by Dave Ramsey
Jaime Morgan (age 27)
Agriculture Communications
Agree on It
If you’re married, agree on the budget with your spouse. This one sentence requires a stand-alone book to describe how, but the bottom line is this: if you aren’t working together, it is almost impossible to win. Once the budget is agreed on and is in writing, pinky-swear and spit-shake that you will never do anything with money that is not on that paper. The paper is the boss of the money, and you are the boss of what goes on the paper, but you have to stick to the budget, or it’s just an elaborate theory.
If something comes up in the middle of the month that causes the budget to need changing, call an emergency budget committee meeting. You can change the budget (and what you do with money) only if you do two things. One, both spouses agree to the change. Two, you must still balance your budget. If you increase what you are spending on car repairs by $50, you must lower what you are spending somewhere else by $50 so that your income minus your outgo still equals zero. This process of midcourse adjustment doesn’t have to be a big hairy deal, but both guidelines must be met. You still zero out so you don’t blow the budget, and you get spousal approval so you haven’t broken the spit pact.
DAVE RANTS . . .
The number one cause of divorce in America is money fights and money problems. Spouses just don’t know how to talk to each other about money. That’s because most of the time the husband and wife have totally different personalities about everything—and that includes their money.
In every marriage, there’s what I call the Nerd and the Free Spirit. The Nerd has fun with numbers and feels like it gives them control. They feel like they are taking care of their loved ones.
But the Free Spirit doesn’t feel cared for; they feel controlled! They don’t want anything to do with the numbers, and they tend to “forget” about the budget.
Guess what? Neither the Nerd nor the Free Spirit is “right” or “wrong.” You’re a team! You need to have a plan, but you need to have some fun. You need to save, but you need to spend a little. The trick is to figure out how your differences can complement each other, and then you can work together.
That only happens when you both sit down together and make a plan. The Nerd can write up the first draft of the budget, but the Free Spirit has to sit down and look at it. Heck, I even make the Free Spirit change something on the budget! That freaks out the Nerds, but this is supposed to be “our” plan, right? That means both spouses need to have mature input and shared goals.
Larry Burkett used to say that if two people just alike get married, one of you is unnecessary. You and your spouse are different, so celebrate the differences and learn to work together on this money stuff!
Adriennnne!
Before we get to Baby Step One, you will have to do one other thing. You will have to be current with all your creditors. If you are behind on payments, the first goal will be to become current. If you are far behind, do necessities first, which are basic food, shelter, utilities, clothing, and transportation. Only when you’re current with the necessities can you catch up on credit cards and student loans. If you need more help with this level of financial crisis, check our website for how to contact one of our counselors or order the book Financial Peace.
Focused intensity is required to win. I can’t stress enough that people who have had a Total Money Makeover, those noted in this book and others across America, got mad. They got sick and tired of being sick and tired! They said, “We’ve had it!” and went ballistic to change their lives. There is no intellectual exercise where you can academically work your way into wealth; you have to get fired up. Play the music from Rocky in the background and listen for Rocky’s cry: “Adriennnne!” Go get ’em, champ! There is no energy in logic; this is behavior and motivation modification, and it works!
After you are current, have a written, agreed-on plan, have the obstacle course behind you, and are focused and intense, you are ready to follow the right priorities. Here we go.
Baby Step One: Save $1,000 Cash as a Starter Emergency Fund
It is going to rain. You need a rainy-day fund. You need an umbrella. Money magazine says that 78 percent of us will have a major negative event in a given ten-year period of time. The job is downsized, right-sized, reorganized, or you just plain get fired. There’s an unexpected pregnancy: “We weren’t going to have kids yet/another one.” Car blows up. Transmission goes out. You bury a loved one. Grown kids move home again. Life happens, so be ready. This is not a surprise. You need an emergency fund, an old-fashioned Grandma’s rainy-day fund. Sometimes people tell me I should be more positive. Well, I am positive; it is going to rain, so you need a rainy-day fund. Now, obviously, $1,000 isn’t going to catch all these big things, but it will catch the little ones until the emergency fund is fully funded.
We don’t have and never will have credit cards ever again. “Why?” you might ask (at least a lot of our family and friends do). Because we have found security and trust in God for the provision of all our needs, and we have gained the strength to build up an emergency fund that can handle sudden expenses we weren’t expecting. Most people use the excuse that you should have at least one credit card for emergencies. We have found a much better strategy. Plan ahead and build an emergency fund that can cover (with cash) whatever might come up.
We have learned that getting a hold on your attitude is the number one factor in being victorious over your finances. We now tell the money where to go instead of it guiding us around and making us slaves to others (such as student loans and credit-card companies). In gaining a newfound respect and understanding of what we have been given, we have come to acknowledge and take responsibility for the money God has blessed us with. We had to face our debt and our desires and become better stewards of our possessions and income. Before, we didn’t realize that every little dollar adds up. The choice we had to make was whether we wanted those growing dollars in our savings account or on our credit-card statements.
Saving that initial $1,000 is so important to the rest of your Total Money Makeover. It teaches you how to prepare for your unknown future and trust that when things do come up, you’ll be able to handle them. It was so much easier to attack our debt and get rid of our credit cards knowing that we had some money in the bank to cover our backs if something came up. We don’t have to have a false sense of security in our credit cards anymore. We’ve been good stewards and have real security because of our habits and perseverance. Sacrifice has had its place in our budgeting wants and desires, but it is completely worth it. We remind ourselves that delaying a purchase doesn’t mean we will never have it. Trusting God, timing, patience, and preparation are everything, though, when it comes to gaining financial peace.
Stacie (age 35) and
André (age 36) Bledsoe
Data Analyst; Production Technician
This emergency fund is not for buying things or for vacation; it is for emergencies only. No cheating. Do you know who Murphy is? Murphy is that guy with all those negative laws, such as, “If it can go wrong, it will.” For years I have worked with people who felt that Murphy was a member of their families. They have spent so much time with trouble that they think trouble is a first cousin. Interestingly enough, when we have had a Total Money Makeover, Murphy leaves. A Total Money Makeover is no guarantee of a trouble-free life, but my observation has been that trouble, Murphy, is not as welcome in homes that have an emergency fund. Saving money for emergencies is Murphy-repellent! Being broke all the time seems to attract ol’ Murphy to set up residence.
Most of America uses credit cards to catch all of life’s “emergencies.” Some of these so-called emergencies are events like Christmas. Christmas is not an emergency; it doesn’t sneak up on you. Christmas is always in December; they don’t move it. Therefore it is not an emergency. Your car will need repairs, and your kids will outgrow their clothes. These are not emergencies; they are items that belong in your budget. If you don’t budge
t for them, they will feel like emergencies. Americans use the credit cards to cover actual emergencies too. Things discussed earlier, like job layoffs, are real emergencies and are the reason for an emergency fund. A leather couch on sale is not an emergency.
Whether the emergency is real or just poor planning, the cycle of dependence on credit cards has to be broken. A well-planned budget for anticipated things and an emergency fund for the truly unexpected can end dependence on credit cards.
The first major Baby Step to your Total Money Makeover is to begin the emergency fund. A small start is to save $1,000 in cash fast! If you have a household income under $20,000 per year, use $500 for your beginner fund. Those who earn more than $20,000 should get together $1,000 fast! Stop everything and focus.
Since I hate debt so much, people often ask why we don’t start with the debt. I used to do that when I first started teaching and counseling, but I discovered that people would stop their whole Total Money Makeover because of an emergency—they felt guilty that they had to stop debt-reducing to survive. It’s like stopping your whole fitness program because you get a sore knee from a fall when running; you’ll find any excuse will do. The alternator on the car would go out, and that $300 repair ruined the whole plan because the purchase had to go on a credit card since there was no emergency fund. If you use debt after swearing off it, you lose the momentum to keep going. It is like eating seven pounds of ice cream on Friday after losing two pounds that week. You feel sick, like a failure.
So start with a little fund to catch the little things before beginning to dump the debt. It is like drinking a light protein shake to fortify your body so you can work out, which enables you to lose weight. The beginner fund will keep life’s little Murphies from turning into new debt while you work off the old debt. If a real emergency happens, you have to handle it with your emergency fund. No more borrowing! You have to break the cycle.
Twist and wring out the budget, work extra hours, sell something, or have a garage sale, but quickly get your $1,000. Most of you should hit this step in less than a month. If it looks as though it is going to take longer, do something radical. Deliver pizzas, work part-time, or sell something else. Get crazy. You are way too close to the edge of falling over a major money cliff here. Remember, if the Joneses (all the broke people) think you are cool, you are heading the wrong way. If they think you are crazy, you are probably on track.
Hide It
When you get the $1,000, hide it. You can’t keep the money handy because it will get spent. If your $1,000 from Baby Step One is in the underwear drawer, the pizza man will get it. No, the pizza man isn’t in your underwear drawer, but you will impulse-buy something if the money is easily accessible. You can put it in the bank savings account, but it cannot become overdraft protection. Don’t attach the savings account to your checking to protect you from overdrafting because then your emergency fund will get spent on impulse. I have had to learn to protect myself from me. We are not putting the money in the bank to earn money, but rather to make it hard to get. Since $1,000 at 4 percent earns only $40 per year, you aren’t getting rich here, just finding a safe place to park money.
Get creative. Maria, who attended one of our classes, went to her local Wal-Mart and bought a cheap 8” x 10” frame. She framed ten $100 bills in a stack. In the space within the frame she wrote, “In case of emergency, break glass.” Then she hung the emergency fund on the wall behind coats in a closet. She knew the average burglar wouldn’t look there, and it would be too much trouble for her to get it out of the closet and out of the frame, so she wouldn’t use it unless there was an emergency. Whether you use a simple savings account or a frame in the coat closet, get your $1,000 quickly.
Keep It Liquid
This is a small step, so take it quickly! Don’t let this small first step last for months! What if you already have more than $1,000? Wow, that was easy, wasn’t it? If you already have the $1,000 in anything other than retirement plans, get it out. If it is in a Certificate of Deposit with penalties, take the penalty for early withdrawal and get it out. If it is in mutual funds, get it out. If it is in savings bonds, get it out. If it is in checking, get it out. If it is in stocks or bonds, get it out. Your emergency fund, limited to $1,000 in liquid, available cash, is all that is acceptable. If you have tried to get fancy with the emergency fund, you are likely to borrow to keep from “cashing it (the cool investment) out.” Details will come later in The Total Money Makeover about what to do with your fully funded emergency fund.
All money you have above and beyond the $1,000 in anything except retirement plans will be used in the next step anyway, so get ready. You won’t have this money to fall back on if the alternator on your car goes out.
What if you are at Baby Step Two in the next chapter and you use $300 from your emergency fund to fix the alternator? If this happens, stop Step Two and return to Step One until the full $1,000 is replenished. Once your beginner emergency fund is funded again, you can return to Step Two. Otherwise, you will gradually do away with this small buffer and be back to old habits of borrowing to cover real emergencies.
I know some of you think this step is very simplistic. For some this is an instantaneous step, and for others this is the first time they have ever had enough control over their money to save it. For some readers, this is an easy step. For others, this is the step that will be the spiritual and emotional basis for the entire Total Money Makeover.
Lilly was such a case. A single mom with two kids, she had been divorced for eight years; struggle had been a way of life for some time. Lilly had survival debt, not stupid, spoiled-brat debt. She had been ripped off with a super-high-interest car loan, check-advance debt, and lots of credit-card debt. She had a take-home pay of only $1,200 per month with two baby birds to feed, along with a host of greedy rip-off lenders. Saving seemed like such a fairy tale to her that she had long ago lost hope of ever being able to save money. When I met her she had already begun her Total Money Makeover. After hearing me teach the Baby Steps at a live event, weeks later she dropped by a book signing to give me an unsolicited report.
As she moved through the book line, I looked up and saw a huge grin. She asked if she could give me a big hug to say thanks. How could I turn that down? As I looked at her, tears began to run down her cheeks as she gleefully told of fighting through a budget, her first ever. She told me of years of struggle. Then she laughed, and everyone in line (now fully engaged) cheered when she said she now has $500 in cash saved. This was the first $500 in her adult life that was earmarked for her emergency fund. This was the first time she had had money between her and Murphy. Her friend, Amy, who was with Lilly that day, told me that Lilly was a different person already. Amy said, “Even her face has changed, now that she has peace.” Don’t be confused; it wasn’t $500 that did all that. What caused Lilly’s liberation was her newfound hope. She had hope that she never had before. She had hope because she had a sense of power and control over money. Money had been an enemy her whole life, and now that she had tamed it, money was going to be Lilly’s new lifelong companion.
How about you? Now is the time to decide. Is this theory, or is it real? Am I a simpleton kook, or have I found something that works? Keep reading, and we will decide together.
7
The Debt Snowball: Lose Weight Fast, Really
Your Total Money Makeover is dependent upon using your most powerful tools. I believe with everything within me that your most powerful wealth-building tool is your income. Ideas, strategies, goals, vision, focus, and even creative thinking are vastly important, but until you get control and full use of your income to build wealth, you will not build and keep wealth. Some of you might inherit money or win a jackpot, but that is dumb luck, not a proven plan to financial fitness. To build wealth, YOU will have to regain control of your income.
Identify the Enemy
The bottom line is that it is easy to become wealthy if you don’t have any payments. You may get sick of hearing it,
but the key to winning any battle is to identify the enemy. The reason I am so passionate about your getting rid of debt is that I have seen how many people make huge strides toward being a millionaire in the short time after they get rid of their payments. If you didn’t have a car payment, a student loan, credit cards out your ears, medical debt, or even a mortgage, you could become wealthy very quickly. I know that may seem like a faraway place for some of you. You might feel like a 350-pounder looking at Mr. Universe, shaking your head, thinking it will never happen for you. Let me assure you, I have walked with many 350-pounders into financial fitness, so stay with me.
The math is revealing. The typical American with a $50,000 annual income would normally have an $850 house payment and a $495 car payment, with an additional $180 payment on the second car. Then there is a $165 student-loan payment; and the average credit-card debt is about $12,000, making those monthly payments around $185 per month. Also, this typical household will have other miscellaneous debt on things like furniture, stereos, or personal loans on which they pay an additional $120. All these payments total $1,995 per month. If this family were to invest that instead of sending it to the creditors, they would be cash mutual-fund millionaires in just fifteen years! (After fifteen years, it gets really exciting. They’ll have $2 million in five more years, $3 million in three more years, $4 million in two and a half more years, and $5.5 million in two more years. So they will have $5.5 million after twenty-eight years.) Keep in mind, this is with an average income, which means many of you make more than this! If you are thinking that you don’t have that many payments so your math won’t work, you missed the point. If you make $50,000 and have fewer payments, you have a head start, since you already have more control of your income than most people.
