The Total Money Makeover: The Challenge … and Denial

This is the first of twelve parts of a “book club” reading and discussion of Dave Ramsey’s The Total Money Makeover, where this book on debt reduction is teased apart and looked at in detail. This first entry covers the preface and the first two chapters, finishing on page 16. The next entry, covering the third chapter, will appear on Saturday.

ttmmLet’s get this straight right off the bat. I like what Dave Ramsey has to say when it comes to personal finance. I find much of his material makes a lot of sense and he does a great job of balancing a “coaching” attitude without going too over the top a la Larry Winget.

That being said, I don’t care much at all about his political commentary. I know that his relationship with Fox News pretty much requires a conservative bent, but his political perspectives feel very much out in right field to me with only a tenuous connection at best to his personal finance talk.

Given that, I’m going to completely ignore his politics for this discussion. If it’s not inside The Total Money Makeover, which is an excellent book on debt reduction and focus, I’m not going to talk about it.

Ahem.

So what exactly is The Total Money Makeover all about? It’s just a very straightforward plan for getting in control of your finances, particularly in terms of overcoming a heavy load of debt. Many people have “turned the corner” – meaning they’ve realized that debt is dangerous and are actually committed to spending less – but the mountain of debt they’ve incurred makes it almost impossible to move forward. That’s exactly who the book is written for.

‘80% Behavior, 20% Head Knowledge’
Right off the bat, on the first page of the introduction, the basic idea is made clear:

I am positive that personal finance is 80 percent behavior and 20 percent head knowledge. Our concentration on behavior – realizing that most folks have a good idea of what to do with money but not how to do it – has led us to a different view of personal finance. Most financial people make the mistake of trying to show you the number, thinking that you just don’t get the math. I am sure that the problem with my money is the guy in the mirror.

I wholeheartedly agree with this. All of us know that it’s important to save and can see the numbers on how useful it really is. The trick is actually doing it – and that’s all psychology.

If you don’t truly make up your mind to achieve financial success, you’ll hold back. You won’t save – or you won’t save much. You’ll keep telling yourself that “later” is the right time to do it.

And then you’ll find yourself in ten years having not made any progress on your big goals in life.

The choice to start spending less than you earn is a hard one, but it’s the most important one. That choice has nothing to do with math, with running the numbers, or anything else. It’s inside your head.

If You Will Live Like No One Else, Later You Can Live Like No One Else
That phrase is found at the bottom of virtually every page in the book – it’s basically the book’s mantra. Dave’s take on it is clear: live hard now and you’ll live easy later. My take is a little bit different.

I agree with him largely on the first part: it’s incredibly important to tighten up that spending and get rid of the debt. Doing that requires learning how to spend less – and also not allowing yourself to use that extra money for anything but getting rid of debt and building a future. That requires living “different” in a way – your goals shift from the shiny new car and the shiny vacation to the removal of all of your debt.

On my block, I can certainly say I see a lot of shiny cars – my truck is the oldest vehicle on the block, by far. In the end, though, my truck works – and that’s all I can really ask of it. It gets the kids to daycare and gets me to the library, which is really all I need. As long as it keeps running, we’ll keep it. And that’s living quite different when we’re surrounded by vehicles more than ten years newer than my truck.

It’s the other part that’s tricky. I don’t view the “later you can live like no one else” as meaning I can afford that shiny new car. Instead, I take a perspective closer to Your Money or Your Life – the “live like no one else” in the future for me is complete financial independence, meaning I don’t have to work for money.

That, to me, is “living like no one else.” I won’t have to factor in money at all when it comes to choosing how to spend my time, and that’s my real dream.

A 12% Rate of Return?
One big flashing question mark comes on page xv in the preface:

Sadly, many intelligent but ignorant people seem to think that making a 12 percent rate of return on your money in a long term investment is impossible. And that if I state that there is a 12 percent rate of return available, then I have lied to you or misled you. […] The S&P 500 is the 500 largest companies traded on the New York Stock Exchange, sometimes called “The Big Board.” So it is widely accepted to be the best average of the market. The S&P 500 has averaged 11.3 percent per year for the last seventy-plus years, as of this writing.

So, I immediately flip to the front and discover that this revision was published in 2007. Something tells me that 2008 hurt those numbers quite a bit.

Here’s the point, though: The Total Money Makeover tends towards the optimistic when it comes to investment returns. While there are certainly long-term stretches (more than ten years) where the market as a whole – or certain pieces of the market – have returned more than 12% annually, the truth is that there is no guarantee that any 10 year, 20 year, 30 year, or any year period will return any percent. Surely, 2008 taught us all that, loud and clear.

Instead of relying on that extremely optimistic forecast, I’ve come to use Warren Buffett’s more realistic (perhaps even a bit pessimistic) forecast that in the future we should expect 7% returns on average. This might be slightly on the pessimistic side, but when you’re making calculations for your future and banking on them, you’re better off being pessimistic (and having more money than you need when the day comes) than optimistic (and having to work for the rest of your life).

Calculating with 12% returns gets people really excited – and it might happen. But my perspective is that using such hugely optimistic numbers puts your future at risk. Better to finish with more than you expect than with less.

Tapes and Books Aren’t the Solution
On page 4, a certain quote really caught my eye:

So my Total Money Makeover begins with a challenge. The challenge is you. You are the problem with your money. The financial channel and some tape sets aren’t your answer; you are.

All the blogs, all the books, all the “tape sets,” all the financial products in the world won’t help if you’re not committed to sucking it up and making it work.

If you’re not willing to look at your behaviors, step up to the plate, and make some changes in your life, nothing is going to change.

This kind of talk generates three kinds of reactions. It makes some people angry – they want to believe that they can suddenly get rich without changing a thing, even though it hasn’t happened yet. It makes some people stick their fingers in their ears and sing “lalalala” – they know it’s true, but they’d rather keep the sinking ship they’re on than try to change anything. And then others embrace it and work hard for something better.

I was in the “lalalala” group for years. I knew very well what I needed to do, I just didn’t want to hear it. I knew on some level that what I was doing wasn’t working, I just didn’t want to think about it.

My epiphany threw me on a new track – the “embrace change” track. I finally woke up and realized that if I didn’t take charge of my situation, I was going to keep sinking slowly. This one choice led to tons of things – I paid off four credit cards, two vehicles, three student debts, totaling $30,000 or so in debt; I bought a house; and, finally, I switched careers, earning less but doing what I love.

All of the moves I made were simply the aftermath of that one choice to really make a change. That choice is up to you – no blog or book or podcast can make that happen (well, except for MY blog or book or podcast … just kidding).

King of Denial
The second chapter of the book focuses on denial – simply ignoring that there are problems. Like I said, I did this myself for far too long. One quote from the chapter took my breath away, though:

For your own good, for the good of your family and your future, grow a backbone. When something is wrong, stand up and say it is wrong, and don’t back down.

Powerful stuff, and exactly right. If you’re not going to take charge of things, who is?

The Pain of Change
Another interesting piece comes in on page 15:

Change is painful. Few people have the courage to seek out change. Most people won’t change until the pain of where they are exceeds the pain of change.

I strongly believe that for many people in a routine of spending more than they own, there’s a “bottoming out” effect, not too different than a junkie. At some point, the problems that have been building for a long while explode – you can’t pay the bills any more (which happened to me), you’re forced into bankruptcy, your family splits apart.

For many people, that final point is painful enough that it tips the scales. Suddenly, in comparison, the big change doesn’t seem so painful any more.

I like to think of it like the Mississippi River flood of 1993, which destroyed my hometown. It kept raining and raining and raining throughout the months of June and July, like debt building up. The river kept rising, pushing against the levees, until that fateful day when the levee broke. Chaos ensued and new patterns were rapidly discovered in countless lives.

Soon, we found that the actual path of the river had changed – in many places, it had found a new channel to flow through. The new patterns of life began to settle in place and soon things began to return to normal – but with some big changes. Levees were rebuilt stronger than ever. People prepared their homes for future flooding.

In short, life took on a new, better, safer routine. When you’re recovering from a financial meltdown and discovering new ways to live, this happens – you begin to discover new, better, safer routines.

And you begin to live like no one else.

Do you have any other thoughts on the first two chapters of The Total Money Makeover? Please share them in the comments – and feel free to respond to any of my impressions as well. After all, a good book club is all about discussion!

On Saturday, we’ll tackle the third chapter – Debt Myths: Debt Is (Not) A Tool.