Updated on 02.20.07

The Total Money Makeover: Building Wealth

Trent Hamm

The Total Money MakeoverThis week, The Simple Dollar is conducting a detailed review of radio host Dave Ramsey’s The Total Money Makeover. This book is basically a printed distillation of Dave’s “financial preacher man” style on his radio show. Is there serious meat to be found here, or is it a bunch a fluff around a few small ideas? Let’s find out.

Once you’ve built a solid foundation by following the steps outlined in the middle portion of The Total Money Makeover, Dave offers suggestions on how to build up your wealth.

It is important to note that prior to these concepts, the book instructs the reader to pay off all debts except for the home loan and build up a six month emergency fund before moving on.

First, start paying for your retirement. Dave advocates pretty strongly that one should save 15% of their income towards retirement using the basic formula of paying into the work retirement plan until you reach the matching cap, then maximizing a Roth IRA contribution, then putting the rest in the work retirement plan. It’s the basic rule of every retirement advisor because it works.

Second, start paying for the kid’s college education. This chapter felt sort of wishy-washy, mostly because Dave strongly hinted that a child learns more if they have to pay for college themselves than if their parents cover it for them. Still, a well-funded 529 savings program is recommended.

Third, pay off that home mortgage. Once the first two items are in place, you should be paying off that home mortgage as fast as you can. He advocates getting into a 15 year mortgage and still overpaying each payment if you can, just so you can get the mortgage finished off much faster.

Now it gets fun. If you’ve trained yourself well enough to reach this point, you should know very well how to manage your money and suddenly you’ll have more of it floating around than you can imagine. The rest of the book focuses on this stage in life, which we are all striving for: keep some goals, remember who you are, and keep investing.

Tomorrow, I’ll give a “buy or don’t buy” recommendation on this book that might surprise you a bit.

You can jump quickly to the other parts of this review of The Total Money Makeover using these links:
The First Steps
Building Wealth
Buy or Don’t Buy?

The Total Money Makeover is the fifth of fifty-two books in The Simple Dollar’s series 52 Personal Finance Books in 52 Weeks.

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  1. Amy says:

    Could you explain why it’s better to pay off your mortgage early?

    I’m debt adverse, so paying off the mortgage is my first instinct, but I also know my mortgage is only at 4.375% interest. I can beat that rate by putting my extra $$ into an ING savings account these days.

    Is it still better to pay extra on the principal of my mortgage?

  2. Trent Hamm Trent says:

    Dave is heavily into risk minimalization, and having any outstanding debt is a risk; that’s why he encourages people to pay off their debts and never incur any again.

  3. Amy says:

    Ah! Got it, thanks!

  4. Rocky Hinten says:

    There is also more to it than just the numbers. (Not to mention that by the time you pay tax on the gain of that savings account, you’re probably falling a little behind anyway.)

    There is an emotional side that really affects the situation. For example, when people call in to his talk radio show and are considering that type of situation, like investing more instead of paying off their house, here is how that exchange goes:

    Dave: “Let me ask you this, if you were sitting there with a completely paid for house that you owned outright, would you go borrow on it to invest in mutual funds?”

    Caller: “Well, no!”

    Dave: “That’s exactly what you’re doing. By me turning the question around, it gets your heart to consider the decision, and your heart is where you measure risk. That feeling of having a paid for house is something you do not want to give up if you have it. When you have a paid for house, you can take your shoes off and walk around barefoot in your back yard, and the grass feels different.”

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