The Total Money Makeover / Полное финансовое преображение (by Dave Ramsey, 2003) - аудиокнига на английском

1 The Total Money Makeover Challenge “As lost as a ball in tall weeds!” That is exactly how I felt. Although it was twenty years ago, I can still taste the emotion as if it were yesterday. Out of control, lost, no sense of power, I felt dread creep across the room like the afternoon shadows on a cold winter’s day. Sitting again at the kitchen table with too much month left at the end of the money, I was not having fun. This “adult” stuff where a wife looks to you to provide and kids expect to be fed and kept warm was not exactly working. I didn’t feel like some powerful adult; instead, there was a little boy inside me who was very afraid—afraid of this month’s bills, afraid of this month’s mortgage, and absolutely terrified when I considered the future. How was I to send kids to college, retire, enjoy life, and not live at the edge of money worries? The “Normal” American Family It seemed every month I sat at that same table with the same worries, fears, and problems. I had too much debt, too little savings, and no sense of control over my life. No matter how hard I worked, it seemed I couldn’t win. I was to forever be slave to some banker, to the government, and to the “needs” of my family. When Sharon and I “talked” about money, we ended up in a fight, leaving her feeling afraid and me feeling inadequate. The next car purchase, the next house, the kids’ college—our entire future seemed out of reach. I had too much debt, too little savings, and no sense of control over my life. I didn’t need a get-rich-quick guy to pump me up or tell me to be positive. I didn’t need a secret formula to riches. I wasn’t afraid of hard work or sacrifice. I didn’t want to “feel” my way into being “positive.” I was positive of only one thing: I was sick and tired of being sick and tired. I was tired of sitting down to “do the bills” and having a heaviness come over me. The hopelessness was overwhelming. I felt like a gerbil in a wheel—run, run, run, no traction, no ground covered; maybe life was just a financial illusion. All the money came in, all the money went out, and only the names were changed to protect the innocent. I owe, I owe, so off to work I go. You know the drill and all the clich?s that go with the drill. Oh, some months everything seemed to work, and I thought maybe we were going to be okay. I could tell myself then, “Oh well, this is how everyone lives.” Those times offered enough wiggle room that I could continue to lie to myself that we were making headway, but deep down, I knew we weren’t. I Did It My Way, and My Way Wasn’t Working ENOUGH! THIS STINKS! I finally decided that this nonplan wasn’t working. If you have ever had any of those feelings, you are going to love this book, and, more important, you will love your Total Money Makeover. More than 20 years ago, my wife, Sharon, and I went broke. We lost everything due to my stupidity in handling money, or not handling it, as the case may be. Hitting bottom and hitting it hard was the worst thing that ever happened to me and the best thing that ever happened to me. We started with nothing, but by the time I was twenty-six years old, we held real estate worth over $4 million. I was good at real estate, but I was better at borrowing money. Even though I had become a millionaire, I had built a house of cards. The short version of the story is that we went through financial hell and lost everything over a three-year period of time. We were sued, foreclosed on, and, finally, with a brand-new baby and a toddler, we were bankrupt. Scared doesn’t begin to cover it. Crushed comes close, but we held on to each other and decided we needed a change. Myths vs.Truth Myth: I don’t have time to work on a budget, retirement plan, or estate plan. Truth: You don’t have time not to. So after losing everything, I went on a quest, a quest to find out how money really works, how I could get control of it, and how I could have confidence in handling it. I read everything I could get my hands on. I interviewed older rich people, people who made money and kept it. That quest led me to a really, really uncomfortable place—my mirror. I came to realize that my money problems, worries, and shortages largely began and ended with the person in my mirror. I realized also that if I could learn to manage the character I shaved with every morning, I could win at money. That quest, the one that ended with me staring at myself in the mirror, led me on a new journey over the last twenty years: the journey of helping others, literally millions of others, take that same quest to the mirror. Live Events, Financial Peace University, The Dave Ramsey Show (talk radio and TV show), and the New York Times best-sellers Financial Peace, More Than Enough, and The Total Money Makeover have enabled me to tell millions of Americans what I have learned—the hard way—about money. The Big Challenge: Find a Mirror I have a challenge for you. Are you ready to take on the guy or gal in your mirror? If you are, you are ready to win. I rediscovered God’s and Grandma’s simple way of handling money. Wealth building isn’t rocket science, which is a good thing for me (and probably you). Winning at money is 80 percent behavior and 20 percent head knowledge. What to do isn’t the problem; doing it is. Most of us know what to do, but we just don’t do it. If I can control the guy in the mirror, I can be skinny and rich. We will let other books work on the skinny, and I will help you with the rich part. No, there are no secrets, and yes, this will be very hard. Hey, if it were easy, every moron walking would be wealthy. Winning at money is 80 percent behavior and 20 percent head knowledge. So my Total Money Makeover begins with a challenge. The challenge is you. You are the problem with your money. The financial channel or some DVD sets aren’t your answer; you are. You are the king of your future, and I have a plan. The Total Money Makeover plan isn’t theory. It works every single time. It works because it is simple. It works because it gets to the heart of your money problems: you. It is based on a series of prices that must be paid to win. All winners pay a price to win. Some losers pay a price and never win, and that is usually because they didn’t have the benefit of a proven plan for financial fitness. Ordinary People Tens of thousands of ordinary people have used the system in this book to get out of debt, regain control, and build wealth. I’ve scattered their stories throughout the book. If at any point during your makeover you are tempted to quit or you just need a little encouragement, read one of these stories. These people have sacrificed for a short period of time so they will never have to sacrifice again. If you are looking for a road map to get you home, you’ve found it. If you are looking for something easy or fast, you have the wrong book. If you are looking for a book to help you pass your CPA exam in the area of financial knowledge, you have the wrong book. If you are looking for a writer who has intricate academic theories (that don’t work in the real world), you’ve got the wrong guy. I have many of the academic pedigrees, but I ended up broke. I have actually twice become a millionaire from nothing. The first time I was in my twenties, the money was in real estate, and I lost that due to my stupidity; the second time I was not yet forty, but I did the money thing right that time, and I am debt-free. SHOCKING STATS 90% of people in our culture buy things they can’t afford. I often hear about broke finance professors who bemoan that I am way too simple, or as an e-mailer told me on The Dave Ramsey Show one day, “You are a one-trick pony.” To those of you who say you have great but unexecuted plans, I say, “Prove it. I have.” I like the way I’ve built wealth better than the way you haven’t. You will meet people, educated and uneducated, throughout this book who have won, or begun to win, with money for the first time in their lives. The Total Money Makeover works! The Total Money Makeover Motto This plan works, but it will cost you. It will teach you to say new words, like “no.” In short, your Total Money Makeover will be a personal money makeover where you learn this motto: IF YOU WILL LIVE LIKE NO ONE ELSE, LATER YOU CAN LIVE LIKE NO ONE ELSE. This is the motto of your Total Money Makeover. It’s my way of reminding you that if you will make the sacrifices now that most people aren’t willing to make, later on you will be able to live as those folks will never be able to live. You will notice the motto all through the book, even across the bottom of the pages. I’m sorry there isn’t an easier path to feature in the motto, but the good thing about this one is that it works. You can repeat the motto to yourself as you pass up a purchase in order to hit your goals. When you work late and are tired, you can say the motto to yourself. Of course, this isn’t a magic formula; I’m not into that. But it does remind you that you will win, and the payoff will be worth the cost. Dum Math and Stupid Tax A False Sense of Security Some people want to buy a new car for the warranty. If you lose $17,000 of value over four years, on average you have paid too much for a warranty. You could have completely rebuilt the car twice for $17,000! Some of you are so immature that you are unwilling to delay pleasure for a greater result. I will show you exactly how to get the result you want, so the price you pay will not be in vain. I don’t want to walk across hot coals because it is fun, but if I can be shown how a short, painful walk will do away with the lifetime of worry, frustration, stress, and fear that being constantly broke brings me, then bring on the hot coals. You will win, and the payoff will be worth the cost. Early on in our marriage, we decided that Kari would stay home with our children rather than working outside the home. This decision has perhaps disadvantaged us financially at times, but it has been the best choice for our family in many other regards. Financially, we have made some mistakes such as keeping our student loans around because of the “low interest” and even leasing a car at one point. To us, credit cards were a status symbol, and we had a few. Our debt peaked at about $375,000 (including the mortgage). That’s not the smartest situation to get yourself into when you have four kids and one salary. By the time we got on Dave’s plan, we were ready to work with gazelle-intensity to get rid of our debt! During one six-month period we paid off $57,000 and gave $7,000 to our church. That really encouraged us and kept us going! It was also great going to Atlantis with Dave and Sharon as finalists in The Total Money Makeover Challenge! Now we are debt-free and helping our daughter through her first year of college. We are also saving for retirement at a good rate and building a new house. We enjoy earning interest now, rather than paying it. We couldn’t have done it without Dave. We pay cash for everything, and we tell our money where to go. We can’t even tell you the peace and freedom this has brought our entire family! The first months were the most painful as we went from credit to cash.But it’s so nice not to be paying for today and yesterday anymore! By following Dave’s Total Money Makeover plan, you will gain peace of mind as you get control of your money. Just remember to stay focused. The key to our success was both of us getting on the same page at the same time. We now work together to plan our spending rather than racing to outspend each other. We are each other’s source of strength during weak moments when spending sounds fun again. We have learned to have FUN talking about money and financial goals.It’s no longer a contentious subject. Our advice: Honestly assess your earning capacity and live below your means. Be in control of your own destiny and your own happiness! Mark and Kari Stolworthy (both age 43) CPA/Systems Consultant; Stay-at-Home Mom My Promise to You My promise to you is this: if you will follow the guidelines of this proven system of sacrifice and discipline, you can be debt-free, begin saving, and give as you’ve never given before. You will build wealth. I will also promise you that it is totally up to you. The Total Money Makeover isn’t a magic formula to wealth. This system will not work unless you do, and then only to the degree of your intensity in implementing it. In the following pages, you will meet many individuals and families who have won many money victories, but not one of them won until they won the battle with the guy in the mirror. Your situation isn’t your spouse’s fault (well, maybe, but we’ll talk later), it isn’t your parents’ fault, it isn’t your children’s fault, and it isn’t your friends’ fault. IT IS YOUR FAULT! Dave Rants . Savings without a mission is garbage. Your money needs to work for you, not lie around. My financial life began turning around when I took responsibility for it. People all across America have used these steps to become free, regain a sense of confidence and control, and build a future for their families. Please join me on a journey away from the young man I was, the one I described earlier who was racked with worry, fear, and guilt over money. Take this journey with me to your own Total Money Makeover, but remember, the first part of the quest is confronting the man in the mirror. That man in the mirror is your Total Money Makeover Challenge. 2 Denial: I’m Not That Out of Shape Several years ago I realized I had let my body dissolve into flab. I had worked so hard for so many years that I had abandoned the care of my physical condition. The first step to getting into shape was to realize I needed to change my ways, but the second and equally important step was to identify the obstacles to getting there. What would stop me from getting into shape? Once I understood those obstacles, I began a process to lose weight, grow muscle, and become more fit. Your Total Money Makeover is the same. You need to realize there’s a problem, but you must also see what could hinder your move toward financial fitness. The next few chapters will identify some major obstacles to YOUR Total Money Makeover. Myths vs.Truth Myth: Debt consolidation saves interest, and you have one smaller payment. Truth: Debt consolidation is dangerous because you treat only the symptom. Look in the mirror. Take a long look. What do you see? Suck in that gut; hold up your chest, and really look at yourself. It doesn’t matter how many angles or poses you take, the mirror is cruel. “Well, I’m really not that fat, maybe just a little flabby.” My dad used to say that 90 percent of solving a problem is realizing there is one. Focused intensity, life-or-death intensity, is required for you to reset your money-spending patterns, and one of your biggest obstacles is DENIAL. The sad thing is that you can be financially mediocre in this country, financially flabby, and still be average. And if the truth be known, being average, normal, and financially flabby is pretty much okay by most folks’ standards. This, however, is not a book for the wimpy among us. This is a book about winning, about really having something. Ninety percent of solving a problem is realizing there is one. We started out our marriage with absolutely no debt. We lived on a single income, the cars were paid for, and we even had a small amount of savings.However, we eventually made the misguided decision to move into a much larger house that stretched us financially.After a few years, I changed jobs and we increased our annual income—giving us the illusion that we could increase our standard of living. That is when the debt really started accumulating. We financed two NEW cars to replace our old ones.We started buying everything on credit. We even got a home equity loan. Before we realized it, we were buried in debt! Kelley saw The Total Money Makeover in our local bookstore and bought it as a Father’s Day gift for me. By Independence Day, we had declared war on our debt! We had $6,000 in savings but $16,000 in debt, not including our house. The plan required us to take out $5,000 from our savings to put toward our debt—leaving us with the $1,000 Baby Emergency Fund. It was tough seeing our hard-earned savings disappear, but it really helped our Debt Snowball get rolling.We sacrificed in other areas, and in just ten months we paid off all of our consumer debt! Dave helped us realize that we had to draw the line and stop living beyond our means. Instead of having to pay our creditors each month, we can finally start paying ourselves and investing in our future! Mark (age 40) and Kelley (age 39) Reep Civil Engineer; Nursing School Student Don’t Wait to Have Denial Knocked Out of You For several years I have spoken multiple times a year to live audiences of two thousand to twelve thousand people, teaching them the ideas in this book. After one live event where I spoke to four thousand people, Sara told me that her Total Money Makeover came only after life placed a call to her. She said she had heard me quote the Wall Street Journal as reporting that 70 percent of Americans live paycheck to paycheck, but she honestly thought she was in the 30 percent who were fine. She had financially struck a pose, and the pose was denial. Dave Rants . For your own good, for the good of your family and your future, grow a backbone. When something is wrong, stand up and say it is wrong, and don’t back down. With two sons from her previous marriage, Sara had just remarried and was happy and secure in her job, as was her husband, John. Their new life together seemed awesome. Their household combined income was about $75,000 per year, with the “normal” debts of a small student loan, a car loan, and “only” $5,000 on a credit card. With life under control and even going well, Sara and John decided their new family needed a new home, so the builder was selected and construction began. Somewhere deep inside there may have been uneasiness, but it was very deep. Finally the day came when the new home was complete. Everything was going to be fine now, the new family in the new home, the way it is “supposed” to be. In May they moved into the new home, complete with big new payments. Dum Math and Stupid Tax Washer and Dryer for Sale—$1,800! Yes, that’s correct, and you, too, can get this sweet deal. Just head on down to your local rent-to-own store. In September Sara’s boss asked to see her in his office. She was excelling at work and braced herself for a big “atta, girl” followed by a nice bonus or raise. Instead, the boss explained her job was being eliminated. “Downsizing, you know,” he said. Her life’s work was cut from her—and $45,000 of their $75,000 income—with the boss’s chilling words. Not only was her pride hurt and her career path cut short, a creeping terror grew deep down inside as she drove home to tell John. That night there were tears, fears, and the sudden stark realization that she and John were financially fat. Suddenly, Sara and her family were facing foreclosure on the house and repossession of the car. The basics of life had become precious. Sara and John had listened to The Dave Ramsey Show on the radio, but they always thought someone else needed a Total Money Makeover. After all, they always held their stomachs in when standing in front of the mirror. The night after her layoff was the first night they looked in the financial mirror and saw fat people. The sight wasn’t pretty—big house payments, fat car payments, large student loans, bloated credit cards, anorexic savings, and no budget. They saw fat people. When you are physically fat, it is hard to be in denial, because there is the ever-widening belt line. When you are financially fat, however, you can fake it and look good for a while. Your friends and family will participate in your fantasy/denial, which makes you believe you are doing just fine. One of the four major factors that keep people from winning in money by getting a Total Money Makeover is not realizing they need one. Sadly, some of the most dramatic makeovers I’ve seen have been by people who had life smack them so hard they got the denial knocked out of them, like Sara. If life isn’t smacking you around at the moment, you are actually in greater danger than Sara and John the night of the layoff. You are a real candidate for financial mediocrity or even a major crisis brought on by denial, and you have to see the need to make dramatic changes. If you are apathetic because everything seems “just fine,” then you will be unwilling to make the huge changes needed to get huge results. You have to see the need to make dramatic changes. Mmm . . . Frog Legs Years ago, in a motivational seminar by the master, Zig Ziglar, I heard a story about how mediocrity will sneak up on you. The story goes that if you drop a frog into boiling water, he will sense the pain and immediately jump out. However, if you put a frog in room-temperature water, he will swim around happily, and as you gradually turn the water up to boiling, the frog will not sense the change. The frog is lured to his death by gradual change. We can lose our health, our fitness, and our wealth gradually, one day at a time. It might be a clich?, but that’s because it is true: The enemy of “the best” is not “the worst.” The enemy of “the best” is “just fine.” SHOCKING STATS 88% of graduating college seniors have credit-card debt—before they even have a job! I was in denial for a long time about my life and my spending habits. By my mid-twenties, I was $23,000 in debt and had little motivation to get out of it.My biggest problem wasn’t realizing how nice it was to be free of financial concerns—it was gambling. I couldn’t stop. Even when I began listening to The Dave Ramsey Show and tried to start attacking my debt, I often failed. I kept losing my money to the addiction I had—never giving me time to get my feet on the ground. It took some time, but finally the financial pressures became too much to bear. I knew I needed a change. I started attending an amazing program called Celebrate Recovery, a ministry dedicated to helping people with addictions, hurts, and hang-ups. I also started my Total Money Makeover walking through the Baby Steps one by one. Establishing my emergency fund was the hardest part because I was still trying to break my gambling addiction, and that money would always get lost to some game. But, as my addiction weakened and I established a budget, the debt I had incurred became less and less. I moved in with my parents to put would-be rent money toward my final debt. Now I’m saving for a downpayment on a house. I hope to reach my goal by next year. It is a wonderful feeling to live without the strain of debt on my life! Tony E. Newman (age 26) Financial Analyst The Pain of Change Change is painful. Few people have the courage to seek out change. Most people won’t change until the pain of where they are exceeds the pain of change. When it comes to money, we can be like the toddler in a soiled diaper. “I know it smells bad, but it’s warm and it’s mine.” Only when the rash comes will we cry out. I hope Sara’s story and the others in this book will make you unwilling to stay where you are. If you keep doing the same things, you will keep getting the same results. You are where you are right now financially as a sum total of the decisions you’ve made to this point. If you like where you are, keep it up. Keep in mind, however, why you are reading a book called The Total Money Makeover. Is it because deep down you have the same uneasy feeling Sara had but didn’t address until it was almost too late? Are you really looking for something more? If so, I’ve got great news. This plan works! Break through the temptation to remain in the same situation, and opt for the pain of change before the pain of not changing searches you out. Don’t wait for a heart attack to show you that you are overweight. Cut the carbs, the fats, the sugars, and lace up the running shoes now. Few people have the courage to seek out change. The good news about Sara and John was that the financial heart attack they had made them address their financial eating and exercise habits. The layoff was a wake-up call and the end to denial. After a year of very hard times, Sara was able to find a whole new career. Only this time when the checks started rolling in, Sara and John were using this system. Every paycheck became an exciting event because they had a plan. They were financially losing weight and toning up. It wasn’t a quick process, but after following the steps over time, today they are really winning. The night I met Sara and John, they were two years into their plan— and smiling. They told me they were debt-free except for their house, and they had $12,000 in the bank just for emergencies. They had broken through their own denial, but they made their family uncomfortable because they refused to live like everyone else. Albert Einstein said, “Great spirits have often encountered violent opposition from weak minds.” John’s dad had made fun of their plan and the extra jobs they took to win. He asked if they had joined some cult or something. Once Sara and John had realized they were the emperor with no clothes, denial was no longer an option. They also realized all they had been doing with money to impress others—but no more. Sara chuckled as she told me how she used to think: We must be doing well; all these credit-card companies think I’m creditworthy. If I’m getting approvals from all these banks, I must be okay because, otherwise, they wouldn’t want to loan me money. Besides, I pay my credit cards off every month. How could I be in any trouble? I can afford to buy that car or that furniture if I can afford the payment. John was grinning now, too, as they both laughed at the language of financially fat people who think they are fine, the language of denial. As we closed our conversation that night, Sara told me that while she hoped she or John never lost another job unexpectedly, they are ready if they do. “We are no longer living a lie. We know where we are, we know where we are going, and we know how we are going to get there,” she said. She and John wanted to leave me a gift for inspiring their Total Money Makeover, but I assured them they already had. 3 Debt Myths: Debt Is (Not) a Tool Red-faced and fists clenched, the toddler yells with murder in his voice, “I want it! I want it! I want it!” We have all watched this scene unfold in the grocery store. We may even have watched our own children do this (once). Now that I’m older and more mellow, I sometimes grin a little as a young mom tries without success to stifle the out-of-control screams of a child who is denied something. It is human nature to want it and want it now; it is also a sign of immaturity. It is human nature to want it and want it now; it is also a sign of immaturity. Being willing to delay pleasure for a greater result is a sign of maturity. However, our culture teaches us to live for the now. “I want it!” we scream, and we can get it if we are willing to go into debt. Debt is a means to obtain the “I want its” before we can afford them. Joining in the Lie I have heard it said that if you tell a lie often enough, loudly enough, and long enough, the myth will become accepted as a fact. Repetition, volume, and longevity will twist and turn a myth, or a lie, into a commonly accepted way of doing things. Entire populations have been lulled into the approval of ghastly deeds and even participation in them by gradually moving from the truth to a lie. Throughout history, twisted logic, rationalization, and incremental changes have allowed normally intelligent people to be party to ridiculous things. Propaganda, in particular, played a big part in allowing these things to happen. Dum Math and Stupid Tax Freedom 15 Years Early for About $250 a Month Imagine you buy a $130,000 home, for which you take out a $110,000 mortgage at 7%. The final cost after all is said and done and paid would be $283,520 after 30 years or $197,840 after 15. The difference? Just $256 extra per month. Go with 15 years! We have propaganda in our culture today. I’m not speaking in a political sense, but rather recognizing that there are people out there who want us to think their way and who will go to great lengths to accomplish that. The financial and banking industries, in particular, are very good at teaching us their way of handling money, which, of course, leads us to buy their products. If I see an ad again and again that tells me I will be cool and sharp looking if I drive a certain car, I can fall under the illusion that with the purchase of that car, those good things will happen to me. We may not really believe that we will become a model just from purchasing a car, but notice that ugly people aren’t used in the TV spots to sell cars. We aren’t really falling for that lie, or are we? I’m just asking. After all, we do buy the car and then justify our purchase on the basis of something academic like gas mileage. When we participate in what the crowd identifies as normal, even if it is stupid, we gain acceptance into the club. Sometimes we don’t even realize what we are doing is stupid because we have been taught that it’s just “the way you do it,” and so we never ask why. As we participate in the myth, we learn to spout the principles of the myth. After the years go by and we have invested more money and time into the myth, we become great disciples and can preach the points of the myth with great fervor and volume. We become such experts on the myth that we can sell others on joining the lie. I once joined in the lie, but no more. Don’t Let the Monkeys Pull You Down! Debt has been sold to us so aggressively, so loudly, and so often that to imagine living without debt requires myth-busting. We have to systematically destroy the inner workings of the myths. Debt is so ingrained into our culture that most Americans can’t even envision a car without a payment, a house without a mortgage, a student without a loan, and credit without a card. We have been sold debt with such repetition and with such fervor that most folks cannot conceive what it would be like to have no payments. Just as slaves born into slavery can’t visualize freedom, we Americans don’t know what it would be like to wake up to no debt. In 2007, 7 billion credit-card offers were put in our mailboxes, and we are taking advantage of those offers. According to CardTrak, Americans currently have $928 billion in credit-card debt. We can’t do without debt, or can we? A major barrier to winning is our view of debt. Working with tens of thousands of people on their Total Money Makeover in the last several years, I have found that a major barrier to winning is our view of debt. Most people who have made the decision to stop borrowing money have experienced something weird: ridicule. Friends and family who are disciples of the myth that debt is good have ridiculed those on the path to freedom. John Maxwell tells of a study done on monkeys. A group of monkeys were locked in a room with a pole at the center. Some luscious, ripe bananas were placed on top of the pole. When a monkey would begin to climb the pole, the experimenters would knock him off with a blast of water from a fire hose. Each time a monkey would climb, off he would go, until all the monkeys had been knocked off repeatedly, thus learning that the climb was hopeless. The experimenters then observed that the other primates would pull down any monkey trying to climb. They replaced a single monkey with one who didn’t know the system. As soon as the new guy tried to climb, the others would pull him down and punish him for trying. One by one, each monkey was replaced and the scene repeated until there were no monkeys left in the room that had experienced the fire hose. Still, none of the new guys were allowed to climb. The other monkeys pulled them down. Not one monkey in the room knew why, but none were allowed to get the bananas. We aren’t monkeys, but sometimes we exhibit behavior that seems rather chimplike. We don’t even remember why; we just know that debt is needed to win. So when a loved one decides to get a Total Money Makeover, we laugh, get angry, and pull him down. We Americans are like the last set of monkeys. With rolled eyes we spout the pat lines associated with the myth as if anyone not wanting to have debt is unintelligent. That person must be a simpleton, a fanatic, or, worst of all, “uneducated in finance.” Then why are so many finance professors broke? I think a broke finance professor is like a shop teacher with missing fingers. Myth vs. Truth I want to expose the inner workings of the Debt Myth by looking at many of the sub-myths. However, I need to warn you to watch out for your instinct to defend the American way of borrowing. Calm down. Relax and go for a ride with me for a few pages. I might be onto something. If, at the end of this myth-busting section, you conclude I’m just a nut with a book, you will not be forced to change. But just in case the tens of thousands of families who have experienced a Total Money Makeover have something to say to you, read on in a relaxed state. Let your guard down. You can always put the shields back up later. Myth: Debt is a tool and should be used to create prosperity. Truth: Debt adds considerable risk, most often doesn’t bring prosperity, and isn’t used by wealthy people nearly as much as we are led to believe. When training for my first career in real estate, I remember being told that debt was a tool. “Debt is like a fulcrum and lever,” allowing us to lift what we otherwise could not. We can buy a home, a car, start a business, or go out to eat and not be bothered with having to wait. I remember a finance professor telling us that debt was a two-edged sword, which could cut for you like a tool but could also cut into you and bring harm. The myth has been sold that we should use OPM, other people’s money, to prosper. The academic garbage is spread really thick on this issue. We are told with sufficient snobbery and noses in the air that sophisticated and disciplined financiers use debt to their advantage. Careful there, you’ll get a sunburn on your upper lip. Debt brings on enough risk to offset any advantage that could be gained through leverage of debt. My contention is that debt brings on enough risk to offset any advantage that could be gained through leverage of debt. Given time, a lifetime, risk will destroy the perceived returns purported by the mythsayers. I once was a mythsayer myself and could repeat the myths very convincingly. I was especially good with the “debt is a tool” myth. I have even sold rental property that was losing money to investors by showing them, with very sophisticated internal rates of return, how they would actually make money. Boy, what a reach. I could spout the myth with enthusiasm, but life and God had some lessons to teach me. Only after losing everything I owned and finding myself bankrupt did I think that risk should be factored in, even mathematically. It took my waking up in “intensive care” to realize how dumb and dangerous this myth is. Life hit me hard enough to get my attention and teach me. According to Proverbs 22:7: “The rich rules over the poor, and the borrower is slave to the lender” (NRSV). I was confronted with this Scripture and had to make a conscious decision of who was right—my broke finance professor, who taught that debt is a tool, or God, who showed obvious disdain for debt. Beverly Sills had it right when she said, “There is no shortcut to anyplace worth going.” Myths vs.Truth Myth: Playing the Lotto and other forms of gambling will make you rich. Truth: Lotto and Powerball are a tax on the poor and people who can’t do math. We bought the lie! We lived our lives according to the standards set to “keep up with the Joneses.” Turns out they were broke and living in debt too. My husband and I owed $72,000 on a rental property and $35,000 on credit cards, student loans, and car notes.And on top of that, we bought a four-bedroom home complete with a pool that was in need of major repairs—all of this on a $40,000 teacher’s salary. But we decided that all of this was a good investment in our future. We were so wrong! We were sick and tired of always having more month than money.We needed a Total Money Makeover. We sold our rental property and our WAY-too-big house and downsized to something much smaller. We spent two and a half years of focused intensity to finally become DEBT-FREE! If you are living in the bondage of debt, you’re not living. Our marriage is so much better, and there is an element of peace that wasn’t there before we had a financial plan. We feel blessed to have found this information early in our marriage and thankful to have the opportunity to teach our children to be financially responsible. Alison (age 29) and Mike (age 33) Wessner Homemaker; Physical-Education Teacher I have found that if you look into the lives of the kind of people you want to be like, you will find common themes. If you want to be skinny, study skinny people, and if you want to be rich, do what lots of rich people do, not what some mythsayer says to do. The Forbes 400 is a list of the richest 400 people in America as rated by Forbes magazine. When surveyed, 75 percent of the Forbes 400 (rich people, not your broke brother-in-law with an opinion) said the best way to build wealth is to become and stay debt-free. Walgreen’s, Cisco, and Harley-Davidson are run debt-free. I have met with thousands of millionaires in my years as a financial counselor, and I have never met one who said he made it all with Discover Card bonus points. They all lived on less than they made and spent only when they had cash. No payments. History also teaches us that debt wasn’t always a way of life; in fact, three of the biggest lenders today were founded by people who hated debt. Sears now makes more money on credit than on the sale of merchandise. They are not a store; they are a lender with some stuff out front. However, in 1910 the Sears catalog stated, “Buying on Credit Is Folly.” J. C. Penney department stores make millions annually on their plastic, but their founder was nicknamed James “Cash” Penney because he detested the use of debt. Henry Ford thought debt was a lazy man’s method to purchase items, and his philosophy was so ingrained in Ford Motor Company that Ford didn’t offer financing until ten years after General Motors did. Now, of course, Ford Motor Credit is one of the most profitable of Ford Motor’s operations. The old school saw the folly of debt; the new school saw the opportunity to take advantage of the consumer with debt. You have probably heard a lot of the sub-myths, which fall in line behind the big one that says, “Debt is a tool.” So that we leave no stone unturned, let’s review and debunk each of the myths spread by a culture that has officially bought the lie. Myth: If I loan money to friends or relatives, I am helping them. Truth: If I loan money to a friend or relative, the relationship will be strained or destroyed. The only relationship that would be enhanced is the kind resulting from one party being the master and the other party a servant. The old joke is that if you loan your brother-in-law $100 and he never speaks to you again, was it worth the investment? We have all experienced loaning someone money and finding an immediate distancing in the relationship. Joan called my radio show one day complaining about how a loan had ruined her relationship with one of her best friends at work. She had loaned the lady, a broke single mom, $50 until payday. Payday came and went, and her friend—someone she used to talk to at lunch every day, someone who was her confidante and sounding board—now avoided her. Shame and guilt had entered the scene with no provocation. We don’t control how debt affects relationships; debt does that independently of what we want. The borrower is slave to the lender; and you change the spiritual dynamic of relationships when you loan loved ones money. They are no longer a friend, uncle, or child; they are now your servant. I know some of you think that is overstated, but tell me why Thanksgiving dinner tastes different when a loan has been served. Eating with your master is different from eating with your family. Joan was really torn up about losing this friendship. I asked her if the friendship was worth $50. She gushed that it was worth many times that, so I told her to call her friend and tell her the debt was forgiven, a gift. The forgiveness of the debt helped her remove the master-servant dynamic from the relationship. Of course, it would be better if that dynamic had never entered the scene. I also suggested two stipulations to the forgiveness of the debt: first, that the friend agree to help someone in need someday; and second, that she never loan friends money. Let’s break the myth chain. In Joan’s case, the myth chain of loaning a friend money will be broken only if they both learn their lesson. The lesson is that while it is fine to give money to friends in need if you have it, loaning them money will mess up relationships. The borrower is slave to the lender. I have dealt with hundreds of strained and destroyed families in which well-meaning people loaned money to “help.” Parents loan the twenty-five-year-old newly married couple the down-payment money for the first home. It all seems so noble and nice until the daughter-in-law catches the disapproving glances at the mention of the couple’s upcoming vacation. She knows the meaning of the glances, that she should check with these well-meaning, noble parents-in-law before she buys toilet paper until the loan is repaid. A lifetime of resentment can be born right there. The grandfather loans the twenty-year-old $25,000 to purchase that new four-wheel-drive truck he “needs.” Of course, the loan is at 6 percent, much better than Junior can get at the bank and much better than Grandpa gets from his CD at the bank. Everyone wins, or do they? What happens when Junior loses his job and can’t pay Grandpa, who is from the old school where you dig ditches till midnight if you have to in order to honor your word? Now Junior and Grandpa are at odds, so Junior sells the truck and pays Grandpa the $19,000 he gets for it. Grandpa hadn’t taken a lien on the title, so he now expects broke, angry, and unemployed Junior to repay the balance of $6,000. Grandpa will never see his $6,000 or his grandson again. In some perverted twist of the myth, mixed with shame and guilt, Junior’s mind somehow concocts that this is all Grandpa’s fault, and he abandons the relationship. Hundreds of times I’ve seen relationships strained and sometimes destroyed. We all have, but we continue to believe the myth that a loan to a loved one is a blessing. It isn’t; it is a curse. Don’t put that burden on any relationship you care about. Myth: By cosigning a loan, I am helping a friend or relative. Truth: Be ready to repay the loan; the bank wants a cosigner for a reason, which is that they don’t expect the friend or relative to pay. Think with me for a moment. If debt is the most aggressively marketed product in our culture today, if lenders must meet sales quotas for “loan production,” if lenders can project the likelihood of a loan’s going into default with unbelievable accuracy—if all these things are true, and the lending industry has denied your friend or relative a loan, there is little doubt the potential borrower is trouble just looking for a place to happen. Yet people across America make the very unwise (yes, dumb) decision to cosign for someone else every day. We continue to believe the myth that a loan to a loved one is a blessing. The lender requires a cosigner because there is a very high statistical chance that the applicant won’t pay. So why do we appoint ourselves as the generous, all-knowing, benevolent helper to override the judgment of an industry that is foaming at the mouth to lend money, and yet has deemed our friend or relative a deadbeat looking for a place to fail, or at least a loan default looking for a new home? Why do we cosign knowing full well the inherent problems? We enter this ridiculous situation only on emotion. Intellect could not take us on this ride. We “know” they will pay because we “know” them. Wrong. Parents cosign for a young couple to buy a home. Why do they need a cosigner? Because they couldn’t afford the home! Parents cosign for a teenager to buy a car. Why would parents do this? “So he can learn to be responsible.” No, what the teenager has learned is, if you can’t pay for something, buy it anyway. The sad thing is that those of us who have cosigned loans know how they end up. We end up paying them, but only after our credit is damaged or ruined. If you cosign for a car, the lender will not contact you when the loan is paid late every month, but your credit is damaged every month. The lender will not contact you before they repossess the car, but you now have a repo on your credit report. They will contact you to pay the difference between the debt and the below-wholesale repo price they got for the car, which is called a deficit. If the lender did contact you, there is nothing you can legally do to force the sale of the car, because you don’t own it; you are merely on the hook for the debt. When you cosign on a house, you will get the same results. According to Proverbs 17:18, “It’s stupid to guarantee someone else’s loan” (CEV). That pretty well sums it up. Just like trying to bless a loved one with a loan, many people are trying to help by cosigning, and the result is damaged credit and damaged or destroyed relationships. I have cosigned loans and ended up paying them; one poor guy cosigned for me, and he ended up paying when I went broke. If you truly want to help someone, give money. If you don’t have it, then don’t sign up to pay it, because you likely will. I see cases of people caught in the cosigning trap every day on The Dave Ramsey Show, our radio talk show. Kevin called to complain that a mortgage company was counting his cosigning for his mom’s car against him as a debt even though she had insurance that would pay the loan if she died. Of course they count it, Kevin; it is a debt you are liable for! The mortgage company isn’t worrying about her dying; they are worried about her not paying, which would require Kevin to make her car payments and then possibly not be able to pay his mortgage. Joe, another caller, was surprised to find he was on the hook for $16,000 on a mobile home he cosigned for fifteen years ago. Ten years ago his brother’s mobile home was repo’ed, and the bank sold it for $16,000 less than was owed; now, ten years later, the bank caught up with Joe and wanted its money. Joe was angry that this could happen! Most cosigners have no concept of the trip they’ve signed up for. That sums up cosigning: broken hearts and broken wallets. Brian e-mailed me about his girlfriend’s car. It seems ol’ Brian cosigned for a $5,000 car for his sweetie. Sweetie took off with the car, he can’t find her, and, surprise of surprises, she isn’t making the payments. Now, either his credit shows him as a deadbeat, or he makes payments on a car he can’t find for a girl he doesn’t want to find. That sums up cosigning: broken hearts and broken wallets. That’s how cosigning usually goes, so unless you are looking for a broken heart and a broken wallet, don’t do it. Myth: Cash Advance, Payday Loans, Rent-to-Own, Title Pawning, and Tote-the-Note Car Lots are needed to help lower-income people get ahead. Truth: These rip-off examples of predatory lending are designed to take advantage of lower-income people and benefit only the owners of the companies making the loans. Lower-income people will remain at the bottom of the socioeconomic ladder if they fall for these rip-offs. These “lenders” (or, as I like to call them, “the scum of the scum”) are bottom-feeders and legally make themselves rich on the backs of the poor or those soon to be poor. The lending rates of these types of operations are over 100 percent interest, and if you want to stay on the bottom, keep dealing with these guys. You know why these types of operations are located only at the poor end of town? Because rich people won’t play. That is how they got to be rich people. The Payday Loan is one of the fastest-growing trash lenders out there. You write a hot check for $225, dated one week from now, which will be payday. They will give you $200 cash on the spot. All for a mere $25 service charge, which equates to over 650 percent interest annually! Mike called my talk show recently and was caught in a web of Payday Loans. He had not yet had a Total Money Makeover and was still spending like always. He kept adding loan after loan until he couldn’t beat the shell game he had created. Basically, Mike had borrowed from one trash lender to pay another, and by doing this again and again, had created a cycle of financial death. He was panicked because he was being threatened with criminal charges for writing bad checks by the very places that have a business model based on postdated “bad” checks. The sad thing is that the only way out for Mike is to pop the balloon. He has to stop paying them, close his accounts, and then meet with each lender to work out payment arrangements. That will mean extra jobs and selling things around the house. This type of business is legalized loan-sharking. Some states, like Georgia and Arkansas, have legally run payday-loan businesses out of their state. Others, like New York and New Jersey, limit the amount of annual interest they can charge. Even the federal government recognized the problem and put a cap of 36 percent on payday loans made to military personnel. Hopefully other states will follow suit. The classic Tote-the-Note Car Lot is no better. Most of these transactions involve older, cheaper cars. The dealer purchases these cars and sells them for a down payment equal to what he paid for the car, so the payments at 18 to 38 percent interest paid weekly are all gravy. Tow trucks all over town recognize these exact cars because the car being sold has been sold many times and repeatedly repo’ed by the dealer. Every time the dealer sells the car, his return on investment skyrockets. The payments could have purchased the car for cash in a matter of weeks; in fact, the down payment could have purchased the car if the buyer had been a little more savvy. Rent-to-Own is one of the worst examples of the little Red-Faced Kid in “I want it now!” mode. The Federal Trade Commission continues to investigate this industry because the effective interest rates in rent-to-own transactions are over 1,800 percent on average. People rent items they can’t possibly afford to buy because they look only at “how much a week” and think, I can afford this. Well, when you look at the numbers, no one can afford this. The average washer and dryer will cost you just $20 per week for ninety weeks. That is a total of $1,800 for a washer and dryer you could have bought new at full retail price for $500 and slightly used for $200. As my old professor used to say about the “own” part of Rent-to-Own, “You should live so long!” We buy things we don’t need with money we don’t have in order to impress people we don’t like. If you had saved $20 per week for just ten weeks, you could have bought the scratch-and-dent model off the floor at the same Rent-to-Own store for $200! Or you could have bought a used set out of the classifieds or online. It pays to look past the weekend and suffer through going to the Laundromat with your quarters. When you think short-term, you always set yourself up for being ripped off by a predatory lender. If the Red-Faced Kid (“I want it, and I want it now!”) rules your life, you will stay broke! If you use Payday Loans, Tote-the-Note, and Rent-to-Own, please understand that you are being destroyed financially. These businesses feed on the working poor, and you must avoid them at all costs if you want to win with money. Myth: “Ninety days same as cash” equals using other people’s money for free. Truth: Ninety days is not the same as cash. The silly marketing that America falls for has resulted in this: we buy things we don’t need with money we don’t have in order to impress people we don’t like. “Ninety days same as cash” has exploded in furniture, electronics, and appliance sales. I recently met a lady who financed her dog at the pet store. “But I paid him off early,” she said proudly. Good thing for Rover that he was able to avoid the repo man. Dave Rants . Whole Life insurance is a horrible product. Why would you pay someone interest on your own savings? That’s backward, and it does not make you smart. Ninety days is NOT the same as cash for three basic reasons: One, if you will flash cash ($100 bills) in front of a manager who has a sales quota to meet, you will likely get a discount. If you can’t get a discount, go to the competitor and get one. You do not get the discount when you sign up for the finance plan. Two, most people don’t pay off the debt in the allotted time. Nationally, 88 percent of these contracts convert to debt—a debt where you are charged a rip-off interest rate of 24 to 38 percent, and they back-charge you to the date of purchase. Please don’t tell me you are the one who is actually going to pay it off. A $1,000 stereo (don’t forget, you didn’t get a discount) will not make you rich in ninety days. But $1,000 left in a savings account at 3-percent annual interest will earn you $7.50 in ninety days. Wow, some financial genius you are! Three, you are playing with snakes, and you will get bitten. Marge called my radio show with this little story. She and her husband purchased a big-screen TV at a nationally known electronics store. This couple paid off the big screen slightly early to be sure they would not be tricked into the interest being back-charged. No such luck. They had declined the disability and life insurance (for a charge of $174), but apparently the salesperson had fraudulently initialed the contract in that area, something that happens more frequently than you think. So although our brilliant couple thought they had paid off the TV, they still had a balance and were charged with the interest back through the entire deal. They were fighting it, but it would take hiring a handwriting expert and going to court with an attorney to avoid paying a bill under $1,000, even though they did not owe it. That is disheartening. The little game of “we are going to use your money for free” backfired big-time. I recently purchased a TV in that exact same store for cash; I got a discount and walked out with my TV. No hassle, no court costs, no interest, no lies. No, Virginia, ninety days is NOT the same as cash. Myth: Car payments are a way of life; you’ll always have one. Truth: Staying away from car payments by driving reliable used cars is what the average millionaire does; that is how he or she became a millionaire. Taking on a car payment is one of the dumbest things people do to destroy their chances of building wealth. The car payment is most folks’ largest payment except for their home mortgage, so it steals more money from the income than virtually anything else. The Federal Reserve notes that the average car payment is $495 over sixty-four months. Most people get a car payment and keep it throughout their lives. As soon as a car is paid off, they get another payment because they “need” a new car. If you keep a $495 car payment throughout your life, which is “normal,” you miss the opportunity to save that money. If you invested $495 per month from age 25 to age 65, a normal working lifetime, in the average mutual fund averaging 12 percent (the eighty-year stock market average), you would have $5,881,799.14 at age sixty-five. Hope you like the car! Some of you had your nose in the air as intellectual snobs when I illustrated how bad Rent-to-Own is because you would never enter such an establishment, and yet you are doing worse on your car deal. If you put $495 per month in a cookie jar for just ten months, you have nearly $5,000 for a cash car. I am not suggesting you drive a $5,000 car your whole life, but that is how you start without debt. Then you can save the same amount again and trade up to an $10,000 car ten months later and up to a $15,000 car ten months after that. In just thirty months, or two and a half years, you can drive a paid-for $15,000 car, never having made a payment, and never have to make payments again. Taking on car payments because everyone else does it does not make it smart. Will your broke relatives and friends make fun of your junk car while you do this? Sure they will, but that is a very good sign you are on the right track. SHOCKING STATS Over 97% of people don’t systematically pay extra on their mortgage. Having been a millionaire and gone broke, I dug my way out by making a decision about looking good versus being good. Looking good is when your broke friends are impressed by what you drive, and being good is having more money than they have. Are you starting to realize that The Total Money Makeover is also in your heart? You have to reach the point that what people think is not your primary motivator. Reaching the goal is the motivator. Do you remember the circus game where you swing the large hammer over your head to hit the lever to send a weight up a pole to ring the bell? You reach the point that you want to ring the bell! Who cares if you are a ninety-eight-pound weakling with gawky form? The girls are still impressed when the bell is rung. When the goal, not how you look, begins to matter, you are on your way to a Total Money Makeover. Today I drive very nice, very expensive, slightly used cars, but it wasn’t always that way. After going broke, I drove a borrowed 400,000-mile Cadillac with a vinyl roof torn loose so that it filled up with air like a parachute. The predominant color on this car was Bondo. I drove the Bondo buggy for what felt like ten years during one three-month period. I had dropped from a Jaguar to a borrowed Bondo buggy! This was not fun, but I knew that if I would live like no one else, later I could live like no one else. Today I am convinced that my wife and I are able to do anything we want financially partially because of the car sacrifices we made in the early days. I believe, with everything within me, that we are winning because of the heart change that allowed us to drive old, beat-up cars in order to win. If you insist on driving new cars with payments your whole life, you will literally blow a life’s fortune on them. If you are willing to sacrifice for a while, you can have your life’s fortune and drive quality cars. I’d opt for the millionaire’s strategy. Myth: Leasing a car is what sophisticated people do. You should lease things that go down in value and take the tax advantage. Truth: Consumer advocates, noted experts, and a good calculator will confirm that the car lease is the most expensive way to operate a vehicle. Consumer Reports, Smart Money magazine, and my calculator tell me that leasing a car is the worst possible way to acquire a vehicle. In effect, you are renting to own. The cost of capital, which is the interest rate, is extremely high, yet most new car deals this year will be a fleece . . . I mean, a lease. They’re baaaadd! Sorry, that’s my impression of a sheep getting “fleeced.” The auto industry lobbyists are so powerful that the law does not require full lender disclosure. The industry argues that you are merely renting, which you are, so they shouldn’t be required to show you the actual effective interest rate. The Federal Trade Commission requires a truth-in-lending statement when you buy a car or get a mortgage, but not on a lease, so you don’t know what you are paying unless you are very good with a calculator. Having seen several hundred lease agreements entered into by people I have counseled, my financial calculator confirms that the average interest rate is 14 percent. Most new car deals this year will be a fleece . . . I mean, a lease. Shouldn’t you lease or rent things that go down in value? Not necessarily, and the math doesn’t work on a car, for sure. Follow me through this example: If you rent (lease) a car with a value of $22,000 for three years, and when you turn it in at the end of that three-year lease the car is worth $10,000, someone has to cover the $12,000 loss. You’re not stupid, so you know that General Motors, Ford, or any of the other auto giants aren’t going to put together a plan to lose money. Your fleece/lease payment is designed to cover the loss in value ($12,000 spread over 36 months is equal to $333 per month), plus provide profit (the interest you pay). Where did you get a deal in that? You didn’t! On top of that, there is the charge of 10 to 17 cents per mile for going over the allotted miles and the penalties everyone turning in a lease has experienced for “excessive wear and tear,” which takes into account every little nick, dent, carpet tear, smudge, or smell. You end up writing a large check just to walk away after renting your car. The whole idea of the back-end penalties is twofold: to get you to fleece/lease another one so you can painlessly roll the gotchas into the new lease, and to make sure the car company makes money. Smart Money magazine quotes the National Auto Dealers Association (NADA) as stating the average new car purchased for cash makes the dealer an $82 profit. When the dealer can get you to finance with them, they sell the financing contract and make an average of $775 per car! But if they can get you to fleece the car, the dealer can sell that fleece to the local bank or GMAC, Ford Motor Credit, Toyota Credit, etc., for an average of $1,300! The typical car dealer makes their money in the finance office and the shop, not in the sale of new cars. Car fleecing is exploding because dealers know it is their largest profit center. We live in a culture that quit asking, “How much?” and instead asks, “How much down, and how much a month?” If you look at only the monthly outlay, then you will always fleece, because it almost always costs less down and less a month, but in the long run, it is much more expensive. Once again, the Red-Faced Kid bought something he couldn’t afford using an unwise method and then attempted to justify his stupidity. That red-faced stuff won’t work if you want a Total Money Makeover. Craig called my radio show to argue about leasing because his CPA said he should lease a car. (Proof that some CPAs can’t add, or at least don’t take the time to!) Craig owned his own business and thought the tax write-off if his business owned the car made fleecing smart. Craig had the $20,000 cash to buy a one-year-old car just like the one he wanted, but instead he was going to fleece a new $30,000 one. He missed two important points. First, 98 percent of fleecing is done on a new car, which rapidly loses value, not a wise business decision. Second, creating an unneeded business expense for the sake of a tax write-off is bad math. Let’s say that Craig fleeced a car for $416 per month, $5,000 per year, and used it 100 percent for business (which is highly unlikely and most times won’t survive an audit). If you have a tax write-off of $5,000, you don’t pay taxes on that money. If Craig didn’t have the $5,000 write-off, he would pay taxes on that $5,000, which would be about $1,500 in taxes. So Craig’s CPA’s suggestion that he send the car company $5,000 to keep from sending the government $1,500 sounds as though he can’t add. Plus, Craig now is responsible for a $30,000 car that is dropping in value instead of a $20,000 car that took the worst drop in value during its first year. My company owns my cars. We are able to straight-line depreciate those cars or write off the mileage. If you drive inexpensive cars in your business and put high mileage on them, take the mileage deduction. If you, like me, drive expensive cars but do not put many miles on them, take the straight-line depreciation. Both tax deductions are available to you without having a stupid car payment. If you don’t own a business and didn’t understand everything I just said about tax write-offs, etc., don’t worry. Just know that, as a wise business owner, you don’t want to fleece a car. Myth: You can get a good deal on a new car at 0 percent interest. Truth: A new car loses 60 percent of its value in the first four years; that isn’t 0 percent. We have discussed the new-car purchase in its various forms for the last several pages. No, you can’t afford a new car unless you are a millionaire and can, therefore, afford to lose thousands of dollars, all in the name of the neat new-car smell. A good used car that is less than three years old is as reliable or more reliable than a new car. A new $28,000 car will lose about $17,000 of value in the first four years you own it. That is almost $100 per week in lost value. To understand what I’m talking about, open your window on your way to work once a week and throw out a $100 bill. The average millionaire drives a two-year-old car with no payments. The average millionaire drives a two-year-old car with no payments. He or she simply bought it. The average millionaire is unwilling to take the loss that a new car dishes out; that is how they became millionaires. I am not saying you will never drive a brand-new car, but until you have so much money you can lose big bucks and not notice, you can’t afford the luxury. The car dealer will tell you that you are “buying someone else’s problems.” Then why do they sell used cars? Wouldn’t that be morally wrong? The truth is that most slightly used cars have gotten all the kinks worked out of them and were not traded because they were bad cars. Since almost 80 percent of the new cars this year will be fleeced, more than likely you are buying a car that came off a lease. My last two car purchases were one- and two-year lease turn-ins with low miles. If you understand what I am saying about this huge loss in value, you now realize that 0 percent interest isn’t really “no cost.” While the money to borrow isn’t technically costing you, you are losing so much in value that you have still been taken. Zero percent, however, is used quite often by guys (seldom gals) to rationalize their “need” for some new wheels. So even though the interest rate is attractive, pass it up because the whole transaction still means throwing $100 bills out the window each week. Some people want to buy a new car for the warranty. If you lose $17,000 of value over four years, on average you have paid too much for a warranty. You could have completely rebuilt the car twice for $17,000! Also, keep in mind that most manufacturers’ warranties will still cover you when buying a slightly used car. Of course, when you begin your Total Money Makeover, you may have an old beater, but the goal is to avoid the temptation of the 0 percent interest myth and get into quality used cars. (Still want to buy a new car? Sure they look great, smell great, and drive great—but the month-after-month and year-after-year payments definitely don’t feel great.) Myth: You should get a credit card to build your credit. Truth: You won’t use credit with your Total Money Makeover, except maybe for a mortgage, and you don’t need a credit card for that. The best myth is the “build your credit” myth. Bankers, car dealers, and unknowledgeable mortgage lenders have told America for years to “build your credit.” This myth means we have to get debt so we can get more debt because debt is how we get stuff. Those of us who have had a Total Money Makeover have found that cash buys stuff better than debt. But if I were selling debt, as the banker is, I also would tell you to get debt to get more debt. This is, however, a myth. Yes, you will need to “build your credit” by borrowing and repaying debt in a timely fashion if you want to live a life of credit cards, student loans, and car payments. Not me. The one question we must answer is, “How do I get a home mortgage?” Later, I will introduce you to the 100-percent-down plan, or if you must, how to settle for a fifteen-year fixed-rate mortgage. But if you want that fifteen-year fixed rate with a payment that is no more than 25 percent of your take-home pay so I won’t yell about it, don’t you need credit? No. You can get a mortgage if you have lived right. You will need to find a mortgage company that does actual underwriting. That means they are professional enough to process the details of your life instead of using only a FICO score (lending for dummies). You can get a mortgage if you have lived right. Let me define “lived right.” You can qualify for a Conventional fifteen-year fixed-rate loan if: • You have paid your landlord early or on time for two years. • You have been in the same career field for two years. • You have a good down payment, which is more than “nothing down.” • You have no other credit, good or bad. • You are not trying to take too big a loan. A payment that totals 25 percent of take-home pay is conservative and will help you qualify. The FICO score is an “I Love Debt” score. According the FICO Web site, your FICO score is determined by: 35% Debt Payment History 30% Debt Levels 15% Length of Debt 10% New Debt 10% Type of Debt So if you quit borrowing money you will lose your FICO score. It is not a score that says you are winning with money or that you have a million dollars; it mathematically says you LOVE DEBT. Please don’t brag about your FICO score, that makes you look like you love playing kissy face with some bank. Dumb, dumb, dumb. So can you get a mortgage without a FICO score? Many mortgage companies have gotten so lazy that FICO is the only lending they do. Others simply don’t know how to write a loan without a score. But as of this writing, you can still get a mortgage with a zero score. You don’t want to have a low score; it is best to have a high one or none at all. My personal score, by the way, is zero—because I haven’t borrowed any money in decades. Myth: You need a credit card to rent a car, check into a hotel, or buy online. Truth: A debit card will do all that. The Visa debit card or other check cards that are connected to your checking account give you the ability to do virtually anything a credit card will do. I carry a debit card on my personal account and one on my business and do not have one credit card. Of course, you must have money before you can buy something with a debit card, but paying for things with money you have now is part of your Total Money Makeover. Some rental-car places don’t take debit cards, but most do. Even though most will take the debit card, you need to check with the specific rental location in advance. I buy things online and stay in hotels using my debit card all the time. In fact, I travel all over the nation several times a year speaking and doing appearances, and my debit card allows me access to the best things life has to offer with no debt. Remember, there is one thing the debit card won’t do: get you into debt. Myth: The debit card has more risk than a credit card. Truth: Nope. Some of you were concerned when I mentioned buying things online and reserving hotels with a debit card. The perception is that it’s riskier to conduct that kind of business with a debit card. Supposed financial experts have spread this myth to the point that it is virtually urban legend. The fact is, Visa’s regulations require the card-issuing bank to afford the debit card the exact same protections in cases of theft or fraud. If you have any doubt, read the liability information on Visa’s own Web site. I contacted Visa directly and they sent this statement: Visa’s Zero Liability policy covers all Visa credit—and debit-card transactions processed over the Visa network. Visa extends the same protections and benefits to its debit cards as it does to credit cards—including the ability for credit card issuers to resolve merchant disputes on the cardholder’s behalf if goods were defective or weren’t received, you were overcharged, or for other reasons. But remember, in order to get the full protection, be sure to run your card as a credit transaction—not using your PIN number. That’s what I do. Myth: If you pay off your credit card every month, you get the free use of someone else’s money. Truth: CardTrak says that 60 percent of people don’t pay off their credit cards every month. As I said, when you play with snakes, you get bitten. I have heard all the bait put out there to lure the unsuspecting into the pit. A free hat, airline miles, brownie points back, free use of someone else’s money, a discount at the register—the list goes on to get you to sign up for a credit card. Have you ever asked why they work so hard to get you involved? The answer is that you lose and they win. When you play with snakes, you get bitten. You won’t wear the hat, and according to MSNBC.com, 90 percent of the airline miles are never redeemed. Next time you are in the store that gave you a discount for signing up for a card, you will have forgotten your cash, you’ll use the card, and the cycle begins. Maybe you think, I pay mine off, so I’m using their money. I’m winning. Wrong again. A study of credit card use at McDonald’s found that people spent 47 percent more when using credit instead of cash. It hurts when you spend cash; therefore you spend less. The big question is, what do millionaires do? They don’t get rich with free hats, brownie points, air miles, and the use of someone else’s money. What do broke people do? They use credit cards. An American Bankruptcy Institute study of bankruptcy filers reveals that 69 percent of filers say credit-card debt caused the bankruptcy. Broke people use credit cards; rich people don’t. I rest my case. Before getting onboard with Dave’s plan, I was so stressed with work and our financial situation that I ended up in the hospital with chest pains. My wife and I were making very good money in the San Francisco Bay area, having nothing to show for it but lives under constant pressure. For years we had desired to move closer to our children and grandchildren, parents, and siblings. But the debt we carried would not allow us to move to a possibly lower-paying situation. By the time we found The Dave Ramsey Show on our daily long commutes to work, we were $95,000 in debt. It didn’t take long for us to realize that he spoke truths laced with a strong dose of common sense. We destroyed the credit cards and set up a plan of attack following the baby steps as outlined in The Total Money Makeover. We paid off all consumer debt and cars within eighteen months, saved our six-month emergency fund, and had a plan to pay off the house within seven years. A funny thing happened once we got rid of all that consumer debt; the stressful jobs were no longer a financial necessity. We didn’t feel so much pressure on our lives either, and for the first time we could see a very bright light as we came out of the tunnel. Through Dave, God answered our prayers and allowed us to see clearly how we could move closer to our family! We are now totally debt-free, including our home. We see family weekly and get to take part in all those wonderful events we had missed over the years. We are still saving 15 percent of our income and give with joy to church and charities in hopes that we can repay those blessings we have received and continue to receive. We tell everyone who will listen to us about Dave and this great gift of financial peace. Getting rid of our credit cards and eliminating our outstanding debt on those cards freed us up to a point financially where we could take a pay cut and focus more on the things that really matter. My wife and I were happy before, but now we feel true joy in our lives. Alan (age 48) and Lonnie (age 47) Cluff Both in Information Technology Management Myth: Make sure your teenager gets a credit card so he or she will learn to be responsible with money. Truth: Getting a credit card for your teenager is an excellent way to teach him or her to be financially irresponsible. That’s why teens are now the number-one target of credit-card companies. The past several pages have been devoted to the evils of credit cards, so I’m not going to repeat myself in the case of teenagers. I’ll only add that throwing your teen into a pool of sharks is a sure way to guarantee a life- time of heartache for them and for you. I will also tell you that over 88 percent of graduating college seniors have credit-card debt before they even have a job! The credit-card marketers have done such a thorough job that a credit card is seen as a rite of passage into adulthood. American teens view themselves as adults if they have a credit card, a cell phone, and a driver’s license. Sadly, none of these “accomplishments” are in any way associated with real adulthood. You are not teaching your sixteen-year-old child to spend responsibly when you give him a credit card. You are not teaching your sixteen-year-old child to spend responsibly when you give him a credit card any more than you are teaching gun responsibility by letting him sleep with a loaded automatic weapon with the safety off. In both cases, you as a parent are being stupid. People with common sense don’t give sixteen-year-olds beer to teach them how to hold their liquor. By giving a teenager a credit card, the parent, the one with supposed credibility, introduces a financially harmful substance and endorses its use, which is dumb but unfortunately very normal in today’s families. Parents must instead teach the teenager to just say no. Anyone visiting a college campus in recent years has been shocked at the aggressive and senseless marketing of credit cards to people who don’t have jobs. The results can be devastating. Two college students in Oklahoma gave up on their credit-card debt and committed suicide with the bills lying on the bed beside them. Igot my first credit card when I was 18. Getting it felt like a rite of passage into adulthood, even though I didn’t really know how it worked. I’m not sure I even understood that the money had to be paid back! I ended up losing my job. The bills started piling up, so I moved out of my apartment and into my truck to save some cash. Then, my truck got repossessed! For far too long, I used my credit cards to buy anything and everything. I wasn’t budgeting at all, and I continued to treat credit card cash as income. I got married and debt continued to cause my wife and me a lot of stress and worry. We were living in Section 8 housing—and my wife was scared to be there alone! We hoped that disaster wouldn’t strike while we lived paycheck to paycheck. Without a buffer between us and life, we never knew when the next emergency would hit us. I heard Dave on the radio, started his Baby Steps, and read The Total Money Makeover. We cut up our credit cards before we had an emergency fund in place, which made my wife nervous. We paid off $10,000 in debt on a $30,000 combined yearly income, and we are now debt-free! We rarely disagree anymore when we create a budget. With each paycheck, we tithe, pay ourselves first (save!), pay bills, and use the envelope system for our other expenses. I ordered 20 copies of The Total Money Makeover and have enjoyed giving them away to my coworkers so they, too, can experience what it’s like to be debt-free and have cash in hand for purchases. I’ve gone from being completely ignorant about my money to becoming debt-free and trying to help others gain financial peace! David (age 30) and Tayelor (age 25) Jarrett Technical Support Rep/Small Business Owner; Clinical Assistant Vince called my radio show with a problem that has become a trend. Vince signed up for multiple cards during his sophomore year at college to get the free campus T-shirt. He wasn’t going to use the cards unless there was an emergency, but there was an “emergency” every week, and soon he was $15,000 in debt. He couldn’t make the payments, so he quit school to get a job. The problem was, without his degree, his earnings were minimal. Worse than that, he also had $27,000 in student loans. Student loans aren’t payable while you are in school, but when you leave school by graduating or quitting, the payments begin. Vince was one scared twenty-one-year-old with $42,000 in debt, but making only $15,000 per year. What’s scary is that Vince is “normal.” The American Bankruptcy Institute reveals that 19 percent of the people who filed for bankruptcy were college students. That means one in five bankruptcy filings were by very young people who started their lives as financial failures. Do you still think it is wise to give a teen a card? I hope not. The reason why lenders market so aggressively to teens is brand loyalty. The lenders’ studies have found that we consumers are very loyal to the first bank that certifies our adulthood by issuing us plastic. When I am doing an appearance and cutting up credit cards, the emotional attachment many people have to the first card they got in college is amazing. They clutch it like it is an old friend. Brand loyalty is real. Several thousand schools across America are using our high-school curriculum called “Foundations in Personal Finance.” The results have been staggering. Teens latch onto The Total Money Makeover before they need one. A recent graduate of the program, fifteen-year-old Chelsea, said, “I think this class has totally changed my life. Whenever I see someone using a credit card, I think, Whoa! How could they do that to their life? I always thought you had to have credit-card payments, house payments, and car payments. Now, I realize you don’t have to.” Very cool, Chelsea. Kid-Branding You have to start teaching kids early because “kid-branding” is now commonplace. When my son was eleven years old, I looked at the back of a box of Raisin Bran and read “Visa . . . the official card of Whoville . . . from How the Grinch Stole Christmas.” I was not the target of this ad; my kid was. Lenders are teaching kids earlier and earlier their message of reliance on plastic. A few years back, Mattel put out “Cool Shopping Barbie,” which was sponsored by MasterCard. Of course, this “cool” babe had her own MasterCard. When she scanned her card, the cash register said, “Credit approved.” There was so much consumer backlash that Mattel pulled the product. A few years ago, Barbie came out with the “Barbie Cash Register,” and apparently this lady does a lot of shopping. The register comes with its own American Express card. Why are these companies selling to our small children? Kid-branding intends to influence card choices later in life. This is immoral. Again, we decided to combat kid-branding with our own antidote. Financial Peace Jr. is a collection of aids to help parents teach their children (ages three to twelve) about money. Of course, you can teach the principles without the kit, but, either way, they need to learn them. In my home, we used the same techniques to teach our kids four things to do with money. We wanted to create teachable moments so that the kid-branding would be counteracted by common sense. We teach our kids to work—not like being at some boot camp, but that doing chores equals money. Our kids are on commission, not allowance. Work and get paid; don’t work and don’t get paid. It’s just like the real world. Our children put their newly earned money in envelopes labeled Save, Spend, and Give. When a child learns to work, save, spend, and give under a mature parent’s direction, the child can avoid the messages that say a credit card equals prosperity. Work and get paid; don’t work and don’t get paid. Myth: Debt consolidation saves interest, and you have one smaller payment. Truth: Debt consolidation is dangerous because you treat only the symptom. Debt CONsolidation—it’s nothing more than a con because you think you’ve done something about the debt problem. The debt is still there, as are the habits that caused it; you just moved it! You can’t borrow your way out of debt. You can’t get out of a hole by digging out the bottom. Larry Burkett said debt is not the problem; it is the symptom. I feel debt is the symptom of overspending and undersaving. A friend of mine works for a debt-consolidation firm whose internal statistics estimate that 78 percent of the time, after someone consolidates his credit-card debt, the debt grows back. Why? He still doesn’t have a game plan to either pay cash or not buy at all, and hasn’t saved for “unexpected events,” which will also become debt. Debt consolidation seems appealing because there is a lower interest rate on some of the debt and a lower payment. In almost every case we review, though, we find that the lower payment exists not because the rate is actually lower but because the term is extended. If you stay in debt longer, you get a lower payment. If you stay in debt longer, you pay the lender more, which is why they are in the business of debt consolidation. The answer is not the interest rate; the answer is a Total Money Makeover. Myth: Borrowing more than my home’s value is wise because I’ll restructure my debt. Truth: You are stuck in the house, which is really dumb. On today’s radio show I took a call from a desperate man facing bankruptcy. He had borrowed $42,000 on a second mortgage, a home equity loan. Dan’s existing balance on his first mortgage was $110,000, making his total new mortgage debt $152,000. Dan’s home was worth $125,000, so he owed $27,000 more on his home than it was worth. He lost his job two months ago and luckily has just found a job in another state, but he can’t sell his home. He had the same job for sixteen years and thought he had security, but now, just a few months later, he is “in the soup.” My suggestion to Dan was that he call the second mortgage rip-off lender and get an acknowledgment of the truth, that there really isn’t any collateral for the loan. They wouldn’t foreclose in a hundred years, but they will sue him when the first mortgage company forecloses. So, after asking the second lender to release the lien for whatever proceeds above the first mortgage come from a sale, Dan will sign a note and make payments on the rest. Dan will have payments for years to come on a second mortgage for a home he no longer owns, but like most folks, his second mortgage was to pay off (move) debt he already had on credit cards, medical bills, and other life issues. Today, with a job in another state, Dan would rather have all his old debt back and his home where he could sell it easily. Myth: If no one used debt, our economy would collapse. Truth: Nope, it would prosper. The occasional economics teacher feels the need to pose this ridiculous scenario. My dream is to get as many Americans as possible out of debt with a Total Money Makeover. Unfortunately, I could sell ten million books, and there would still be seven billion credit-card offers per year, so there is no danger of my working myself out of a job. The best weight-loss program in the world can never ensure there will be no fat Americans; after all, there are too many McDonald’s. What would people do if they didn’t have any payments? However, let’s pretend for the fun of it. What if every single American stopped using debt of any kind in one year? The economy would collapse. What if every single American stopped using debt of any kind over the next fifty years, a gradual TOTAL Money Makeover? The economy would prosper, although banks and other lenders would suffer. Do I see tears anywhere? What would people do if they didn’t have any payments? They would save and they would spend, not support banks. Spending by debt-free people would support and prosper the economy. The economy would be much more stable without the tidal waves caused by “consumer confidence” or the lack thereof. (Consumer confidence is that thing economists use to measure how much you will overspend due to your being giddy about how great the economy is, never taking into consideration that you are going deeply into debt. If the consumer were out of debt and living within his means, the confidence he would have would be well-founded.) Saving and investing would cause wealth to be built at an unprecedented level, which would create more stability and spending. Giving would increase, and many social problems would be privatized; thus, the government could get out of the welfare business. Then taxes could come down, and we would have even more wealth. As that great philosopher Austin Powers said, “Capitalism, yeah, baby!” Ahhhh, capitalism is cool. Those who are worried about polarization, the widening gap between the haves and the have-nots, need not look to government to solve the problem; just call for a national Total Money Makeover. Debt Is Not a Tool Are you beginning to understand that debt is NOT a tool? This myth and all its little sub-myths have been spread far and wide. Always keep in mind the idea that if you tell a lie often enough, loud enough, and long enough, the myth becomes accepted as a fact. Repetition, volume, and longevity will twist and turn a myth, a lie, into a commonly accepted way of doing things. No more. Debt is not a tool; it is a method to make banks wealthy, not you. The borrower truly is slave to the lender. Debt is not a tool; it is a method to make banks wealthy, not you. Your largest wealth-building asset is your income. When you tie up your income, you lose. When you invest your income, you become wealthy and can do anything you want. How much could you give every month, save every month, and spend every month if you had no payments? Your income is your greatest wealth-building tool, not debt. Your Total Money Makeover begins with a permanently changed view of the Debt Myths. 4 Money Myths: The (Non)Secrets of the Rich Most Money Myths have to do with a lie about a shortcut or a lie about safety. We yearn to become healthy, wealthy, and wise with no effort and with no risk, but it will never happen. Why else is the lottery so successful in pulling in millions of dollars? Why do people stay in jobs they hate, seeking false security? The Total Money Makeover mentality is to live like no one else so later we can live like no one else. A price has to be paid, and there are no shortcuts. While no one goes looking for needless pain, risk, or sacrifice, when something sounds too good to be true, it is. The myths in this chapter are rooted in two basic problems. First is risk denial, thinking total safety is possible and likely. Second is easy wealth, or looking for the magic key to open the treasure chest. Risk Denial Risk denial takes several forms in the world of money. Sometimes risk denial is a kind of laziness, when we don’t want to take the energy to realize that energy is needed to win. Other times, risk denial is a kind of surrender in which we settle for a bad solution because we are so beat down or beat up that we wave the white flag and do something stupid. At still other times, risk denial can have an active component when we search for a false security that simply doesn’t exist. This is the risk denial of someone who keeps a job he or she hates for fourteen years because the company is “secure,” only to find life turned upside down by a layoff when the “secure” company files for bankruptcy. Money denial always involves an illusion, followed by disillusionment. Quick, Easy Money The second underlying problem is the quest for easy wealth. Quick, easy money is one of the oldest lies, or myths, in the book of the human race. A shortcut, a microwave dinner, instant coffee, and lottery millionaires are things we wish would give us high quality, but they never do. The secrets of the rich don’t exist, because the principles aren’t a secret. There is no magic key, and if you are looking for one, you’ve set yourself up for pain and the loss of money. One of my pastors says that living right is not complicated; it may be difficult, but it is not complicated. Living right financially is the same way—it is not complicated; it may be difficult, but it is not complicated. The secrets of the rich don’t exist, because the principles aren’t a secret. Myth vs. Truth In addition to Debt Myths, we must dispel several other Money Myths as part of your Total Money Makeover. Most of these Money Myths are rooted in the problems we have already discussed: denial and/or a shortcut mentality. Myth: Everything will be fine when I retire. I know I’m not saving yet, but it will be okay. Truth: The Cavalry isn’t coming. How can I put this delicately? There is no shining knight headed your way on a white horse to save the day. Wake up! This is the real world where sad old people eat Alpo! Please don’t be under the illusion that this government, one that is so inept and dim-witted with money, is going to take great care of you in your golden years. That is your job! This is an emergency! The house is on fire! You have to save. You have to invest in your future. You won’t be FINE! Do you get the picture? We live in the land of plenty, and that has until recently lulled a large percentage of Americans to sleep, thinking everything will be “okay.” Things won’t be okay unless you make them that way. Your destiny and your dignity are up to you. You are in charge of your retirement. We’ll talk about how to take charge of it later in the book, but for now, you’d better be 100 percent convinced that this area deserves your full attention right now—not tomorrow or pretty soon. Personally, I don’t want to work at McDonald’s when I retire—unless it’s the one I own on St. Thomas in the U.S. Virgin Islands. Myth: Gold is a good investment and will cover me if the economy collapses. Truth: Gold has a poor track record and isn’t used when an economy collapses. Gold has been sold as a stable investment that everyone should own. Conventional wisdom intones, “Since the beginning of time, gold has been the standard that man has used to exchange goods and services.” After making that pitch, the mythsayer will follow up with the statement that in a failed economy, gold is the only thing that will retain its value. “You will have what everyone wants” is how the pitch continues. After hearing these pitches, people buy gold as an investment under the illusion of false security, or risk denial. The truth is that gold is a lousy investment with a long track record of mediocrity. The average rates of return tracked as far back as Napoleon are around 2 percent gain per year. In recent history, gold has a fifty-year track record of around 4.4 percent, about the same as inflation and just above savings accounts. During that same time frame, you would have made around 12 percent in a good growth-stock mutual fund. During those fifty years, though, there has been incredible volatility and tons of risk. While gold has done very well since 2001, this is the only five-year period in history that it has seen great rates of return. And most of those returns are based on the doomsayer emotions brought on by 9/11 and the recession of 2008–09. It is also important to remember that gold is not used when economies fail. History shows that when an economy completely collapses, the first thing that appears is a black-market barter system in which people trade items for other items or services. In a primitive culture, items of utility often become the medium of exchange, and the same is temporarily true in a failed economy. A skill, a pair of blue jeans, or a tank of gas becomes very valuable, but not gold coins or nuggets. Usually a new government rises from the ashes, and new paper money or coinage is established. Gold will, at best, play a minor role, and the gold investor will be left with the sick feeling that real estate, canned soup, or knowledge would have been a better hedge against a failed economy. Myth: I can get rich quickly and easily if I join these groups, buy this DVD set, and work three hours a week. Truth: No one develops and makes a six-figure income on three hours a week. I received an e-mail recently from a gentleman offering me a 500-to-1 return on my money. He stated that he has become so enthused about the prospects of this “investment” that he has gotten several of his friends in the deal with him. (Oh no.) He didn’t have a lot of time in his busy schedule, but he would make time if I would meet with him. No thanks. I don’t know what this is, but I know it is a scam. I am not cynical, but I do know investments. Odds of 500 to 1 don’t come through, and I won’t waste my time discussing them or trying to find the flaw in the logic. It is a scam, period. Run as fast as you can to get away from these people! Dum Math and Stupid Tax The Answer, My Friend, Is Blowing Out the Window A new $28,000 car will lose about $17,000 of value in the first four years you own it. To get the same result, you could toss a $100 bill out the window once a week during your commute. As a younger man I often fell prey to this type of garbage. Later, I used to have meetings with these guys to try to find the flaw. Now I just shake my head—because I know he is heading for pain and loss, and so are his friends. Have you seen the midnight infomercial about ordering the DVD set with the “secrets” so that “you, too,” can become wildly wealthy by buying nothing-down real estate or by learning the hidden formula to success in the stock market? Small-business ideas abound, such as getting rich at home by stuffing envelopes and doing medical billings. Be realistic. Envelopes are stuffed by machines at a rate of thousands a minute and at a cost of tenths of a penny; they are not stuffed by a stay-at-home mom trying to supplement the family income! One person in every thousand who attempt the oversold, overdone medical-billing concept does so at a profit. The legitimate, profitable medical biller is usually someone who came from the medical industry, not someone who got ripped off taking a weekend course. Don’t fall for this! Real estate can be purchased for nothing down, but then you owe so much on it that there is no cash flow. You have to “feed” it every month. I bought foreclosure and bankruptcy real estate for years and know it can be done, but the players with cash are the ones who win. The good deals are one in two hundred if you are experienced and very good at the business; I worked sixty hours a week, and it took me years to get to a six-figure income in real estate. The stock market attracts the brightest business minds on the planet. These meganerds study, track, chart, eat, and breathe the stock market, and have for generations. Still, every other year, a book or con artist comes out claiming to have “discovered” little-known keys, patterns, or trends that will “make you rich.” The Beardstown Ladies published a New York Times best-seller about their cute little quilting group who started investing and discovered how to get unbelievable returns. As it turns out, the whole thing was a fraud; they never got those reported returns, and the publisher got sued. Another book was published on the Dogs of the Dow, showing a little-known pattern about buying the worst stocks on the Dow Jones Industrial Average to gain wealth. As it turns out, the author wrote another book about how to invest in bonds, after he had discovered his formula didn’t work. It is really hard to sell books and DVDs that teach the necessity of lots of hard work, living on less than you make, getting out of debt, and living on a plan, but I’m trying—because it’s the only way that will work. Meanwhile, the sooner you understand that no one gets rich quick by using secret information, the better. Myth: Cash Value life insurance, like Whole Life, will help me retire wealthy. Truth: Cash Value life insurance is one of the worst financial products available. Sadly, over 70 percent of the life insurance policies sold today are Cash Value policies. A Cash Value policy is an insurance product that packages insurance and savings together. Do not invest money in life insurance; the returns are horrible. Your insurance person will show you wonderful projections, but none of these policies perform as projected. No one gets rich quick by using secret information. Let’s look at an example. If a thirty-year-old man has $100 per month to spend on life insurance and shops the top five Cash Value companies, he will find he can purchase an average of $125,000 in insurance for his family. The pitch is to get a policy that will build up savings for retirement, which is what a Cash Value policy does. However, if this same guy purchases twenty-year level term insurance with coverage of $125,000, the cost will be only $7 per month, not $100. Wow. If he goes with the Cash Value option, the other $93 per month should be in savings, right? Well, not really; you see, there are expenses. Expenses? How much? All of the $93 per month disappears in commissions and expenses for the first three years; after that, the return will average 2.6 percent per year for Whole Life, 4.2 percent for Universal Life, and 7.4 percent for the new-and-improved Variable Life policy that includes mutual funds. These statistics are from Consumer Reports, Consumer Federation of America, Kiplinger’s Personal Finance, and Fortune magazine, so these are the real numbers. Additionally, a recent article in National Underwriter, The Industry Mouthpiece, showed charts of returns from fourteen national companies. The returns they show average only 6.29 percent over twenty years. Either way, this product is a really bad idea! Worse yet, with Whole Life and Universal Life, the savings you finally build up after being ripped off for years don’t go to your family upon your death; the only benefit paid to your family is the face value of the policy, the $125,000 of our example. The truth is that you would be better off to get the $7 term policy and put the extra $93 in a cookie jar! At least after three years you would have $3,000, and when you died your family would get your savings. As you continue in this book and learn how to have a Total Money Makeover, you will begin investing well. Then, when you are fifty-seven and the kids are grown and gone, the house is paid for, and you have $700,000 in mutual funds, you’ll become self-insured. That means when your twenty-year term is up, you shouldn’t need life insurance at all— because with no kids to feed, no house payment, and $700,000, your spouse will just have to suffer through if you die without insurance. Myth: Playing the lottery and other forms of gambling will make you rich. Truth: The lottery is a tax on the poor and on people who can’t do math. Just the other day, I was in a lottery state for a speaking engagement. I went into the gas station to pay for my fill-up and saw a line of people. For a moment I thought I was going to have to stand in line to pay for my gas, before I realized that the line was for purchasing lottery tickets. Have you ever seen those lines? Next time you do, look at the people in the line. Darryl and his other brother Darryl. These are not rich people, and these are not smart people. The lottery is a tax on poor people and on people who can’t do math. Rich people and smart people would be in the line if the lottery were a real wealth-building tool, but the truth is that the lottery is a rip-off instituted by our government. This is not a moral position; it is a mathematical, statistical fact. Studies show that the zip codes that spend four times what anyone else does on lottery tickets are those in lower-income parts of town. The lottery, or gambling of any kind, offers false hope, not a ticket out. A Total Money Makeover offers hope because it works. Remember, I have been broke twice in my life, but never poor; poor is a state of mind. The lottery is a tax on poor people and on people who can’t do math. Gambling represents false hope and denial. Energy, thrift, and diligence are how wealth is built, not dumb luck. Myth: Mobile homes, or trailers, will allow me to own something instead of renting, and that will help me to become wealthy. Truth: Trailers go down in value rapidly, making your chances for wealth building less than if you had rented. Trailers go down in value rapidly. People who buy a $25,000 double-wide home will in five years owe $22,000 on a trailer worth $8,000. Financially, it’s like living in your new car. If I were to suggest you invest $25,000 into a mutual fund with a proven track record of dropping to $8,000 in just five years, you would look at me as if I had lost my mind. I am not above living in a mobile home. I have lived in worse. I just know mobile homes are lousy places to put money. Please don’t kid yourself on this. If it walks like a duck and quacks like a duck, it is a duck. Call it “manufactured housing,” put it on a permanent foundation, add lots of improvements around the yard, and it is still a trailer when you are ready to sell it. I want you to own a home because homes are a good investment. The fastest way to become a homeowner is through a Total Money Makeover while renting the cheapest thing you can suffer through. The purchase of a trailer is not a shortcut, but a setback on the path to owning real estate that goes up in value. If the typical consumer considering buying your home can walk up and tell it was ever a trailer in any form, your home will go down, not up, in value. The only exception to the “no trailers” rule is Ron’s plan. Ron graduated from Financial Peace University and was on track for a Total Money Makeover. Ron and his wife prayerfully decided to sell their nice $120,000 home on which they owed only $50,000. They bought a small farm and a very used $3,000 trailer. With no payments and an income of $85,000, they saved and built a very nice, paid-for $250,000 home in just a couple of years. The appraisal was $250,000, but since they paid cash for the land, they got a bargain. Also, as a contractor Ron built the home for pennies on the dollar, so it didn’t take them long to finish paying for the home. They sold the $3,000 trailer for $3,200; after all, $3,000 trailers have lost about all their value, so the sale comes down to negotiating. Myth: Prepaying my funeral or my kids’ college expenses is a good way to invest and protect myself against inflation. Truth: Plans for prepaid funerals and college expenses give low rates of return and put money in the other guy’s pocket. When you prepay something, your return on investment (interest) is the amount the item will go up in value before you use it. In other words, by prepaying, you avoid the price increases, and that is your return. Prepaying items is like investing at the item’s inflation rate. For example, prepaying college tuition will save you the amount tuition goes up between the time you lock in and the time your child begins his college education. The average inflation rate for tuition nationally is about 8 percent, so prepaying tuition is like investing money at 8 percent. That is not bad, but mutual funds will average about 12 percent over a long period of time, and you can save for college tax-FREE. (More about college saving later in your Total Money Makeover.) The same concept is true for prepaid burial plans. If you have gone through the gut-wrenching exercise of selecting a casket, burial plot, and so on in the middle of grief, you don’t want loved ones to experience the same. Preplanning the details of your funeral is wise, but prepaying is unwise. Sara’s mom died suddenly, and the grief was overwhelming. In the midst of that pain, Sara felt they made unwise purchases as part of the funeral arrangements, and she vowed not to leave her family in the same predicament. So Sara, age thirty-nine, paid $3,500 for a prepaid funeral. Again, it is wise to preplan, not to prepay. Why? If she were to invest $3,500 in a mutual fund averaging 12 percent, upon an average death age of seventy-eight, Sara’s mutual fund would be worth $368,500! I think Sara could be buried for that, with a little left over, unless of course she is King Tut! Myth: I don’t have time to work on a budget, retirement plan, or estate plan. Truth: You don’t have time not to. Most people concentrate on the urgent in our culture. We worry about our health and focus on our money only after they’re gone. Dr. Stephen Covey’s book The Seven Habits of Highly Effective People examines this problem. Dr. Covey says one of the habits of highly effective people is that they begin with the end in mind. Wandering through life aimlessly will bring you much frustration. We worry about our health and focus on our money only after they’re gone. Covey says to divide activities into four quadrants. Two of the quadrants are Important/Urgent and Important/Not Urgent. The other two are “Not Important,” so let’s skip those. We take care of the Urgent/Important stuff, but what is Important/Not Urgent in a Total Money Makeover is planning. You can pay the electric bill or sit in the dark, but if you don’t do a monthly spending plan, there is no apparent immediate damage. John Maxwell has the best quote on budgeting I have ever heard. I wish I had said it: “A budget is people telling their money where to go instead of wondering where it went.” You have to make your money behave, and a written plan is the whip and chair for the money tamer. Earl Nightingale, motivational legend, said that most people spend more time picking out a suit of clothes than planning their careers or even their retirements. What if your life depended on how you managed your 401k or whether you started your Roth IRA today? Actually, it does— because the quality of your life at retirement depends on your becoming an expert in money management today. Estate planning is never urgent until someone dies. You must think long-term to win with money, and that includes thinking all the way through death. More on this later, but just remember, everyone must budget, plan retirement, and do estate planning—everyone. Myth: The debt-management companies on TV, like AmeriDebt, will save me. Truth: You may get out of debt, but only with your credit trashed. Debt-management companies are springing up everywhere. These companies “manage” your debt by taking one monthly payment from you and distributing the money among your creditors, with whom they’ve often worked out lower payments and lower interest. This is not a loan as with debt consolidation. Sometimes people get the two confused. Both are bad, but we have already covered the debt consolidation loans. However, because America needs a Total Money Makeover, the debt-management business has become one of the fastest-growing industries today. Companies like AmeriDebt and Consumer Credit Counseling Services can help you get better interest rates and lower payments, but at a price. When you use one of these companies and then try to get a Conventional, FHA, or VA loan, you will be treated the same as if you had filed a Chapter 13 Bankruptcy. Mortgage underwriting guidelines for traditional mortgages will consider your credit trashed, so don’t do it. Another problem with debt management by someone else is that your habits don’t change. You can’t have someone lose weight for you; you have to change your exercise and diet habits. Handling money is the same way; you have to change your behavior. Turning all your problems over to someone else treats the symptom, not the problem. Our firm does financial counseling and trains counselors around the nation for referrals. We will not handle your money for you. We lead you into a mandatory Total Money Makeover. We are not babysitters. We have had thousands of clients over the years who have gone to debt-management companies for help. When the clerk taking the order couldn’t make the person’s life fit their cookie-cutter computer program, the customer was advised to file for bankruptcy. After meeting with them, it was obvious that the customer wasn’t bankrupt; they just needed radical surgery. Don’t take bankruptcy advice from debt-management companies; you likely aren’t bankrupt. Myths vs.Truth Myth: Everything will be fine when I retire. I know I’m not saving yet, but it will be okay. Truth: The Cavalry isn’t coming. Of the debt-management companies, Consumer Credit is the best. They do the most thorough job, some branches actually educate, and they are the most powerful in the renegotiation of your debt. You still destroy your credit by using them, though, so don’t do it; but if I absolutely can’t talk you out of it, they are the one to use. The worst abuser in this industry has now been put out of business. AmeriDebt was started by Andris Pukke, who, prior to beginning this business, plead guilty to federal charges of defrauding customers in a debt-consolidation loan scam. In spite of this, AmeriDebt grew to revenues of $40 million and spent $15 million per year getting you to use their services. They were so blatant in their misleading of consumers that the Federal Trade Commission (FTC) finally stepped in and shut them down. The FTC says hidden fees and deceptive practices took over $170 million out of Americans’ pockets. In the largest case of this type ever, the FTC took a $170 million judgment against AmeriDebt, who is now in bankruptcy. Andris Pukke is court-ordered to give up $35 million in personal assets to settle with consumers. There are truly sharks out there. Myth: I can buy a kit to clean up my credit, and all my past misdeeds will be washed away. Truth: Only inaccuracies can be cleaned from credit reports, so this is a scam. The Federal Fair Credit Reporting Act dictates how consumers and creditors interact with the credit bureaus. Bad credit drops off your credit report after seven years unless you have a Chapter 7 Bankruptcy, which stays on for ten years. Your credit report is your financial reputation, and you can’t have anything taken off your report unless the item is inaccurate. If you have an inaccuracy that needs to be removed, you need to write a letter pointing out the error and ask them to correct this error right away. Accurate bad credit stays unless you lie. Lying for the purpose of getting money is fraud. Don’t do it. Dave Rants . I am not against the enjoyment of money. What I am against is spending money when you do not have money to begin with. Credit-repair companies are largely scams. The Federal Trade Commission regularly conducts raids to close down these fraudulent companies. I have had many callers on my radio show who purchased a $300 kit to “clean” their credit. Sometimes the kit tells you to dispute all bad credit and ask to have it removed even if the item is reported accurately. Don’t do that. The worst idea the kits push is to get a new Social Security number. By getting a second identity, you get a brand-new credit report, and lenders will never know about your past misdeeds. This is fraud, and if you do this, you will go to jail. Do not pass go; go directly to jail—fraud. You are lying to get a loan, which is not credit cleanup, and this is criminal. Clean your credit with a Total Money Makeover. I will show you how to live under control and pay cash for stuff so you don’t need credit, and over time your credit will clean itself. Myth: My divorce decree says my spouse has to pay the debt, so I don’t. Truth: Divorce decrees do not have the power to take your name off credit cards and mortgages, so if your spouse doesn’t pay, be ready to. You still owe the debt. Divorce happens a lot, and it is truly sad. Divorce means we split up everything, including the debts; however, the debts are not easily split. If your name is on a debt, you are liable to pay it, and your credit is affected if you don’t. A divorce court does not have the power to take your name off a debt. The divorce judge only has the power to tell your spouse to pay it for you. If your spouse doesn’t pay, you can tell the judge, but you are still liable. A lender who doesn’t get paid will correctly report bad credit on all parties to the loan, including you. A lender who doesn’t get paid can correctly sue the parties to the loan, including you. If your ex-husband keeps his truck that you both signed for and then doesn’t make the payments, your credit is damaged, the truck gets repo’ed, and you will get sued for the balance. If you quitclaim-deed your ownership in the family home to your ex-wife as part of the settlement, you will find yourself in a mess. A quitclaim deed is the easy way to give up ownership in your home. If she doesn’t pay on time, your credit is trashed; if she gets foreclosed on, so have you. Even if she pays perfectly on the home or he does on the truck, you will find that you have trouble buying the next home because you have too much debt. If you are going to leave a marriage, make sure that all debts are refinanced out of your name or force the sale of the item. Don’t have the attitude: “I don’t want to make him sell his truck.” If you are that much in love, don’t get divorced; but if you are walking away, make it a complete, clean break even though it’s painful now. I have counseled thousands of people who were broken financially by ex-spouses and bad advice from a divorce attorney. So sell the house or refinance it as part of the divorce, period. The only other option is mega-risk, and you can count on heartache and even more anger coming your way. Myth: That collector was so helpful; he really likes me. Truth: Collectors are not your friends. There are a few good collectors, very few. Almost every time a collector is “understanding,” or wants to “be your friend,” there is a reason: to get you to pay your bill. The other technique is to be mean and nasty, and you may find your new “friend” using all kinds of bullying tactics once you have a “relationship.” Your Total Money Makeover will cause you to pay your debts. I want you to pay what you owe, but collectors are not your friends. Credit-card collectors are the worst, for they will lie, cheat, and steal—and that is just before breakfast. You can tell if a credit-card collector is lying by looking to see if his lips are moving. Any deal, special plan, or settlement you make with collectors must be in writing BEFORE you send them money. Otherwise, you will find that you don’t have a deal, that they lied. Never allow collectors electronic access to your checking account, and never send postdated checks. They will abuse you if you give them this power, and there will be nothing you can do, because you owe them money. Clear? Myth: I’ll just file bankruptcy and start over; it seems so easy. Truth: Bankruptcy is a gut-wrenching, life-changing event that causes lifelong damage. Kathy called my radio show, ready to file bankruptcy. Her debts were overwhelming, and her cheating husband had left with his girlfriend. The house was in his name, as was all the debt except $11,000. Kathy is twenty years old, and her brilliant uncle, a lawyer from California, told her to file bankruptcy. Kathy is beat up, beat down, and deserted, but she is not bankrupt. When her soon-to-be ex-husband ends up with all the debt in his name, he may be bankrupt, but Kathy isn’t. Bankruptcy is life-altering and leaves deep wounds both to the psyche and the credit report. Bankruptcy is not something I recommend any more than I would recommend divorce. Are there times when good people see no way out and file bankruptcy? Yes, but I will still talk you out of it if given the opportunity. Few people who have been through bankruptcy would report that it is a painless wiping-clean of the slate, after which you merrily trot off into your future to start fresh. Don’t let anyone fool you. I have been bankrupt and have worked with the bankrupt for decades, and it is not a place you want to visit. Bankruptcy is listed in the top five life-altering negative events that we can go through, along with divorce, severe illness, disability, and the loss of a loved one. I would never say that bankruptcy is as bad as losing a loved one, but it is life-altering and leaves deep wounds both to the psyche and the credit report. Chapter 7 Bankruptcy, which is total bankruptcy, stays on your credit report for ten years. Chapter 13 Bankruptcy, more like a payment plan, stays on your credit report for seven years. Bankruptcy, however, is for life. Loan applications and many job applications ask if you have ever filed for bankruptcy. Ever. If you lie to get a loan because your bankruptcy is very old, technically you have committed criminal fraud. Most bankruptcies can be avoided with a Total Money Makeover. Your Total Money Makeover may involve extensive amputation of stuff, which will be painful, but bankruptcy is much more painful. If you take the thoughtful step backward to get on solid ground instead of looking at the false allure of the quick fix that bankruptcy seems to offer, you will win more quickly and easily. I know from personal experience the pain of bankruptcy, foreclosure, and lawsuits. Been there, done that, got the T-shirt, and it is not worth it. We’ve never handled money well at all. I guess that’s a bit of an understatement—we’ve filed bankruptcy three times! The first time we filed, we felt like bankruptcy was our only option.Our small-business loan to buy a body shop went from 4% to 22% APR, and we lost all our earnest money. Soon after, my husband had his first heart attack, and other problems seemed to pile on. Before long, we lost our house and cars.We moved to a different state with four kids, two cats, a dog, a motorcycle, a U-Haul trailer, $800—and no jobs. We were depressed and felt like failures as we put our life back together. You’d have thought we would have learned our lesson, right?Wrong. Instead of learning from our mistakes, we actually repeated the whole thing again a little over a decade later. After an injury due to a fall, my husband was out of work for six months. Our income went from $4,000 a week to $400 a week. We racked up credit card debt and ended up filing bankruptcy a second time. Again, we lost our house and most of our possessions. Although the first bankruptcy felt like the end of the world, the second one didn’t upset us too much. We felt like it wasn’t a big deal because we’d been down that road before. So, we just started over a third time, still making the same bad choices. Over the next seven years, we started a new business, made a lot of poor decisions, and closed yet another company. Then we filed bankruptcy a third time. After filing, we were ashamed and too embarrassed to tell anyone. We had this awful, dirty secret that we hid from our family and friends. To make matters worse, all the stress and shame caused my husband to have two more heart attacks. Going through the bankruptcy process was horrible. No one will meet your eye in the trial room. It’s like everyone has the plague and is afraid to talk to anyone. Filing bankruptcy three times made us feel like a fraud. We wondered, What’s wrong with us? Why do we keep repeating the same mistakes? When our son came home from deployment with a mental illness, we became his full-time caretakers. Money was extremely tight because we were caring for our son on only one income—my husband had retired after his third heart attack. We were close to filing bankruptcy for a fourth time when my daughter came to our rescue by introducing us to Dave Ramsey. Now, we’re on The Total Money Makeover plan and trying to make a dent in our financial mess. It’s tough trying to correct a lifetime of bad decisions and behaviors about money! But even though we’ve restarted Baby Step 1 three times, we’ve still been able to pay off $26,000 of debt! Finally, we have hope for our future, and we are motivated to help others so they don’t go down the same path we did. Larry (age 67) and Susan (age 52) Hickman Retired insurance broker; Collection manager Myth: I can’t use cash because it is dangerous; I might get robbed. Truth: You are being robbed every day by not using the power of cash. We teach people to carry cash. In a culture where the salesclerk thinks you are a drug dealer if you pay with cash, I know this suggestion may seem weird. However, cash is powerful. If you carry cash, you spend less, and you can get bargains by flashing cash. Linda e-mailed my newspaper column, complaining that she would get robbed if she carried cash. I explained to her that crooks don’t have X-ray vision to look into her pocket or purse. The crooks assume that your purse is like all the others filled with credit cards that are over the limit. Look, I’m not making light of crime. There’s a chance you may get robbed, because people do get robbed—whether they carry cash or not. And if it happens to you, the cash will be taken. But, trust me, you need to be far more worried about the danger of using credit cards than the danger of being robbed while carrying cash. Carrying cash doesn’t make you more likely to get robbed; on the contrary, the mismanagement of plastic is robbing you every month. We have already destroyed the myth of credit cards and shown that when you spend cash, you spend less. When you put together your written game plan, you will find that managing spending categories as part of your Total Money Makeover is a must to gain control. Cash enables you to say no to yourself. When the food envelope is getting low on cash, we eat leftovers instead of ordering pizza again. Myth: I can’t afford insurance. Truth: Some insurance you can’t afford to be without. One day as I went to lunch, I met Steve and Sandy in my reception area. They came by to say thanks. What for? This young couple in their twenties listens to our radio program, and because I constantly push people to get the right kinds of insurance, they did. This year they got term life insurance and a Medical Saving Account health-insurance policy. “Good thing we did what you said to do,” said Steve as he pulled off his cap to reveal a shaved head with a big scar across the top. “What in the world happened?” I asked. The scar was from a biopsy that revealed inoperable brain cancer. Sandy smiled and said, “The health insurance has already paid over $100,000 in bills, and we would be sunk if we hadn’t followed through as you push all the time.” Also, Steve was uninsurable, so he was thankful to have his term life insurance in place. Steve and Sandy became friends of mine over the next few years as he fought cancer. A friend of mine heard their story and gave them a seven-day Caribbean cruise. Steve lost his battle to cancer in 2005, and we buried him on the day his son was born. He would be proud if his story inspires you to get and keep the right kinds of insurance. He was a good husband and father. By being responsible and buying the right kinds of insurance, they had covered life and death, which we all have to do. Two years ago, my wife and I were just an average family making the typical financial mistakes most “normal” families do. We believed all the money myths people kept telling us. However, once our mistakes started adding up, they began to really take their toll on us. It wasn’t until we stumbled upon Dave’s radio show and The Total Money Makeover that we put a stop to our financial foolishness. Years ago, we were not handling our finances well at all. At one point we were married with no kids, making more than $80,000 a year, and we did not have the cash to buy a washing machine. We went along with too many “buy now, pay later” deals. “Ninety days same as cash” sounded like a good idea at the time. WRONG! We ended up paying much more than the items were worth. When we make purchases today, we “buy now, pay now,” with $1,800 buying $2,000 worth of furniture. Another big mistake we made was our life-insurance plan. People warned us that we needed to have whole life insurance before we turn thirty “or else.” They talked about how amazing the cash value savings feature was. WRONG! We were ignorant about how overpriced the coverage was, how high the fees were, and how long it really took to build cash value. We now know better. We plan to save, invest, and become self-insured. In 2006, we were still making minimum payments on student loans that we had for more than a decade. We bought into what all the “normal” people were telling us: “Student loans are good debt. Everyone has them.” WRONG! We knew we needed to kick Sallie Mae to the curb once and for all. Now, instead of writing her a check every month, we are able to save in advance for our children’s college fund. Fast forward through the Financial Peace University Home-study Kit and fifteen months of complete sacrifice—we’ve paid off $27,000 in debt, saved an emergency fund, dumped the whole life insurance and purchased term life, created wills, and saved cash for a two-week “Freedom!” beach vacation to celebrate. After a lot of hard work and gazelle intensity, we are finally living like no one else! Travis (age 33) and Merry (age 35) Skinner AutoCAD Draftsman in land surveying; Registered Nurse We all hate insurance, until we need it. We pay and pay and pay premiums, and sometimes we feel insurance-poor. There are certainly many gimmicks in the world of insurance. We cover insurance in detail at Financial Peace University and in other books, but you must have insurance in some basic categories as part of a Total Money Makeover: • Auto and Homeowner Insurance—Choose higher deductibles in order to save on premiums. With high liability limits, these are the best buys in the insurance world. • Life Insurance—Purchase twenty-year level term insurance equal to about ten times your income. Term insurance is cheap and the only way to go; never use life insurance as a place to save money. • Long-Term Disability—If you are thirty-two years old, you are twelve times more likely to become disabled than to die by age sixty-five. The best place to buy disability insurance is through work at a fraction of the cost. You can usually get coverage that equals from 50 to 70 percent of your income. • Health Insurance—The number-one cause of bankruptcy today is medical bills; number two is credit cards. One way to control costs is to look for large deductibles to lower your premium. The HSA (Health Savings Account) is a great way to save on premiums. The high deductible creates a much lower premium, and this plan allows you to save for medical expenses in a tax-free savings account. • Long-Term Care Insurance—If you are over sixty, buy Long-Term Care insurance to cover in-home care or nursing home care. The average nursing home stay costs $40,000 per year, which will crack and scramble a nest egg in a heartbeat. Dad in the nursing home can use up Mom’s $250,000 savings in just a few short years. Make your parents get it. Iwas so impressed with Dave when I heard him for the first time on the The Oprah Winfrey Show. I knew the personal responsibility and financial accountability he was challenging people with was exactly what Ken and I needed. Our financial problems had been accumulating for twenty years and were pretty substantial. It all started the year after Ken and I were married. He was thirty-one and I was twenty-two—excited about life and the future ahead of us. But everything changed when Ken suffered a severe stroke and was left a quadriplegic. We didn’t know what to do (in many regards). Financially, we started putting everything on the credit card because we weren’t bringing in much money. Thankfully Ken’s medical bills were covered. Without that coverage, the medical bills would have been too much to handle. For years we racked up debt and were struggling to get by.Nevertheless, God truly blessed us and continued to pull us through everything. And then we found Dave. Ken and I read The Total Money Makeover and began to practice the principles immediately. When we started budgeting, Ken really showed interest in helping me handle our finances and started paying the bills online. The first time that I didn’t have to pay the bills, I actually sat down and cried because it was one thing that I didn’t have to worry about. Ken lit up, knowing that he was an active partner, making my life a little easier. We have made budgeting and planning our future together enjoyable and fun. It’s like dating again! Ken is the most amazing man I have ever met and has been my rock all these years. I am so blessed to be on this journey with him. Cheryl (age 44) and Ken (age 52) Rhoads Mary Kay Independent Sales Director Myth: If I do a will, I might die. Truth: You are going to die—so do it with a will. Estate planners tell us that 70 percent of Americans die without a will. Dumb, really dumb. The state, known for its financial prowess, will decide what happens to your stuff, your kids, and your financial legacy. The proverb says, “A good man leaves an inheritance to his children’s children” (Prov. 13:22 NKJV). I am a pragmatist, and so I don’t understand all the fretting over a will. A will is a gift you leave your family or loved ones. It is a gift because it makes the management of your estate very clear and light-years easier. SHOCKING STATS 70% of Americans die without a will. You are going to die, so go out in style, and die with a will in place. We’ve revealed Debt Myths and Money Myths. If you have carefully read and understood why these myths are untrue, I have great news for you. Your Total Money Makeover has already begun! The Total Money Makeover is a remaking of your view of money so that you permanently change how you deal with money. You must walk to the beat of a different drummer, the same beat that the wealthy hear. If the beat sounds common or normal, evacuate the dance floor immediately. The goal is not to be normal because, as my radio listeners know by now, normal is broke. 5 Two More Hurdles: Ignorance and Keeping Up with the Joneses Denial (I don’t have a problem), Debt Myths (debt is how you become wealthy), and Money Myths (stories told by the culture) are three major obstacles that keep you from becoming a fiscally fit body of money management and staying power. Before we move to the proven plan, we must explore two more enemies of your Total Money Makeover. If you have a major issue with Ben and Jerry’s ice cream, you should tell your trainer before you try to change your diet and exercise program. First, you must admit your ice-cream problem and recognize the myths about ice cream as a great weight-loss product. The point is, we must identify the enemy, the hurdles to winning. To set out a game plan and not acknowledge the obstacles to that plan would be immature and unrealistic. Those of us who have been knocked around by life know that we must find the problems or obstacles and plan a way over them, through them, or around them. If you can box up the things that would defeat your Total Money Makeover, then the plan will work. The first step to losing weight and toning up is to identify weight-loss myths, overeating, wrong eating, and no exercise as problems to overcome; the same is true for a Total Money Makeover. As the great philosopher Pogo from the Sunday comics said years ago, “We have met the enemy and he is us.” “We have met the enemy and he is us.” Hurdle N1: Ignorance: No One Is Born Financially Smart The first hurdle is Ignorance. In a culture that worships knowledge, to say ignorance about money is an issue makes some people defensive. Don’t be defensive. Ignorance is not lack of intelligence; it is lack of know-how. I have seen many newborn babies of friends, relatives, church members, and team members. I have never seen a baby who was born ready to be wealthy. Never do the friends and relatives gather around the window of the nursery and exclaim, “Oh, look! She is a born financial genius!” No one is born with the knowledge of how to drive a car. We are taught the skill (although some of us don’t seem to have learned). No one is born with the knowledge of how to read and write; we are taught how. None of these are innate skills; all must be taught. Likewise, no one is born with the knowledge of how to handle money, but we AREN’T taught that! At the coffeepot one day, one of my leaders said, “We need to get this Total Money Makeover process taught in college.” Before she could graduate from a small Christian college, she was required to take a class on how to interview and hunt for a job. She said the class wasn’t very hard academically, but its practical implications made it one of the most valuable classes she took in college. We go to school to learn to earn; we earn and then have no idea what to do with the money. According to the Census Bureau, the average family in America last year made $50,233. Even if they never get a raise, the average family will make over $2 million in a working lifetime! And we teach NOTHING about how to manage this money in most high schools and colleges. We graduate from school, go out into the world, and get a financial master’s degree in D.U.M.B. Ignorance is not lack of intelligence; it is lack of know-how. Do we make a mess of our finances because we aren’t intelligent? No. If you put someone who has never driven a car, has never seen a car, and can’t spell car in the driver’s seat of a brand-new car, the wreck will come before leaving the driveway. Backing up and gaining more speed only leads to another wreck. “Trying harder” isn’t the answer because the next wreck will not only total the car but also hurt other people. This is ludicrous! During our lifetimes Americans average $2 million, yet we graduate from high school, college, or even graduate school and can’t spell financial. This is a bad plan! We have quit teaching personal finance, and we have to start again. That is why “Foundations in Personal Finance” is taught in high schools around the nation; however, our high-school curriculum won’t help you unless you are still in high school. Dave Rants . Stupid things are always going to be done in families unless the wiser member learns to stand up to the forceful one. If you made a mess of your money and/or haven’t gotten the best use from it, usually the reason is that you were never taught to do so. Ignorance doesn’t mean dumb; it means you have to learn how. I’m fairly intelligent. I have had multiple best-selling books, speak to millions on my radio and TV programs, and run a multimillion-dollar company, but if you asked me to work on your car, I would make a mess. I don’t know how; I’m ignorant in that area. Overcoming ignorance is easy. First, with no shame, admit that you are not a financial expert because you were never taught. Second, finish this book. Third, go on a lifetime quest to learn more about money. You don’t need to apply to Harvard to get an MBA with a specialization in finance; you don’t have to watch the financial channel instead of a great movie. You do need to read something about money at least once a year. You should occasionally attend a seminar about money. Your actions should show that you care about money by learning something about it. Sharon and I have a great marriage—not perfect, but great. Why? We read about marriage, we go to marriage retreat weekends, we date weekly, we sometimes take a Sunday school class on marriage, and we even meet once in a while with a friend who is a Christian marriage counselor. Do we do all these things because our marriage is weak? No, we do all these things to make our marriage great. We have a great marriage because we work at it, make it a priority, and seek knowledge on marriage. Great marriages don’t just happen. Wealth doesn’t just happen. You will spend some time and effort on getting rid of ignorance. Again, you do not need to become a financial geek; you just need to spend more time on your 401k options and your budget than you do picking out this year’s vacation. We were going through life like, as Dave says, “Gomer Pyle on Valium.” We didn’t have a clue where our money was going. My wife and I couldn’t seem to agree on how to manage our incomes. Like all “normal” couples, we thought you HAD to have credit cards to build up your credit and that the SMART thing to do was finance everything. What a huge lie! Then one day my wife happened to catch The Dave Ramsey Show. After listening for a while, she began to share with me the principles Dave talked about, and we were hooked! The first step in our Total Money Makeover was to get our budget together, which certainly helped us to get organized with our money, but it was also our desire to live a debt-free lifestyle that allowed us to succeed. Next we had to work toward saving for an Emergency Fund and paying off our debts using the Debt Snowball. Baby Step Three, the fully funded emergency fund, was the hardest step for us. We had to resist the urge to go spend all this available extra money after finishing our Debt Snowball. Thankfully we built up our Emergency Fund, because later I lost my job. With no debt and an Emergency Fund in place, I was able to take my time to find the great job I have today. Our family life has totally changed for the better. We know what our goals are for our money, and our kids are learning to give, save, and spend money wisely. This plan has helped us regain the hope of financial security and the spiritual peace we all look for in life. Walter (age 47) and Stephanie (age 45) Frick Sales Representative; Kindergarten Teacher’s Assistant Ignorance is not okay. “What you don’t know won’t hurt you” is a really stupid statement. What you don’t know will kill you. What you don’t know about money will make you broke and keep you broke. Finish this book and read others. You can always check my Web site at daveramsey.com for recommended reading by other authors that generally line up with my teachings. Hurdle N2: Keeping Up with the Joneses: The Joneses Can’t Do Math The second hurdle in this chapter is Keeping Up with the Joneses. Peer pressure, cultural expectations, “reasonable standard of living”—I don’t care how you say it, we all need to be accepted by our crowd and our families. This need for approval and respect drives us to do some really insane things. One of the paradoxically dumb things we do is to destroy our finances by buying garbage we can’t afford to try to make ourselves appear wealthy to others. Dr. Tom Stanley wrote a wonderful book in the ’90s that you should read entitled The Millionaire Next Door. His book is a study of America’s millionaires. Remember, if you want to be thin and muscular, you should study the habits of people who are thin and muscular. If you want to be rich, you should study the habits and value systems of the rich. In his study of millionaires, Stanley discovered that their habits and value systems were not what most people think. When we think of millionaires, we think of big houses, new cars, and really nice clothes. Stanley found that most millionaires don’t have those things. He found the typical millionaire lives in a middle-class home, drives a two-year-old or older paid-for car, and buys blue jeans at Wal-Mart. In short, Stanley found that the typical millionaire found infinitely more motivation from the goal of financial security than from what friends and family thought. The need for approval and respect from others based on what they owned was virtually nonexistent. Dum Math and Stupid Tax Get a Head Start on Big-Time Debt The average college student pays $5,000 more per year to live and eat off-campus than to live in the dorm and eat cafeteria food. Student loans were needed not to earn their degree but only to look good while getting it. If we look at Stanley’s findings and hold those up against Ken and Barbie’s life plan, we find Ken and Barbie to be lost, off course, and clueless. Ken and Barbie are in our office all the time for financial counseling. Last year they were here, and their names were Bob and Sara. Bob and Sara make $93,000 per year and have for the last seven years. What do they have to show for it? A $400,000 home that they still owe $390,000 on, including a home equity loan used to furnish it. They have two $30,000 fleeced cars and $52,000 in credit-card debt, but they have traveled well and dressed in high fashion. The $25,000 left on a student loan from college ten years ago is still outstanding because they have no money. On the positive side, they have $2,000 in savings and $18,000 in their 401k. These people have a negative net worth, but they really look good. Bob’s mom is very impressed, and Sara’s brother frequently stops by to ask for money because they are “obviously doing well.” They present the perfect picture of the American dream that has turned into a nightmare. Behind the perfect hair and the French manicure, there was deep desperation, a sense of futility, an unraveling marriage, and disgust with themselves. Don’t even consider keeping up with the Joneses. THEY’RE BROKE! This may be one of the places our metaphor of weight loss for fiscal fitness breaks down. If your body were in the same condition that Bob and Sara’s money is in, everyone would think, Five hundred pounds is just too fat. Your problem would be apparent to family, friends, strangers, and even you. The difference with Bob and Sara is that they have a “dirty little secret.” The secret is that they are nowhere near as cool as they appear. They are broke and desperate, and no one knows it. Not only does no one know it, but everyone thinks the opposite is true. So when my counselor made suggestions to turn around this bankruptcy looking for a place to happen, there was more than one place of resistance in the heart. The truth is that Bob and Sara are broke. They need to get rid of the cars and sell the house. Resistance of the heart is real. First, of course, we like our nice houses and nice cars, and selling them would be painful. Second, we don’t want to admit to everyone we have impressed that we are fakes. Yes, when you buy a big pile of stuff with no money and lots of debt, you are a financial fake. Peer pressure is very, very powerful. “We are scaling down” is a painful statement to make to friends or family. “We will have to pass on that trip or dinner because it is not in our budget” is virtually impossible for some people to say. Being real takes tremendous courage. We like approval, and we like respect, and to say otherwise is another form of denial. To wish for the admiration of others is normal. The problem is that this admiration can become a drug. Many of you are addicted to this drug, and the destruction to your wealth and financial well-being caused by your addiction is huge. Radical change . . . is required for a money breakthrough. Radical change in the quest for approval, which has involved purchasing stuff with money we don’t have, is required for a money breakthrough. Sara’s breakthrough came with family. Her family was upper-middle-crust and had always given Christmas gifts to every member. With twenty nieces and nephews and six sets of adults to buy for, just on her side, the budget was ridiculous. Sara’s announcement at Thanksgiving that this year Christmas giving was going to be done with the drawing of names, because she and Bob couldn’t afford it, was earth-shattering. Some of you are grinning as if this is no big deal. It was a huge deal in Sara’s family! Gift giving was a tradition! Her mother and two of her sisters-in-law were furious. Very little thanks were given that Thanksgiving, but Sara stood her ground and said, “No more.” Sara has a master’s degree in sociology, so she is no pushover. She understood how the family dynamic would be upset, and she understood that she would lose approval, admiration, and respect. Sara said later that while she grasped intellectually what her announcement meant, and she knew emotionally and financially that this was the correct thing to do, the reality was very hard. Strong peer pressure from her family literally kept her awake the whole night before. She told me, “As I lay in the dark, I was afraid, like a little twelve-year-old girl yearning for approval from her daddy.” The courage to address what may seem like a small issue was a huge breakthrough for Sara. That Thanksgiving her heart had a Total Money Makeover, and she was not going to be led into well-dressed poverty by peer pressure anymore. Our financial makeover began in March 2008, when we bought a copy of The Total Money Makeover while on vacation. I read the foreword aloud to my husband as we drove home, and he asked me to continue reading. Four hours later, my voice was hoarse and tired, but we were still reading as the family minivan pulled into the driveway!We were hooked and energized. It felt like our whole world had just been lit up! That same night, we pulled out all of our bills and made a list of everything we owed. Then, we made a budget. It took hours, but afterward we were ready to attack our debt! We set a goal to pay everything off in time to celebrate some major milestones that were less than a year away: our fifteenth wedding anniversary and Darrin’s fortieth birthday. At the time, it seemed impossible! We’ve always had car payments and credit card payments—there’s never been a time when we were debt-free. We avoided discussing money because it would always end with an argument or someone’s feelings getting hurt. We simply pretended our personal finances didn’t exist. But with our new plan in place, we went crazy and never looked back. We cut up our credit cards one by one as we paid them off.More important, we got on the same page with our money, which is something we never thought possible! In 10 months we paid off $58,000 of debt and put $18,000 toward our fully funded emergency fund! We’re teaching our three boys how to save their money and make smart decisions with it. They’ve learned about the dangers of credit cards and how to compare prices on things they want. Not only are we confident about our financial future today, but we are more excited about it than any other time in our lives. Words can’t describe the burden that has been lifted from our hearts and minds! We’ve really had a Total Money Makeover! Darrin (age 40) and Kristin (age 39) Schmidt Accountant; stay-at-home mom Everyone has a weak spot like Sara’s. It could be your third-generation failing business that needs to be closed. It could be your clothes shopping. It probably is your car. It could be the boat. Maybe yours is giving to your grown children. Unless you have had a heart-level Total Money Makeover somewhere, sometime in your life, you are still doing something with money to impress others, and that has to change before you can get on a real plan to fiscal fitness. The Bible states, “Godliness with contentment is great gain” (1 Tim. 6:6 NKJV). Those of us who have had a Total Money Makeover still know where our Achilles’ heel is and still see that weak spot as a fatal wound if we allow it to grow again. What is the one “money thing” that makes you grin inside when you see others admiring it? Do you need to give it up to break that feeling inside you? Until you recognize that weak area, you will always be prone to financial stupidity on that subject. My weak spot is cars. After starting with nothing and becoming a millionaire the first time by age twenty-six, I had the eye of my heart set on a Jaguar. I “needed” a Jaguar. What I needed was for people to be impressed with my success. What I needed was family raising an eyebrow of approval based on my ability to win. What I yearned for was respect. What I was so shallow to believe was that the car I drove gave me those things. God used the whole story of what I drove to give my heart a Total Money Makeover in the area of peer pressure. Totally Broke and Driving a Jag! As I was going broke, losing everything, I kept the Jaguar by refinancing it repeatedly at different, friendlier banks. I even went so far as to get a good friend to cosign a loan so I could keep this image car. I couldn’t afford to keep up the maintenance on the car, so it began to deteriorate. It ran poorly and wasn’t reliable, but I still loved it and hung on. Within the year of our bankruptcy, we were so broke that our electricity was once cut off for two days. I have often wondered what the guy from the electric company thought as he stood in the driveway next to my Jaguar and pulled my electric meter. That is sick. The car continued to deteriorate, and the main seal on the oil pan cracked. This caused oil coming out the back of the engine onto the muffler to burn. The burning oil, lots of it, created a smoke screen for miles behind me everywhere I went. The bid to fix it was $1,700, and I hadn’t seen an extra $1,700 in months, so I just kept driving my James Bond smoke-screen mobile. Finally, my friend got really tired of making the payments he had cosigned for and gently suggested I sell my precious car. I was mad at him. How dare he suggest that I sell my car! So he quit making the payments, and the bank not so gently suggested I sell the car or they would repo it. I tried to stall and only came to my senses and sold the Jaguar on a Thursday morning because the bank assured me they would take it on Friday. I was able to work my way through the mess, pay the bank and even my friend back, but the process was humiliating. Because I was too stubborn to address what that car represented in my life, I caused much damage that was avoidable. Myths vs.Truth Myth: Car payments are a way of life; you’ll always have one. Truth: Staying away from car payments by driving reliable used cars is what the average millionaire does; that is how he or she became a millionaire. An interesting footnote about how healing can occur on your weak spot: I was so disgusted with myself when I woke up and realized the depth of my stupidity that I swore off my drug, cars. I went to abstinence, meaning I didn’t care what we drove or what it looked like as long as we were winning in our Total Money Makeover. Fast-forward fifteen years. We had become wealthy again, and I decided to get a different car. I’m always looking for a one- or two-year-old car, I’m always paying cash, and I’m always looking for a deal, not really caring what car it is. I was kind of looking for a Mercedes or a Lexus, but I was really looking for a steal. A friend in the car business called me with a deal—on a Jaguar. So all those years and tears later, when it was no longer the driving force of my approval rating, God allowed a Jaguar back into my life. He returned what the locusts had eaten, but He only did so when it was not my idol. Rumor has it that God doesn’t like us to have other gods in our lives. Looking back, we were your typical American family: making good money, having lots of nice toys, and drowning in debt. We always told ourselves we deserved new cars and we needed a house so we could stop paying rent. A friend at work was talking about Dave Ramsey one day, and it intrigued me so I got his book, The Total Money Makeover, and we started reading. We got motivated because we heard the stories of people making much less than us but who were debt-free—a place we wanted to be. Establishing a budget was priority, but first we had to overcome the mind-set that we “needed” stuff to make us happy. We were able to pay off our debt without having to give up too much; instead we redirected what we already had. The change has been amazing. My wife no longer feels guilty for spending money on much-needed clothes. I can relax when it comes to paying bills at the end of the month, knowing there’s still money in the checking account. It’s all worth it. We now talk about our finances instead of just fighting about money. We have been able to save for retirement and know that if anything happens to one of us, the other is taken care of and will not be burdened with debt. My wife and I have been debt-free since January of 2004, and life is so much easier now. Brian (age 36) and Tammy (age 33) McKinley Purchasing Agent for physician- management organization; Agricultural Economist So maybe someday Sara and Bob will be able to pay cash to take Sara’s whole family on a cruise for Christmas. After their Total Money Makeover, Bob and Sara will be able to pay cash for a huge event like that and not even dent their wealth. They will be able to buy that cruise in memory of that fateful Thanksgiving when Sara’s heart had a Total Money Makeover in her need for her family’s approval. That change has taught Sara and Bob that if they will live like no one else, later they will be able to live like no one else. Past the Obstacle Course and Up the Mountain One thing I have learned as I have lost fat, become toned, and generally gotten into better shape is this: things that require physical output are easier for me. Things like mountain climbing or obstacle courses are actually doable now, not a dream as they were when I was overweight and out of shape. The same is true of our Total Money Makeover journey to fiscal fitness. Have you realized by now that the start of your Total Money Makeover is almost an obstacle course? We busted through denial. We waded through and climbed over Debt Myths. We carefully scaled the wall of Money Myths. We are working through Ignorance. And we have learned not to place so much emphasis on our competition on the course; we have permanently quit keeping up with the Joneses, because the Joneses are broke. The obstacle course, however, was only part of our journey. SHOCKING STATS 90% of airline miles “rewarded” are never redeemed. Now we stand at the bottom of a mountain with a clear view of the top. We are in better shape now for mountain climbing, and there are no blind spots. We are ready to climb. The goal is far off, but we can see it clearly now. There is a distinct and very clear path we will take to the top. The good thing about this path is that it is not virgin territory; it is a well-worn path. It is a narrow path, one that most people don’t follow, but many winners have. Tens of thousands have followed this path once they made it through the obstacle course. Take a look back before we start. The climb will be hard, but it will be near impossible if you are still struggling with any of the obstacles, if you are still hanging on to Myths, Denial, or any other obstacles. On this mountain climb you will feel as if you have bricks in your backpack. A couple of pounds of denial might not be fatal, but mixing it with three pounds of “I still think credit cards are good” and a can or two of “folding to peer pressure” will result in a backpack load that will ensure your climb is a failure. Most of us make the first climb wearing a hat of Ignorance, and while it will slow the climb, ignorance will not keep anyone from the top when mixed with some humility. This mountain is doable, but not if you are still bogged down on the obstacle course. Some things I’ll tell you to do won’t work and will cause damage if you still cling to Denial, Myths, Ignorance, or Approval. Decide before the climb if you are going to follow the guide. If you aren’t going to listen to the seasoned guide who has personally made this climb alone and then returned to lead tens of thousands up this path, then you climb at your own peril. Finish reading the book even if you don’t agree with me, but following these steps while trying to hold on to Myths, Ignorance, Approval, or Denial will make your climb very hard and may injure you. “Continuing to do the same thing over and over again and expecting a different result is the definition of insanity.” Why not climb? The only other path is to follow all the normal people who are broke. That isn’t a path; it is a well-beaten interstate highway. Most people drive around and around, occasionally glancing forlornly at the mountain we will climb, but when they see how tough the obstacle course is just to get to the bottom, those sad souls quit before they ever begin. The Twelve Steppers have it right. They say, “Continuing to do the same thing over and over again and expecting a different result is the definition of insanity.” What you have falsely believed and acted on or not acted on has brought you to the place you are today with your money. If you want to be in a different place, you must believe and do things differently. If I want a smaller waist size than fifty-two inches, I must eat and exercise differently. The change will be painful, but the result will be worth it. I’ve been to the top of Total Money Makeover Mountain, and I’ve led countless others there. I say, IT IS WORTH THE EFFORT! So lace up your shoes of resolve, wave good-bye to your “normal” friends, and let’s climb! 6 Save $1,000 Fast: Walk Before You Run In my first book, Financial Peace, there is a chapter entitled “Baby Steps,” the premise of which is that we can do anything financially if we do it one little step at a time. I have developed the Baby Steps over years of counseling one-on-one, in small-group discussions, with real-world lives in Financial Peace University, and by answering questions on our radio show. Tens of thousands have followed this tried-and-true system to achieve their Total Money Makeover. The term baby steps comes from the comedy What About Bob? starring Bill Murray. Bill plays a crazy guy who drives his psychiatrist crazy. The therapist has written a book called Baby Steps. The statement “You can get anywhere if you simply go one step at a time” is the framework for the movie. We will use the Baby Steps to walk through our Total Money Makeover. Why do the Baby Steps work? I thought you would never ask. “You can get anywhere if you simply go one step at a time.” Eating an Elephant Gives You Energy The way you eat an elephant is one bite at a time. Find something to do and do that with vigor until it is complete; then and only then do you move to the next step. If you try to do everything at once, you will fail. If you woke up this morning and realized you needed to lose 100 pounds, build your cardiovascular system, and tone your muscles, what would you do? If on the first day of your new plan you quit eating, run three miles, and lift all the weight you can lift with every muscle group, you will collapse. If you don’t collapse the first day, wait forty-eight hours for the muscle groups to lock up and the cardio to go crazy, and you will be bingeing on food shortly thereafter. When I went on a quest for a better body and better health a few years ago, my wise trainer didn’t try to kill me the first day. Not even by the second week were we pushing the envelope, because he knew I had to create some muscle tone before we could hit hard workouts. We walked before we ran. Plus, if I had tried to do everything at once, I would have been overwhelmed and frustrated with my inability to do it all. The power of focus is what causes our Baby Steps to work. When you try to do everything at once, progress can be very slow. When you put 3 percent in your 401k, $50 extra on the house payment, and $5 extra on the credit card, you dilute your efforts. Because you attack several areas at once, you don’t finish anything you start for a long time. That makes you feel that you aren’t accomplishing anything, which is very dangerous. If you feel that nothing is getting done, you will soon lose energy for the task of money management altogether. The power of focus is that it works. Things happen. You check stuff off your list. Life gives you an “attaboy” in the form of actual visible progress. The power of priority also causes the Baby Steps to work. Each of these steps is part of the proven plan to financial fitness I promised you. They build on one another; therefore, if done out of order, they do not work. Think of a 350-pound person beginning marathon training with a quick ten-mile run. The results of not building up to that run could be total frustration at best and a heart attack at worst. So do the Baby Steps in order. Walk around the block and lose some weight before going on a ten-mile run. To start the Baby Steps, we will work on one important step to the exclusion of others. Patience! We will climb the whole mountain, but not until we first have a strong base camp. You will be tempted to short-circuit the process because you are more concerned about one certain area of your money, but don’t do it. These steps are the proven plan to financial fitness, and they are in the right order for everyone. For example, if you are fifty-five with no retirement, you may be tempted to jump to Step Four (Invest 15 Percent of Your Income in Retirement), because you are scared about not being able to retire with dignity. The paradox is that by shortcutting the process, you are much more likely to fail at retiring with dignity. Failure could also occur when you cash out your newly formed retirement plan to cover the inevitable emergency. If you have kids heading toward college, you may be panicking about saving for college, which is covered in Baby Step Five, but don’t do it out of order. I will address the problems you’ll run into at each stage if you get things out of order, because I have seen most of them. Focus exclusively on the Baby Step you are on, even though it seems to be a temporary detriment to other areas of money. Things will be fine if you don’t focus on retirement for a few months, as long as you can kick retirement into the stratosphere when we get there. YOU, Inc. This chapter is about the first Baby Step, but before we discuss saving $1,000 fast, we need to look at some basic tools needed to win and some ongoing things you should be doing as you go. The dreaded B word enters the picture here. You must set up a budget, a written budget, every month. This is a book about a process that will enable you to win with your money, a process that others have completed successfully, and I assure you that virtually none of the thousands of winners I have seen did so without a written budget. We were so motivated to start our Total Money Makeover when we finally realized that what we were doing wasn’t working. Every month there was more month than money, and all we would do is fight about it. We were sick and tired of being sick and tired! Budgeting was the best and the hardest part of the whole process.We needed to make sure we had our money going toward certain debts while cutting back on WANTS. It takes some effort every week and, for sure, discipline, and if we were good at either, we would have never been in this mess. Our biggest sacrifice has been having to wait. We wait on a lot of things now until we actually have the money. What a great idea!Christmas will be different this year. I think it will be a lot better because everything under the tree will be paid for, and we’ll actually enjoy it instead of regret it. The change is evident in so many areas of our life. We feel comfortable knowing that we will be able to save for our children’s college and we’re able to tithe consistently. And the funny thing is that we don’t miss the money. Living debt-free has been amazing. My wife and I communicate better, and we’re more loving to each other and the kids because we aren’t stressed out about money all of the time. Tony (age 36) and Tara (age 37) Kiger Small-business Owner; Homemaker In Chapter 4 on Money Myths, the importance of a written budget was discussed. If you worked for a company called YOU, Inc., and your job at YOU, Inc., was to manage money—and you managed money at YOU, Inc., the way you manage your own money now, would YOU, Inc., fire you? You have to tell money what to do or it leaves. A written budget for the month is your money goal. People who win at anything have written goals. Goals are what you are aiming at. Zig Ziglar says, “If you aim at nothing, you will hit it every time.” Money won’t behave unless you tame it. P. T. Barnum said, “Money is an excellent slave and a horrible master.” You wouldn’t build a house without a blueprint, so why do you spend your lifetime income of over $2 million without a blueprint? Jesus said, “Which of you, intending to build a tower, does not sit down first and count the cost, whether he has enough to finish it . . .” (Luke 14:28 NKJV). You have to tell money what to do or it leaves. There never seemed to be enough “bucks” to cover all our family’s expenses. I was panicked each month because we were barely squeaking by: paying our bills, funding extracurricular activities for our kids, paying for car repairs, etc. John was frustrated because his check was gone before he walked in the door. There was too little to go around, and we had huge differences in opinion regarding what to pay first. Thanks to a friend, I ended up reading The Total Money Makeover and realized our family’s financially peaceful future was just around the corner if we could get everyone onboard. Sure enough, after John read Dave’s book, he came to the same conclusions I had. We were so excited to be on the same page financially and start using our money wisely! We established a budget and got rid of our credit cards. We knew we had to work together to accomplish our goal, so we’ve spent a lot of time communicating with one another concerning how our spending can really enhance the lives of our family. A lot of couples forfeit working together on their budgets, and one always ends up pushing and nagging the other. It is so important to work with each other from the very beginning! It might seem boring, but we’ve turned our regular budget/calendar meetings into enjoyable, future-planning dates! It’s so nice not to have anxiety about money. We have been able to do so much more with our four kids and truly enjoy those special times with them. Also, we’re making plans to add a second floor to our house. Before starting Dave’s plan, I had a hard time dreaming with John about it because I thought it would never happen. Now I can see that second floor in our near future. Making a plan and sticking to it has made all the difference for the entire family. I can’t imagine living without a budget! The financial rewards are wonderful, but the peace of mind it has given John and me is even greater. Sarada (age 34) and John (age 37) Marsh Homemaker; Civil Engineer Brian Tracy, motivational speaker, says, “What does it take to succeed on a big scale? A tremendous God-given talent? Inherited wealth? A decade of postgraduate education? Connections? Fortunately for most of us, what it takes is something very simple and accessible: clear, written goals.” According to Brian Tracy, a study of Harvard graduates found that after two years, the 3 percent who had written goals achieved more financially than the other 97 percent combined! This is not a textbook on money; this is a book on the steps to take and how to take them. This isn’t a chapter on budgeting; however, many of our budget forms from the Financial Peace software program are in the back of this book for you to use. The instructions are on each page, but let me give you a couple of guidelines to get started on budgeting. Set up a new budget every month. Don’t try to have the perfect budget for the perfect month, because we never have those. Spend every dollar on paper before the month begins. Give every dollar of your income a name before the month begins, which is called a zero-based budget. Income minus outgo equals zero every month. Look at this month’s income and this month’s bills, savings, and debts, and match them up until you have given every income dollar an outgo name. If you have an irregular income due to commissions, self-employment, or bonuses, use the Irregular-Income Planning sheet in the system to create a prioritized spending plan, but you still must do a written budget before each month begins. Income minus outgo equals zero every month. The financial mentality I grew up with said, “If you want anything out of life, you’re going to have to get into debt for it!” And so I did. By the time I was in my mid-twenties, I had accumulated $3,000 in debt on a mobile home, $9,000 in debt on a car, approximately $1,000 on credit cards, and $50,000 on a newly purchased home. That’s a lot of debt to pay off on a salary of around $30,000 a year. It wasn’t until my cousin and her husband introduced me to Dave that I began to make the change in how I handled my money. They had attended Financial Peace University at a local church and decided to share the CDs with me. A few hours into the CDs, the light came on. I knew that I had to get a hold of my finances and start living life differently. I purchased Financial Peace and The Total Money Makeover and began listening online to Dave every weekday. My most important move in becoming financially free: budgeting. I nearly passed out when I realized how much I was spending on eating out! It took a few months to organize my funds and expenses, but now I’ve become a great budgeter! I give 10 percent of every paycheck, and I’m currently allotting 49 percent of my salary to paying off my house. But thanks to careful budgeting and spending, I’ll be able to assign 52 percent of my paycheck to the house at the turn of the year! Then I will be able to give more and help others find the peace that I have found. 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. 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 Web site for how to contact one of our counselors or order the book Financial Peace. Dum Math and Stupid Tax It’s a Life-and-Life Situation Looking to spend $100 per month on life insurance? You could pay $7 a month toward term insurance and invest the remaining $93. But go with a cash-value policy if you’d rather have someone else earn interest on your investments. 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. They got sick and tired of being sick and tired! They said, “We’ve had it!” 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 Andr? (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 budget 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. Christmas 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. Myths vs.Truth Myth: The debit card has more risk than a credit card. Truth: Nope. 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. SHOCKING STATS 49% of Americans could cover less than one month’s expenses if they lost their income. 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 has been divorced for eight years; struggle has 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 is the first $500 in her adult life that is earmarked for her emergency fund. This is the first time she has had money between her and Murphy. Her friend, Amy, who was with Lilly that day, told me that Lilly is 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 has hope that she never had before. She has hope because she has a sense of power and control over money. Money has been an enemy her whole life, and now that she has tamed it, money is 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 key to winning any battle is to identify the enemy. 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. With a take-home pay of $3,350, could you invest $1,995 if you had no payments? All you have to pay for are utilities, food, clothes, insurance, and other miscellaneous expenses. That would be tight, but doable. If you do that for just fifteen years, you will have a pinnacle experience. I will explain that later. Many of you reading this are convinced that you could become wealthy if you could get out of debt. The problem now is that you are feeling more and more trapped by the debt. I have great news! I have a foolproof, but very difficult, method for getting out of debt. Most people won’t do it because they are average, but not you. You have already figured out that if you will live like no one else, later you can live like no one else. You are sick and tired of being sick and tired, so you are willing to pay the price for greatness. This is the toughest of all the Baby Steps to your Total Money Makeover. It is so hard, but it is so worth it. This step requires the most effort, the most sacrifice, and is where all your broke friends and relatives will make fun of you (or join you). This step requires you to shave your head and drink the Kool-Aid. Just kidding, but not by much. Your focused intensity has to go off the scale. Remember the Albert Einstein quote from earlier in the book? “Great spirits have often encountered violent opposition from weak minds.” “Great spirits have often encountered violent opposition from weak minds.” If you really believe that wealth building will no longer be a dream but a reality if you have no payments, you should be willing to do bizarre and sacrificial things to have no payments. Time to pay off the DEBT! Baby Step Two: Start the Debt Snowball The way we pay off the debt is called the Debt Snowball. The forms are on the following pages, as well as with the budget forms in the back of the book, and they are part of the Financial Peace budgeting software. The Debt Snowball process is simple to understand but will require truckloads of effort. Remember what my pastor said: “It isn’t complicated, but it is difficult.” We have discussed that personal finance is 80 percent behavior and 20 percent head knowledge. The Debt Snowball is designed the way it is because we are more concerned with modifying behavior than correct mathematics. (You’ll see what I mean shortly.) Being a certified nerd, I always used to start with making the math work. I have learned that the math does need to work, but sometimes motivation is more important than math. This is one of those times. THE DEBT SNOWBALL List your debts in order, with the smallest payoff or balance first. Do not be concerned with interest rates or terms unless two debts have similar payoffs, then list the higher-interest-rate debt first. Paying the little debts off first gives you quick feedback, and you are more likely to stay with the plan. Redo this sheet each time you pay off a debt, so you can see how close you are getting to freedom. Keep the old sheets to wallpaper the bathroom in your new debt-free house. The "New Payment" is found by adding all the payments on the debts listed above that item to the payment you are working on, so you have compounding payments that will get you out of debt very quickly. "Payments Remaining" is the number of payments remaining when you get down the snowball to that item. "Cumulative Payments" is the total payments needed, including the snowball, to pay off that item. In other words, this is your running total for "Payments Remaining." COUNTDOWN TO FREEDOM!! Date:_________________ ItemTotal PayoffMinimum PaymentNew PaymentPayments RemainingCumulative Payments __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ The Debt Snowball method requires you to list all your debts in order of smallest payoff balance to largest. List all your debts except your home; we will get to it in another step. List all of your debts—even loans from Mom and Dad or medical debts that have zero interest. I don’t care if there is interest or not. I don’t care if some have 24 percent interest and others 4 percent. List the debts smallest to largest! If you were so fabulous with math, you wouldn’t have debt, so try this my way. The only time to pay off a larger debt sooner than a smaller one is some kind of big-time emergency such as owing the IRS and having them come after you, or in situations where there will be a foreclosure if you don’t pay it off. Otherwise, don’t argue about it; just list the debts smallest to largest. Dum Math and Stupid Tax The Eternal Car Payment Most people carry a car note for their entire lives, paying about $495 a month. That same amount invested from age 25 to retirement would, on average, amount to more than $6 million by age 65. You do the math! The reason we list smallest to largest is to have some quick wins. This is the “behavior modification over math” part I referred to earlier. Face it, if you go on a diet and lose weight the first week, you will stay on that diet. If you go on a diet and gain weight or go six weeks with no visible progress, you will quit. When training salespeople, I try to get them a sale or two quickly because that fires them up. When you start the Debt Snowball and in the first few days pay off a couple of little debts, trust me, it lights your fire. I don’t care if you have a master’s degree in psychology; you need quick wins to get fired up. And getting fired up is super-important. It’s funny to think that at first, I didn’t even realize we had a problem. But I started listening to Dave on the radio and read The Total Money Makeover, and I got scared. We realized that we were one accident or one job loss away from losing all we had. We simply made too much money to have six-figure debt, not including our home. It all started after we graduated, loaded with $60,000 in student-loan debt, we did what was normal. We bought a house, two new cars, and took on an additional $35,000 in credit card debt. We just didn’t bother—we weren’t trying to keep up with anyone or buy a lot of miscellaneous stuff over time—we just failed to care. It was the budget that allowed us to communicate in ways we never had before. When we saw that we could clear up a lot of debt in a relatively short period of time instead of the ten to twenty years we originally thought it would take, a huge amount of stress was suddenly lifted off of Amanda. The thirty-five months working on the Debt Snowball was the hardest part, but we never wavered. Yes, we had visits from Murphy—having a baby plus Amanda’s back surgery and other emergencies, to name a few—but we did it! We actually reached our goal of becoming DEBT-FREE! We sold our brand-new Jeep Liberty (Amanda really loved that Jeep) and bought a gently used 1991 model. Amanda took on an extra shift at work, and I took over extra tasks around the house to compensate. We scaled back our lifestyle considerably and folks made fun of us, which told us we were on the right track. We knew that we couldn’t wander out of debt like we wandered into it. Our entire paradigm shifted. For the six years we’ve been married, we’ve always had debt. We have yet to have a major argument over money since we started this plan. We know that we can do anything we want in a short time. We literally changed our family tree—all because we bothered and cared enough to do something about it. Steven (age 32) and Amanda (age 31) Farrar eBay Store Owner; Pharmacist One lady took her Debt Snowball form to the local copy shop and had it enlarged to supersize. She then put her huge Debt Snowball on the refrigerator. Every time she paid off another debt, she drew a big red line through that debt, now gone forever. She told me that every time she walked through the kitchen and looked at that refrigerator door, she would yell, “Oh yeah, we are getting out of debt!” If that sounds corny to you, you are still not getting it. This lady has a PhD. She is not a dumb person. She is so sophisticated and intelligent that she got it. She understood that her Total Money Makeover was about a change in behavior, and that behavioral change is best enhanced by some quick (although small) wins. When you pay off a nagging $52 medical bill or that $122 cell-phone bill from eight months ago, your life is not changed that much mathematically yet. You have, however, begun a process that works, and you have seen it work, and you will keep doing it because you will be fired up about the fact that it works. After you list the debts smallest to largest, pay the minimum payment to stay current on all the debts except the smallest. Every dollar you can find from anywhere in your budget goes toward the smallest debt until it is paid. Once the smallest is paid, the payment from that debt, plus any extra “found” money, is added to the next smallest debt. (Trust me, once you get going, you will find money.) Then, when debt number two is paid off, you take the money that you used to pay on number one and number two and you pay it, plus any found money, on number three. When three is paid, you attack four, and so on. Keep paying minimums on all the debts except the smallest until it is paid. Every time you pay one off, the amount you pay on the next one down increases. All the money from old debts and all the money you can find anywhere goes on the smallest until it is gone. Attack! Every time the Snowball rolls over, it picks up more snow and gets larger, and by the time you get to the bottom, you have an avalanche. Most people get to the bottom of the list and find that now they can pay well over $1,000 per month on a car loan or a student loan. At that point, it won’t take long to bust out and be debt-free except for the house. That is Baby Step Two: Use the Debt Snowball to become debt-free except for your home. My wife and I were under twenty-five and had over $169,000 in debt. We were sick and tired of being sick and tired! Our debt had grown little by little. Amy would buy small things like clothes and stuff for the house that seemed to nickel and dime us to death. I, on the other hand, would blow money on a larger scale. For example, I bought a BMW (for Amy, of course) and took her on a surprise vacation to New York City. We did not yet have the discipline to tell that inner child to shut up long enough for us to think before we made a purchase. We did not have the urgency to get rid of our huge amount of debt until a turn in events changed our mind-set. Several years ago, I changed jobs, which required a training period that decreased my monthly income by $4,000. We had some money in savings, but it quickly dwindled. To start our Total Money Makeover, we decided we had to lower our overhead, sell everything but the kids (maybe), and change our spending habits. We got crazy and sold our rental property, and we paid off the BMW, department-store card, medical bills, and student loan. We were invited to do fun stuff, and to spend money doing it, but we held off. We decided to have a garage sale that ended up looking like an estate sale; we ate “creative” meals, and then I committed what some people would consider the ultimate sin: I sold my wife’s BMW. We knew if our family of four could just make it through these six months living on only $1,700 a month, we could ultimately change our family tree. And we did it! We became debt-free except for the house and were named one of the Total Money Makeover finalists! The most important part of this whole process was learning to delay pleasure. It’s like Dave says, “Live like no one else, so later you can live like no one else!” Josh (age 26) and Amy (age 25) Hopkins Mortgage Loan Officer; Stay-at-Home Mom The Elements of Making It Work When I first started teaching this more than twenty years ago, I didn’t understand what all the elements of success were or all the clarifications that would be needed. The major elements of making the Debt Snowball work are using a budget, getting current before you start, smallest-to-largest payoff (no cheating), sacrifice, and focused intensity. Total, sold-out, focused intensity is possibly the most important. This means saying to yourself (and meaning it), To the exclusion of virtually everything else, I’m getting out of debt! If you take an old-fashioned magnifying glass outside and set it near some crumpled newspapers, nothing will happen. If you point the sun’s rays through the magnifying glass but move it around or wiggle it, nothing will happen. If you hold really still and focus the sun’s rays totally on that crumpled newspaper, things begin to happen. Focused intensity will cause you to smell something burning, and soon you will see an actual fire. If you think this Debt Snowball stuff is cute and you might sort of give it a try, it won’t work. Total, sold-out, focused intensity is required to win. Aiming at the goal and nothing else is the only way to win. You have to know where you are going, and by definition know where you aren’t going, or you will never get there. I fly a lot, and I never get on a plane and think to myself, I wonder where this plane is heading? I know where I want to go, and if I’m heading to New York, I stay off the plane heading to Detroit. When I get off the plane, I don’t catch the first cab I see and say, “Why don’t we just drive around a while because I don’t have a plan.” I tell them the hotel and street where I want to go. I then ask how long that will take and what the fare will be. My point is that we don’t wander aimlessly around in any other parts of our lives, but we seem to think that will work with money. You can’t get ready, fire, and then aim with money, and you can’t try to do six things at the same time. You are trying to get out of debt. Period. You will have to focus with great intensity to do it. To the exclusion of virtually everything else, I’m getting out of debt! Proverbs 6:1 and 5 (loosely Dave-paraphrased) says, “If you have signed surety, my son, [surety is Bible talk for debt] . . . deliver yourself like the bird from the hand of the fowler and the gazelle from the hand of the hunter.” I remember reading that Bible verse in my daily Bible study one day and thinking what a cute little animal metaphor it was for getting out of debt. Then one day later that week I was surfing channels and hit the Discovery Channel. I noticed they were filming gazelles. The gazelles were peacefully gazelling around. Of course, you know the Discovery Channel wasn’t there just for the gazelles. The next camera shot was of Mr. Cheetah sneaking up in the bushes looking for lunch in all the right places. Suddenly, one of the gazelles got a whiff of Mr. Cheetah and became very aware of his plan. The other gazelles noticed the alarm and soon also were on edge. They couldn’t yet see the cheetah, so out of fear of running at him, they froze until he played his cards. Realizing he had been discovered, Mr. Cheetah decided to give it his best shot and leaped from the bushes. The gazelles all yelled, “Cheetah!” Well, not really, but they did run like crazy in fourteen different directions. The Discovery Channel that day reminded viewers that the cheetah is the fastest mammal on dry land; he can go from zero to forty-five miles per hour in four leaps. The show also proved that because the gazelle will outmaneuver the cheetah instead of outrunning him, the cheetah will tire quickly. As a matter of fact, the cheetah only gets his gazelle burger for lunch in one out of nineteen chases. The gazelle’s primary hunter is the fastest mammal on dry ground, yet the gazelle wins almost every time. Likewise, the way out of debt is to outmaneuver the enemy and run for your life. The way out of debt is to outmaneuver the enemy and run for your life. Around our office, the counselors can predict who will make it out of debt based on how “gazelle-intense” they are. If they are looking at a red line on the refrigerator door and yelling, they have a really good shot. However, if they are looking for a get-rich-quick scheme or some intellectual theory instead of sacrifice, hard work, and total focus, we give them a really low gazelle rating and a low probability of becoming debt-free. I was first introduced to Dave through his radio show The Dave Ramsey Show. I was hooked right away. I was really inspired to read The Total Money Makeover and signed myself up to be a facilitator of Dave’s Financial Peace University at my church. His principles just make sense. They are so simple and very relevant to everyone. I simply needed to wake up and start paying more attention to my spending habits. It was all up to me. Immediately after beginning his plan and creating a budget, I realized how stupid I had been. I spent too much of my life wasting so much money! With a cash-flow plan in place, I felt more in control. I was telling my money where it should go instead of wondering where it went. It was a very freeing experience. Once I made the decision to change my mind-set and start living more responsibly, I was ready to embrace the Seven Baby Steps. My first inclination was to save money first, invest in retirement, and then pay off my debt. I was so wrong. If I had done it my way, I would still be struggling. I would still be a slave to my lenders. Starting the Debt Snowball really got me fired up. It was amazing to see my debt gradually become smaller and smaller while my snowball became larger and larger. I was so proud of my progress that became more and more evident with every month. Just to be able to make small accomplishments made a tremendous amount of difference. It continuously gave me hope throughout this process. Granted, I did not have or earn a lot of money to put toward becoming debt-free. But I think that made it all the more incredible. I knew I just had to make it work. The ability to become debt-free isn’t contingent upon a certain income. It is all about changing behavior and being intense about getting rid of that nasty debt! Years ago I was simply ignorant when it came to debt. My family didn’t talk about that stuff. I just thought debt was something everyone had. Thank God I now know differently and can start living the life I deserve! DeLisa Dangerfield (age 42) Registered Nurse An obvious step to working the Debt Snowball is to stop borrowing. Otherwise, you will just be changing the names of the creditors on your debt list. So you must draw a line in the sand and say, “I will never borrow again.” As soon as you make that statement, there will be a test. Trust me. Your transmission will go out. Your kid will need braces. It is almost as if God wants to see if you are really gazelle-intense. At this point, you are ready for a plastectomy—plastic surgery to cut up your credit cards. I’m often asked, “Dave, should I cut my cards up now or when I pay them off?” Cut them up NOW. A permanent change in your view of debt is your only chance. No matter what happens, you have to pursue the opportunity or solve the challenge without debt. It has to stop. If you think you can get out of debt without huge resolve to stop borrowing, you are wrong. You can’t get out of a hole by digging out the bottom. How to Get the Snowball Rolling Sometimes your Debt Snowball won’t roll. When some people do their budget, there is barely enough to make all the minimum payments and nothing extra to pay on the smallest. There is no push to get the Snowball rolling. Let me offer another image to help you better understand this problem and the solution. My great-great-grandfather ran a timber operation in the hills of Kentucky and West Virginia. In that bygone era, after cutting the timber, they would put the logs into the river to float them downstream to the sawmill. The logs would build up at a bend in the river, and a traffic jam of wood occurred. This would continue as long as the jammed-up area stopped the progress of the other logs. Sometimes the loggers could break the jam loose by pushing the logs. Other times they would have to get radical before a real mess occurred. Dave Rants. Remember, just because one of you is keeping the checkbook, this does not mean that this person makes all the financial decisions. When it got bad, they would break the logjam by throwing dynamite into the middle of the logs that were blocking the progress. As you can imagine, this created a dramatic effect. When the dynamite blew, logs and pieces of logs would fly into the air. After working so hard to cut the trees, some of them were a total loss. They had to blow up some of the timber to get the rest of the crop to market. That’s the sacrifice the situation required. Sometimes that is what you have to do with the stopped-up budget. You have to dynamite it. You have to get radical to get the money flowing again. One way to do that is to sell something. You could sell lots of little stuff at a garage sale, sell a seldom-used item on the Internet, or sell a precious item through the classifieds. Get gazelle-intense and sell so much stuff that the kids are afraid they are next. Sell things that make your broke friends question your sanity. If your budget is stopped-up and your Debt Snowball won’t roll on its own, you are going to have to get radical. In watching heroes across the nation get out of debt with gazelle intensity, believe me, I have seen them sell things. One lady sold 350 goldfish from her pond for a dollar apiece. Men have sold their Harleys, boats, knife collections, or baseball cards. Ladies have sold precious things like nonfamily antiques (keep the heirlooms because you can’t get them back) or a personal car they thought was necessary to life on the planet. I don’t recommend selling your home unless you have payments above 45 percent of your monthly take-home pay. Usually, the home isn’t the problem. I do recommend that most people sell the car with the most debt on it. A good rule of thumb on items (except the house) is this: if you can’t be debt-free on it (not counting the home) in eighteen to twenty months, sell it. If you have a car or a boat that you can’t pay off in eighteen to twenty months, sell it. It is just a car; dynamite the logjam! I used to love my car, too, but I found keeping that huge debt while trying to get out of debt was like running a race wearing ankle weights. Get a Total Money Makeover, so later you can drive anything you want and pay cash for it. When it comes to that debt-ridden item, you may have to make the decision to live like no one else, but remember, later you will be living, or driving, like no one else. It is just a car; dynamite the logjam! My wife and I considered credit cards to be just a way of life. It seemed “normal” to simply throw down the cards for everyday items. Vacation rentals, gas, clothes, food—you name it, we paid for it with plastic. Eventually, all of those charges started piling up. It was a gradual and steady accumulation of debt that just kept growing and growing. It was like a snowball that was chasing us instead of us pushing it. All this time I had left my wife to handle the money and didn’t give it a second thought, which wasn’t fair to her. The next thing we knew, we were $30,000 in debt and in need of a Total Money Makeover. We had four credit cards with different balances totaling around $25,000. The other $5,000 we owed to the IRS. That was really scary. Needless to say, we attacked the IRS debt first and furiously knocked it out in just three months. Once we were current with all of our payments, we started attacking the credit-card debt. We threw every spare dime we could at it. Today we are debt-free except for the house, and we are building our three- to six-month emergency fund. It was definitely hard learning how to say “NO!” to ourselves. For the first time as a couple, we knew we had to make a budget and really stick to it. It wasn’t as easy as it sounds, but the payoff has been immeasurable. Once we got used to this lifestyle, everything just seemed to be less stressful. We found contentment and became happier than we had ever been. I know now that this debt was as much my fault as it was my wife’s. Just because we agreed she’d be “in charge of the checkbook” didn’t let me off the hook. I realize now that it was wrong to leave her to handle all the financial responsibilities. If a spouse has been keeping financial secrets, it’s definitely for the best to get them out in the open. It’s the only way these problems can get solved. There may be some anger at first and even some feelings of betrayal. Nevertheless, a marriage can only improve with unobstructed communication. The key is to hang on to each other and enjoy the ride out of the mess that you BOTH created. Jeff (age 41) and Teresa (age 41) Eller Owner of a dump-truck company; Medical Manager The number of people I talk to about this who will not throw dynamite into their logjam to get the money flowing makes me sad. They can see that the logs will never get to market, they will never have wealth, but they just can’t stand the thought of blowing up a few of them so the rest will get down the river. Translation: “I love my stupid car more than the idea of becoming wealthy enough to give cars away.” Don’t make that mistake. There is another method of breaking your logjam that the lumberjacks didn’t have available to them. More water would have pushed the logs around that corner, too, if they could have flooded the river. I may be stretching this metaphor, but more income will also break up your logjam; it will push the Snowball. If your budget is too tight to get the Debt Snowball rolling, you need to do something to increase income. Selling debt-ridden items lowers the outgo, and selling other items temporarily increases your income. Likewise, working extra hours can increase income in order to increase the speed of debt repayment. SHOCKING STATS 60% of Americans don’t pay off their credit cards every month. I don’t like the idea of working one hundred hours per week, but sometimes extreme situations require extreme solutions. Temporarily, just for a manageable period of time, the extra job or overtime may be your solution. I met Randy while doing a book signing in a major city. Randy was two months from being debt-free. He is twenty-six years old and has paid off $78,000 in debt in twenty-one months. He sold a car and works ten hours a day, seven days a week. Randy is not a doctor or a lawyer; he is a plumber. Some lawyers would argue that plumbers make more than they do, and in some cases they might be right. Randy’s one-man plumbing company has prospered. He had already worked that morning before coming with his wife and little girl to the bookstore. His wife smiled as she looked at her husband with deep respect and told me she hadn’t seen him much this last year, but it was going to be worth it soon. Can you imagine the pressure that young marriage must have been under with $78,000 in debt? Now they are almost free. Randy got radical. He used income to bust the logjam. He promised me he was going to slow down as soon as the debt was paid so he could spend time with his wife and little girl. Now they will be able to go places as a family and do things their debt would never have allowed them to do. I picked up a pizza one night, and as the guy behind the counter started walking toward his car with a stack of pizzas to be delivered, he saw me and stopped. Smiling, he said, “Hey, Dave, I’m here because of you. Only three more months, and I’m debt-free!” This was not some seventeen-year-old teenager; this was a dad, a thirty-five-year-old guy who wants to be free. There is a young single guy who works on my team. He is gazelle-intense about becoming debt-free. He works here until 5:30 every day, and he smiles as he leaves to work for UPS for another four or five hours virtually every night. Myths vs.Truth Myth: I’ll just file bankruptcy and start over; it seems so easy. Truth: Bankruptcy is a gut-wrenching, life-changing event that causes lifelong damage. Why are these guys all smiling? They work hard and unbelievable extra hours, so why would they smile? They smile because they have caught the vision, the vision of living like no one else so later they can live like no one else. What About Saving for Retirement While the Snowball’s Rolling? Matt asked me on the radio show about another subject people have trouble with on Baby Step Two. Matt wanted to know if he should stop his 401k contributions to get his Debt Snowball moving. He really didn’t want to stop contributing, especially the first 3 percent because his company matches that 100 percent. I am a math nerd, and I know the 100 percent match is sweet, but I have seen something more powerful— focused intensity. If you are going to be gazelle-intense and do everything in your power to become debt-free very quickly, then stop your retirement plan contributions, even if your company matches them. The power of focus and quick wins is more important in the long term to your Total Money Makeover than is the match. This is only for people who have already pulled out all the stops and are ready for “anything goes” to become debt-free quickly. If you are radically gazelle-intense, the speed of your debt freedom will enable you to return to that 401k with the match in just a matter of months. Imagine how much you’ll be able to contribute without payments. The average person who throws the dynamite and is gazelle-intense will be debt-free except for his or her home in eighteen months. Some take longer and others less, depending on debt, income, and savings at the time they start their Total Money Makeover. If for some reason you are stuck in an extremely deep hole, you may want to continue doing some retirement saving. An extremely deep hole is NOT defined by your unwillingness to apply yourself. An extremely deep hole is not Phil’s situation. Phil makes $120,000 per year and has $70,000 of debt, $32,000 of which is on one car. Sell the car and amputate the lifestyle, Phil. Phil should be debt-free in nine months, no excuses and no prisoners. An extremely deep hole is Tammy’s situation. Tammy has $74,000 in student loans with another $15,000 in credit-card debt. Tammy is a single mom with three children and has an income of $24,000 per year. It is going to take Tammy a few years to work her Debt Snowball. She will figure a way through it, but her situation is one of the very rare exceptions; she should keep contributing to the 401k with the match. When You Have to Dip Into the Emergency Fund Penny’s air conditioner went out in the dead of summer. The repairs were $650, which she took from her emergency fund. “Thank goodness that $1,000 was there,” she said with a sigh. Now what does she do? The Debt Snowball, or stop and go back to Baby Step One (save $1,000)? Penny needs to put the Debt Snowball temporarily on hold. She will continue to make minimum payments and go back to the first step until she gets back up to $1,000 in her emergency fund. If she doesn’t, soon she will have nothing in savings, and when the alternator on the car goes out, she will reopen some credit-card account. The same applies to you. If you use the emergency fund, return to Baby Step One until you have re-funded your beginner emergency fund, then move right back to your Debt Snowball, Baby Step Two. Second Mortgages, Business Debt, and Rental Property Mortgages Because of debt-consolidation loans and other mistakes, many people have a home equity loan or some kind of large second mortgage. What should be done with this loan? Is it put in the Debt Snowball, or just called a mortgage and not dealt with at this step? It will be paid off; it is just a matter of at which step. Generally speaking, if your second mortgage is more than 50 percent of your gross annual income, you should not put it in the Debt Snowball. We will get to it later. If you make $40,000 per year and have a $15,000 second mortgage, you should put it in the Debt Snowball. Let’s just take care of it now. But if you have a $35,000 second mortgage and make $40,000, you will get to it in another step. By the way, you should consider refinancing your first and second mortgages together if you can lower both interest rates. Then put the total on a fifteen-year mortgage, or the remaining years of your current first mortgage, whichever is less (e.g., if you have twelve years remaining on your first mortgage at 9 percent interest, refinance the first and second mortgages together into a new first at 6 percent over twelve years or less). Many small-business owners have debt and want to know how to handle that debt in the Debt Snowball. Most small-business debt is personally guaranteed, which means it is really personal debt. If you have a small-business loan of $15,000 at the bank or have borrowed on your credit cards for business, this is personal debt. Treat small-business debt like any other kind of debt. List it with all your other debts, smallest to largest, in the Debt Snowball. If your business debt is larger than half your gross annual income or half your home mortgage, hold the payoff on that size debt until later. Smaller and medium-sized debts are what we want to pay off at this step. The only other larger debts to delay are mortgages on rental properties. Stop buying more rental property, but hold that debt until later. After your home mortgage is paid off in a later Baby Step, you should Snowball your rental mortgages. List the rental debts smallest to largest, and concentrate all your focus on the smallest until paid. Then work your way through the rest. If you own several, or even just one, rental property, you should consider selling some or all to get the money to pay off the ones you keep or pay off other debt listed in the Debt Snowball. Having $40,000 in credit-card debt and a rental with $40,000 equity doesn’t make sense. You wouldn’t borrow $40,000 on credit cards to buy a rental, I hope. So why would you keep the situation described here, which has the same effect? Other than the home mortgage, larger second mortgages, business loans, and rental mortgages are the only things that aren’t paid off in Baby Step Two (Start the Debt Snowball). With gazelle intensity, great focus, extreme sacrifice, selling things, and working extra, we clear all debt. Again, if you are fired up, normally this will happen within eighteen to twenty months. Some will get out of debt sooner, and some will get out in a slightly longer period of time. If your Snowball is scheduled to run longer, never fear; it may not take as long as the math seems to indicate. Many people find a way to shorten the time with sheer intensity, and God tends to pour blessings on people going in a direction He wants them to go. It is as if you are walking or running at a fast pace, and a moving sidewalk suddenly appears below you to carry you faster than your own effort would. God tends to pour blessings on people going in a direction He wants them to go. The Debt Snowball is very possibly the most important step in your Total Money Makeover for two reasons. One, you free up your most powerful wealth-building tool, your income, during this step. Two, you take on the entire American culture by declaring war on debt. By paying off your debt, you make a statement about your stance on the issue of debt. By paying off your debt, you show that The Total Money Makeover of your heart has occurred, paving the way for a Total Money Makeover of your actual wealth. 8 Finish the Emergency Fund: Kick Murphy Out Close your eyes and think about what it will be like when you reach this Baby Step. Most gazelle-intense participants in a Total Money Makeover will arrive at the beginning of Baby Step Three in around eighteen to twenty months. When you reach this step, you have $1,000 cash and no debt except your home mortgage. You have pushed with such focused intensity that the ball is now rolling, and you have momentum on your side. Again, close your eyes and breathe in. Think about what it will feel like when you are debt-free except for the house and have $1,000 cash. Did I see you smiling? You are beginning to see the power of being in control of your largest wealth-building tool, your income. Now that you don’t have any payments, except the house, Baby Step Three should come quickly. Baby Step Three: Finish the Emergency Fund A fully funded emergency fund covers three to six months of expenses. What would it take for you to live three to six months if you lost your income? Financial Planners and Financial Counselors like myself have used this rule of thumb for years, and it has served my Total Money Makeover participants well. You start the emergency fund with $1,000, but a fully funded emergency fund will usually range from $5,000 to $25,000. The typical family that can make it on $3,000 per month might have a $10,000 emergency fund as a minimum. What would it feel like to have no payments but the house, and $10,000 in savings for when it rains? Remember what we said about emergencies a couple of chapters back? It will rain; you need an umbrella. Don’t forget, Money magazine says that 78 percent of us will have a major unexpected event within the next ten years. When the big stuff happens, like the job layoff or the blown car engine, you can’t depend on credit cards. If you use debt to cover emergencies, you have backtracked again. A well-designed Total Money Makeover will walk you out of debt forever. A strong foundation in your financial house includes the big savings account, which will be used just for emergencies. After my divorce, I found myself homeless, pregnant, and raising my 18-month-old son alone. Plus, I was stuck with all the debt from the failed marriage! I went from two incomes and one child, to one income and two children. I started living off of credit cards out of necessity, racking up piles of debt as I went along. I moved into public housing and lived there for two years, trying to take care of my kids and stay current on the bills. It was tough feeling like I couldn’t provide for my family; I wanted more for my children. They have gone without birthday parties and other little things that kids their age have. They have never had a place to call home, and that’s my strongest drive in getting out of debt. I know firsthand the importance of an emergency fund. For the first time in my life, I had money in the bank when my truck broke down. I didn’t have to go into debt, and my income wasn’t affected. I just paid the mechanic and refilled my emergency fund as soon as possible. Then, I went right back to paying off my debts. It was time-consuming and tedious, but worth it to have the security that the emergency fund provided. It hasn’t been easy. Just about every time I’ve gotten within a few dollars of having my emergency fund back in place, something has happened, and I’ve had to use it again. But it is now standard practice to refill my emergency fund whenever I use it—it has saved my family from a lot of hard times and from going further into debt. Rebecca Gonzalez (age 28) Human Resources Assistant I’m going to bang on this drum again because it is vital if your makeover is going to be permanent. The worst time to borrow is when times are bad. If there is a recession and you lose your job (read, “no income”), you don’t want to have a bunch of debt. In a recent Gallup poll, 56 percent of Americans said they would borrow on a credit card if a rainy day came, and it wouldn’t be difficult. I agree it wouldn’t be difficult because credit cards are issued to dogs and dead people every year, but that doesn’t mean it would be smart. What would be difficult is to make the payments and even pay off the debt if you don’t get that new replacement job. A Country Financial Security Index survey found that 49 percent of Americans could cover less than one month’s expenses if they lost their income. Half of this culture has virtually no buffer between them and life. Here comes Murphy! Remember how we discussed that problems seem to be (and I believe actually are) less frequent when you have your fully funded emergency fund? Don’t forget that the emergency fund actually acts as Murphy repellent. So, what is an emergency anyway? An emergency is something you had no way of knowing was coming, something that has a major impact on you and your family if you don’t cover it. Emergencies include paying the deductible on medical, homeowner’s, or car insurance after an accident, a job loss or cutback, medical bills resulting from an accident or unforeseen medical problem, or a blown transmission or engine in a car that you need to function. All of these are emergencies. Something on sale that you “need” is not an emergency. Fixing the boat, unless you live on it, is not an emergency. “I want to start a business” is not an emergency. “I want to buy a car or a leather couch or go to Canc?n” is not an emergency. Prom dresses and college tuition are not emergencies. Beware not to rationalize the use of your emergency fund for something that you should save for and purchase. On the other hand, don’t make payments on medical bills after an accident while your emergency fund sits there fully funded. If you’ve gone to the trouble of creating an emergency fund, make sure you are crystal clear on what is and is not an emergency. Beware not to rationalize the use of your emergency fund for something that you should save for and purchase. Before using the emergency fund, back up from the situation and calm down. Sharon and I would never use the emergency fund without first discussing it and being in agreement. We also would never use the emergency fund without sleeping on the decision and praying about it. Our agreement, our prayer, and our cooling-off period all help us determine if this decision is a rationalization, a reaction, or a real emergency. The Emergency Fund Must Be Easy to Access Keep your emergency fund in something that is liquid. Liquid is a money term that means easy to get to with no penalties. If you would hesitate to use the fund because of the penalties you’ll incur to get to it, you have it in the wrong place. I use growth-stock mutual funds for long-term investing, but I would never put my emergency fund there. If my car engine blew, I would be tempted to borrow to fix it rather than cash in my mutual fund because the market is down (we always want to wait on it to go back up). That means I have the emergency fund in the wrong place. Mutual funds are good long-term investments, but because of market fluctuations, you are likely to have an emergency when the market is down—another invitation to Murphy. So keep your emergency fund liquid! SHOCKING STATS 56% of Americans said they would borrow on a credit card if a rainy day came. For the same reason, don’t use Certificates of Deposit for your emergency fund because typically you will be charged a penalty for making an early withdrawal. The exception to this is if you can get some kind of “quick-release” CD that allows one withdrawal during the committed period without penalty. That quick release makes the money available to you without penalty and would make that CD a good emergency fund. Understand, you don’t want to “invest” the emergency fund, just have it someplace safe and easy to get to. If you already have emergency-fund money someplace it shouldn’t be, use your head if a true emergency hits you. Christine, a sixty-nine-year-old grandmother, told me she borrowed to fix her transmission because she didn’t want to pay a penalty to cash out her CD. The loan was her “wise” banker’s suggestion, and Christine trusted her banker. The only problem is, even with the penalty, Christine would have been better off to cash out her CD. The repair cost was $3,000. Her CD earned 5 percent, and the penalty for cashing it out early was half the interest. So her banker loaned her $3,000 at 9 percent interest so she wouldn’t lose 2.5 percent in penalties. Doesn’t sound too wise to me. Honestly, it doesn’t sound too ethical to me either. Words are powerful; none of us want to be “penalized.” When emotions took over, Christine trusted instead of thinking and made a bad decision. I suggest a Money Market account with no penalties and full checkwriting privileges for your emergency fund. We have a large emergency fund for our household in a mutual-fund company Money Market account. Wherever you get your mutual funds, look at the Web site to find Money Market accounts that pay interest equal to one-year CDs. I haven’t found bank Money Market accounts to be competitive. The FDIC does not insure the mutual-fund Money Market accounts, but I keep mine there anyway because I’ve never known one to fail. Keep in mind that the interest earned is not the main thing. The main thing is that the money is available to cover emergencies. Your wealth building is not going to happen in this account; that will come later, in other places. This account is more like insurance against rainy days than investing.