Friday, January 8, 2021

The Total Money Makeover

Dave Ramsey is a very popular radio show personality who offers personal financial advice.  He captures that advice in his book The Total Money Makeover, Classic Edition.  Ramsey says the formula for financial success isn’t complex, and that there is little in the book you can’t find elsewhere.  “Personal finance is 80 percent behavior and only 20 percent head knowledge.”  As a result, his book is long on motivation, and short on specifics of how to follow his “baby steps” to financial freedom.  This focus on motivation may be what his target audience of people who handle money poorly need most.  While most personal finance experts discuss the dangers of debt, Ramsey takes debt aversion to a new level, which is also likely good for his target audience.

It’s not hard to find things to criticize about Ramsey’s approach.  Many readers may find the frequent bible references off-putting, particularly toward the end of the book.  The religious content will give some readers extra motivation to improve their financial lives, and will turn off others.  However, the religious references aren’t central to the “Total Money Makeover” methods and can be safely ignored or embraced.

Return Assumptions

A more serious criticism is his claim that “you should make 12 percent on your money over time” in “good growth-stock mutual funds.”  Part of the problem is that this book came out in 2013 and is based on some material a decade older than that.  So, the decades over which Ramsey studied stock returns likely included high inflation periods.  It’s better to think of returns in real terms (which means after subtracting inflation).  Most experts think the long-term 6% or so real return of U.S. stocks is too high to expect in the coming decades.  Perhaps 4% real on stocks and considerably less on bonds is more realistic.

The 12% stock return that Ramsey sticks with is harmless in some cases but not others.  In one example, Ramsey says that if you could avoid a $495 monthly car payment from age 25 to 65, “you would have $5,881,799.14 at age sixty-five.”  As a motivational tool this is harmless, but the numbers are highly misleading.  If we imagine a 65-year old today, there is no way the payments on a car loan 40 years ago would have been $495.  If we imagine a 25-year old today, 40 years of inflation would make that nearly $6 million figure worth far less than it seems.

We see a much more serious problem with Ramsey’s 12% stock return assumption when he writes “you can live off of 8 percent of your nest egg per year.”  Even a 4% retirement withdrawal rate can fail for young retirees.  Withdrawing 8% each year offers a near guarantee of seriously declining available spending throughout retirement.  I’ve had to witness such forced declines in spending up close with family members.


Ramsey takes dead aim at claims that debt is a useful tool.  “Debt is so ingrained into our culture that most Americans cannot even envision a car without a payment, a house without a mortgage, a student without a loan, and credit without a card.”  “Debt brings on enough risk to offset any advantage that could be gained through leverage of debt.”

“If I loan money to a friend or relative, the relationship will be strained or destroyed.”  This is one I’ve experienced personally.  If you cosign a loan, “Be ready to repay the loan.”  Again, I’ve lived through this one.  Gifts to friends and family are better than loans.

Most people think that “Car payments are a way of life; you’ll always have one.”  “Taking on a car payment is one of the dumbest things people do to destroy their chances of building wealth.”  Despite the possible tax advantages of leasing cars, “the car lease is the most expensive way to operate a vehicle.”

Ramsey’s most interesting claims are that you don’t need a credit card or a credit score.  He says he uses a debit card, but makes “credit transactions” with it that offer exactly the same consumer protections as using a credit card, and he verified this by contacting Visa for a statement.  This allows him to book flights and hotel rooms, and order things online with his debit card.  There are even some mortgage companies who will work with clients with no credit scores.

I had other questions about the viability of living without a credit score.  I’ve heard that credit scores are used by some landlords to choose tenants, by some insurance companies as an input to the premiums we pay, and by some employers in making hiring decisions.  How problematic would it be to not have a credit score?  My preference is that it be illegal to use credit scores for these purposes, but I don’t know if they do get used this way routinely.  It seems ridiculous that you have to be in debt to live somewhere or get a job.  “The FICO score is an ‘I Love Debt’ score.”

Some people can handle credit cards, but “CardTrak says that 60 percent of people don’t pay off their credit cards every month.”  “When you play with snakes, you get bitten.”  Not surprisingly, Ramsey doesn’t like the idea of getting a teenager a credit card to learn to be responsible.  “Getting a credit card for your teenager is an excellent way to teach him or her to be financially irresponsible.  That’s why teens are now the number one target of credit-card companies.”

Some fear that “If no one used debt, our economy would collapse.”  Ramsey says if everyone stopped using debt immediately, then “The economy would collapse.  What if every single American stopped using debt of any kind over the next 50 years, a gradual TOTAL Money Makeover?  The economy would prosper, although the banks and other lenders would suffer.  Do I see tears anywhere?”

Baby Steps

Although Ramsey refers to the steps of his plan as “baby steps,” only the first one is really a baby step: “save $1,000 cash as a starter emergency fund.”  The rest of the steps are much more substantial: pay off debts, finish building the emergency fund, save 15% of income for retirement, save for college, pay off your mortgage, and finally enjoy being wealthy.  Readers are warned to do the steps in order and complete each one before moving on.

Before any of the steps begin, Ramsey says you must make a budget, and if you’re married, you must agree with your spouse on it.  Further, “If you are behind on payments, the first goal will be to become current.”

Some people believe that having available credit is a substitute for an emergency fund.  “The worst time to borrow is when times are bad.”  “Emergencies are precisely when you don’t need debt.”

Although it certainly is possible to pay cash for a home, Ramsey allows that a mortgage is the one type of permissible debt.  “Never take out more than a fifteen-year fixed-rate loan, and never have a payment of over 25 percent of your take-home pay.”  I think this limit on the size of payments is important; too many people bury themselves in mortgage debt.  As for the 15-year rule instead of a longer mortgage with the plan to make extra payments, “Research has found that almost no one systematically pays extra on their mortgage.”  I guess my wife and I are exceptions.  For the first 3 years of our first mortgage, we doubled every monthly payment and made a 10% annual payment.

Throughout the 7 baby steps, “Always manage your own money.  You should surround yourself with a team of people smarter than you, but you make the decisions.  You can tell if they are smarter than you if they can explain complex issues in ways you can understand.  If a member of your team wants to do something ‘because I say so,’ get a new team member.”

An interesting take on financial advice: “When selecting and working with your wealth team, it is vital to bring on only members who have the heart of a teacher, not the heart of a salesman or the heart of an ‘expert.’”


The best parts of this book are the attack on debt to shake people away from the feeling that debt is normal, and the motivational aspects to get people going with changing their lives.  Like many books, it’s not hard to find parts that are easy to criticize, but there are enough good parts to be worth reading if you have debt problems or want more insight into how to help others who have debt problems.


  1. Thanks for the book review Michael. I've read Dave's book couple of months ago and agree with your 2 assessment in the expected return of 12% and withdrawal rate of 8% during retirement.

    While 12% is a bit on the high side, I do think 9-10% over the long term (e.g. 30 years) is not unreasonable. Even a balanced portfolio of 60/40 can expect 8-9% return over the long run. You might be right about the low return in the coming decade but for younger investors having a 20-30 time horizon can expect a much higher return than 4% (providing they stay invested and not bail during a crash).

    The 8% withdrawal rate is interesting as Dave is not the only one suggesting that. Over at The Greater Fool, he seems to have the same idea. While he doesn't flat out say 8%, the examples he gives indicate an approx. 8% withdrawal rate. Personally, I wouldn't even consider 5%, 3.5-4% is a safer bet.

    1. Hi Financial Ramen,

      I don't like to speculate about future nominal returns because it's inflation-adjusted (real) returns that matter. Over 20 to 30 years, I plan based on 4% real returns for stocks and 0% real for bonds, which may be conservative but it's hard to tell.

      I agree that a 3.5-4% withdrawal rate makes sense for a younger retiree. Older retirees can get away with higher withdrawal rates.