether you should spend the $5,000 to pay down the debt. You should use that money ONLY if you and your whole family are into a Total Money Makeover. Gazelle-intensity, budgeting, selling ankle-weight cars, and overall total commitment to the plan are the only ways using that savings makes sense.

  You Need All Parties Completely Onboard

  Sherry called our radio show saying that her husband wanted to use $9,000 of their $10,000 emergency fund on Baby Step Two, but he wanted to keep his $21,000 truck debt—with a household income of $43,000. Sherry was mad at me for suggesting something so absurd. Of course, I didn’t make that suggestion. I think it would be a bad move for them to use $9,000 in this situation. The reason I’m against using the savings as suggested is that hubby isn’t onboard. He wants to do part of the plan and keep his stupid truck. There are two reasons not to use the emergency fund in Sherry’s case. First, hubby has not had a Total Money Makeover in his heart, and they will never make it out of debt under any strategy until he does. Second, do the math: on a $43,000 income, they will be in debt and have only a super-small emergency fund for years if they keep the truck. This would be like my wife saying she wants me to lose weight and then baking homemade chocolate-chip cookies every night. She would be saying one thing and doing another.

  I don’t suggest you clean out your savings if everyone isn’t having a Total Money Makeover. I also don’t suggest you clean out your savings if you are planning to be in Baby Step Two (Start the Debt Snowball) for five years. However, few of you will be in Step Two very long if you go gazelle-intense and follow this plan to the letter. If your family is exposed to the elements, with only $1,000 standing between you and life for eighteen to twenty months, that is fine. In that case, you should use your savings to become debt-free or accelerate the Snowball.

  I know that even if everyone is onboard, gazelle-intense, and there is a plan, my suggestion still scares some of you. Good. Don’t you think one of the things that make the gazelle intense is fear? For a short period of time, while you work your Debt Snowball and rebuild your emergency fund in Step Three, use that fear as a motivator to stay focused and keep everyone else moving.

  DAVE RANTS . . .

  The reason you are afraid of investing is because you do not know what you are getting into. Learn about investments.

  The good news in Sherry’s story is that her hubby heard her on the radio with me, and a lightbulb came on. He sold “his” truck, she used “her” savings, and in fourteen months they were debt-free; in eighteen months they were debt-free with a fully funded emergency fund. Sherry sent an e-mail to me about an amusing part of their journey. She said after they were debt-free and rebuilding her precious emergency fund with the same gazelle-intensity they used to pay the debt, one of their teens asked them to buy a computer. Before Sherry could say no, her hubby grabbed the teen in a loving headlock and started yelling, in jest, that there would be no purchases in that house until the emergency fund was done. This made Sherry smile because it told her that not only was the emergency fund coming back soon, but that her husband had gotten the message of how important that fund was to her. She was willing to have a Total Money Makeover, but only if it was Total—for both of them.

  Gender and Emergencies

  The sexes do view the emergency fund differently. In general, men are more task-oriented, and ladies are more security-based. Guys like to know what you “do,” so some of us don’t understand the idea of money just sitting there causing security. Most ladies I meet smile when we start talking about having $10,000 between them and the rain. Many of them say the emergency fund and life insurance are the best parts of their family’s Total Money Makeover.

  Guys, let’s talk. God wired ladies better on this subject than He did us. Their nature causes them to gravitate toward the emergency fund. Somewhere down inside the typical lady is a “security gland,” and when financial stress enters the scene, that gland will spasm. This spasmodic gland will affect your wife in ways you can’t always predict. A spasmodic security gland can affect her emotions, her concentration, and eve
n her love life. Apparently, the security gland is attached to her face. Can you see the financial stress on her face? Believe me, guys, one of the best investments you will ever make is in an emergency fund. A fully funded emergency fund and a husband in the midst of a Total Money Makeover will relax the security gland and make your life much better. My friend Jeff Allen, a comedian, does a whole routine on “Happy Wife, Happy Life.” The bottom line is that even if you don’t “get” the emergency fund, get one.

  I already told you that Sharon and I lost everything, went broke, crashed, and were at the bottom, so you can imagine that this subject is a little sensitive at my house. Our financial crash was totally my doing: it was my real estate business screwup that Sharon watched before she took the ride with me. One of the wounds in our relationship is this issue of security. Her emotions can revisit the fear of looking at a brand-new baby and a toddler and not knowing how we were going to keep the heat on. That is a sensitive place in her psyche, and with good reason. We don’t even use the emergency fund for emergencies. Part of the salve on that wound is that our emergency fund has an emergency fund. If I even walk near the drawer where the emergency fund Money Market checkbook is kept, Sharon’s security gland can tighten up.

  Being the highly trained investment mogul that I am, I could certainly find places to put that money where it would earn more. Or would it? Remember, personal finance is personal. I have come to realize that Sharon’s peace of mind bought with the oversized emergency fund is a great return on investment. Guys, this can be a wonderful gift to your wife.