THE TOTAL MONEY

MAKEOVER
A Proven Plan For Financial Fitness

DAVE RAMSEY

KEY QUOTES
The Big “So What”

Many Americans are debt-ridden and live from paycheck to paycheck. “Personal finance is 80
This book debunks myths about money and debt, and provides a proven percent behavior and only
20 percent head knowledge.”
step-by-step plan to help you become debt-free and wealthy. If you
embrace the ideas in this book and implement the steps consistently,
you will regain your financial health and transform your life.

Introduction

A shocking number of Americans are in poor financial health. 88% “What to do isn’t the
of graduating college students have credit-card debts before they problem; doing it is. Most of
have jobs, 60% of Americans don’t pay off their monthly credit us know what to do, but we
just don’t do it.”
card bills, 91% of families have no/little savings for their kids’
college education, and 49% only have enough savings to last <1
month if they lose their household income.

To change your financial situation, you need 20% know-how and

80% action. Just like how we learn to read, write and drive, we
must learn about money and master the skills through practice.

• Adopt financial principles and processes that work in both good “When the tide goes out, you
and bad times. Unfortunately, during good times, people tend can tell who was skinny-
dipping.”
to become overconfident, develop bad financial habits, take
-Warren Buffett
huge risks and buy things they can’t afford. When they’re hit
by bad times—be it an economic downturn, a job loss or a bad
accident—they find themselves drowning financially with no
backup options.

• The principles in this book are not new, and are actually very “This is a process book. We
simple. The real challenge is in adopting them and taking are aiming at carefully
weaving inspiration and
concrete action to change the way you think and live. In this
information together into a
book, Ramsey (i) explains various financial principles vs myths, step-by-step plan.”
(ii) a 7-step plan to transform your life, and (iii) injects hope/

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 inspiration through stories of people who’ve successfully
applied the plan. Regardless of your current financial situation,
the key is to start taking action now to improve your financial
health.

Addressing Obstacles to Financial Health

The Total Money Makeover (TMM) program is built on this underlying

KEY QUOTES
principle: if you will make the sacrifices now that most people won’t, “If you will live like no one
you can live later in a way that most people can’t. To successfully else, later you can live like no
embrace the TMM, you must first address several mental-emotional one else.”
obstacles.

Overcome Self-denial

Change is uncomfortable and we tend to avoid it if possible. Thus, the

first obstacle to overcome is yourself.

Face up to reality. If you’re financially overweight (i.e. you have

challenges with money), the first step is to acknowledge it so you
can start getting back in shape.

Take 100% responsibility for your money and life. Stop finding “90 percent of solving a
excuses (“I have no time”) or deluding yourself (“It’s ok, there’s no problem is realizing there is
one.”
real problem”). Get financially fit before you get a financial heart
attack. Don’t fall into the trap of these 3 common risk denials:

• Laziness: Denying that you must put in effort to make money.

• Fatalism: Denying that you can do something in a bad situation.

• False security: Denying that there are risks in your current

situation, e.g. thinking your job is 100% secure or your
investments are 100% safe.

Debunk the Debt/Money Myths

Any lie, if repeated enough times, will start to seem like the truth. “If you tell a lie often enough,
Our modern culture is filled with propaganda designed to influence loudly enough, and long
enough, the myth will
our buying behaviors and lifestyle choices. To transform your financial become accepted as a fact.”
health you must first change your perspectives about debt and money.
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Debt is not a tool and won’t bring you prosperity.

• Debt has become such an integral part of the American

lifestyle that people expect to have housing mortgages, car
payments, student loans and credit cards. You’re constantly
being brainwashed that to be successful or admired, you must
wear a certain watch, drive a certain car, or join a certain club.
You’re also told that you should get these things now using
debt. In reality, debt promotes instant gratification, encourages KEY QUOTES
you to live beyond your means and exposes you to unnecessary
financial risks. “It is human nature to want
it and want it now; it is also
a sign of immaturity.”
• A loan makes the borrower a slave to the lender. That’s why
it’s a bad idea to lend money to a friend or family member—it
fundamentally shifts the balance of power and the relationship
starts to deteriorate. Moreover, you’re only helping your friend/ “Debt is not a tool; it is a
method to make banks
relative to stay financially irresponsible, which hurts them in
wealthy, not you. The
the long run. If you have extra cash and truly want to help, borrower truly is slave to the
then give the money without expecting it back. lender.”

• Likewise, loan schemes like cash advances, payday loans or

rent-to-own schemes do not genuinely help lower-income
earners. The lenders actually charge high interest rates and
make money at the expense of the poor.

• Learn to calculate the real costs of debt. If you buy a TV for “I am not against the
$1,000 under a “90 days same as cash” scheme, you do not enjoyment of money. What
I am against is spending
get a free TV; you merely get a 90-day interest-free loan. money when you do not
Chances are, you won’t get a discount and will be charged 24- have money to begin with.”
38% interest if you don’t pay the full $1,000 within 90 days.
If you had paid for the TV in cash, you could’ve negotiated
a discount and avoided the interest payments. Better still, if
you’d invested the $1,000 instead of buying the TV, you’ll be
earning interests instead of paying it.

Debt is not necessary nor unavoidable:

• You do not need to build your credit. Your credit or FICO scores “Just as slaves born into
affect your ability to get mortgages/loans. However, you don’t slavery can’t visualize
need to keep borrowing to improve your scores. You’re better freedom, we Americans don’t
know what it would be like
off building your financial health so you won’t even need a loan. to wake up to no debt.”

• You do not need a credit card. 69% of bankruptcy filers state

credit-card debt as the cause of bankruptcy, and 19% of
bankruptcy filing are by college students. Use a debit card
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 instead of a credit card—it offers the same convenience
without the risk of overspending and accruing huge interests
from overdue payments.

• Debt consolidation is not a lasting solution. It may save you

some short-term interest, but your debt levels will grow
back quickly if you don’t change your spending habits.

The real building-block for your wealth is your income. The key KEY QUOTES
to wealth is to free up your income so you can invest and grow it.
In “The Millionaire Next Door”, Dr. Stanley shares how a typical “Looking good is when your
broke friends are impressed
millionaire lives in a middle-class home, drives a second-hand by what you drive, and being
car, and buys jeans from Wal-Mart. They become wealthy not good is having more money
by incurring debt, but by spending less than what they earn and than they have.”
using the remaining cash to build wealth. They apply delayed
gratification and focus on growing their money instead of living
a lavish lifestyle.

Unfortunately, most people prefer to believe in the myth of easy “Money denial always
involves an illusion, followed
money. They look for miracles and secrets to overnight riches by disillusionment.”
which don’t exist.

• If you don’t plan and save for your retirement, don’t count on “Things won’t be okay unless
you make them that way…
the government or God to provide for you. If you don’t set You are in charge of your
aside time for budgeting or financial planning, then you’ll only retirement.”
have yourself to blame when you’re stuck with no savings and
no job during a financial downturn.

• You can’t buy a DVD, learn some secrets and become rich with “The lottery is a tax on poor
just a few hours a week. Likewise, you won’t get rich on lottery people and on people who
or other games of chance. Take a closer look at the people in can’t do math.”
the lottery queues and you’ll realize that they are not rich.

• The faster you let go of the illusion of easy money, the faster
you can redirect your time, energy and efforts to building the
right financial foundation.

Learn to discern the truth about investment-related products.

• Gold is a not a secure investment for bad times. The historical “The secrets of the rich don’t
rates of return for gold have been relatively low. In the event exist, because the principles
aren’t a secret.”
of total economic collapse, gold will have no more use or value
than food, clothing and other essentials.

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 • Mobile homes or trailers aren’t good investments either as their
value depreciates rapidly.

• Most whole life insurance products (that bundle insurance and

savings) yield poor returns. By all means get insurance for your
home, car or permanent disability, but do not use insurance as
a form of saving or investment.

• Do not prepay for something (e.g. your funeral or your kids’ KEY QUOTES
college fees) to protect yourself against inflation, since your “Ignorance is not lack of
rate of return will be capped at the rate of inflation. Pre-plan intelligence; it is lack of
know-how.”
for such expenses but don’t pre-pay them.

Conquer Ignorance and Social Pressure

The typical American family has much more debt than savings, “We buy things we don’t
and no control over their finances. Couples quarrel over money need with money we don’t
have in order to impress
and struggle with debt payment, taxes, and family expenses. Yet, people we don’t like.”
people continue to live beyond their means; they buy houses,
cars and lifestyle items on credit, only to lose everything when
they get a pay-cut or lose their jobs. Stop following the ignorant
masses; to become rich, you must learn from rich people.

Prioritize your financial goals over others’ opinions.

• It’s normal to want to feel accepted and respected, but there’s

no point in trying to impress others with a lifestyle you can’t
afford. Aim to be truly wealthy, not just appear to be wealthy.

• Have the guts to resist peer pressure: Say “no” to that expensive “To wish for the admiration
meal or the luxury trip beyond your budget. Be willing to give of others is normal. The
problem is that this
up your nice cars and boats or admit that you can’t afford them admiration can become a
yet. The good news is, once you have built your wealth, you’ll drug.”
be able to buy them using cash, not debt.

Total Money Makeover: Your 7-Step

Financial Plan

The TMM is built on a series of Baby Steps, each acting as a building “The paradox is that by
block for the next step. shortcutting the process, you
are much more likely to fail.”

Just like how you’d eat an elephant 1 bite at a time, you become
financially ultra-fit 1 Baby Step at a time. Don’t skip any step.
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 Before you begin, do up a written budget. At the start of each
month, set up a zero-based budget where income = expenses.
Every dollar you earn must be accounted for on paper—for bills,
debt repayment, savings etc. This forms a baseline for your next
7 steps.

1. Set up a $1,000 Mini Emergency Fund

KEY QUOTES
“We will climb the whole
Do whatever you must to save $1,000 asap, e.g. cut your
mountain, but not until we
expenses, work extra hours, cut your expenses or do a part-time first have a strong base
project. camp.”

• You will have an emergency at some point. Without a

contingency fund, you’re likely to throw all your financial plans
out of the window. This starter fund can tide you through a
mini-emergency without falling back on debt or credit cards.

• Make sure you keep it for true emergencies, i.e. something

unpredictable but impactful, like a major illness or
retrenchment. Car repairs, textbooks for the kids or Christmas
dinners are not emergencies; with pre-planning, you could’ve
saved up for them.

Keep the $1,000 out of sight, e.g. in a separate savings account.

One of Ramsey’s clients placed the money in a photo frame at
the back of the closet wall with the words “In case of emergency,
break glass”. If you use your emergency funds at any point during
the TMM plan, return to Step 1 to top up the $1,000 before
proceeding further.

2. Start your "Debt Snowball"

Debt payments drain your monthly income and cultivate debt- “Until you get control and
dependency. Eliminate your debts to regain control of your full use of your income to
income and free up cash for wealth-building. build wealth, you will not
build and keep wealth.”

• According to the Federal Reserve, an average person pays $495

a month for a car over 64 months. Once the car is fully paid
off, the person would buy a new car and restart the payments.
The same $495, if invested monthly (from age 25 to 65) in a
mutual fund at 12% returns, will give you almost $5.9 million
by 65 years old.
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• Imagine the impact if you were to invest $2,000 of your monthly
income instead of using it for your mortgages, car payments
and credit card debts.

The Debt Snowball is basically a strategy for clearing your debt.

• List down all your debts in order of debt balance, from the
smallest to largest amounts. Include every loan, e.g. parental
loans, zero-interest loans and business loans that’re personally- KEY QUOTES
guaranteed. Exclude only your home loan. Don’t worry about
the interest rates unless there’re 2 loans with similar balances,
in which case you’d list the one with higher interest rates first.

• Pay off your smallest debts first. These are easier to clear and
you’ll feel motivated by the progress. The money freed up
from the smaller debts will also snowball toward your next-
biggest payments. Only repay a bigger debt first if there’re
major repercussions e.g. a foreclosure.

• Each time you repay a debt, redo the list to see how you’re
moving toward financial freedom.

Commit 100% to become debt-free and retain a laser-sharp “Total, sold-out, focused
focus. intensity is required to win.
Aiming at the goal and
nothing else is the only way
• Stop taking new loans. Cut up your credit cards and stop buying
to win.”
anything using debt.

• Every dollar counts. Use all penalty-free investments and non- “You can’t get out of a hole
retirement savings to pay off your debt, and find ways to tighten by digging out the bottom.”
the belt, e.g. sell your expensive car and use a fraction of the
original monthly payment to get a cheap second-hand car.

• A casual let’s-give-it-a-try approach simply won’t work. It’s

also critical to get everyone in the family onboard, e.g. if your
husband refuses to sell the luxury car and boat, there’s only so
much you can achieve by cutting back on groceries.

To gain initial momentum and get your snowball rolling, you need
a cash injection. You can:

• Temporarily increase your income, e.g. by taking on a part-time

job; and/or

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 • Sell something. You can either sell many small items in a garage
sale, or a few high-value items. As a rule of thumb, if you can’t
be debt-free on something (except for your house), sell it. This
includes luxury items (e.g. a boat with 20 months’ outstanding
installments) and your rental properties (i.e. don’t keep a
property with $50,000 rental equity if you have a $50,000
credit card debt). Pay off your debt first. You can always buy
these items again in future when you’re debt-free and have
excess cash to spend/invest. KEY QUOTES

3. Complete your Emergency Fund

By now, you have $1,000 cash in your emergency fund, no debt

besides your home mortgage and some financial momentum. It’s
time to finish building your emergency fund, so you have 3-6
months of living expenses if you lost your income. The riskier
your financial situation, the more you should set aside.

Keep the money liquid or easily accessible, e.g. in a savings “The mission statement for
account or Money Market account where there’s no penalty for the emergency fund is to
protect you against storms,
withdrawals. Don’t worry about interest rates since you’re not give you peace of mind, and
relying on this fund to get rich. keep the next problem from
becoming debt.”
• If there’s clearly an upcoming emergency (e.g. your wife is
pregnant with twins or your company is closing down in 3
months), it’s ok to pause the Debt Snowball and build your
emergency fund first.

• If you don’t own a home yet, start saving for your house only
after you’ve completed this step.

4. Build your retirement fund with 15% of your income

Invest 15% of your annual pre-tax gross income, excluding any “Investing with the long-term
matching contributions by your company. This figure is big enough goal of security is not a
to build your nest egg, yet small enough to leave enough for your theory to ponder every few
years; it is a necessity you
home mortgages and other expenses. must act on now.”

Take the time to learn about investments so you can evaluate

your own investment options.

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 • Ramsey recommends investing in growth-stock mutual funds,
which are good for long-term investments. The historical
performance of the stock market has been slightly less than
12%.

• In selecting the funds, Ramsey:

(i) Only considers those with good track record over at least
5-10 years; and KEY QUOTES
(ii) Spreads his investments evenly across 4 types of funds:
Blue Chip funds, Equity funds, International funds and
Emerging Market funds.

Calculate how much you must save/invest monthly.

• Ideally, you can withdraw and live on 8% of your nest egg “Start where you are,
yearly, assuming you deduct 4% inflation from 12% annual because that is your only
investment returns. Calculate your required retirement fund by option.”
dividing your desired annual income by 0.08. For example, if
you want a $30,000 retirement income each year, you’ll need
a total fund of $375,000.

• Calculate the required monthly savings, taking into account the “Systematic, consistent
# years you have to retirement. The later you start, the harder investing is the tortoise that
it’ll be. For example, to reach $375,000 by age 65, you’ll only beats the hare in the race.
have to save $163.50 p.m. if you start at age 30, but you’ll When you keep at it, the
investing compounds and
have to save $636.75 p.m. if you start at age 45.
explodes.”

• This approach requires that you build your nest egg patiently
and consistently. It won’t work if you keep jumping in and out
of the market, or pull out your investments each time you want
to buy something.

5. Save up for college

If you don’t need to attend college and don’t have kids who do, you “College degrees do not
can skip this step. ensure jobs. College degrees
certainly don’t ensure
success. College degrees do
Choose a college that you can afford.
not ensure wealth. College
degrees only prove that
• College education is important, but going to the most expensive, someone has successfully
prestigious college does not guarantee future success or wealth. passed a series of tests.”
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 Don’t prioritize college fees over your emergency funds or
chalk up a huge loan for it.

• As a general rule: pay cash, don’t take a loan. If you have excess
money or a scholarship, go ahead and enrol in a private school.
If not, it’s better to attend a state school debt-free than to take
on a huge loan for a private school.

Calculate how much to save/invest monthly: KEY QUOTES

• Multiply the annual cost by the number of years to get the “Student loans are a cancer.
Once you have them, you
total college funds you need, then work backward to calculate can’t get rid of them.”
the monthly savings required.

• If you’re from the USA, you can grow your college funds with
an Educational Savings Account (ESA)—this is tax-free for higher
education and gives you the choice to invest it in any fund(s)
and switch them at will. If you go for the 529 (a state plan),
make sure you only go for the flexible plan that allows you to
choose/switch your investments.

• If you’re starting late and only have a few years before your kid “Knowledge is what you are
starts college, then get creative. Approach companies that offer after, not a pedigree.”
scholarships or work-study program, take on summer jobs etc.
Do not take up a loan.

6. Pay off your home mortgage

By this phase, you’re already fit and are ready to get ultra-fit. Resist “Finishing well can be more
the temptation to settle for being “good enough”. Finish strong with important than starting well.”
the last 2 steps to become truly debt-free and truly wealthy.

Once you pay off your home mortgage, you will be totally
debt-free. Don’t believe the myths about the benefits of home
mortgage.

• The tax deductions from the loans do not justify the interest
payments;

• It’s a bad idea to borrow money at lower interest rates to invest

in something with potentially higher returns, because you’re
not accounting for the risks involved. You won’t compare the

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 potential returns from mutual funds with those from a casino
roulette spin because the latter is much riskier. Likewise, debt
is risky and you could lose your house if something happens
during the 15-30 year debt tenure.

You can consider refinancing your home mortgage if you’ll (i) save
on interests and (ii) stay longer in your home than the duration
it’d take to breakeven. Remember to ask for a par quote so you
don’t end up pre-paying the interests. KEY QUOTES

7. Build wealth

By now, you’re debt free, in control of your finances and are

“When your money makes
systematically planning, saving and investing for your future more than you do, you are
needs. You become truly wealthy when the returns from your officially wealthy.”
investments are higher than your regular income. That means
you have money working 24x7 for you, regardless of whether
you work. From here, building your wealth will seem like an easy
downhill ride instead of a tedious uphill climb.

Money won’t solve all your problems or make you happy, but it
“To possess riches is to have
can certainly give you more options in life. Money is also not the right to say how they will
inherently good or bad but will merely amplify who you are. To or will not be used.”
make the most of your resources, use your wealth for all of these
3 things.

• Have fun. To get to this step, you may have given up your fancy
“Someone who never has fun
cars and luxury house which were bought using debt. But if with money misses the point.
you're now debt-free, have a healthy emergency fund, millions Someone who never invests
invested and a stable monthly income, it’s ok to reward yourself. money will never have any.
Use the spare cash to have some fun—bring your family for a Someone who never gives is
a monkey with his hand in a
luxurious holiday, buy a nice diamond or car. bottle. Do some of each.”

• Invest to keep building your wealth over the long-term. When

you have a strong financial foundation, you’re less likely
to panic in face of temporary market fluctuations and can
deliberately buy low and sell high to multiply your wealth.
Keep your investments simple until you have >$10 million.
Develop a “wealth team” by surrounding yourself with people
who’re financially stronger than you, and hire qualified financial
planners who’re humble, nurturing and will act with your best
interests in mind.

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 • Give. Don’t hog your wealth. Giving to others can be deeply
rewarding and will only enrich (not impoverish) you.

Conclusion & Other Details in the Book

If you follow the 7 steps in the TMM plan above, you will become
wealthy in the next 20-40 years. The process is like how an overweight KEY QUOTES
person gradually becomes fit, then ultra-fit. It’s the hardest at the
start, but it gets progressively easier once you’ve shed some weight “Only the strong can help the
and gotten in shape. In the book, Ramsey also shares: weak, and that is true of
money too.”
• Short examples and calculations to illustrate the financially-unsound
decisions that we make in our daily lives;

• Various US-centric examples and illustrations of retirement-related

regulations and tools, additional debt and money myths; and

• Many short stories of people who’ve transformed their financial

situation with the TMM.

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