The Total Money Makeover

The Total Money Makeover shows you how to stop accepting debt as normal, eliminate it forever in small increments, and build the financial future you deserve in seven steps.

If you crashed your car right now, could you even pay the mechanic in cash? I’m serious. Most people can’t. They’d have to use their credit card. If you think that’s bad, consider you or your child suddenly gets sick and racks up a $1,000 hospital bill.

Ouch! According to Money Magazine, 78% of us will experience a major bad event in any given 10-year period of our lives. That’s why Dave Ramsey’s first step to getting on top of your finances is to save $1,000 and put it away in an emergency fund.

More importantly, even, this teaches you two things:

It’s okay to tackle your finances step by step. You can’t start with all of your debt, investments, and savings at once, and that’s fine. It gives you the confidence that you can indeed save money and helps you approach the next step without fretting.

Of course, $1,000 doesn’t cover all that much, but it’s a great start and will make you less likely to take on more debt.

The next step is to start what Ramsey calls a debt snowball. If you form a small snowball and roll it down a hill, it’ll pick up more snow and thus more speed, quickly growing into a huge and powerful snow boulder.

When you pay off your debt, you can use that same effect to your advantage. List all of your debts and order them by size, starting with the smallest. Then pay off the first one. Yup, even if it’s just the outstanding $10 for your phone bill or some money you owe a friend.

The smaller you start, the better. Each crossed off debt that disappears off your list gives you the confidence you need to take on the next, bigger thing until only your gigantic mortgage is left – but by then you’ll long have what it takes to get rid of it once and for all.

Personal tip: I’m not sure if this is Ramsey’s approach here, but I’d start with taking 10% of my income to pay down debt. No matter how much or how little you earn, you can (hopefully) take 10% away from it without losing any essential financial capability (like being able to pay your rent).

If your boss fired you tomorrow, could you pay for rent and food for the next six months? No? Maybe three? No? Then I hope your alarm bells start ringing right now. The worst financial setbacks are always the ones that creep up on us without…