Total Money Makeover Book Review

Dave Ramsey's book helps you take control of your finances and build wealth.

Dave Ramsey's Total Money Makeover is a comprehensive guide to taking control of your finances and achieving financial freedom. Many people struggle with debt, live paycheck to paycheck, and have little to no savings. The Total Money Makeover provides a step-by-step plan to help individuals and families get out of debt, save money, and build wealth.

Being financially literate also allows you to make informed decisions about your money and avoid common pitfalls such as excessive debt and poor investment choices. By following the principles outlined in the Total Money Makeover, you can gain control over your finances and work towards achieving your financial goals.

The 7 Baby Steps to Financial Freedom In Total Money Makeover

The Total Money Makeover outlines seven baby steps that are designed to help individuals and families achieve financial freedom. These steps provide a clear roadmap for taking control of your finances and building wealth.

Save $1,000 for an emergency fund: 

The first step is to save $1,000 as a starter emergency fund. This fund is designed to cover unexpected expenses such as car repairs or medical bills. Having this fund in place provides a safety net and prevents individuals from going into debt when faced with unexpected expenses.

Pay off all debt (except for the mortgage): 

The second step is to pay off all non-mortgage debt using the debt snowball method. This involves listing all debts from smallest to largest and paying them off in that order. By focusing on one debt at a time, individuals can gain momentum and stay motivated as they see their debts disappear.

Save 3-6 months of expenses in a fully-funded emergency fund: 

Once all non-mortgage debt is paid off, the next step is to save 3-6 months of living expenses in a fully-funded emergency fund. This fund provides a cushion in case of job loss or other financial emergencies.

Invest 15% of household income into retirement: 

The fourth step is to start investing 15% of household income into retirement accounts. By starting early and consistently investing, individuals can take advantage of compound interest and build wealth over time.

Save for your children's college fund: 

The fifth step is to save for your children's college education. This can be done through investment vehicles specifically designed for education savings.

Pay off the mortgage: 

The sixth step is to pay off the mortgage early. By making extra principal payments and paying off the mortgage early, individuals can save thousands of dollars in interest and become completely debt-free.

Build wealth and give generously: 

The final step is to build wealth and give generously. This involves continuing to invest, saving for large purchases, and giving back to others in need.

Implementing these steps in your own life requires discipline and commitment. It may require making sacrifices and changing your spending habits. However, by following these steps, you can achieve financial freedom and live a life free from the burden of debt.

Creating a Budget that Works for You

Creating a budget is a crucial step in taking control of your finances. A budget allows you to track your income and expenses, prioritize your spending, and ensure that you are living within your means. Here are some tips for creating a budget that fits your lifestyle:

Track your expenses: 

Before creating a budget, it's important to have a clear understanding of where your money is going. Track your expenses for a month or two to get an accurate picture of your spending habits.

Determine your income: 

Calculate your monthly income, including any regular paychecks, side hustles, or other sources of income.

Prioritize your expenses: 

Once you have a clear understanding of your income and expenses, prioritize your spending. Start with essential expenses such as housing, utilities, and food. Then allocate money towards savings and debt repayment. Finally, allocate money towards discretionary expenses such as entertainment and dining out.

Set realistic goals: 

When creating a budget, you need to set realistic goals. Be honest with yourself about what you can afford and what you are willing to sacrifice in order to achieve your financial goals.

Review and adjust regularly: 

A budget is not set in stone. It's important to review and adjust your budget regularly as your income and expenses change. Be flexible and willing to make adjustments as needed.

How To Stick To Your Budget

Once you have created a budget, the next step is to stick to it. This requires discipline and self-control. Here are some tips for sticking to your budget:

Automate your savings:

Set up automatic transfers to your savings account or retirement account. This ensures that you are consistently saving and helps to remove the temptation to spend that money elsewhere.

Use cash envelopes: 

One method that Dave Ramsey recommends is using cash envelopes for certain categories of spending such as groceries or entertainment. This helps to limit your spending in those categories and prevents overspending.

Avoid impulse purchases: 

Before making a purchase, ask yourself if it aligns with your budget and financial goals. Avoid impulse purchases and give yourself time to think before making a purchase.

Find free or low-cost alternatives: 

Look for free or low-cost alternatives to expensive activities or purchases. For example, instead of going out to eat, try cooking at home or having a picnic in the park.

By creating a budget that works for you and sticking to it, you can take control of your finances and work towards achieving your financial goals.

You can read my in-depth guide to budgeting for more information

Emergency Funds

An emergency fund is a crucial component of financial stability. It provides a safety net in case of unexpected expenses or emergencies. Here's why having an emergency fund is important:

Financial security: 

Having an emergency fund provides a sense of security and peace of mind. It allows you to handle unexpected expenses without going into debt or relying on credit cards.

Avoiding debt: 

Without an emergency fund, many people are forced to rely on credit cards or loans to cover unexpected expenses. This can lead to a cycle of debt and financial stress.

Flexibility: 

An emergency fund provides flexibility and allows you to handle unexpected expenses without disrupting your regular budget or financial plans.

So how much should you save for emergencies? Dave Ramsey recommends saving 3-6 months of living expenses in a fully-funded emergency fund. This means having enough money to cover all of your essential expenses such as housing, utilities, food, and transportation for 3-6 months.

How To Build An Emergency Fund

Start small: 

If you don't have any savings, start by saving a small amount each month. Even saving £10 or £20 per month can add up over time.

Make it a priority: 

Treat your emergency fund as a priority and allocate money towards it each month. Consider it a non-negotiable expense, just like your rent or mortgage payment.

Cut expenses: 

Look for ways to cut expenses and free up money to put towards your emergency fund. This may involve making sacrifices or changing your spending habits.

Save windfalls: 

If you receive a bonus at work or a tax refund, consider putting that money towards your emergency fund instead of spending it on discretionary expenses.

Automate your savings: 

Set up automatic transfers to your emergency fund each month. This ensures that you are consistently saving and helps to remove the temptation to spend that money elsewhere.

By building and maintaining an emergency fund, you can protect yourself from unexpected expenses and achieve greater financial stability.

Top 10 books on frugal living that can help you on your frugal journey.

Paying Off Debt: Snowball vs. Avalanche Method

Paying off debt is a crucial step in achieving financial freedom. The Total Money Makeover outlines two methods for paying off debt: the snowball method and the avalanche method. Here's an explanation of each method and the pros and cons of each:

Snowball method: 

The snowball method involves listing all of your debts from smallest to largest and paying them off in that order. You make minimum payments on all of your debts except for the smallest one, which you attack with all of your extra money. Once the smallest debt is paid off, you move on to the next smallest debt, and so on.

Pros of the snowball method:

  • Provides quick wins and motivation: By paying off the smallest debts first, you experience quick wins and gain momentum. This can provide motivation to continue paying off your debts.

  • Simplifies the process: The snowball method simplifies the debt repayment process by focusing on one debt at a time. This can make it easier to stay organized and track your progress.

Cons of the snowball method:

  • May not save as much money on interest: Because the snowball method focuses on paying off the smallest debts first, you may end up paying more in interest over time compared to the avalanche method.

  • May take longer to pay off all debts: Depending on the size of your debts, it may take longer to pay off all of your debts using the snowball method compared to the avalanche method.

Avalanche method: 

The avalanche method involves listing all of your debts from highest interest rate to lowest interest rate and paying them off in that order. You make minimum payments on all of your debts except for the one with the highest interest rate, which you attack with all of your extra money. Once the highest interest rate debt is paid off, you move on to the next highest interest rate debt, and so on.

Pros of the avalanche method:

  • Saves more money on interest: Because the avalanche method focuses on paying off the highest interest rate debts first, you can save more money on interest over time compared to the snowball method.

  • May pay off debts faster: Depending on the size of your debts and the interest rates, you may be able to pay off your debts faster using the avalanche method compared to the snowball method.

Cons of the avalanche method:

  • May not provide quick wins: Because the avalanche method focuses on paying off the highest interest rate debts first, it may take longer to experience quick wins and gain motivation compared to the snowball method.

  • May be more challenging to stay motivated: The avalanche method requires discipline and patience, as it may take longer to pay off certain debts compared to the snowball method.

So how do you choose the best method for your situation? It ultimately depends on your personal preferences and financial goals. If you are motivated by quick wins and need the psychological boost of paying off debts quickly, the snowball method may be the best choice for you. 

However, if you are focused on saving money on interest and are willing to be patient, the avalanche method may be a better fit. Consider your own financial situation and goals when deciding which method to use.

Read more about paying off debt tips and tricks

Building Wealth Through Investing

Investing is a crucial component of long-term financial success. By investing, you can grow your wealth and achieve financial independence. Here are some reasons why investing is important:

Beat inflation: 

Investing allows you to earn a return on your money that exceeds the rate of inflation. This helps to preserve your purchasing power and ensure that your money grows over time.

Take advantage of compound interest: 

Compound interest is the concept of earning interest on your initial investment as well as on the interest that is earned over time. By starting early and consistently investing, you can take advantage of compound interest and grow your wealth exponentially.

Diversify your income: 

Investing allows you to diversify your sources of income and reduce your reliance on a single income stream. This provides greater financial security and stability.

Investment Ideas To Consider

Stocks: 

Stocks represent ownership in a company and can provide the potential for high returns. However, they also come with a higher level of risk compared to other types of investments.

Bonds: 

Bonds are debt securities that are issued by governments or corporations. They provide a fixed income stream and are generally considered to be lower risk compared to stocks.

Mutual funds: 

Mutual funds pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. They provide instant diversification and are managed by professional fund managers.

Real estate:

Real estate can be a lucrative investment option, providing both rental income and potential appreciation in value. However, it also requires a significant upfront investment and ongoing maintenance.

Index funds: 

Index funds are a type of mutual fund or exchange-traded fund (ETF) that aims to replicate the performance of a specific market index, such as the S&P 500. They provide broad market exposure and are generally considered to be lower cost compared to actively managed funds.

Getting Started With Investing Quick Tips

Educate yourself: 

Take the time to educate yourself about different investment options and strategies. Read books, listen to podcasts, and seek advice from financial professionals.

Start small: 

If you are new to investing, start with a small amount of money and gradually increase your investments over time. This allows you to learn and gain experience without taking on too much risk.

Diversify your portfolio: 

Diversification is key to reducing risk and maximizing returns. Spread your investments across different asset classes and sectors to minimize the impact of any single investment.

Stay disciplined: 

Investing requires discipline and a long-term perspective. Avoid making emotional decisions based on short-term market fluctuations and stick to your investment plan.

By investing for the long term and staying disciplined, you can build wealth and achieve financial independence.

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