From Total Money Makeover

Excerpts from Total Money Makeover by Dave Ramsey (2003) - interesting how this book defies most of the conventional wisdom that it is important to borrow to build wealth.

If you will live like no one else, later you can live like no one else. (If you make sacrifices now that most people aren't willing to make, later on you will be able to live as most people will never be able to live.)

If you keep doing the same things, you will keep getting the same results.

Myth: Debit is a tool and should be used to create prosperity
Truth: Debt adds considerable risk, often doesn't bring prosperity, and isn't used by wealthy people as much as we believe.

Car lease is the most expensive way to operate a vehicle

• 98% of leasing is done on new car, which loses 60% of its value in first four years
  
• creating unneeded business expense for tax write off is bad math

Debit is not a tool; it is a way to make banks wealthy, not you.

You should be far more worried about the danger of using credit cards than the danger of being robbed while carrying cash. When you spend cash, you spend less.

Insurance

1. Auto / Homeowner - choose high deductibles to save on premiums
2. Life - 20 year term - 10x income - never use as place to save $
3. Long Term Disability - buy through work at fraction of cost; cover 50-70% of income
4. Health - #1 cause of bankruptcy is medical bills (#2 is credit cards)
5. Long Term Care - if over 60, buy

Must have will.

We destroy our finances by buying stuff we can't afford to try to make ourselves appear wealthy to others. If you are using $ to impress others, this has to change before you can get on a real plan to fiscal fitness.

You must use a written budget every month.
If you aren't working together as a couple, it is almost impossible to win.
Once a budget is agreed to and in writing, don't do anything with money that isn't on that paper.
If something comes up in mid-month that causes budget to need changing, call emergency budget committee meeting. You can change budget (and what you do with $) only if:

• both spouses agree to change
• budget is still in balance - if you increase spending in one category, you must reduce spending somewhere else.

Baby Step One: Save $1,000 as Starter Emergency Fund (liquid available cash - must be easy to access - not in mutual funds). The emergency fund is not for buying things or for vacation - it is for emergencies only. A well planned budget for anticipated expenditures and an emergency fund for truly unexpected can end cycle of dependence on credit cards.

Baby Step Two: Start the Debt Snowball to become debt free, except for your home. Pay off smallest debts first (so you have some quick wins). Most important step in Total Money Makeover. Stop borrowing!

Baby Step Three: Finish the Emergency Fund so you can cover 3-6 months of expenses:

• something 'on sale' that you 'need' is not an emergency
• beware of using the emergency fund for something that you should save for then purchase
• emergency fund is not for wealth building. It is to protect you against storms, give you peace of mind and keep next problem from becoming debt.
• with an emergency fund, what used to be a huge, life altering event will become a mere inconvenience

Baby Step Four: Invest 15% of your before tax gross income in retirement. Growth stock mutual funds:

1. Growth (mid cap equity)- 25%
2. Growth & income (large cap blue chips) - 25%
3. International (foreign / overseas) - 25%
4. Aggressive Growth (small cap, emerging market) - 25%

Baby Step Five: Save for kids college

Baby Step Six: Pay off home mortgage early

Baby Step Seven: Build wealth

Myth: It is wise to keep home mortgage to get tax deduction
Truth: Tax deductions are no bargain

Myth: It is wise to borrow all I can on my house (or continually refinance for cash out) because of great interest rates, then I can invest money.
Truth You really don't make anything when the smoke clears

Myth: Take out a 30 year mortgage and promise to pay it in 15 years so if something goes wrong you have wiggle room
Truth: Something will go wrong
If you take out a mortgage, pretend that only 15 year terms exist.

Myth: It is wise to use lower rates offered by ARM or balloon mortgage if you know you'll be moving in a few years anyway.
Truth: You'll be moving when they refinance

Myth: A home equity loan is good to have instead of an emergency fund.
Truth: Emergencies are precisely when you don't need debt

Use money for:

1. fun
2. investment
3. give - the most fun you will ever have with money

More on web at Total Money Makeover and Dave Ramsey.