by Dave Ramsey
This Book Is NOT Wrong
Don’t confuse extreme confidence with arrogance. I am extremely confident that this material works because millions of people have benefited from it. I am not arrogant because I realize I am not personally responsible for any of the lives changed. The stuff I teach is the truth, and those principles are responsible for changing lives. But I always answer the same questions with the same answers even though sometimes folks think their situation may be different. It isn’t different. The principles stand, and they work every time.
This Book Is NOT the Same as My Other Books
When we took on The Total Money Makeover project, we had to answer a question of integrity: Could we honestly go into the market and ask my readers to buy another book that said the same thing? I couldn’t in good conscience do that. Financial Peace has sold millions of copies as of this writing, so did I really need to write another book? I came to the conclusion that there was a distinct difference in the two projects. Financial Peace is “what to do with money.” It is a great textbook for common-sense money management. So how is The Total Money Makeover different? It is more than a “what to do” book—it is a “how to do it” plan. This is a process book. We are aiming at carefully weaving inspiration and information together into a step-by-step plan. Yes, you will find in this book a lot of the same subjects, along with many of the same principles I discuss in my other books, but this book is different in that it is a process-driven work.
If you are looking for a ton of new information because you are someone who only gathers facts and figures, then you will be disappointed. If you are looking to engage this money thing head-on, you will love this book. Many Financial Peace readers have told me that The Total Money Makeover gave legs to the concepts to which they had been introduced, so they were thankful to read it as well. But again, don’t look for some big revelation or chapters of new principles.
This Book Is NOT Getting Any Complaints or Criticism . . .
. . . from people who do it. I have never had someone write to me, saying, “I got on a budget, got out of debt, got on the same page with my spouse, built wealth—and I HATE IT.” For those who have followed this plan and discovered a new life of financial freedom, their lives have been changed forever! Wouldn’t you like to experience the same transformation? You can be the next success story people hear about. You can have a Total Money Makeover starting today!
Flying Turkeys and Skinny-Dipping
When I was a child, my grandmother—a second-grade schoolteacher who also taught drama—used to sit me on her knee and read to me. She read with great enthusiasm and a lot of drama.
One of the children’s stories she read to me was about the three little pigs. One built his house out of straw, one out of twigs, and one out of brick. You know the story—the two who built their houses “quick and dirty” goofed off, partied, and made fun of the bricklayer because he was taking too much time and effort to do it right. Of course, when the wind and rains came, the two short-term thinkers ended up moving in with their brother. Why? Because he had prepared well enough to weather the storms. The other two found their lives completely blown apart.
Economic Storms, Real Ones
A huge economic storm hit America—and the rest of the world—in 2008. As with all strong storms, the only houses that survived were the ones that were built well, on a solid foundation. The rest were blown over. Companies who had been built well survived; those who hadn’t are now history. Many once-great businesses abandoned their strong foundations by investing in bad, high-risk investments and taking on mountains of debt. Sadly, most of those companies are now history or are owned by someone else.
What happened? Well, this is not a textbook on economics, so we won’t dissect every detail. However, it is instructive to your Total Money Makeover to look at the event to learn our private lessons. The thirty-thousand-foot view you would get from an airplane might look like this:
Broke people in serious financial trouble borrowed money from greedy bankers at horrible terms and high interest rates to buy homes. The loans were not prime (good) loans, so they were accurately called SUBprime loans. That just means these mortgages were less than good. Duh.
This rip-off lending has always been done, but never on such a large scale. In an effort to make more profits to keep their stock prices up, banks and investment bankers began to buy these loans in bulk—and they bought lots of them. What was unthinkable in the investment community just a few years earlier became common practice.
Formerly legitimate, upstanding, major banks and investment bankers essentially became loan sharks using very sophisticated financial instruments. For years, the mortgage industry had packaged good mortgages together and sold them as bonds. You have probably heard of Fannie Mae bonds. That used to refer to a group of good Fannie Mae mortgages that were wrapped together and sold as a unit, or bond. During this period of stupidity, however, the subprime (bad) loans were packaged together and sold as bonds—a lot of them.
We live in a cause-and-effect world. What you sow, you will reap. In a shocking turn of events, the broke people didn’t pay their mortgage payments (he says sarcastically). This, for some unknown reason, seemed to surprise the greedy bankers. Surprise! Broke people can’t pay ridiculous house payments! Go figure.
The big problem, however, was scale. A lot of broke people didn’t pay their payments. So foreclosure numbers began to rise rapidly. In some boom markets, where the real estate prices had shot up artificially high, the foreclosures began bringing home prices down. And down and down.
With values dropping so low, relatively secure and responsible home-owners started to get in trouble too. Fear broke out on Wall Street, and stock prices started dropping. By the time the fear got to Washington, it had become a full-blown panic. And once the panic got to the news media, it had become all-out hysteria.
Every day American consumers watched the hysteria play out on television. With their 401(k) and home values dropping, they wisely decided this was not a good time to keep spending like a drunken congressman.
When we stopped buying stuff at a breakneck speed, the economy slowed, and businesses began hurting everywhere. Companies who were deeply in debt and cash-poor began to die. A LOT of businesses vanished almost overnight. People stopped buying washers and dryers, so the washer-and-dryer manufacturers started laying people off, and unemployment rose. This, of course, just made the cycle go around again, forcing real estate and stock prices even lower.
Good News, Bad News
The good news is that we are recovering and will continue to recover. Some learned the painful lessons on a private, individual level; others learned the economic lessons on a more widespread, national level. Many people didn’t learn anything at all.
The great news is that, for some of you, this event was your Great Depression, emotionally speaking. The Great Depression permanently changed the way many people handled their money. If you have a grandfather or great-aunt who was an adult during that time, he or she likely has a completely different way of looking at debt, saving, and giving than most people of other generations. That is because your loved one has experience. And as my pastor says, “A man with an experience is not at the mercy of a man with an opinion.”
I went broke in my late twenties, and that experience changed my life. I had already applied the principles of this book to my life for two and a half decades before that particular storm hit in 2008, so when it did, I was just a spectator. It didn’t hurt me a bit. I actually came out ahead by buying real estate at great prices and investing heavily in the stock market while both were down.
I’ve spent the last twenty-five years trying to get people to live these Total Money Makeover principles. A lot of people have listened, so when the winds blew and the storms came, they were just as ready as I was. They had a strong foundation.
Flying Turkeys
What does all this mean for your Total Money Makeover? The first lesson of this economic storm is
that your financial process and principles must work in good times and in bad times—otherwise, they don’t work. Our economy had been so good for so long that really stupid ideas had been working on the short term. That fooled people into believing that stupid had become smart. In other words, stupid hadn’t been stress tested in quite a while; when it finally was, it came up looking, well, stupid.
When times are booming, you can do dumb things with money, get sloppy, and take huge risks without realizing it. I have heard it said this way: “Even a turkey can fly in a tornado.” People were running around buying things they couldn’t afford with money they didn’t have to impress people they didn’t even like, and they were doing it in record numbers. Worse, they seemed to get away with it!
They were like the two little pigs with straw and twig homes: As long as the sun was shining, life was a party, and the pig with brick seemed kind of nerdy, or overly conservative, or even fanatical. But when their stupid theories were stress tested, their houses fell.
Jim Collins, one of America’s greatest business writers, wrote a book called How the Mighty Fall. In this book, he discusses the five stages of decline when a business fails, or falls. There is a great application here for our nation’s economy and for your life and mine.
Collins says the first stage of decline is marked by hubris. Pride and arrogance, mixed with a false notion of invincibility, lead the mighty to take huge, ridiculous risks. In our case, that would be borrowing lots of money and not saving any because “my job is ‘stable.’ I can afford the ‘easy payments’ with my ‘job.’”
This hubris causes sloppiness and denial of risk. Hey, that sounds like me in my late twenties—right before I went broke. I had been taught a group of myths—lies—that I accepted as truth about money. I thought the rules of risk and restraint didn’t apply to me because I was so smart. That led me to build a house of cards that fell the first time there was a light breeze, much less a real storm.
Here’s the lesson: just because you see a turkey flying in a tornado doesn’t mean turkeys can fly. Just because some wild-eyed theory of investing, borrowing, and living without cash reserves works in good times doesn’t mean you can survive a storm. Remember, your ways of handling money have to work in good times and in bad.
Skinny-Dipping
Warren Buffett has a great saying: “When the tide goes out, you can tell who was skinny-dipping.” I have taught for years that if you have a bad map, you will be late for—or completely miss—the party. The principles that you build your life on will determine your level of success. If you plan your marriage around a bad map, or bad set of assumptions, then it will likely fail. If you have all the good intentions in the world, but build your financial house on bad ideas, it will fall. I personally experienced this a long time ago. With this last recession, many more Americans are discovering that their theories about money and their assumptions about how money works were wrong. And they discovered they were wrong the hard way—through pain.
Overspending that doesn’t feel like overspending because things are going well is still overspending. Using debt to invest in real estate or the stock market with the hope of a quick return will cause you to go broke the minute the market turns. Chasing the next get-rich-quick scam, like the lottery or investing in gold, will always bring you pain. Hiring someone else—like some debt-settlement company—to fix your life virtually never works.
The myths—lies spread by our culture—that were covered in this book’s first three editions were all proven by this economic downturn. If you live the way we teach in this book, you will prosper in good times and in bad times.
I have a friend whom we will call Chris. Chris told me an interesting story in the middle of the latest recession that illustrates what I am pointing out to you. For thirteen years, Chris worked for a large corporation whose name you would recognize. He started his Total Money Makeover about seven years ago. When I saw him two years ago, he ran up to me with a big smile and big hug to proudly proclaim that he was “DEBT FREE!!” including his home. He had absolutely no debt and had saved $38,000 in his emergency fund.
When I saw him again a year later, he had another fun story to share with me. It seems that he and his boss had become best friends over the years that they worked together. That week his friend—his boss—came into his office, with blood drained from his face and his lip quivering, saying, “I don’t know how to tell you this, but corporate is making me lay you off.” Chris jumped up from his chair, ran around the desk, gave his friend a big hug, and said, “Cool! How much is the severance?”
The company gave him more than $70,000 in severance, and he is now starting his own business—something he has wanted to do for years. He wasn’t stressed, but instead saw only opportunity, because he was ready. As of this writing, he will make almost double his old salary with his new business this year. Wow.
However, most people live on the other side of the coin. When they get news of a layoff, they have the blood drain from their faces and it is their lips that are quivering. If you have lost your job and are struggling, I am not picking on you. I have seen hard times. But I want you to do what I did when I faced pain brought on by my own stupid decisions and lack of preparation. I said very loudly, “NEVER AGAIN!” Next time . . . well, there won’t be a next time.
So my prayer for you is that whatever fear or pain you have gotten out of this last recession, you learn from it. Remember the day when stupid financial tricks were stress tested and came up looking, well, stupid.
I have met many children of the Great Depression who learned their lessons well. They are prosperous and take only the carefully calculated risk. They have seen much, much more extreme economic times than you have seen. But we can still learn our lessons and not get sucked back into the craziness of the last few years. It is time for your Total Money Makeover. Are you ready?
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The Total Money Makeover Challenge
“As lost as a ball in tall weeds!” That is exactly how I felt. Although it was decades ago, I can still taste the emotion as if it were yesterday. Out of control, lost, no sense of power, I felt dread creep across the room like the afternoon shadows on a cold winter’s day. Sitting again at the kitchen table with too much month left at the end of the money, I was not having fun. This “adult” stuff where a wife looks to you to provide and kids expect to be fed and kept warm was not exactly working. I didn’t feel like some powerful adult; instead, there was a little boy inside me who was very afraid—afraid of this month’s bills, afraid of this month’s mortgage, and absolutely terrified when I considered the future. How was I to send kids to college, retire, enjoy life, and not live at the edge of money worries?
The “Normal” American Family
It seemed every month I sat at that same table with the same worries, fears, and problems. I had too much debt, too little savings, and no sense of control over my life. No matter how hard I worked, it seemed I couldn’t win. I was to forever be a slave to some banker, to the government, and to the “needs” of my family. When Sharon and I “talked” about money, we ended up in a fight, leaving her feeling afraid and me feeling inadequate. The next car purchase, the next house, the kids’ college—our entire future seemed out of reach.
I didn’t need a get-rich-quick guy to pump me up or tell me to be positive. I didn’t need a secret formula to riches. I wasn’t afraid of hard work or sacrifice. I didn’t want to “feel” my way into being “positive.” I was positive of only one thing: I was sick and tired of being sick and tired. I was tired of sitting down to “do the bills” and having a heaviness come over me. The hopelessness was overwhelming. I felt like a gerbil in a wheel—run, run, run, no traction, no ground covered; maybe life was just a financial illusion. All the money came in, all the money went out, and only the names were changed to protect the innocent. I owe, I owe, so off to work I go. You know the drill and all the clichés that go with the drill.
Oh, some months everything seemed to work, and
I thought maybe we were going to be okay. I could tell myself then, “Oh well, this is how everyone lives.” Those times offered enough wiggle room that I could continue to lie to myself that we were making headway, but deep down, I knew we weren’t.
I Did It My Way, and My Way Wasn’t Working
ENOUGH! THIS STINKS! I finally decided that this nonplan wasn’t working. If you have ever had any of those feelings, you are going to love this book, and, more important, you will love your Total Money Makeover.
Back in our late twenties, my wife, Sharon, and I went broke. We lost everything due to my stupidity in handling money, or not handling it, as the case may be. Hitting bottom and hitting it hard was the worst thing that ever happened to me and the best thing that ever happened to me.
We started with nothing, but by the time I was twenty-six years old, we held real estate worth over $4 million. I was good at real estate, but I was better at borrowing money. Even though I had become a millionaire, I had built a house of cards. The short version of the story is that we went through financial hell and lost everything over a three-year period of time. We were sued, foreclosed on, and, finally, with a brand-new baby and a toddler, we were bankrupt. Scared doesn’t begin to cover it. Crushed comes close, but we held on to each other and decided we needed a change.
