My Total Money Makeover
by Dave Ramsey
I believe with everything in 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.
Identify the Enemy
The bottom line is that it is easy to become wealthy if you don’t have any payments. 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 term after they get rid of their payments.
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 are willing to pay the price for greatness.
This is the toughest of all the Baby Steps. 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. Your focused intensity has got to go off the scale. Time to pay off the DEBT!
The way we pay off the debt is called the Debt Snowball. The Debt Snowball method requires you to list all of 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, debts with no interest. I don’t care if some debts have 24% interest and others 4%. List the debts smallest to largest!
We do them in this order to have some quick wins. 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 go six weeks with no visible progress, you will quit.
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.
Then, when debt number 2 is paid off, you take the money that you used to pay on numbers 1 and 2 and you pay it, plus any found money, on #3. 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.
Attack! Every time a snowball rolls over, it picks up more snow and gets larger, and by the time you get to the bottom, you have an avalanche!!
The Elements of Making It Work
The major elements of making the Debt Snowball work are using a budget, getting current before you start, smallest-to-largest payoff, sacrifice, and focused intensity. Total, sold-out, focused intensity is possibly the most important.
The cheetah is the fastest mammal on dry land, yet it only gets his gazelle in one out of 19 chases. The gazelle will outmaneuver the cheetah instead of outrunning him, making the cheetah tired. The way out of debt is to outmaneuver the enemy and run for your life.
An obvious step to working the Debt Snowball is to stop borrowing. You must draw a line in the sand and say, “I will never borrow again.” At this point, you are ready for a plastectomy – plastic surgery to cut up your credit cards. Cut them up NOW. A permanent change in your view of debt is your only chance. If you think you can get out of debt without huge resolve to stop borrowing, you are wrong.
As I said in Are You Financially Fit?, my husband and I do not have credit cards. It made my husband very nervous at first in case a major car or home repair was needed. But we have done without one for several years, faced major home repairs during that time, and figured out how to pay for it without using a credit card.
How to Get the Debt 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.
I don’t recommend selling your home unless you have payments above 45% of your monthly take-home pay. I do recommend that most people sell the car with the most debt on it.
A good rule of thumb is this: if you can’t be debt-free on it in 18-20 months, sell it. Get a Total Money Makeover so later you can drive anything you want and pay cash for it!
When my husband and I first worked out what we were bringing in every month and compared it to what was going out every month, we were grossly overspending. My sister helped me trim the fat on our budget. I cried and cried. I said things like, “But we always stop and get nuggets from Wendy’s after gymnastics because I won’t have time to make dinner and get homework done before bedtime!”
Thankfully, my sister didn’t laugh at me. My husband and I did several things to decrease our expenses. Some of these may help you out if you feel like you have nothing left at the end of the month to put toward paying off your debt:
1. We decreased our car insurance to the state legal minimum with the understanding that we’d increase it once we could. We also shopped several companies and found the best rates with Liberty Mutual.
2. We scaled back our 401k contributions as well as decreased our tax withholdings to increase our take-home pay .
3. We made an effort to decrease our biggest expense outside of our mortgage – our food.
- We eat out only on special occasions. (And that includes fast food! If we get fast food, we never get drinks or sides, just the main part of the meal. We have drinks and fruit at home. And if we eat out for special occasion, we drink water and don’t get dessert.)
- We shop sales and cut coupons.
- No more going out for ice cream or snowballs as a family treat (We go to the park and have a scoop of ice cream from our own freezer instead.)
- We shop the 4 walls of the grocery store (And try to only get off-brand basics from the aisles.)
- We make inexpensive dinners.
- When I cook, I make a ton and freeze leftovers for future meals.
- My husband packs a lunch instead of buying lunch at work.
4. We got rid of luxuries like:
- My gym membership (Ours was over $100/mo and getting rid of this made me cry the hardest)
- My husband’s magazine subscriptions
- Going to events like concerts, movies, sports games
- Satellite TV (We scaled back to the basic package since no package meant no sports games and that wasn’t okay with my hubby.)
- Our excessive cell phone plans (Get rid of your data plan!)
- Paying for babysitters (I created a babysitting co-op where my friends and I watch each others’ kids for tickets instead of money.)
- Going shopping without out a specific need (No more cruising Target for cute things for the house, no more wants, only needs.)
- New clothes and shoes (Stick with what you have for now)
- Oblivious driving (I was getting speed and red-light-camera tickets for absent-minded driving. I resolved to slow down, come to complete stops, and be mindful of the school zone signs.)
- Nice gifts (We scaled way back on birthday and different holiday gifts for our family. We also simplified gifts that we brought to friends’ birthday parties and asked our extended family members to not exchange gifts at Christmas.)
- Salon hair cuts (My husband and I both go to Super Cuts now, and I cut the kids’ hair.)
- Buying Lottery tickets (“It’s just a dollar!” he said. But those dollars add up, so we stopped.)
- Going to every wedding we were invited to (This was hard. But we had to prioritize. Flights, hotels, gifts – it was too much and we just couldn’t keep up.)
More income will also get your snowball rolling. Work extra hours. I don’t like the idea of working 100 hours per week, but sometimes extreme situations require extreme solutions. Temporarily, the extra job or overtime may be your solution.
As soon as your debt is paid, scale back the overtime so you can spend more time with your family. I met a Dad delivering pizzas who happily worked this extra job at night to get his snowball rolling. A guy on my team works here until 5:30 every day, and he smiles as he leaves to work for UPS for another 4 or 5 hours virtually every night. He smiles because he has caught the vision, the vision of living like no one else so later he can live like no one else.
If you are going to be gazelle-intense and do everything in our power to become debt-free very quickly, then stop your retirement plan contributions, even if your company matches them.
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 is gazelle-intense will be debt-free except for his or her home in 18 months.
My husband and I backed down on our 401k contributions to the amount that his employer matched because our financial planners really emphasized it, but we did not stop it altogether. Most of it was actually just laziness on my part. Dave would disagree with me and my financial planners. But I still love him!
Also, this step has taken us 3 1/2 years. We are a family of 6 with a mortgage living on less than 6 figures. But we’ve kept at it, little by little, and the finish line is in sight! We will be debt free by next month! Alleluia!!!
When You Have to Dip Into the Emergency Fund
If you use your emergency fund, return to Baby Step #1 until you have re-funed your beginner emergency fund, then move right back to your Debt Snowball, Baby Step #2.
Second Mortgages, Business Debt, and Rental Property Mortgages
Many people have a home equity loan or some kind of large second mortgage. If your second mortgage is more than 50% of your gross annual income, you should not include it in the Dent Snowball. If it is less than 50% of your gross annual income, you should put it in the Debt Snowball.
Small business owners have debt. Treat small-business debt like any other kind of debt. list is 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.
Stop buying rental propery, but hold off on paying off that debt until later.
With gazelle intensity, great focus, extreme sacrifice, selling things, and working extra, you will be walking or running at a fast pace and a moving sidewalk will suddenly appear blow you to carry you faster than your own effort would.
Are you ready to find out about Baby Step #3? Here we go!