Total Money Makeover

Myth: Debt is a tool and should be used to create prosperity.

Truth: Our country is based on credit; therefore, it runs on debt. Dave recalls the story of a professor who says that debt is two edged sword, one side could help you like a tool while the other will bring you nothing but harm.

Myth: Ninety days same as cash equals using other people's money for free.

Truth: Money talks and credit doesn't, well at least not enough to get you a discount. Stores are in business to make money and the way to do that is to move their product. When you sign up for ninety days same as cash, they have you on their terms. If you were to walk into the same store with cash you could get the same product cheaper.

For example, I needed a new washer and dryer. I did my homework and found that the one I wanted was well over $1700. With cash in hand, I went into an appliance store and inquired about their current sale. It just so happened that their sale price brought the washer and dryer down to $1500. That was better but it still wasn't what I wanted to pay. When I was talking with the sales associate, I learned that some water companies were offering a rebate of $150 for buying water efficient washing machines. All I had to do to obtain the rebate was to show the water department my receipt. So I asked the sales associate to write down their quote and I then went home and called the water department.

The water department said they would not be offering the rebate again that year because they had already used up their quota. I thanked the lady at the water department and proceeded to the next store. When I was talking to this sales associate, I casually mentioned my price quote and the part about the water department. Not wanting to lose the sale, this sales associate was able to miraculously able to match the other store's sale price plus an extra 10% and subtract $150 for water rebate. That was a huge savings and that was all due to not needing credit.

Myth: Car Payments are a way of life: you'll always have one.

Truth: You don't need to have a car payment. In fact, today's cars are made better than ever and are designed to have over 150,000 miles put on them. If you drive the average of 12,000 - 15, 0000 miles a year then that car will last at least 10 years. Dave says that the average car payment today is approximately $378 monthly. However, if you were to take that same $378 each month from the age of 25-65 and deposit it into a mutual fund averaging 12%, you would end up with $4,447,084!

Of course, Dave does realize that we do need a car to get around. He brings up great points about how quickly cars depreciate and how long cars will last if we take car of them.

There are so many other money myths that Dave talks about in his book, Total Money Makeover. For each myth, he explains why the myth is not valid and he provides suggestions on how to avoid falling into a deep financial trap.

Dave outlines many more debt and money myths and does an excellent job providing evidence of how debt does more harm than good. The next part of the book outlines Dave's strategy to get out of debt. This is fondly known as the debt snowball.

The first step in the debt snowball is to save $1000 cash as an emergency fund. This will be a liquid fund that will help you in case of emergency.

The next step is to write down all your monthly bills from the smallest payoff to the largest. Then you will need to set up a budget to allocate where your money is going to go. At this point, he recommends that you pay the minimum amount to remain current on each bill.

Once you have all that information in place, you are ready to start the snowball. The trick to the snowball effect is that you have to get your snowball rolling so you will need to get creative to initially help you find extra money. You can find money by cutting out luxuries, holding a garage sale, or even by getting a temporary second job. At this point, anything that you can do to create any extra income will benefit you.

Then you will pay the minimum on each of your bills and you will put the "extra" income toward the balance of the lowest bill. Hopefully, the yard sale will generate enough income to at least pay the littlest bill but even if it doesn't then you probably will have knocked it down quite a bit.

Once you get the smallest bill paid, then you take the money that you would have used on the paid off bill and apply it to the next smallest bill. When you get that bill paid off then that money that you used to pay the paid bill rolls into the amount you put toward the next smallest bill.

For example, lets say you had a student loan for $20,000, a $12,000 car loan, a credit card with a $3000 balance, a credit card with a $1000 balance, a medical bill for $500, and a cell phone bill for $325. Now let's say the minimum payment for the Student loan was $220, the car loan was $300, the first credit card was $100, the second credit card was $75, and the other two would accept a payment of $50 per month.

Now let's say that you held a garage sale and made $275. So to get the snowball rolling, you would pay the minimum payment for the all the bill except for the smallest one. By applying the minimum payment plus the earnings from the garage sale you could pay off the smallest bill. Then the next month, you would take the $50 that you would have paid on the cell phone and add that to the medical bill making your payment $100. Let's say you also sold a couple of things on ebay and made $150 so would add that to the medical bill. Now after a couple of months you have that bill off. Now you are able to take that $100 that you were paying on you medical bill and apply that to the $1000 credit card bill making your payment $175. You can see that now it won't take you too long to pay off that credit card. Once you have that paid off then that $175 will be added to the $100 payment you were making bringing your payment up to $275.

You can see that the key to getting out of debt is to start to free up some money and get a couple bills paid off. In fact, with the above example, it was just a matter of selling a few things to earn some extra money to get the ball rolling. Once it starts rolling then you just have to diligently work to wipe out the other bills.

Remember, in the introduction, I said that this book is all about changing your life. First, it takes you step by step to help you get out of debt. Once you are out of debt, then this book will teach you how to get your money to start to work for you.

After getting out of debt, the first thing you will need to do is set up a 3-6 month emergency fund. Our country is in a recession today and unemployment is on the rise. If you are in this situation you know how stressful these times can be. No one is really ever protected from adversity. Therefore, you must expect it and prepare for it. That's why after you have knocked out your debt you will need to have an emergency fund. If you have that fund and you loose your job you know that you have a safety net to help pull you through the tough times.

After flushing out the emergency fund, then you will work on saving for retirement as well as your children's education. Because you are debt free, you will have the resources to knock these two things out pretty quick and you will be amazed at how easy it will be to flush out these funds.

After securing your retirement and your children's educational future, the next step is to pay off your mortgage in order to completely set you free.

The Fun Begins

What would you do with an extra $2000 a month in cash? If you follow Dave's advice then, in time, that could be your reality. You could easy take that money and invest it and make it grow even more. If you wanted to travel, then you would have to money to do so. Maybe your dream is to help others through charity and $2000 could benefit so many people.

Regardless, the point is you will have the means to do what you want on your terms. Once you reach this point, you will have done the hard work and escaped the clutches of debt and secured you and your family's future. Now, you will be able call the shots and do what makes you happy. That is truly living.