This is the 800 lb gorilla. If you were to walk into a bookstore and look for a book on personal finance, chances are this would be displayed prominently. The book has stayed perched atop the best-seller lists so long, it’s like Dark Side Of The Moon. If you search the web for “get out of debt” you’ll be delivered on a silver platter to Dave’s website. You, a family member, or friend may already own this book…OK so it’s popular, but is it any good?
In a word, yes. But when tackling a subject as broad as money, most people will agree with some topics and disagree with others. I happen to know the good, bad, and ugly of the Ramsey topics and will detail them all – with my opinions – below.
The book breaks down the complex subject of personal finance into what he calls the seven Baby Steps. Ramsey teaches that you should save, get out of debt, and invest but in a very specific order. And unlike other pundits he wants you to do most of these things one at a time. Meaning, you are not to invest in your 401(k) at work and get the matching funds while you are paying off your consumer debt. It’s one of the few controversial elements to his program but it’s not without merit; you are more likely to make progress if you concentrate on one thing at a time. And that is really the crux of the book, and of Ramsey’s entire mission: Personal finance isn’t about simple math on paper. It’s about human behavior, and about creating a belief that you can achieve these simple Baby Steps – because you can. You must make the first step of commitment and the plan is designed to provide you with positive reinforcement feedback each step along the way. When you see that you are in fact winning, you will be more inclined to stick with the process as you get out of debt and begin investing for wealth-building.
In 200+ pages, you are shown the seven steps in detail. He covers saving for emergencies, getting out of debt, buying the right types of insurance, investing for retirement, working in harmony with your spouse, saving for college, buying a house, and giving. There are also several motivating stories of families who have started where we all start (broke and in debt) and have crawled their way to Financial Peace. They’ve paid a price to win – getting out from under crushing student loans and credit card debt is not easy, nor fun as it turns out – and their stories are included to emphasize that you, too, can do this.
One of the two biggest areas that people disagree with Ramsey is on the subject of credit cards. Banks and retailers want you to have several; all other money gurus think you should have at least one, and use it responsibly. Dave Ramsey, on the other hand, wants you to cut ALL your credit cards up and never use one again. You don’t need a FICO score, he says. You can make that call for yourself, but if you think about it – if you are reading this and you are in debt, then it’s very wise to stop using a credit card altogether and use cash – at least during the time that you are cleaning up your act.
The other area that people go bananas over is his investment advice, where he casually uses a 12% rate of return when discussing mutual fund performance and retirement. Is it realistic? Well….the S&P has historically returned just about that on average since its inception, even including the recessions over the years. And being an “average”, it really is possible to find mutual funds that outperform it. Think about it this way – if the average is 12, then some do better and some do worse. That’s the textbook definition of an average. It’s up to you and your advisor to pick funds that do better than 12% average annually. There aren’t many of them, but there are some. The funds that Christie and I are in have been doing very well over the last 20+ years. But I would never count on 12% each year, especially when you use the Compound Annual Growth Rate, vs the Average Annual Growth Rate. I personally use a more conservative number when factoring any calculations. I would rather base my projections on 8% and be pleasantly surprised when I get 10-11, than base my projections on 12% and be disappointed if they were less over time.
But really, this 12% argument is moot when you consider the entire plan. If you do the steps outlined in the book, and follow the plan exactly, you will become wealthy. You can’t help but become wealthy. It’s a 15-25 year plan, but that’s just it – it’s a plan. Follow it, diligently, all the way through, and you’ll win. 20 years of investing with returns of 10% and not 12% will still cause you to become wealthy. But you can’t get there (Baby Step 4) without doing the hard work of Baby Steps 1-3 first.
The same information that is presented in this book is presented in even greater detail in a classroom setting known as Financial Peace University. Over 10,000,000 people have bought The Total Money Makeover or taken the class. I’ve often wondered how many of those people completed all seven Baby Steps to where the house is paid off early, mutual funds are being bought for retirement at an aggressive pace, and generous giving is factored into the monthly budget. I can tell you from experience that it works. Winning is not easy, that’s why so few people do it. But it’s worth it. And if you want to win with money, you could do a lot worse than following the advice in this book.