The Total Money Makeover: Classic Edition

by Dave Ramsey

  I also started my Total Money Makeover walking through the Baby Steps one by one. Establishing my emergency fund was the hardest part because I was still trying to break my gambling addiction, and that money would always get lost to some game. But as my addiction weakened and I established a budget, the debt I had incurred became less and less. I moved in with my parents to put would-be rent money toward my final debt.

  Now I’m saving for a down payment on a house. I hope to reach my goal by next year. It is a wonderful feeling to live without the strain of debt on my life!

  Tony E. Newman (age 26)

  Financial Analyst

  The Pain of Change

  Change is painful. Few people have the courage to seek out change. Most people won’t change until the pain of where they are exceeds the pain of change. When it comes to money, we can be like the toddler in a soiled diaper. “I know it smells bad, but it’s warm and it’s mine.” Only when the rash comes will we cry out. I hope Sara’s story and the others in this book will make you unwilling to stay where you are. If you keep doing the same things, you will keep getting the same results. You are where you are right now financially as a sum total of the decisions you’ve made to this point. If you like where you are, keep it up. Keep in mind, however, why you are reading a book called The Total Money Makeover. Is it because deep down you have the same uneasy feeling Sara had but didn’t address until it was almost too late? Are you really looking for something more? If so, I’ve got great news. This plan works! Break through the temptation to remain in the same situation, and opt for the pain of change before the pain of not changing searches you out. Don’t wait for a heart attack to show you that you are overweight. Cut the carbs, the fats, and the sugars, and lace up the running shoes now.

  The good news about Sara and John was that the financial heart attack they had made them address their financial eating and exercise habits. The layoff was a wake-up call and the end to denial. After a year of very hard times, Sara was able to find a whole new career. Only this time when the checks started rolling in, Sara and John were using this system. Every paycheck became an exciting event because they had a plan. They were financially losing weight and toning up. It wasn’t a quick process, but after following the steps over time, today they are really winning.

  The night I met Sara and John, they were two years into their plan—and smiling. They told me they were debt-free except for their house, and they had $12,000 in the bank just for emergencies. They had broken through their own denial, but they made their family uncomfortable because they refused to live like everyone else. Albert Einstein said, “Great spirits have often encountered violent opposition from weak minds.” John’s dad had made fun of their plan and the extra jobs they took to win. He asked if they had joined some cult or something. Once Sara and John had realized they were the emperor with no clothes, denial was no longer an option. They also realized all they had been doing with money to impress others—but no more.

  Sara chuckled as she told me how she used to think: We must be doing well; all these credit-card companies think I’m creditworthy. If I’m getting approvals from all these banks, I must be okay because, otherwise, they wouldn’t want to loan me money. Besides, I pay my credit cards off every month. How could I be in any trouble? I can afford to buy that car or that furniture if I can afford the payment. John was grinning now, too, as they both laughed at the language of financially fat people who think they are fine, the language of denial.

  As we closed our conversation that night, Sara told me that while she hoped she or John never lost another job unexpectedly, they are ready if they do. “We are no longer living a lie. We know where we are, we know where we are going, and we know how we are going to get there,” she said. She and John wanted to leave me a gift for inspiring their Total Money Makeover, but I assured them they already had.

  3

  Debt Myths: Debt Is (Not) a Tool

  Red-faced and fists clenched, the toddler yells with murder in his voice, “I want it! I want it! I want it!” We have all watched this scene unfold in the grocery store. We may even have watched our own children do this (once). Now that I’m older and more mellow, I sometimes grin a little as a young mom tries without success to stifle the out-of-control screams of a child who is denied something.

  It is human nature to want it and want it now; it is also a sign of immaturity. Being willing to delay pleasure for a greater result is a sign of maturity. However, our culture teaches us to live for the now. “I want it!” we scream, and we can get it if we are willing to go into debt. Debt is a means to obtain the “I want its” before we can afford them.

  Joining in the Lie

  I have heard it said that if you tell a lie often enough, loudly enough, and long enough, the myth will become accepted as a fact. Repetition, volume, and longevity will twist and turn a myth, or a lie, into a commonly accepted way of doing things. Entire populations have been lulled into the approval of ghastly deeds and even participation in them by gradually moving from the truth to a lie. Throughout history, twisted logic, rationalization, and incremental changes have allowed normally intelligent people to be party to ridiculous things. Propaganda, in particular, has played a big part in allowing these things to happen.

  We have propaganda in our culture today. I’m not speaking in a political sense, but rather recognizing that there are people out there who want us to think their way, and who will go to great lengths to accomplish that. The financial and banking industries, in particular, are very good at teaching us their way of handling money, which, of course, leads us to buy their products. If I see an ad again and again that tells me I will be cool and sharp-looking if I drive a certain car, I can fall under the illusion that with the purchase of that car, those good things will happen to me. We may not really believe that we will become a model just from purchasing a car, but notice that ugly people aren’t used in the TV spots to sell cars. We aren’t really falling for that lie—or are we? I’m just asking. After all, we do buy the car and then justify our purchase on the basis of something academic like gas mileage.

  When we participate in what the crowd identifies as normal, even if it is stupid, we gain acceptance into the club. Sometimes we don’t even realize what we are doing is stupid because we have been taught that it’s just “the way you do it,” and so we never ask why. As we participate in the myth, we learn to spout the principles of the myth. After the years go by and we have invested more money and time into the myth, we become great disciples and can preach the points of the myth with great fervor and volume. We become such experts on the myth that we can sell others on joining the lie. I once joined in the lie, but no more.

  Don’t Let the Monkeys Pull You Down!

  Debt has been sold to us so aggressively, so loudly, and so often that to imagine living without debt requires myth-busting. We have to systematically destroy the inner workings of the myths. Debt is so ingrained into our culture that most Americans cannot even envision a car without a payment, a house without a mortgage, a student without a loan, and credit without a card. We have been sold debt with such repetition and with such fervor that most folks cannot conceive what it would be like to have no payments. Just as slaves born into slavery can’t visualize freedom, we Americans don’t know what it would be like to wake up to no debt. Literally billions of credit-card offers hit our mailboxes and in-boxes every year, and we are taking advantage of those offers. Americans currently have around $900 billion in credit-card debt. We can’t do without debt—or can we?

  Working with tens of thousands of people on their Total Money Makeovers over the years, I have found that a major barrier to winning is our view of debt. Most people who have made the decision to stop borrowing money have experienced something weird: ridicule. Friends and family who are disciples of the myth that debt is good have ridiculed those on the path to freedom.

  John Maxwell tells of a study done on monkeys. A group of monkeys were locked in a room with a pole at the center.
Some luscious, ripe bananas were placed on top of the pole. When a monkey would begin to climb the pole, the experimenters would knock him off with a blast of water from a fire hose. Each time a monkey would climb, off he would go, until all the monkeys had been knocked off repeatedly, thus learning that the climb was hopeless. The experimenters then observed that the other primates would pull down any monkey trying to climb. They replaced a single monkey with one who didn’t know the system. As soon as the new guy tried to climb, the others would pull him down and punish him for trying. One by one, each monkey was replaced, and the scene repeated until there were no monkeys left in the room that had experienced the fire hose. Still, none of the new guys were allowed to climb. The other monkeys pulled them down. Not one monkey in the room knew why, but none were allowed to get the bananas.

  We aren’t monkeys, but sometimes we exhibit behavior that seems rather chimp-like. We don’t even remember why; we just know that debt is needed to win. So when a loved one decides to get a Total Money Makeover, we laugh, get angry, and pull him down. We Americans are like the last set of monkeys. With rolled eyes we spout the pat lines associated with the myth as if anyone not wanting to have debt is unintelligent. That person must be a simpleton, a fanatic, or, worst of all, “uneducated in finance.” Then why are so many finance professors broke? I think a broke finance professor is like a shop teacher with missing fingers.

  Myth vs. Truth

  I want to expose the inner workings of the Debt Myth by looking at many of the sub-myths. However, I need to warn you to watch out for your instinct to defend the American way of borrowing. Calm down. Relax and go for a ride with me for a few pages. I might be on to something. If, at the end of this myth-busting section, you conclude I’m just a nut with a book, you will not be forced to change. But just in case the tens of thousands of families who have experienced a Total Money Makeover have something to say to you, read on in a relaxed state. Let your guard down. You can always put the shields back up later.

  MYTH: Debt is a tool and should be used to create prosperity.

  TRUTH: Debt adds considerable risk, most often doesn’t bring prosperity, and isn’t used by wealthy people nearly as much as we are led to believe.

  When training for my first career in real estate, I remember being told that debt was a tool. “Debt is like a fulcrum and lever,” allowing us to lift what we otherwise could not. We can buy a home, a car, start a business, or go out to eat and not be bothered with having to wait. I remember a finance professor telling us that debt was a two-edged sword, which could cut for you like a tool but could also cut into you and bring harm. The myth has been sold that we should use OPM, other people’s money, to prosper. The academic garbage is spread really thick on this issue. We are told with sufficient snobbery and noses in the air that sophisticated and disciplined financiers use debt to their advantage. Careful there, you’ll get a sunburn on your upper lip.

  My contention is that debt brings on enough risk to offset any advantage that could be gained through leverage of debt. Given time, a lifetime, risk will destroy the perceived returns purported by the mythsayers.

  I once was a mythsayer myself and could repeat the myths very convincingly. I was especially good with the “debt is a tool” myth. I have even sold rental property that was losing money to investors by showing them, with very sophisticated internal rates of return, how they would actually make money. Boy, what a reach. I could spout the myth with enthusiasm, but life and God had some lessons to teach me. Only after losing everything I owned and finding myself bankrupt did I think that risk should be factored in, even mathematically. It took my waking up in “intensive care” to realize how dumb and dangerous this myth is. Life hit me hard enough to get my attention and teach me. According to Proverbs 22:7: “The rich rule over the poor, and the borrower is slave to the lender” (NIV). I was confronted with this scripture and had to make a conscious decision of who was right—my broke finance professor, who taught that debt is a tool, or God, who showed obvious disdain for debt. Beverly Sills had it right when she said, “There is no shortcut to anyplace worth going.”

  We bought the lie! We lived our lives according to the standards set to “keep up with the Joneses.” Turns out they were broke and living in debt too. My husband and I owed $72,000 on a rental property and $35,000 on credit cards, student loans, and car notes. And on top of that, we bought a four-bedroom home complete with a pool that was in need of major repairs—all of this on a $40,000 teacher’s salary. But we decided that all of this was a good investment in our future. We were so wrong!

  We were sick and tired of always having more month than money. We needed a Total Money Makeover. We sold our rental property and our WAY-too-big house and downsized to something much smaller. We spent two and a half years of focused intensity to finally become DEBT-FREE!

  If you are living in the bondage of debt, you’re not living. Our marriage is so much better, and there is an element of peace that wasn’t there before we had a financial plan. We feel blessed to have found this information early in our marriage and thankful to have the opportunity to teach our children to be financially responsible.

  Alison (age 29) and

  Mike (age 33) Wessner

  Homemaker; Physical Education

  Teacher

  I have found that if you look into the lives of the kind of people you want to be like, you will find common themes. If you want to be skinny, study skinny people, and if you want to be rich, do what lots of rich people do, not what some mythsayer says to do. The Forbes 400 is a list of the richest 400 people in America as rated by Forbes magazine. When surveyed, 75 percent of the Forbes 400 (rich people, not your broke brother-in-law with an opinion) said the best way to build wealth is to become and stay debt-free. Walgreen’s, Cisco, and Harley-Davidson are run debt-free. I have met with thousands of millionaires in my years as a financial counselor, and I have never met one who said he made it all with Discover Card bonus points. They all lived on less than they made and spent only when they had cash. No payments.

  History also teaches us that debt wasn’t always a way of life; in fact, three of the biggest lenders today were founded by people who hated debt. Sears now makes more money on credit than on the sale of merchandise. They are not a store; they are a lender with some stuff out front. However, in 1910 the Sears catalog stated, “Buying on Credit Is Folly.” J. C. Penney department stores make millions annually on their plastic, but their founder was nicknamed James “Cash” Penney because he detested the use of debt. Henry Ford thought debt was a lazy man’s method to purchase items, and his philosophy was so ingrained in Ford Motor Company that Ford didn’t offer financing until ten years after General Motors did. Now, of course, Ford Motor Credit is one of the most profitable of Ford Motor’s operations. The old school saw the folly of debt; the new school saw the opportunity to take advantage of the consumer with debt.

  You have probably heard a lot of the sub-myths, which fall in line behind the big one that says, “Debt is a tool.” So that we leave no stone unturned, let’s review and debunk each of the myths spread by a culture that has officially bought the lie.

  MYTH: If I loan money to friends or relatives, I am helping them.

  TRUTH: If I loan money to a friend or relative, the relationship will be strained or destroyed. The only relationship that would be enhanced is the kind resulting from one party being the master and the other party a servant.

  The old joke is that if you loan your brother-in-law $100 and he never speaks to you again, was it worth the investment? We have all experienced loaning someone money and finding an immediate distancing in the relationship. Joan called my radio show one day complaining about how a loan had ruined her relationship with one of her best friends at work. She had loaned the lady, a broke single mom, $50 until payday. Payday came and went, and her friend—someone she used to talk to at lunch every day, someone who was her confidante and sounding board—now avoided her. Shame and guilt had entered the scene with
no provocation. We don’t control how debt affects relationships; debt does that independently of what we want. The borrower is slave to the lender, and you change the spiritual dynamic of relationships when you loan loved ones money. They are no longer a friend, uncle, or child; they are now your servant. I know some of you think that is overstated, but tell me why Thanksgiving dinner tastes different when a loan has been served. Eating with your master is different from eating with your family.

  Joan was really torn up about losing this friendship. I asked her if the friendship was worth $50. She gushed that it was worth many times that, so I told her to call her friend and tell her the debt was forgiven, a gift. The forgiveness of the debt helped her remove the master-servant dynamic from the relationship. Of course, it would be better if that dynamic had never entered the scene. I also suggested two stipulations to the forgiveness of the debt: first, that the friend agrees to help someone in need someday; and second, that she never loan friends money. Let’s break the myth chain. In Joan’s case, the myth chain of loaning a friend money will be broken only if they both learn their lesson. The lesson is that while it is fine to give money to friends in need if you have it, loaning them money will mess up relationships.

  I have dealt with hundreds of strained and destroyed families in which well-meaning people loaned money to “help.” Parents loan the twenty-five-year-old newly married couple the down-payment money for the first home. It all seems so noble and nice until the daughter-in-law catches the disapproving glances at the mention of the couple’s upcoming vacation. She knows the meaning of the glances, that she should check with these well-meaning, noble parents-in-law before she buys toilet paper until the loan is repaid. A lifetime of resentment can be born right there. The grandfather loans the twenty-year-old $25,000 to purchase that new four-wheel-drive truck he “needs.” Of course, the loan is at 6 percent, much better than Junior can get at the bank and much better than Grandpa gets from his CD at the bank. Everyone wins—or do they? What happens when Junior loses his job and can’t pay Grandpa, who is from the old school where you dig ditches till midnight if you have to in order to honor your word? Now Junior and Grandpa are at odds, so Junior sells the truck and pays Grandpa the $19,000 he gets for it. Grandpa hadn’t taken a lien on the title, so he now expects broke, angry, and unemployed Junior to repay the balance of $6,000. Grandpa will never see his $6,000 or his grandson again. In some perverted twist of the myth, mixed with shame and guilt, Junior’s mind somehow concocts that this is all Grandpa’s fault, and he abandons the relationship.