7 steps to build financial future | Book summary: The total Money Makeover

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The total money makeover by Dave Ramsay shows us how to eliminate debt forever in small increments, and 7 steps plan to build the financial future you deserve.

Are you struggling financially?

Before we can solve a problem, we must know and admit that there is a problem. Our formal education does not teach us to make our financial future. This is the reason, most of us do not know much about finance and end up struggling financially.

That’s fine! Having a problem is perfectly fine if we know about it and take actions to fix it. The question is, “What actions”? This is where The total money makeover by Dave Ramsay will help us.

7 steps to build financial future

The author suggested a 7 baby-step process to build a financial future. They are:

  1. Save $1,000 for your Starter Emergency Fund
  2. Pay off all debt (except the Home-loan) using the Debt Snowball
  3. Save 3–6 months of expenses in a Fully Funded Emergency Fund
  4. Invest 15% of your household income in Retirement
  5. Save for your Children’s College Fund
  6. Pay off your home early
  7. Build Wealth and Give

Let’s see these steps in more details

Baby-step 1: Save $1,000 for Your Starter Emergency Fund

Well, $1000 might not be a good fit for Indian audiences. This is not a complete emergency fund, that we will do in baby-step 3. However, assuming we are in a bad financial situation, we need to start from somewhere first.

In India, we may consider it as ₹ 1,00,000 or whatever fit your budget. It may be equal to your 1-month salary. Think carefully, how much amount you will need if you get an emergency. In this note, for reference purpose, we will refer starter emergency fund as ₹ 1,00,000.

Why we need Starter Emergency Fund for financial future?

In his books, Dave Ramsay gives a citation stating “Money magazine states that 78% of us will have a major negative financial event in any given 10-year period”

How saving $1000 (or ₹ 1,00,000) will help?

Most of us do not have any financial education. Even though everyone needs to manage their finance, our formal education does not prepare us for a financial future. Thus, it is our responsibility to train ourselves in the field.

Most of us are stuck in a financial rat race; we live paycheck to paycheck. We get the salary and we use almost all of that every month.

The first thing this step will help is by teaching to make a budget. If we need to save ₹ 1,00,000, we need to think about where we may cut our expenses. We can’t stop must do things like paying different EMIs or school fee for kids. However, it will force us to see where our money is going and where we may cut to make Starter Emergency Fund.


A budget is telling your money where to go instead of wondering where it went.

Dave Ramsay

The second thing this step will help is having a Starter Emergency Fund. If we get an emergency, we will not need to ask for money from friends/relatives or take up a new loan. However, a golden rule here, if we use it for an emergency, consider it as a loan and refill it as soon as possible.

The third and most important thing it will teach us is strong self-control. We need strong self-control not only making this fund but not to use it for our new phone, just because you need the latest phone launched recently and your friend purchased it. This is an emergency fund and must be used for life-threatening and unforeseen emergencies only.

impress people

We buy things, we don’t need

with money, we don’t have

to impress people, we don’t like.

Dave Ramsay

Baby-step 2: Pay off all debt (except the home-loan) using the Debt Snowball

Once we have a starter emergency fund, it is time for the next step; Debt Snowball.

If we want to win in the game of money, we need to identify our enemy;

That enemy is Debt.

With financial rat-race, we all have some loans like Home loan, Auto (car/two-wheeler) loan, Personal loan, loan from friends/family etc. We end up paying interest on these loans, which is simply a wastage of money. We must have a plan to get rid of these money burning loans as soon as possible.

What is Debt Snowball?

In warm countries like India, we do not have snow except few regions. On mountains covered with snow, some times, small snow starts rolling downhill. As it comes down, it’ll pick up more snow and speed, quickly growing into a huge and powerful snow boulder.

In terms of debt, by Debt Snowball, the author means to start small and soon it becomes big until we have most of our debt paid. Let’s see how?

How to make a Debt Snowball?

pray and work

Pray like it all depends on God, but work like it all depends on you.

Dave Ramsay

According to the author, the first thing we need is to make a list of all the loans we have. It also includes loan we took from friends/family. Arrange them in ascending order; smallest at top and biggest at the bottom. Most likely, you will have a Home loan at the bottom.

The next step, use the money you were putting monthly in your starter emergency fund. Now since the starter emergency fund is ready, we can use that money. Do not start using that money for useless things again.

better tomorrow

Live like no else today, so you can live like no else tomorrow.

Dave Ramsay

We first must put this and any extra money in the smallest loan and get it closed.

What! Really? We may think paying the biggest loan first is mathematically more beneficial, and that’s true. However, the author says, it’s not a game of Maths. If it would be a maths game, we would have never taken a loan.

To win in a game of money, we must win emotionally. Focusing on the smallest loan first, it will finish early and we will realize “Yes, I can do it.

Once the first small loan finish, use the instalment of the first small loan into the second small loan. This will soon become a snowball effect and you will soon end up paying all your loans, except Home loan.

If we start with the biggest loan first, our first victory will be so late that we might lose focus.

Baby-step 3: Save 3–6 months of expenses in a Fully Funded Emergency Fund

This step will start once we close all our loans, except the home loan (Biggest loan).

In baby step 1, we created a starter emergency fund. Now it is time to make a fully-funded emergency fund.

What is a fully-funded emergency fund?

Life is full of uncertainties. We recently have Covid-19, which disturbed everyone’s life. Are we prepared for the uncertainty of the loss of a job? Can you survive 6 months without a job? No. Well, 3 months? No. Then there is a huge concern.

This is the emergency fund for such uncertainties.

An emergency fund is money that we need for 6 months. Again, do not confuse with 6 months expenses, it is 6 months income. (Assuming your monthly expenses is less than monthly income.)

The author suggests we need not spend this emergency fund anywhere. It must be present in a saving account or somewhere we can access it on very short notice. This is an emergency fund, not for getting interest.

Part 2

This post has grown too long. I’ll be covering the remaining 4 baby steps in the next note, which will be published soon. Please let me know if this is helpful and you need part 2 of this post. Just write down a comment, letting me know if this note was helpful for you or you need part 2 soon.

Please note: This is just a book summary. No summary can replace the original book. If you like the summary and agree with it, it is highly recommended to purchase the original book and read it. Details, examples, case studies provided by the author in the original book cannot be matched by any book summary.

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