The Total Money Makeover: Classic Edition

by Dave Ramsey

  The bank wasn’t evil; they were just doing their job as they began foreclosure. I wish I could tell you a happy ending, but the truth is, they sold their home at a deep discount to stop the foreclosure and now rent and try to survive. All of this happened because they tried to save a few dollars on the interest rate, “and we knew we were going to move.” They did.

  MYTH: The home equity loan is good to have instead of an emergency fund.

  TRUTH: Again, emergencies are precisely when you don’t need debt.

  The home equity loan is one of the most aggressively marketed loans today. The average American in debt to his eyeballs has exhausted all means of borrowing except the big second mortgage on his home. This is very sad because we now put our homes at risk to go on vacation, open a business, consolidate debt, or just for an emergency fund. Families come to us in dire straits when the home equity loan is their last bad mistake and the straw that breaks the camel’s back.

  The banking industry calls these loans HELs for short, and my experience tells me they simply left off an L. These loans are very dangerous, and an unbelievable amount of them end in foreclosure.

  Even a conservative person who doesn’t have credit-card debt and pays cash for vacations can make the mistake of the HEL by setting up a loan or a “line of credit” just for emergencies. That seems reasonable until you have walked through an emergency or two, and you realize very plainly that an emergency is the last time you need to be borrowing money. If you have a car wreck or lose your job and then borrow $30,000 against your home to live on while you make a comeback, you will likely lose your home. Most HELs are renewable annually, meaning they requalify you for the loan once a year.

  Ed and Sally didn’t realize this. Ed is a very sophisticated financial guy, or so he thought, so he had a HEL for emergencies. Sally had a bad car wreck, and within three months Ed got downsized. They quickly went through the HEL and then got behind in their bills. The annual renewal came up on the HEL, and the bank chose not to renew their loan because of their bad credit, which had been perfect for the previous seventeen years of marriage. The bank called the note. Ed couldn’t believe the bank would kick them when they were down. The note being called meant they had to refinance to pay off the bank, but guess what? They couldn’t because their credit was bad. The end result was very sad; they sold their home to avoid a foreclosure. Ed was wrong. They should have had an emergency fund instead of a loan.

  MYTH: You can’t pay cash for a home!

  TRUTH: Bet me.

  First, let me tell you that mortgage debt is the only kind of debt I don’t yell about. I want you to pay off your home as a part of your Total Money Makeover, and, for all the reasons stated in the previous pages, you have to be very careful. When asked about mortgages, I tell everyone never to take more than a fifteen-year fixed-rate loan, and never have a payment of over 25 percent of your take-home pay. That is the most you should ever borrow.

  I don’t borrow money—ever. Luke called me from Cleveland to tell me that some of our listeners and readers are doing what Sharon and I have done, “The 100-Percent-Down Plan.” Pay cash. Most people don’t think that can be done. Luke did it.

  Luke made really good money. His income at twenty-three years old was $50,000, and he married a young lady making $30,000. His grandfather had preached to him never to borrow money. So Luke and his new bride lived in a very small apartment over a rich lady’s garage. They paid only $250 a month for it. They lived on nothing, did nothing that cost money, and they saved. Man, did they save! Making $80,000 in the household, they saved $50,000 a year for three years and paid cash for a $150,000 home. They closed on the home on Luke’s wife’s twenty-sixth birthday. They lived like no one else, and now they are living like no one else. If you make $80,000 per year and don’t have any payments, you can become very wealthy very quickly. Keep in mind, though, that Luke’s friends and relatives thought he should be committed. They made fun of his cars, his lifestyle, and his dream. Only his bride and his grandfather believed in his dream. Who cares what the broke people think?

  You may not make $80,000 per year, but you may not need a $150,000 home as your starter either. You may not make $80,000 per year, so your dream might take five years instead of three, like Luke’s. Ask any eighty-year-old if five years of sacrifice is worth it to change your financial destiny for the rest of your life! Ask any eighty-year-old if five years of sacrifice is worth it to have the satisfaction of knowing you changed your family tree. Paying cash for a home is possible, very possible. What’s hard to find is people willing to pay the price in sacrificed lifestyle.

  Before we got married, Doug and I had both been divorced and both had custody of our children. As single parents, it was a struggle to afford house payments and all the other bills associated with everyday life. Every time the mortgage or rent was due, the checkbook got tighter and tighter. I was trying to finish college, and he had a lot of unpaid debt from his previous marriage. I had one credit card that I found myself using for emergencies (car repairs, etc.). I didn’t believe in carrying a balance on it, but our debt was fairly substantial when we got married.

  Shortly into our marriage, we began our Total Money Makeover. Doug listened to the radio show every day during his thirty-minute commute to work and was convinced of the financial peace we could have in our future by simply following the Baby Steps. I decided to get onboard with him, because we really had nothing left to lose at this point.

  After we stopped using our credit cards, we spent a lot less! And establishing a budget highlighted the areas in which we had been blindly wasting our money. We realized a lot of our expenses were due to eating out and various luxury items that we could live without. We decided to take every extra dollar we had and pay off our credit card. Next we paid off my car. Then we set up our emergency fund and began working on our mortgage. Thankfully, we paid off the house a year and a half ahead of schedule! While so many people don’t even realize the importance and sense of fulfillment that come from owning your home, we found this to be the last and biggest step in finding true financial peace.

  Since we’ve become debt-free, we have greatly enjoyed taking more family vacations and spending time together. There is so much less stress on the entire family! It’s amazing how much easier it was to bring the family closer together once we eliminated all the money concerns we used to have. We still do not live lavishly, and we love to bargain shop for everything we buy, but the peace we have from being debt-free is worth the small sacrifices! Thanks for redirecting the course our family was headed down, Dave!

  Sabrina (age 42) and

  Doug (age 52) Howerton

  Aluminum Mill Worker; Retail-Store

  Manager

  A Picture of Freedom

  Well, there it is, Baby Step Six, debt-free and loving it. Our observation of families who stay gazelle-intense is that they pay off the mortgage about seven years from the date they declared war on the culture, from the date they decided to have a Total Money Makeover. I’m sure by now you are reassured that this is not a get-rich-quick book. What kind of author would tell a microwave culture that it takes an average of seven years to reach the last Baby Step? What kind of author would tell a sound-bite culture that the first two steps take a very tough two or two and a half years? An author who has seen it done tens of thousands of times by ordinary people with extraordinary desire would do that, the same author who tells you it’s not easy, just worth it.

  I have used the emotional tag with radio audiences and live audiences that the grass will feel different under your feet when you own it. When you pay off the mortgage, have a barefoot mortgage-burning party and invite all your friends, relatives, and neighbors. Maybe they will catch the bug and want a Total Money Makeover when they see yours is really working.

  Were you to visit my offices, you would find around our meeting room mementos of people having a Total Money Makeover. There are lots of exhibits built of destroyed and maimed credit cards sent in by people
who have discovered if they will live like no one else, later they can live like no one else. One of the more memorable exhibits is a framed letter with a ziplock bag. This letter and sample of fescue were handed to me in person in a shopping mall in Louisville, Kentucky. I was there doing a radio appearance and book signing when up walked Alicia, or “Al,” as she likes to be called.

  According to her letter, Al’s story was typical but didn’t end normally. She and her husband started their Total Money Makeover at age twenty-five. They listened to me on our talk radio show and decided they’d had enough. They started with $20,000 in student loans, $10,000 in car loans, $3,000 in credit-card debt, and an $85,000 mortgage: a grand total of $118,000 in debt. On a $70,000 annual household income, they paid off every red cent in six years. At thirty-one years young, Al stood before me a smiling and free woman. She brought me one of my favorite gifts too. She brought me the letter and a ziplock bag. What was in the bag? Fescue from her backyard, “Because,” she said, “the grass really does feel different under my bare feet in the backyard now that there is no mortgage and we are DEBT-FREE!”

  I asked what she was going to do now that she was debt-free. Her response was fun. She said she and her husband were going to dinner to celebrate. At dinner they were going to do two things. First, they were going to read the menu from left to right for a change, because money is now no object. Second, at the celebration dinner they fully intended to spend more than a car payment! You see, if you will live like no one else, later you can live like no one else.

  Next, Al said she and her husband were on a direct course to the last Baby Step and would give more than they had ever imagined they would have. At thirty-one, this couple is destined for extreme levels of wealth. Congratulations, Al. You and your husband are true examples of what a Total Money Makeover looks like.

  12

  Build Wealth Like Crazy: Become the Mr. Universe of Money

  You have reached that perfect number, Baby Step Seven. By reaching the last step of your Total Money Makeover, you have entered the top 2 percent of Americans. You are totally debt-free—no house payment, no car payment. You are not Mastered by a Card, you have not Discovered bondage, American Excess has left your life, you have no student loans (your old pet), and you are free. You live on a monthly written plan and agree on it with your spouse, if you’re married. You have a retirement destiny that looks considerably better than Alpo and Social Insecurity. If you have children, they will be students without a student loan. You have lived like no one else, so now you will be able to live like no one else. Through sweat and sacrifice, you have reclaimed control of your life and your most powerful wealth-building tool, your income.

  Baby Step Seven: Build Wealth

  What was the purpose of your having a Total Money Makeover? Why did you do it? Why all the sacrifice and work? To be in debt and out of control doesn’t take nearly as much effort. Why go to all this trouble? Why do you want to have wealth? If you think wealth will answer all life’s questions and make you trouble-free, you are delusional. I have had wealth twice in my life, and I don’t find it to be trouble-free; as a matter of fact, most of the troubles have zeros on them. Wealth is not an escape mechanism. It is instead a tremendous responsibility. So what would you do if you had $18 million that it took you forty years to acquire?

  After years of studying, teaching, and even preaching on this subject across America, I can find only three good uses for money. Money is good for FUN. Money is good to INVEST. And money is good to GIVE. Most anything else you find to do with it doesn’t represent good mental and spiritual health on your part. So if you one day have $18 million, you should do all three of these things. In fact, while you are working the steps to wealth, you should be doing all three of these things. You have lost weight, you have built up your cardiovascular system, and now you have added muscle because you have lost the debt, saved for emergencies, and invested long term for retirement and college planning. At this stage in The Total Money Makeover, you are the Mr. Universe of Money, with serious abs, pecs, and quads. You have all this financial muscle, so now you should do something intentional with it. It is not just to look at. We built this financial superbody for a reason. To have FUN, INVEST, and GIVE.

  Yes, We Get to Have Fun

  The kid in us likes the FUN part of this equation, and since we have made this kid behave for a long time, with promises of ice cream if he does so, he should get some ice cream. Should anyone wear a $30,000 watch? Should anyone drive a brand-new $50,000 car? Should anyone live in a $700,000 home? Absolutely, they should. The problem with people is, they buy those things when they can’t afford them.

  In chapter 3 on Debt Myths, we talked about new cars and what a bad investment they are. They go down in value very rapidly. Because the new car is the largest thing we buy that goes down in value, the car payment is usually our largest payment, except for the home mortgage. Roughly 70 percent of the people I assist in a Total Money Makeover have to make the difficult decision to sell their car so they can be free of the big payment. If they don’t free themselves from this very large debt and very large payment, they find it very hard to climb the Baby Steps. So some days my talk radio show becomes the “sell the car” show. Some days it seems my answer to every question is, “Sell the car.” “Don’t buy that new car,” is advice you will hear from me so often you’ll be saying it in your sleep.

  Sometimes a caller will ask if he can afford a purchase while on his Total Money Makeover. Sometimes a new listener wanders into the snare of asking about buying something totally ridiculous. I’m nice, at first, to explain that she can’t do that now. I’ll say something like, “The emergency fund is more important than a leather couch.” I have a computer in front of me while I’m on the air, which the phone screener uses to tell me who is on hold and what they are calling about. Not long ago I looked down at the screen and saw that Michael was waiting to talk with me. The note said he wanted to buy a Harley-Davidson motorcycle. Harleys are fabulous bikes, but they are not for broke people, because a nice one will cost over $20,000. I prejudged Michael to be twenty-eight years old, with two car payments, two kids, one wife, and no money. I figured Michael was one of those guys who puts his little-boy fantasies before the good of his family. I loaded my gun to respond to his question. I was prepared not only to tell him not to buy a Harley but also to straighten out his whole way of looking at financial matters.

  I figured Michael was probably making $48,000 per year and broke, so obviously he had no business buying a $20,000 toy. “Dave, I’ve always dreamed of owning a Harley,” Michael started. “I just called to see if you thought I should buy one, and if I can afford it.” For a few minutes I went on about how great Harleys are and how a lot of guys would love to have one. I usually ask a little about the caller’s financial situation in order to make a quasi-reasonable judgment, so I asked Michael what he made last year. His response was, “$650,000.” “Yeah, but what have you averaged over the last five years?” I asked, thinking he maybe hit the Lotto. “About $550,000 per year,” was his answer. Now he had me on the ropes. “So how much do you have in investments?” I queried further. “About $20 million,” came his final blow. “Buy the Harley, dude!” was my advice. Can Michael afford a $20,000 toy? Absolutely. Is it morally wrong for him to enjoy a fun item he wants when for him to purchase it as a percentage of his wealth is equal to most people buying a Happy Meal? No, there is absolutely nothing financially or morally wrong with that purchase. The man has earned his Harley and then some.

  I told you Michael’s story to make sure you understand that one reason to have a Total Money Makeover is to build wealth that allows you to have fun. So have some fun! Taking your family, even the extended ones, on a seven-day cruise, buying large diamonds, or even buying a new car are things you can afford to do when you have millions of dollars. You can afford to do these things because when you do them, your money position is hardly even affected. If you like travel, travel. If you like clothes, bu
y some. I am releasing you to have some fun with your money, because money is to be enjoyed. That guilt-free enjoyment is one of the three reasons to have a Total Money Makeover.

  Investing Is How We Keep on Winning

  The grown-up inside us likes the INVESTING of money because that is part of what makes you wealthy. Also, the growing dollars are a way of keeping score in our Total Money Makeover game. Are we winning? It truly becomes a game. In the movie Two Weeks’ Notice, Hugh Grant plays George Ward. The character of George is a very wealthy and spoiled corporate figurehead. His character isn’t one we want to imitate, but he has a great line in the movie about his wealth. He is telling Sandra Bullock’s character that he lives in this luxury hotel, and he says nonchalantly, “Actually, I own the hotel; my life is a little bit like Monopoly.”

  Investing can feel like that after a while—“a little bit like Monopoly.” When you are playing Monopoly, you can be up, or you can get behind. Sometimes the market fluctuates, but as mature investors we ride out the waves, stay in for the long term. Sometimes I meet people who arrive at this step and are scared because just as they reach retirement age, their investments are heading down. Never fear; if you have quality investments with long-term track records, they will come back. Besides, you don’t need all the nest egg at once to retire on; you just need some of the income from it. So since you don’t need it all right then, it would be silly to cash everything out while the market is at the bottom. “Buy high; sell low” is not the formula to wealth. Be patient with the market while living off the income the nest egg produces.