Total Money Makeover
by Dave Ramsey

  • Personal Finance
  • Ashto = 5/10
  • Jonesy = 4/10
Total Money Makeover

If your personal finances are in a mess, there is perhaps no activity that is higher leverage than getting them sorted. If you find that you’ve dug yourself into a hole, stop digging!

Dave Ramsey, the leading personal finance guru, shows us some simple steps for getting our money back in order. These steps are obvious – there’s nothing revolutionary here, just plain and simple steps that work. If you’re willing to make a few little sacrifices along the way, you can turn your financial life around quicker than you ever thought possible.

 

STEP ONE: Save $1,000 Quick

There’s nothing worse than trying to get your money in order and starting to pay off your debts, only to have a blown radiator or a doctor’s bill to throw you off course. If you have no buffer and you put all your extra money toward your credit card debts, there’s only one place to go when trouble hits… the credit card. We need to break that cycle.

It’s going to rain, so you need an umbrella. By saving $1,000 quickly, you have extra funds to get you through any little speed bumps. You sh0uld be able to get to this first milestone within a month or two. Get rid of extra purchase you can and throw everything into this rainy day fund. If your budget is always at breaking point, you might need to do something drastic – get a second job (drive uber, deliver pizzas, work at a pub a few nights a week) 0r sell something (have a garage sale and get rid of a bunch of crap, or make a sacrifice and sell a big item you probably should have never bought).

STEP TWO: Snowball Your Debts

There’s nothing worse than all of your take home salary going out the door to the banks in debt repayments (Ashto knows this all too well, but maybe that’s another story for another time). Trust me – you want to get rid of your debt.

If you’re stuck underneath a crippling amount of debt it might feel that it’s impossible that you’ll ever get out. But it’s possible. You just need to tackle them one by one. Here’s how:

(1) List out ALL of your debts. Credit cards, personal loans, car loans, the $50 you owe a mate, the money you “borrowed” from your dad last month, the bed you bought on 60-month repayments. Get them all out on one sheet of paper. You need to capture where the debt is, the balance owing, and the minimum monthly repayment. The only thing you don’t put on this is your mortgage – we’ll tackle this later.

(2) Re-order this list from lowest balance to highest balance. Ignore the interest rate for now, just rank them smallest to largest.

(3) Pay off the minimum monthly repayment on every single loan (this is what you’ll be already doing – you can’t avoid this or the debt collectors may come knocking)

(4) With every single extra dollar you have, put it toward the debt with the lowest balance. Make sacrifices, save wherever you can, maybe you sell something else or keep that extra job – do whatever you can to get extra $$$. It all should go to the lowest debt.

(5) Once you pay off one item, you can get a thick red pen and draw a huge line through it. Now, you have one less minimum monthly repayment to make. You can put this extra money toward the second lowest debt. You’ve now got more money going toward the next smallest debt, so you can pay it off quicker. Once you pay this one off, you have even more money to go toward the third debt.

Like a snowball, it starts off small. But each time it rolls over, it picks up more snow. As you keep it rolling, it gets bigger and bigger. As you work your way down the list, you eventually have an avalanche of money that you can direct at the biggest debts and knock them all over.

STEP THREE: Finish The Emergency Fund

In step one, we saved $1000 as a rainy day fund. That’s enough to get you through the little hiccups. But any major emergencies will need more than this. So, now that we’ve paid off all of our debts (aside from the mortgage), let’s bump up this rainy day fund to cover us for any big storms that might roll through.

The real “emergency” fund gets you through the big things. This figure will differ from person to person, but generally it’s about six months worth of your ongoing expenses. This is if you suddenly weren’t able to work for six months (you get laid off, you take time off to look after a sick parent, you hate your boss and want to quit) then you won’t be going hungry – you’ll still be able to survive.

STEP FOUR: Save For Retirement

Over 50% of people don’t have enough money saved to retire in dignity. They need to keep working. You might think you can put this off until later – you tell yourself that you’re not saving for retirement yet but you’ll be able to save more later or the government will pay you to live. But the cavalry isn’t coming. The sooner you take control and get your savings started, the sooner you can capitalise on the power of compound interest and really save yourself up a juicy nest egg.

Dave Ramsey says that you should be saving around 15% of your income for retirement.

STEP FIVE: Pay Off The Mortgage

Once you’ve got to this point – you saved $1000, you paid off your debt, you bumped up your emergency fund to six months of expenses, and you’re now saving 15% a month for retirement. The only obligation you have left is your home loan. Once you knock this off, then every dollar you earn (after tax) is yours! You no longer have to send any of it off to the banks.

Ramsey recommends getting a 15 year mortgage. The standard mortgage is usually 30 years, but he says that the only people who should take a 30 year mortgage instead of a 15 year are the people who love being put in financial slavery for twice as long as they need to. If you look at a $250k loan at 7% interest, if you took a 15 year loan instead of a 30 year you’d have to pay an additional $550 per month. But over the life of the loan, you would save yourself $143k in interest! Not to mention, you’d have an additional 15 years where you’re saving money and investing it and getting compound interest…

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