The Total Money Makeover: A Proven Plan for Financial Fitness

“Ninety percent of solving a problem is realizing there is one.”

Isn’t it tiring to sit at the same table every month, constantly worrying about your bills, debts, and other fees you have to pay? Most of the time, it makes you feel hopeless. Regardless of how hard you work, the future always feels out of reach.

You may feel like you’ve overcome the worst of it. You may begin to believe that your financial situation is typical, that this happens to everyone, even if you know deep down that it is not.

Solving your financial problems begins the moment you recognize them. It happens after you’ve faced the mirror and taken a realistic look at your financial situation – without thinking about pleasing others. Too many of us are frightened to face our own truth because we want to impress people. This, however, prevents us from pursuing the life we truly desire.

If you want to stop living a lie, you have to muster the courage to let go of denials and recognize that you are the source of your financial problems. You need to be accountable for your situation and be honest about where you are. Then, decide where you want to go.

“Ignorance is not lack of intelligence; it is lack of know-how.”

Nobody is born a financial genius. Financial management, like reading and writing, is a skill that must be learned. The problem, however, is that most schools do not teach it. Many people still don’t see the value of financial literacy, or how to implement it in their lives and reach financial independence.

If you want to be financially free, you have first to overcome your ignorance. There are three steps involved.

First, you need to accept that you lack the knowledge and admit that you’re not a financial expert. Second, you have to take action on what you learn. Lastly and most importantly, you need to devote yourself to a lifelong pursuit of financial education. This does not mean getting a degree in finance or enrolling in an MBA class. Rather, it’s about exhausting all the relevant resources that will teach you more about money. It could also mean occasionally attending seminars that can help you become more financially savvy. Investing in your financial knowledge will save you from being broke. 

Aside from ignorance, another hurdle preventing you from being wealthy is the need for validation. Can you imagine how many things you have bought – even if you couldn't afford them – just to impress people? Do you realize now how your need for validation has kept you broke for a long time?

When we talk about millionaires, we used to associate them with the ones who have big houses, lots of cars, and fancy clothes. However, contrary to popular belief, research conducted by Dr. Tom Stanley, author of The Millionaire Next Door, reveals that typical millionaires live a middle-class lifestyle. They live this way because they place a higher priority on financial security than on the approval of others based on what they own.

Like those millionaires, you too have to let go of others’ validation of you and begin focusing on how you can develop a strong financial base. This means you need to stop buying things you don’t truly need and afford. Instead, begin accepting your reality and investing in your education to overcome your ignorance. Read books, attend seminars, and learn from the world's wealthiest people. This is how you will achieve a true financial breakthrough.

“Focused intensity is required to win.”

Taking one step at a time is the most efficient way to accomplish any goal you set for yourself. Regardless of how hard you try, you will not get anything done if you do everything at once. Intense focus is vital to financial success.

The author proposes seven baby steps you can take towards financial independence. Keep in mind that these steps are arranged in order of importance. Thus, they should be followed sequentially. 

Before jumping right into the first baby step, the author encourages taking a realistic look at your situation first. Evaluate how you usually spend your money each month and create a monthly budget that you want to stick to. Don’t worry about making a perfect budget. All you have to do is assign each dollar a name before the month begins (zero-dollar budget). This monthly budget will serve as your blueprint–the core foundation of your total money makeover.

Once you have a written budget, it’s time for you to prepare for a disaster. You see, life is not always rainbows and sunshine. At one point in time, you might lose a job or a loved one. On another, you might have another child. These events are not surprising; they actually happen in real life. The best thing to do is to prepare by saving for your emergency fund. 

The first baby step is saving your first $1000 starter emergency fund. Of course, this won’t cover all of your future emergencies, but saving that kind of amount fast will be a good start until you fully fund it. This will save you from incurring new debt when a real emergency happens.

“The key to winning any battle is to identify the enemy.”

Most of us are convinced that it’s easier to be wealthy if we don’t have any debts to pay. However, many people are still stuck by overwhelming debts that keep them from being financially free. Undoubtedly, getting out of debt is the hardest part of the total money makeover process. You may be laughed at by your broke family and friends here. But if you muster the courage to take this step, you will see how well it pays off in the end.

The second baby step is to pay off your debts using the debt snowball method. This means listing all your debts (except your home payments) in order from smallest balance to largest without looking at their interests. Then, pay the minimum to stay current on all the debts except the smallest. 

Make it a habit to put all the extra dollars in your budget towards your smallest debt until it is fully paid off. Once paid, you need to go on to the next lowest debt while making minimum payments on all other debts until they are all paid. These small wins will keep you motivated. 

The only exemption to this method is when a larger debt is needed to be paid urgently because of its extreme consequence. Thus, you need to pay it off first. Otherwise, keep using the debt snowball method. 

To make this method work, the most important thing you need to have is a focused intensity. This means committing to the plan until all debts are paid off, no matter what. If your budget is too tight to get the snowball rolling, for example, try anything to increase your income – either through side hustles or other ways to generate more money. If you have a burning desire and focused intensity on clearing your debts, the solutions are just endless! 

During this phase of debt clearance, you will start to free up your most powerful wealth-building tool – income. When all your debts are paid off, you will start to regain control of your financial life – setting the door to create your actual wealth.

“The worst time to borrow is when times are bad. If there is a recession and you lose your job, you don’t want to have a bunch of debt.”

Once you have an emergency fund of $1000 and no debt other than your mortgage, you are starting to gain momentum to regain control of your income. 

However, a $1000 emergency fund cannot cover all your emergency expenses and you will have to put more money into it. Ideally, it should cover three to six months of expenses. 

When saving for your emergency fund, it’s best to keep it liquid. This means you can easily get it without any penalty. Thus, mutual funds and Certificates of Deposits are not the best places to put your emergency fund. Keep in mind that your emergency fund is not for wealth-building, so keep it somewhere safe and is easily accessible. 

Once you’ve saved up for your emergency fund, make sure you fully understand when to use it. Real emergencies include losing your job or paying medical bills due to an accident or unforeseen circumstances. If one of these situations occurs shortly, you will no longer have to borrow money – which could bring you back to the second step. 

As you progress through your journey towards financial independence, your concept of what emergencies are worthy of being covered by your fund will evolve. As you gain more wealth, you will have more money in your budget too.

“A Total Money Makeover retirement plan means investing with the goal of security.”

How do you want to spend the rest of your life after retirement? Is it through pursuing your greatest passions–writing a book, designing churches, or simply spending your time with your grandkids? Whatever it is, only one thing could allow you to live life the way you wanted it to be – your retirement plan.

Investing in your retirement plan means securing your future when you can no longer work to sustain your needs. When your investment plan is fully funded, you will no longer have to worry about how to feed yourself every day. All you need to think about is how you could live life to the fullest once you’re retired. 

Baby step four is where you will start to invest 15% pre-tax gross income yearly toward retirement. The reason it's 15% is that you'll also need a portion of your income to pay for your child's college and your mortgage payments rapidly. When calculating your 15%, you must not include potential security benefits. You have to understand that taking care of yourself is your responsibility and that you should never depend on anyone else. 

The best tool for investing towards retirement is mutual funds. If you plan to keep your money for more than five years, growth stock mutual funds are a good way to go. Before you invest, make sure you have done your research and choose only the mutual funds with a proven track record of success over the last five years.

When investing 15% of your income for your retirement plan, you need to take advantage of tax-free incentives and matching offered to you. It’s best to start investing where you have a match. 

If your 401k matches your first 3% for example, you can just put that 3% as part of your 15% investment. If, on the other hand, you don't have a match or have already invested in that match, the next step is to fund your Roth Individual Retirement Account (IRA). The best part about an IRA is that it grows tax-free, which means you don't have to pay taxes when you withdraw it. Take note that the combination of your 401k match and fully-funded Roth IRAs should equate to 15% of your total gross annual income. 

Investing in your retirement plan is not going to be easy. You have to spend your time and effort learning more about mutual funds and investments. It takes willingness, discipline, and intense focus to succeed in this step. If you really want to live your retirement age like no one else, you have to believe that you will win and work towards making that happen.

“If we admit out loud that education is for knowledge, which is only part of the formula to success, then we don’t have to lose our minds in pursuit of the Holy Grail degree.”

Before funding your kid’s college education, it’s important that you understand its purpose first. While college is very important, it does not guarantee a job, wealth, or success. Only when it is paired with the right character and hard work will one become successful in life. 

That said, you do not need to go into huge debt just to get your kids into college. Education is more of a luxury than a need; it should not come before retirement, an emergency fund, and other more important matters. 

There are a few rules for funding a college degree. First, it should be paid in cash. Second, seek a scholarship rather than a loan. Loans will just make you more broke, so devise a more effective method to avoid borrowing money.

If you've planned your savings goal and fell short of money, make lifestyle adjustments by asking your kids to work while studying. Your children will benefit from this too, as it would also help them gain experience that they can include in their resume.

When saving for college, you have to make at least 8% per year to keep up with tuition inflation. It’s best to put up your funds in a growth-stock mutual fund. It averages over 13% when invested long-term instead of bonds that average only about 5%. 

Ramsey recommends funding college with an Educational Savings Account (ESA) invested in a growth-stock mutual fund. The best part about ESA, also known as Education IRA, is that they grow tax-free when used for higher education.

For example, if you invested $2000 every year in prepaid tuition from birth to age eighteen, you would have around $72000 in tuition. But if you used an ESA in mutual funds averaging 12%, you would have $126,000 tax-free! Can you imagine how much money you could save if you use it to support your child's college education?

If your children are older or you wish to send them to a more expensive school, graduate school, or Ph.D. program, you may consider investing in funds that provide a high-interest rate after investing in ESA. Ramsay suggests experimenting with a "flexible plan," which allows you to move your investment around periodically with a certain family of funds. 

Whatever way you choose to save for your kid’s college, make sure to be committed to funding it. Make it a rule not to rely on debts again just to get them a degree. One of the greatest gifts you can offer your child is not allowing them to be burdened with paying debts before they even begin their career.

“Every dollar in your budget that you can find above living, retirement, and college should be used to make extra payments on your home. Attack that home mortgage with gazelle intensity.”

The final hurdle you need to face before totally achieving wealth is paying your home mortgage quickly. Most of us spend decades paying off our home mortgage mainly because of several myths we used to believe in – preventing us from being completely debt-free. 

Some of these myths include keeping your home mortgage to get tax deductions and borrowing money against your home to invest in the stock market with high-interest rates. Both of these are terrible advice. Why?

Say, for example, you borrowed $100,000 on your home at 8% interest and invested it in stocks with a 12% return. This would give you a $12,000 profit, but since you would have to pay $8000 in interest, you would only have $4000 left. This doesn’t account yet for all the taxes and fees associated with stock market investing. When these are deducted, you will probably receive an amount less than $1000. Do you think it’s worth the risk? Of course not. 

One more common myth is taking out a 30-year mortgage and promising yourself to pay it off in 15-years. This seems an impossible promise to fulfill. When expenses like medical and high heat bills, dog vaccination, and bad transmissions get in your way,  you won’t be able to make extra payments. In fact, most of us don’t systematically pay extra on home mortgages. 

In such a case, it’s best to stick with a plan that automates smart moves – which a 15-year mortgage exactly is. A 15-year mortgage is a mortgage loan with an interest rate that remains constant during the loan's 15-year term.

Let’s say you get a 15-year mortgage with a purchase price of $250,000, a downpayment of $25,000, and a mortgage price amounting to $225,000 with a 7% interest rate. In that example, you are likely to save $150,000 over the course of the loan compared to a 30-year mortgage at 7%. Can you imagine how much money you could save with it? Plus, you would no longer be enslaved to pay thousands of dollars for another 15 years! So when taking out a mortgage, convince yourself that only 15-year mortgages exist and pay it off within that term.

“Money is good for FUN. Money is good to INVEST. And money is good to GIVE.”

How does it feel now to be financially healthy–with complete emergency, retirement, and college funds without any debt? You're already at the peak of your wealth at this last stage of your total money makeover journey. You can now do whatever you want to do with your money!

Money has three functions. It can be used for fun, to invest, and to give.

Fun is an essential part of our total money makeover. It's one of the reasons why you should build your wealth. If you want to treat your family to a fancy dinner, buy a new car, or travel — let yourself do so as long as you can afford it. After all, money is meant to be enjoyed, so allow yourself to have some fun with it.

To keep winning in your total money makeover game, you have to invest your money. This is how you can keep yourself wealthy. Too many of us are afraid to do this because of market volatility and risks. But if you're a mature investor with quality investments and the patience to wait until the market goes up, you're likely to win the game.

One best way to make good financial decisions throughout your journey is by creating a wealth team comprised of financially wiser experts than you. This involves a good estate planning attorney, a CPA or tax specialist, an insurance expert, an investment expert, and a reputable realtor.

When choosing members of your wealth team, hire people who have the heart of a teacher — with high levels of integrity and are more focused on guiding you to build wealth than a salesman who is more focused on profits. You have to carefully select your team members to avoid long-term problems.

The last use of your money is to give it away when the opportunity arises. Isn't it rewarding when we use our money for good intentions? Most people who give away their money to help those in need often end up having more fun than the receivers. 

Reaching this last step of the total money makeover also means reaching financial independence. When you manage to achieve this step, you will undoubtedly find yourself in a place of comfort, happiness, and security – living like no one else.