Hey everyone Daniel here from Next Level life and today we're going to be tackling a big
one.
Today we're going to be taking a look at Dave Ramsey's best-selling book The Total Money
Makeover.
This book goes over the 7 baby steps that Dave Ramsey is so famous for and that's what
we're going to cover in this video.
We're going to cover the 7 baby steps as well as a couple of things that you should know
as you're going through each one.
Let's get started.
The first baby step is probably the hardest baby step and it's to save $1,000 in cash
as fast as possible as a starter emergency fund.
Now the reason that I say this is probably the hardest step even though baby step 2 is
probably going to take a lot longer for most of us it's because it is in this step that
you make the decision to change your life.
To finally take control of your finances.
And That in and of itself can be extremely difficult.
Because you've got to get to a point where emotionally you've had it!
You're sick of being in debt, you're sick of living paycheck-to-paycheck, you're sick
of being broke!
And you're finally truly ready to make a lasting change to your financial life.
I also want you to take note of the fact that I said a starter emergency fund.
This $1,000 is not going to be enough to catch all of the major catastrophes that life may
throw out.
For example if you get laid off at your job this probably wouldn't be enough to sustain
you for very long.
But it will sustain you for most of those smaller emergencies that come up.
Basically it'll create a barrier between you and Murphy.
You know Murphy he's the guy with all those really negative laws.
Like the one that says if it can go wrong it will.
Really negative guy.
But a lot of us have seen him around our houses so often that it's almost like he's a first
cousin.
We don't want that anymore and this starter emergency fund will help keep him at Bay.
For some of us it'll also give us a sense of hope.
Because money for a lot of people has been an enemy in their entire lives.
But a funny thing happens when you start saving for this starter emergency fund.
You realize that for maybe the first time in your life you have Tamed your money and
you are in control of it, instead of it being in control of you.
It's a hard sensation to explain but its effect is monumental.
So for the next month focus on just getting $1,000 in cash fast for your starter emergency
fund.
If you have to get a part-time job for a little bit or start selling some things in your garage
that you don't use anymore or if you have the option work some overtime do it.
Whatever you have to do to get that $1,000 in cash as fast as humanly possible, just
do it.
And then make sure to put it in a place that you can't spend it easily.
I think the best example that I've heard of someone doing this has got to be from a lady
who bought a frame and put 10 $100 bills inside the frame and then hung it behind her coats
in her closet and wrote a note that said "in case of emergency break glass."
And the last thing I want to say on the first baby step is I keep mentioning how you want
$1,000 in cash.
And I mean that you want it in cash, it must be liquid.
This is not money that's supposed to be making you money, that will come later.
This is money that's meant to protect the money that makes you money.
So you don't need this to be invested in CDs, you don't need this to be invested in mutual
funds, or anywhere else, you want it in cash.
And again in some place that'll be difficult for you to spend.
That being said let's turn our Focus on baby step 2 which is the debt snowball.
This is probably the concept that Dave is most famous for.
The debt snowball is where you take any debt that you have except for your house and you
list it in order from smallest to largest balance.
And then you make minimum payments on all of the debts except for the one that has the
smallest balance.
You attack that one with a Vengeance and pay it off as quickly as you possibly can.
Using the same focus and intensity that you used to get that $1,000 starter emergency
fund.
A Couple of questions you might have with this step would be should I stop contributing
to my 401k while I'm paying off my debt?
And the answer is: yes.
Now that might seem counterintuitive because especially if your company matches part of
your 401k contributions you're basically throwing away free money.
And that is true however Dave believes and based on my experience I would have to say
I agree with him that the power of focus and quick wins are more important in the long-term
to your Financial Health then getting the match on a few 401k contributions.
Now if everything else was equal you would come out ahead if you continued to make your
contributions while paying off your debt.
But that's not the reality that we live in.
When doing something as difficult and emotionally draining as paying off debt can be we need
that emotional reinvigoration that comes from seeing progress as we pay off some of those
smaller debts.
It gives us the hope and the will to fight on and continue to climb our way out of debt.
This is the same reason why we pay off the smallest balance first and not the debt that
has the highest interest rate.
Again even though mathematically speaking paying off the highest interest rate is best
when you only look at the math you're ignoring 1/2 of The Human Condition.
We humans are not Vulcans.
Emotions play a big part in our decision making and again we are much more likely to finish
getting out of debt if we see that progress early on just like we're more likely to continue
a workout routine if we see ourself losing weight in the first few weeks.
The last thing that I want to mention on baby step 2 is what happens if Murphy comes back
and drains some or even all of your starter emergency fund.
If this does happen you should stop paying off your debts and go back and get that emergency
fund back up to $1,000 cash as fast as humanly possible.
The reason for this is because if you don't Murphy may come again and since you no longer
have an emergency fund in place to protect yourself from him you're likely going to have
to use a credit card to pay for the emergency.
And the emotional and psychological effect that this has when you're trying to pay off
debt is crippling.
You realize that because of this emergency you actually went deeper into debt in essence
you're walking backwards and that just kills any momentum that you have built up to that
point and puts you right back at square one.
We don't want that so if something does happen and you have to dip into your emergency fund
make sure to refill it and then go back to attacking that debt with a vengeance.
Baby step 3 is where you kick Murphy out for good.
Because here is where you're going to be building up your full emergency fund.
The rule of thumb is to have three to six months of expenses in your emergency fund.
But one thing I never hear answered is how do you know which end of that scale you should
be on?
How do you know if you should save 3 months or 6 months worth of expenses?
Well the way I see it is the purpose of the emergency fund is to protect yourself from
risk.
So the more risky your situation is the closer you should be to that six-month end of the
scale.
For example if you earn all your money based on commissions or you're self-employed you
should probably have 6 months worth of your expenses in your emergency fund because if
you lose your job it's pretty much a 100% cut in your household income.
This would also be the case if you have had some chronic medical problems in your family
just because your risk is higher you want to be better protected.
But if you have a steady and secure job, and you've been at the company for many years
and everyone's healthy you could probably lean more towards that 3-month end of the
scale.
And just like with each of the other baby steps you attack this one with your full Focus.
That leads us to baby step 4 which is where you can finally start investing for retirement.
I know it seems like it's been quite a while you've gotten out of debt except for your
house you've gotten a fully funded emergency fund and now you can start saving and investing.
I also want to note that while baby steps one two and three were each done separately
and one at a time, baby steps for five and six are actually going to be done all at the
same time.
So just keep that in mind as we go along.
Now baby step 4 doesn't really cover any new ground.
It's basically what every other financial advisor has said.
Not that there's anything wrong with that it's still good advice and baby step for says
to invest 15% of your income towards retirement.
But since this is something that most of us have heard before I want to look back and
see just from a mathematical sense how much of a difference waiting to invest makes in
the long run.
We're going to use the examples of John and Jane who both make $48,000 a year.
John will be investing for his retirement from the age of 25 to 65 and he won't be following
the baby steps that we've covered so far.
He will be investing the entire time.
Jane will be following the baby steps so she won't be investing at 25 because she will
be spending time getting her emergency fund funded and her debt paid off.
Just to keep this simple I'm going to say that Jane's only debt is $5,000 on her credit
card which is charging her 18% interest and $8,000 left on her car.
Her car payment is $500 per month.
And for the record John has the exact same debts, he'll just be making the minimum payments
on them instead of trying to pay them off quickly like the baby steps would have him
do.
I'm going to assume that both of their average living expenses is about $2,000 a month not
including the car payment or the credit card payment.
How much of a difference would there two strategies end up making?
Well Jane makes $48,000 a year that's $4,000 a month say she sells some stuff and gets
that $1,000 starter emergency fund by the end of the first month.
She is done with baby step 1 and can now begin to turn her focus on her debts.
She's making $4,000 per month and spending $2,000 per month to live.
Add in the $500 a month car payments and the minimum payment on her credit card debt which
let's say just for this example is 3% of her principal or $150 a month that means that
her total living expenses are $2,650 a month.
This leaves her with $1,350 a month to put towards paying off her debts.
Now because her credit card debt happens to have the lowest balance she will be paying
that off first.
And punching in the numbers it will take her 4 months to pay off her credit card.
Now she only has a car payment.
Meaning that her monthly expenses are $2,500. $2,000 in living expenses and the $500 per
month car payment.
So she has $1,500 extra a month to throw at the car.
Punching in those numbers we see that she will be debt free in about 6 months.
Now she has to build up that emergency fund.
Let's say that she decides to go for the full 6 month emergency fund which for her would
be $12,000.
Now that she's debt free she has $2,000 leftover after Expenses to build her emergency fund
and let's not forget the $1,000 that she already has saved.
Meaning in 5.5 months she will have a fully funded emergency fund.
So after about a year-and-a-half she is debt free, has a fully-funded emergency fund, and
can then start investing $2,000 a month.
This gives her 38 and a half years to invest assuming she puts $2,000 in per month and
averages an 8% rate of return she will end up with a net worth of $5,749,665.62.
John starts investing right at 25 as I said but because of the fact that he is not paid
off his debts he is only able to invest $1,350 a month.
If he does that for the full 40 years again at an 8% return you would have an age 65 net
worth of $4,378,577.98.
That's a difference of almost $1.4 million.
And I don't know about you but to me that's quite a chunk of change.
Baby step five is to save for college.
Dave recommends using Esa or 529 plans to save for college.
Now I'll probably go in deeper to the what these are in a future video but for the purposes
of this summary Esa plans are the ones he recommends most because as long as your income
is under $220,000 per year you could invest $2,000 a year from the day your child is born
to the age 18 and that would purchase you a pretty good amount of tuition especially
when you consider that you can invest it in just about any mix of mutual funds and let
that money grow tax-free.
529 plans are a secondary option if you either need to save more to pay off for tuition or
if you make too much money to be allowed to use the esa plans.
I should also note that most of the time your options are more limited using this plan,
but again that's a topic for another video.
Baby step 6 is to pay off your home.
Which is pretty self-explanatory but there is one myth surrounding the topic of paying
off your home early that I want to talk about.
The myth is that it's wise to Keep Your Home Mortgage in order to get the tax deduction
however if you do the math you see how ludicrous that is.
For example if you had a mortgage of $900 per month and of that payment $830 was interest
you would have paid about $10,000 in interest that year which creates quite a good tax deduction.
If you're in a 30% tax bracket you would have saved yourself 30% of $10,000 or $3,000 in
taxes that year however how much were you paying in interest?
Oh that's right $10,000.
So the rationale is in order to save $3,000 in taxes we must spend $10,000 in interest
payments.
Now is it just me or does that just not make a lick of sense?
Would you pay $10,000 in order to save $3,000?
I wouldn't either.
Baby step 7 is to build wealth like crazy.
You saw how much money Jane ended up with earlier in this video.
This is the step where you build the kind of stupid amounts of wealth she had.
This is why you've been going through the baby steps this whole time and making all
the sacrifices along the way in order to get out of debt, build up your emergency fund,
and start investing.
So that you can live and give like nobody else.
Because when it comes right down to it money is just a tool and there are probably a grand
total of three things you can really do with it.
You can have fun with it, you can invest it, and you can give it away.
And you should do all of them.
You should have fun with your money whatever that means for you because you did a lot of
work and sacrificed a lot to get here this is your reward.
So have fun with your money.
You're also going to want to continue to invest because it's going to continue to grow what
money you have and it's how you continue to win with money.
And you should give some of your money away and honestly once you get there you may very
well realize that giving it away is the funnest thing you'll ever get to do with money.
Just because it always feels great to help someone else who's truly in need.
So that was The Total Money Makeover by Dave Ramsey and if you were interested in this
financial plan I do highly recommend that you check out the book for yourself there
are a lot of tools and other tidbits to help you figure out what to do with your own personal
situation that I just cannot cover in a summary video like this.
I'll leave a link in the description below to the book if anyone wants to check it out
but with that being said if you liked this video or learned something be sure to like
And subscribe I've got a lot more these book summaries coming out in the future.
And If you're new to the channel you can also check out my playlist of all the book summaries
I've already done I'll leave that in the description below.
But that'll do it for me so until next time thanks for watching and have a great day.