Total Money Makeover
The book “Total Money Makeover” by Dave Ramsey was the first personal finance book I’ve read. I bought it via an American book store selling second hand books. The price I paid was 50 cents (way frugal I know!) and it was something like 15 dollars in shipment fees. So for roughly 12 euros nothing could’ve gone wrong right?
And indeed, the book has helped me tremendously on my road to financial independence. However, it also has some downsides that I would like to discuss.
Ramsey’s style is very personal. It is for people in debt, who live pay check to pay check. When reading, you really feel it, you will know what Ramsey means.
His method of baby steps has seven steps, and is not easy for people just starting out. Ramsey acknowledges that, by saying
If you will live like no one else, later you can live like no one else
Dave Ramsey
Living like no one else (paying down debt, saving more money) so you can live like no one else (being independent, firing your boss).
Total Money Makeover in 7 steps
Ramsey’s first chapters are about the five difficulties people have to overcome when starting to improve their financial lives. These are denial, debt myths, money myths, ignorance, keeping up with the Joneses.
After discussing these topics, he dives into the seven steps to a healthy financial live.
Step 1 – Save 1,000 USD (or EUR) for Emergencies
This 1,000 euros will be put in a bank account and you will not touch it! You don’t spend it, you don’t invest it. You just let it be available for when emergencies happen.
Wanting a new pair of trousers is not an emergency! The laundry machine suddenly failing is. Your 1,000 euro emergency fund acts as an insurance policy against small financial bad luck and is very important to have.
Whatever you do, make sure you have this fund. If later on in your journey there is an emergency, you can use your emergency fund instead of falling back into debt. And that brings us to step 2.
Step 2 – The Debt Snowball
Everyone knows the strip books, where some character rolls a snowball from a hill, and the snowball becomes bigger and bigger. That’s how Dave Ramsey advises his reader to pay off debt.
Although paying off debt with the highest interest rates first is the most optimal strategy from a mathematical point of view, Ramsey says you have to pay off the smallest balance first. For all your other debts, you will just pay the minimum. Focus all of your energy and money on paying off the smallest loan first.
It should be gone fairly quickly. When it is completely paid off, that’s one payment every month you don’t have to make anymore. Now allocate that freed up money towards the next smallest loan, and so on. The snowball gets bigger and bigger every time you pay off a loan.
This system works off the psychology of seeing results quickly and can be used to pay off debt except for your mortgage. More on the mortgage later.
Step 3 – Increase Your Emergency Fund
The 1,000 euros from step 1 is for beginners. If you arrive at step 3, you will be able to increase your emergency fund since you’ve paid off all your consumer debt and now have money to save every month.
Ramsey advises to build up an amount that is enough to live on for three to six months. In The Netherlands, this is anything in the range of 5,000 to 15,000 euros for most people.
The goal of this step is to make you resilient to any bad luck you can have. There are not many occasions in which a 10,000 euro fund cannot save you.
Step 4 – Save for Retirement
Now that you’ve built your financial house, you can start saving for retirement. Ramsey tells you to put 15% into your pre-tax retirement plan, but since the book is aimed at the American market, things work a little different here.
I would like to add that you could now volunteer to increase your retirement savings, either through your employer or with a personally setup tax advantaged account.
Step 5 – Save for Your Children’s Education
In the US this is very important as education is becoming unaffordable. In Europe, luckily, most universities are still very much affordable, but it never hurts to have some college funds saved up for your kids.
Step 6 – Pay Off Your Mortgage
Of course the assumption here is that you own your home and since Dave Ramsey is really opposed to debt of any kind, in Total Money Makeover he advises people to pay off the mortgage.
Whether that is actually a smart thing to do is up to you, but listening to Dave definitely makes you think about it!
Step 7 – Start Building Wealth
Now that you are debt free, saving for your retirement, and are saving for your children’s future, it is time to build up wealth by investing in both pre-tax and post-tax investment vehicles. It could be stocks or real estate or anything else.
By building wealth like this, you make sure that you can live like no one else.
My Personal Criticism
Because I would like to end on a positive note (as the book is really good!) I will mention the negative thoughts I had while reading Total Money Makeover here first.
First of all, the book relies heavily on anecdotal evidence. After almost every paragraph Ramsey writes, there is a success story of someone that implemented the strategy. While success stories definitely help to make a point, Ramsey uses too much. After a few chapters, I caught myself skipping the anecdotes.
Secondly, the book has quite some Christian tones in it. Ramsey quotes bible verses every 15-20 pages and in my opinion that is simply too much. I’m not opposed to religion, but books like this should be appealing to everyone and not just people from one specific religion. Because I would definitely recommend the book!
I Recommend Total Money Makeover!
Despite the minor irritations described above, I definitely recommends this book. It is a great read for anyone looking to become debt free, or otherwise looking to get started on the path to financial independence. For my more advanced readers, I would skip this book, because it’s meant for beginners.
There is some criticism that the book is too easy. My response to that would be that the system works just because it’s so easy. It means everyone can implement it in their own lives. This was my first book on personal finance, and the simplicity really helped me to get started.
Eager to read more book reviews? Here is my favourite: Rich Dad Poor Dad (Robert Kiyosaki) – Book Review
7 thoughts on “Total Money Makeover (Dave Ramsey) – Book Review”
Than you for your review, I agree with you, I came across this page and website through Google as I live in NL and wanted to see what are my retirement investment options apart from being with beFrank or other pension providers which I already have on top of my state pension.
I am convinced I should invest into my pension separately so I can also have an out whenever I want, as I am 32 years old, I might want to get out in 20 years which is still 15 years before the official retirement age in NL.
So what are your views on that? and also another question that is a bit burdening me, since it’s an investment, it might go anyway, win or lose, what would be your safety net (emergency backup) in terms of retirement if the investment didn’t go well?
Hi, thanks for stopping by! To start with, I write about my own experiences and ideas, I don’t give financial advice. That said, with regards to your pension, if you add to your “official” pension funds (box 1) you get some tax deductions but the money is locked up. If you save or invest yourself (box 3) you don’t get the tax deductions, but the money is freely available.
Personally, I invest both in box 1 as well as box 3.
Box 3 is to have flexibility to retire early, or do something else with that money. Box 1 is my backstop – next to the tax deductions it also is a safety net: I cannot withdraw the money before retirement so even if I make stupid mistakes it will be there.
Lastly, you are right that investments might go up and down. The thing I do to counteract this risk is investing every month, regardless the market being high or low. If I do that for the next 30 years, chances are high that I will make a good return.
Next to that I don’t invest in single stocks, only in broad and cheap index funds.
Third, currently I’m invested almost 100% in stocks. When you get closer to retirement you could start adding in bonds to the mix. Bonds usually (not always!) have lower volatility, but also lower potential returns than stocks. They act as protection against large market drops when you’re close to needing the money.
You can read more about ETFs such as VWRL, my investment strategy, and many more articles on my site.
Thanks again!
Thank you! Appreciate your long reply and indeed, I am looking to learn better and make decisions on how much and where I want to invest towards my retirement funds before I reach that step in the book which will be at some point in 2020.
Meanwhile I have 2 questions following up on your reply:
1. How much do you think (as of today) is a good retirement net monthly payment for you assuming you have no debt payment of any kind except the daily expenses and insurances (maybe some health related expenses)? the number that you can see as a sum of the state pension and the private employer pension here mijnpensioenoverzicht.nl
2. I am also more convinced that I should invest in mutual funds or indeces related to stocks but how can I know what is good for me and do my research? like when you say “broad and cheap indeces”, how do I find those?
Thanks a million again. I am slowly going through the different articles on your website here ;)
Also for me The Total Money Makeover is the first personal money book I ever read and I wish I found it years ago but better at 32 years than never :D
1. That entirely depends on your situation. I have created a net worth calculator that lets you play around with the numbers a bit. In the end, you would need a number that’s large enough to support your expenses, and that’s it in theory. The net worth calculator lets you calculate how much you need to save (with a given return and withdrawal rate) to achieve that number.
2. For me, VWRL is perfect. It has low costs (0.22% expense ratio), broad diversification (3,500 different companies, across lots of countries, industries, etc), and is large enough that there is lots of liquidity (easy to buy and sell). On top of that, using DeGiro I can buy VWRL without paying transaction costs. An alternative to VWRL might be IWDA, I’ve covered both in this comparison.
And thanks again for reading. As you’ve said, it’s better to start now than never! Great work and keep it up.
<3 THANK YOU!! Will keep reading and working and commenting on your different articles :D
Interesting to get your take on Dave Ramsey. His name has come up a lot in the FIRE space but actually he seems more about personal finance and getting out of debt rather than financial independence.
I also tried his podcast for while but didn’t really get on with it, partly as he is very US focussed and partly as once you heard his core messages there didn’t seem to be lot more for me. So I agree with you that he may not be for those us who have been in this space for a number of years.
Having said that I totally agree with you that the basic messages are excellent for beginners. In fact if you stick to them then you will definitely be well on your way to FI.
He really is more a personal finance and debt guy than financial independence, I give you that! However, I think many people would benefit from his baby steps when just starting out. When you are already on the path and have solid financials, skip Ramsey and go straight to the more in depth FIRE books.
I never tried his podcast, for this exact reason. I don’t consider myself in need of the baby steps, and as you say, that’s basically all he advocates.
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