Sunday, December 20, 2015

The Total Money Makeover - Read 52 Books in 52 Weeks - Week 51

This week, for the 51st week of the Read 52 Books in 52 Weeks challenge, I read The Total Money Makeover - A Proven Plan for Financial Fitness by Dave Ramsey.

I had read this book many years ago, but now it seems even more appropriate to read given that I have received inheritance funds from my parents' estate. It is - in some respects - like a "do over" - an opportunity to get a fresh start and do things the way they should have been done had I read this book or known and been taught these principles in my teens or twenties.

One of the most challenging aspects for most my adult life - from a financial aspect - has been the cost of health care. Whether it has been the high cost of health insurance, overpriced medical services/bills, or unreasonably high prescription costs - this has definitely taken a toll financially each year. When medical costs exceed mortgage payments, something is definitely wrong. It would be nice if things were different...but they aren't and so it simply is a fact of life.

In the book, there was a section about debt consolidation and the myth that it saves interest and you can have one smaller payment. When faced with a tremendous number of medical bills, I opted to do this which, in retrospect, wasn't the smartest decision.

As Dave Ramsey said, "debt consolidation is dangerous because you treat only the symptom." That's true. "The debt is still there, as are the habits that caused it; you just moved it."

Had I had a stronger financial foundation by that time in my life, perhaps I could have paid off all those medical bills...or at least not felt like debt consolidation was the only option available.

Another section refers to the required insurance that you must have as part of the Total Money Makeover:
- Auto and Homeowner (have both)
- Life Insurance - recommended 20-year level term insurance equal to about ten times your income. (have this, but need to get a new updated policy since mine will be expiring within the next five years)
- Long-term Disability - (I no longer have this since I am a stay-at-home mom)
- Health Insurance (have this)
- Long-term Care Insurance - this is recommended for anyone over 60 years old. I'm not there yet, but when I am I definitely will get this type of insurance. I saw the benefit of having it for my parents.

So, now, looking at The Total Money Makeover, I noting the following steps it recommends to achieve a much healthier financial place:

Step 1: Save $1,000 cash as a Starter Emergency Fund. It should be liquid cash that is not easily accessible and that you would be tempted to use. It is for emergencies only.

Step 2: Start the Debt Snowball. Basically, this is paying off all debts (with the exception of one's home) from the smallest amount to largest amount. Once the smaller debt is paid off, that payment amount is added to the payment amount of the next larger debt. Soon, that debt will be paid off. You keep repeating that process until everything is paid off.

Step 3: Finish the Emergency Fund. This account should have enough money to fund three to six months of expenses in the event that you lose your income. Dave Ramsey suggests putting the funds in a mutual-funds money market account with check-writing privileges.

Step 4: Invest 15% of Your Income in Retirement. The author mentioned investing in Roth IRAs since the Roth grows tax-free.

Step 5: Save for College. The goal is to graduate debt-free. He is very against having young adults graduate from college with $25,000+ in debt. He recommends finding colleges that are less expensive, using an Educational Savings Account by investing $2,000 per year per child. If a child is older than 8 years old, as in the case of Sophia and Olivia, then he recommends using a 529 plan after putting away $2,000 per year for child in the ESA.

He also recommended seeking scholarships. Look at community clubs (e.g., Rotary, Lions, Jaycees); look for ones based on race, gender, or religion. There alsoo are software programs that have lists of scholarships. He wrote about one woman who bought the software that listed more than 300,000 available scholarships. She narrowed her search until she had 1,000 scholarships. She spent the hole summer filling out applications and writing essays. She was turned down by 970, but got 30 scholarships. Those 30 scholarships paid her $38,000!

Step 6: Pay Off Your Home Mortgage.

Step 7: Build Wealth.

There are helpful forms in the book that are available online:

Monthly Cash Flow Plan
Allocated Spending Plan
Debt Snowball
Breakdown of Savings
Consumer Equity Sheet
Lump Sum Payment Planning Form
Major Components of a Financial Plan
Recommended Percentages

Dave Ramsey ends the book by saying that "there are only three uses for money: fun, investing, and giving. You cannot claim Total Money Makeover status until you do all three." He said that you should begin doing some of each as you go through the steps. Give something - even if it is just giving your time by serving soup to the homeless.

Fun also begins in Step 1, although it has to be inexpensive fun in the beginning. The fun gets bigger and better as you get higher in the steps.

1 comment:

Rita said...

Sounds like good advice. You want to do well with your inheritance, that's for sure. Smart to think it through and plan ahead. Best of luck to you! :)