Tuesday, December 27, 2011

Book Review: "The Total Money Makeover"

Image: barnesandnoble.com

It's official - I'm a Dave Ramsey fan!

I just finished Dave Ramsey's book, "The Total Money Makeover," and it's one of the best books I've read on personal finance. The book is aimed at the 97% of Americans who are still trying to reach financial independence, and especially at those who are struggling. Dave has a simple message, and he doesn't mince words: "debt is dumb."

Dave's personal story is well known. By the age of 26, he had accumulated a real estate portfolio of over $4 million. A tax law change caused a $1.2 million loan to be called, and he was forced to file bankruptcy. After this experience, he began studying personal finance and teaching courses at local churches. Today, he's a best selling author, and his radio show has over three million listeners per week (I'm occasionally one of them).

The tag line for his radio show is: "The Dave Ramsey show, where debt is dumb, cash is king, and the paid off home mortgage has taken the place of the BMW as the status symbol of choice." In our consumer culture today, who else teaches this kind of stuff? It's a great message whose time has come, and Ramsey deserves credit as the purveyor.

Most Self-Help Books on Personal Finance have Two Flaws

Personal finance books usually have too many recommendations. Imagine a person starting out and struggling to get a handle on their finances. They get a book and it says they need to establish an emergency fund equal to six months of expenses, pay off all debt, get a fifteen year mortgage, fund IRAs, Roth IRAs, 401ks, get disability insurance, life insurance, long term care insurance, and so on. Sounds overwhelming, and it is. Where does one start? Most likely they don't.

Second, such books often over promise - "do this, and you'll be rich." Of course, it ain't so easy.

Dave's Message is Focused on Debt Elimination

Ramsey, by contrast, focuses on one key issue: elimination of debt. Debt, he says, "is not a tool." He has identified indebtedness as the thing holding most people back, and he concentrates on its evils like a laser beam.

Nor does he over promise on the upside. Paying off debt is hard work and no fun. It involves monthly budgeting and cash flow analysis. He recommends driving a used car (and selling your new car if it has a big payment associated with it), getting rid of credit cards, and a very modest mortgage.

Dave's Baby Steps

Dave gives his readers a clear sequential plan, called "baby steps." These are: One, establish an emergency fund of $1,000. Two, pay off junk debt like credit cards, home equity lines, and auto loans using the debt snowball technique. Third, build an emergency fund equivalent to three to six months of expenses. Fourth, defer fifteen percent of income into IRAs and, if you have children, Coverdell Education Savings Accounts. Fifth, pay off the mortgage and become debt free.

My Take

Dave Ramsey has the best plan I've seen for those who are in the early stages of taking control of their finances. Dave writes in a simple style, with a tell it like it is ethic. It's worth noting, "The Total Money Make Over" first came out in 2003, before the 2008 debt crisis. Dave was ahead of his time in his warnings about the danger of debt to personal finances, and this only adds to his credibility.

I highly recommend this book. Those following Dave's "Baby Steps," can supplement the book by listening to his radio show to keep their spirits up during the difficult but rewarding process of becoming debt free.