The Total Money Makeover: Classic Edition

by Dave Ramsey

  By the same token, do not use your potential Social Security benefits in your calculations. I don’t count on an inept government for my dignity at retirement, and you shouldn’t either. A recent survey said more people under age thirty believe in flying saucers than believe they will receive a dime from Social Insecurity. I tend to agree. I’m not taking a political position (although I’m not above it), but the mathematics of that system spell doom. I’m not Chicken Little predicting the sky is falling; entire books have been written on the Social Security mess. Understand, it is your job to take care of you and yours, so part of your Total Money Makeover is to invest now to make that happen. If Social Security isn’t there when you retire, you’ll be glad you listened to my advice. If by some miracle Social Security is there when you retire, that will mean I was wrong. In that case, you’ll have some extra money to give away. I’m sure you’ll forgive me for that.

  Your Tool Is Mutual Funds

  Now that you have reached this step, you need to learn about mutual funds. The stock market has averaged just below a 12 percent return on investment throughout its history. Growth-stock mutual funds are what I recommend investing in for the long term. Growth-stock mutual funds are lousy short-term investments because they go up and down in value, but they are excellent long-term investments when leaving the money longer than five years. One hundred percent of the fifteen-year periods in the stock market’s history have made money. The Total Money Makeover is not an investment textbook, so if you need more detailed information, check out our class, Financial Peace University, or my first book, Financial Peace. My personal retirement funds and my kids’ college funds are invested the way I teach in The Total Money Makeover.

  Here’s a Reader’s Digest version of my approach. I select mutual funds that have had a good track record of winning for more than five years, preferably for more than ten years. I don’t look at their one-year or three-year track records because I think long term. I spread my retirement, investing evenly across four types of funds. Growth and Income funds get 25 percent of my investment. (They are sometimes called Large Cap or Blue Chip funds.) Growth funds get 25 percent of my investment. (They are sometimes called Mid Cap or Equity funds; an S&P Index fund would also qualify.) International funds get 25 percent of my investment. (They are sometimes called Foreign or Overseas funds.) Aggressive Growth funds get the last 25 percent of my investment. (They are sometimes called Small Cap or Emerging Market funds.) For a full discussion of what mutual funds are and why I use this mix, go to daveramsey.com/mutual-funds and visit MyTotalMoneyMakeover.com.

  The invested 15 percent of your income should take advantage of all the matching and tax advantages available to you. Again, our purpose here is not to teach the detailed differences in every retirement plan out there (see my other materials for that), but let me give you some guidelines on where to invest first. Always start where you have a match. When your company will give you free money, take it. If your 401(k) matches the first 3 percent, the 3 percent you put in will be the first 3 percent of your 15 percent invested. If you don’t have a match, or after you have invested through the match, you should next fund Roth IRAs.

  The Roth IRA will allow you to invest up to $5,000 per year, per person. There are some limitations as to income and situation, but most people can invest in a Roth IRA. The Roth grows tax-FREE. If you invest $3,000 per year from age thirty-five to age sixty-five, and your mutual funds average 12 percent, you will have $873,000 tax-FREE at age sixty-five. You have invested only $90,000 (30 years x 3,000); the rest is growth, and you pay no taxes. The Roth IRA is a very important tool in virtually anyone’s Total Money Makeover.

  Start with any match you can get, and then fully fund Roth IRAs. Be sure the total you are putting in is 15 percent of your total household gross income. If not, go back to 401(k)s, 403(b)s, 457s, or SEPPs (for the self-employed), and invest enough so that the total invested is 15 percent of your gross annual pay.

  Example:

  Household Income

  $81,000

  Husband

  $45,000

  Wife

  $36,000

  Husband’s 401(k) matches first 3%.

  3% of 45,000 ($1,350) goes into the 401(k).

  Two Roth IRAs are next, totaling $10,000.

  The goal is 15% of 81,000, which is $12,150.

  You have $11,350 going in. So you bump the husband’s 401(k) to 5%, making the total invested $12,250.

  What It Will Take to Retire

  How much do you need to retire with dignity and security? How long will it take you to get there? See the back of the book for worksheets to help you calculate some of these actual numbers. You are secure and will leave a nice inheritance when you can live off of 8 percent of your nest egg per year. If you make 12 percent on your money average and inflation steals 4 percent, 8 percent is a dream number. If you make 12 percent and only pull out 8 percent, you grow your nest egg by 4 percent per year. That 4 percent keeps your nest egg, and therefore your income, ahead of inflation ’til death do you part. You get a cost-of-living raise from your nest egg every year. If you can live with dignity on $40,000, you need a nest egg of only $500,000. I would recommend that you have the largest nest egg possible because there are some really cool non-greedy things to do with it later, like giving it away.

  If, when you run the calculations on the worksheet, you are afraid you won’t make your goal of saving 15 percent, keep in mind that this is just Baby Step Four. Later steps will allow you to accelerate your investing while still having a life.

  Would you dream with me for a moment? Dream that a twenty-seven-year-old couple with average to below-average income commit to a Total Money Makeover. They get gazelle-intense, and in three years, by age thirty, they are at Step Four. They invest 15 percent of their income in four types of growth-stock mutual funds with five- to ten-year track records. The average household income in America is right around $50,000 per year, according to the Census Bureau. Joe and Suzy Average would invest $7,500 (15 percent) per year or $625 per month. If you make $50,000 per year and have no payments except the house mortgage and live on a budget, can you invest $625 per month? Follow me here. If Joe and Suzy invest $625 per month with no match into Roth IRAs from age thirty to age seventy, they will have $7,588,545 tax-FREE! That is almost $8 million. What if I’m half-wrong? What if you end up with only $4 million? What if I’m six times wrong? Sure beats the 97 out of 100 sixty-five-year-olds who can’t write a check for $600!

  I would submit to you that Joe and Suzy are well below average. Why? In our example they started at the average household income in America, and in forty years of work never got a raise. They saved 15 percent of income and never increased it by one dollar. There is no excuse to retire without financial dignity in the United States today. Most of you will have well over $2 million pass through your hands in your working lifetime, so do something about catching some of that money.

  Gayle asked me one day if it was too late for her to start saving. Gayle wasn’t twenty-seven like Joe and Suzy. She was fifty-seven years old, but with her attitude you would have thought this lady was 107. Harold Fisher had a much better outlook at age one hundred than Gayle did at age fifty-seven. Life had dealt her some blows and had knocked most of the hope out of her. A Total Money Makeover is not a magic show. You start where you are, and you do the steps. These steps work if you are twenty-seven or fifty-seven, and they don’t change. Gayle might be starting the retirement investing step at sixty that Joe and Suzy start at thirty years old. Gayle was unwise to enter her sixties without an emergency fund and with credit-card debt and a car payment. She, like all of us, couldn’t save when she has debt and no umbrella for when it rains. Would it have been better for Gayle to start when she was twenty-seven or even forty-seven? Obviously. But once she was done with the pity party, she still needed to start with Baby Step One and follow The Total Money Makeover step-by-step to put herself in the best position possible.

  It is nev
er too late to start. George Burns won his first Oscar at eighty. Golda Meir was prime minister of Israel at seventy-one. Michelangelo painted the back wall of the Sistine Chapel at sixty-six. Colonel Sanders never fried any chicken for money until he was sixty-five, and KFC (Kentucky Fried Chicken) is a household name worldwide. Albert Schweitzer was still performing surgery in Africa at eighty-nine. It is never too late to start. The past has passed. Start where you are, because that is your only option. However, a note to all of you under forty: all of us over forty are giving you a collective yell, “INVEST NOW!”

  Baby Step Four is not “Get rich quick.” The investing you do systematically and consistently over time will make you wealthy. If you play with this by jumping in and out, always finding something more important than investing, you are doomed to being one of those 54 out of 100 sixty-five-year-olds still working because you have to work. Systematic, consistent investing is the tortoise that beats the hare in the race. When you keep at it, the investing compounds and explodes. The following by Timothy Gallwey always reminds me of this concept:

  When we plant a rose seed in the earth, we notice it is small, but we do not criticize it as “rootless and stemless.” We treat it as a seed, giving it the water and nourishment required of a seed.

  When it first shoots up out of the earth, we don’t condemn it as immature and underdeveloped; we do not criticize the buds for not being open when they appear. We stand in wonder at the process taking place, and give the plant the care it needs at each stage of its development.

  The rose is a rose from the time it is a seed to the time it dies. Within it, at all times, it contains its whole potential. It seems to be constantly in the process of change. Yet at each state, at each moment, it is perfectly all right as it is.

  A flower is not better when it blooms than when it is merely a bud; at each stage it is the same thing . . . a flower in the process of expressing its potential.

  The story of the rose is about human potential and about not being defined by what you do, but rather by who you are. Your Total Money Makeover and the stage your investments are in are similar. Push with gazelle intensity to bloom, but know that as long as you take the progressive steps, you are winning. Ultimately, we are not defined by wealth; however, your Total Money Makeover will affect your wealth, as well as your emotions, relationships, and spiritual condition. This is a “Total” process.

  I started listening to Dave a little under two years ago, and in that time we have become completely debt-free with the exception of our house! We have a fully funded emergency fund. We have two very nice vehicles, both of which are completely paid for. And, as we keep paying double toward our monthly mortgage bills, we will have our house paid off in about five years. The amazing thing is, we’re only in our midtwenties!

  I first got into debt before my wife and I were married. I just thought you were supposed to finance cars, and that’s what I did. You can’t have a car without a loan, right? At one point I was working three jobs to pay off our debt. I think the bank was wondering what in the world was going on when my car payments started coming in triple the required amount!

  Once we had our entire consumer debt paid off and our emergency fund, we started investing. We used Dave’s advice from The Total Money Makeover to invest. We have our mutual funds spread out into the four different types of funds Dave talks about—Growth and Income funds, Growth funds, International funds, and Aggressive Growth funds. Thanks to Dave, our future looks very bright. If we don’t earn and invest more annually than we are right now for the rest of our lives, we will still be able to retire at age sixty-five with $12 million!

  It feels so good to be so young and have such financial freedom and the ability to bless other people financially. Thanks, Dave, for your financial insight and more importantly for continuing to give hope to hundreds of thousands of people.

  Adam (age 24) and

  Kristi (age 22) Ivey

  Worship Pastor; Labor-and-Delivery

  Nurse

  After completing this step, you have no debt, except the house, around $10,000 cash for emergencies, and you are taking steps to make sure you will retire with dignity. I think I see a smile broadening. I know when Sharon and I reached this step, things started to move in our lives. We started to regain the confidence that losing everything had taken from us. You are going to win. Can you feel it? Can you see it? If not, go back and read that sentence again. Better yet, write it where you’ll see it every day: “I am going to win!” Your life is changing! This is fun! Now, let’s take another step.

  10

  College Funding: Make Sure the Kids Are Fit Too

  Time to do something about the ever-famous college fund. Many of you have been wringing your hands while we walked through four Baby Steps and have not saved so much as a dime for those little cherubs. Some people in our culture have lost their minds about college education. College is important, so important that I’ve explained to my kids that if they don’t go to college, we will hire people to do mean things to them until they go. Seriously, a solid education to begin your adult life and your career will add to the quality of both. I also attended and graduated from college; go figure.

  Understand the Purpose of a College Education Before You Fund It

  I have done financial counseling for parents whom I was afraid would need years of therapy if they didn’t provide their children the most expensive school, free for the taking. I am sure that as we start this Baby Step, we need to examine our culture’s value system on the college issue. We have sold our young people so hard and so long on college that we have begun to accept some myths about college degrees. College degrees do not ensure jobs. College degrees certainly don’t ensure success. College degrees do not ensure wealth. College degrees only prove that someone has successfully passed a series of tests. We all know college-educated people who are broke and unemployed. They are very disillusioned because they thought they had bought a ticket and yet were denied a seat on the train to success.

  If you are sending your kids to college because you want them to be guaranteed a job, success, or wealth, you will be dramatically let down. In some cases, the letdown won’t take long because as soon as they graduate they will move back in with you. Hear me on this: college is great, but don’t expect too much from that degree. What if we were to admit that, in most cases, college can only teach knowledge? If we did, we’d see that failure and heartache are guaranteed—if we expect a college degree by itself to deliver life’s treasures. Only if you mix knowledge with attitude, character, perseverance, vision, diligence, and extreme levels of work will your college degree produce for you. We have placed a dangerous responsibility on that thin little sheepskin. We have asked that it do things it cannot do.

  Because we have turned a college degree into some kind of “genie in a bottle” formula to help us magically win at life, we go to amazingly stupid extremes to get one. I have been a millionaire starting with nothing two times before I was forty, and I attribute 15 percent of that to college knowledge and 0 percent to the degree. The book Emotional Intelligence reported a similar finding. In studying successful people, the author discovered that 15 percent of success could be attributed to training and education, while 85 percent was attributed to attitude, perseverance, diligence, and vision. If we admit out loud that education is for knowledge, which is only part of the formula to success, then we don’t have to lose our minds in pursuit of the Holy Grail degree.

  What about those lifelong friends your children will make in college who can “help” them when they graduate? Let me ask you: Have you made any extra money because of friendships you made in college? I’m not saying friendships don’t matter, or even that college friends won’t ever help you in your career; however, if the price for those kinds of friendships is major debt, it’s way too high. Besides, you can build quality relationships for the future no matter where you attend school.

  We need this foundation of why we want college for our kids in o
rder to set goals for school. In other words, if you do not expect quite as much from the degree, maybe you won’t break all the branches in your family tree getting the kids into a college you frankly can’t afford. Again, college is important—very important—but it is not the answer to all your kids’ problems. I will be so bold as to say college isn’t even a need; it is a want. It isn’t a necessity; it is a luxury. This luxury is one of the first on my list, but not before retirement, not before an emergency fund, and certainly not as a reason to go into debt.

  DAVE RANTS . . .

  One Myth About the College Degree

  I’ve never walked into a doctor’s office and said, “You know what, Doc, before you check my blood pressure, you better tell me where you went to medical school.” And I’ve never gone into my CPA’s office and quizzed him about where he got his accounting degree.

  But when we’re picking a school for ourselves or our kids, we act like where we get our degree is some kind of magical fairy dust that’s going to automatically make our lives successful. Here’s a shocker: it’s not.

  Knowledge, perseverance, integrity, and character will carry you a lot farther than a piece of paper with a particular school’s logo on it. When I hire team members at my company, I almost never look at where they went to school. I care more about what they’ve done since they left there.

  Now, I’m not against an elite education or a private education. But what I am against is the debt that usually comes with those degrees and the lack of thought that often goes into getting them.