Both Dave Ramsey’s book and workbook, The Total Money Makeover, detail his system for getting out of debt. When I saw that it’s published by Thomas Nelson, I was concerned it would be heavy on the scripture and light on the advice, but I was very pleasantly surprised. I’m ever the contrarian, though, so there were still some elements that turned me off.
The Total Money Makeover Workbook
First, let me get The Total Money Makeover Workbook out of the way quickly. It’s almost exactly the same as the book, but with some of the information delivered in quiz form. If you enjoy quizzes or are dealing with a spouse who’s still in denial about your debt, then the workbook may be right for you. Otherwise, I’d stick with the book.
The Good Parts of the Book
I really enjoyed Ramsey’s basic and pragmatic approach to getting out of debt. His Baby Steps chapters are heavy on practical advice and light on filler information. The Total Money Makeoverfeatures seven Baby Steps, although most of them are actually full-sized adult steps. The steps are:
- Establish a $1,000 emergency fund
- Work the Debt Snowball
- Fill out the emergency fund
- Maximize retirement investments
- Save for college
- Pay off the mortgage
- Build wealth
Each of the steps is clearly explained and includes solid reasoning for each step. Even if you don’t agree, you’ll understand why he makes each recommendation. He also suggests modifications to help you get through the program, like only saving a $500 emergency fund if you have a low income and not including any debt that totals more than half your annual income in your initial debt snowball.
To quickly summarize the first three steps, he recommends establishing a $1,000 emergency fund before you start paying off debt. That way you don’t have to create new debt when an emergency arises. His debt snowball works from the smallest debt to the largest rather than highest interest rate to lowest. Like most other personal finance advisers, he says to pay the minimums on all debts except the first one, which you pay off as quickly as possibly. Then apply those larger payments, plus the minimum, to the second debt, and so on. After the debts are paid off (excluding very large debts and the mortgage), he says to fill out your emergency fund with 3-6 months worth of expenses.
I also appreciated his three very detailed budgeting worksheets, each designed to accommodate different types of income scenarios, including variable income from self-employment.
Negative Aspects
I found the first 90 pages of the book to be largely filler, mostly because I already know why payday loans, rent-to-own deals, and car leases are a bad idea. For people in serious debt from these loan products, then the first 90 pages may be necessary.
I was seriously turned off by his cutesy phrases, like “Social Insecurity” and “debt CONsolidation.” I felt I was being condescended to. I want a personal finance book that treats me like the adult I am.
I strongly disliked five aspects of The Total Money Makeover:
- Suggestions to pay off the mortgage early
- Warnings to never use credit cards
- Generalizations about how the rich live
- Claims about expected annual investment returns
- Suggestions about expected annual withdrawals.
Pay Off the Mortgage Early
He encourages readers to pay cash for a house or accept a 15-year fixed-rate mortgage at most. That may be very doable for people with low-priced homes, but it’s unreasonable for first-time buyers in California. I also disagree that you should pay off a mortgage early. According to The Simple Dollar, Consumer Reports says it’s better to invest than to pay off your mortgage earlybecause you can earn more through your investments.
Never Use Credit Cards
Ramsey is heavily influenced by his own past debt disasters, which I think skew his thinking on the mortgage issue. They also skew his thinking on credit cards. He argues that all credit cards are evil and that you should only use cash or a debit card. He says that banks can’t hold you liable for fraudulent purchases with your card. This is true – but that doesn’t mean the banks have to make it easy for you. I’ve heard several stories about banks either taking several weeks to replace the funds, or refunding the money promptly and then later deciding you did make the purchases and taking the money away. I don’t trust banks to get it right, so I’d rather use credit and pay it off every month. Credit cards are fine if you know how to control your spending and pay them off every month.
Generalizations about the Rich
He makes numerous general statements about how the rich live. He claims they don’t use credit cards and they don’t have mortgages. I know a few rich people and they do use credit cards – they just use them the way they were originally meant to be used rather than letting them collect interest. I also know some rich people with mortgages because they have such low interest rates or low mortgage balances. They believe that they can make more investing than they can paying off the mortgage early, especially if the bulk of the payment goes toward principal anyway.
Expected Annual Investment Returns
Ramsey also asserts numerous times in The Total Money Makeover that you can expect a 12% annual return on your investments (averaged over time.) As most investing books and magazines will tell you, that 12% is not guaranteed. Most recommend using the safer estimate of 8% for the total stock market. Ramsey suggests index funds, which have historically provided a 12% annual returns, but again, you have no guarantee of that. It’s better to be conservative and save more than to expect a higher return and find yourself without money when you’re 100.
Expected Annual Withdrawals
Finally, Ramsey advises readers to expect to withdraw 8% a year from their retirement and savings after they retire. Most financial experts recommend a maximum of 4% a year, no matter how much you’ve saved, because you don’t know for sure how long you will live and what medical expenses may arise. If your investments only end up earning 8% and you withdraw 8%, you’ll be in big trouble fairly quickly.
So-So Elements of The Total Money Makeover
While reading the numerous testimonials included in the book, I noticed that more than 50% of them are families with stay-at-home moms. He may not have intended that to be a message, but it was a subtle hint that women should aim to stay home to raise the children. There wasn’t a single stay-at-home dad. After a while, I stopped reading the testimonials because they also didn’t provide any real information.
My other issue involved an unfinished point. While discussing the Debt Snowball, Ramsey says he’ll explain later how to tackle large debts, but he never really comes back to that, unless you do it the same way you pay down the mortgage early, which he also doesn’t fully explain. I could probably figure it out, but I wanted to see his method.
Final Thoughts
If I were deep in debt and needed a good, simple plan for getting out of it, I would buy The Total Money Makeover. If I wanted something more in-depth or wanted a good solid plan for building future wealth, I’d read Your Money or Your Life. If I wanted a detailed discussion of wills, retirement investments, and real estate, as well as debt tools, I’d read The 9 Steps to Financial Freedom.
