Dissecting Dave Ramsey’s “Total Money Makeover” - Start Your Emergency Fund [Part 1 of 7]

Posted by panzer on July 8, 2008. Filed under [Total Money Makeover, book review, cash management, financial freedom in Singapore, financial freedom principles, financial literacy in singapore, live within your means, personal finance, personal finance in Singapore]
Tags: [7 baby steps, Dave Ramsey]

Panzer’s penchant for performing book reviews surfaces again as I embark on my next series reviewing Dave Ramsey’s “Total Money Makeover” that took me a weekend to read but many more sessions to digest each of his 7 Baby Steps. This 7 parter will be less intense that the previous “Are You Ready for Retirement” series as Dave’s 7 steps are more intuitive and require lesser number crunching and running through of CPF rules.

I had heard of Dave Ramsey many times because many personal finance blogs make reference to the concept of “debt snowball” that is popularised by Dave Ramsey. I had heard of that term many times but never really understood it until I picked up a copy of “Total Money Makeover” through our excellent public library system.

Who is Dave Ramsey
He a best-selling author, radio host and someone who was a millionnaire before his 30s and he became bankrupt before discovering the knack for counselling people in dire financial straits. Like any popular figure, he also has his share of criticisms as you can see in this wikipedia article.

“Total Money Makeover” is one of his popular books and is the subject of our discussion.

Debt is BAD, BAD, BAD!

Make no qualms about it, Dave Ramsey is an interesting writer because his writing voice is informal and feels like he’s talking to you through the book. He peppers the books with side notes on “Dave’s Rants” or “Myths” that he dispels about debt and money. His approach to your total money makeover of a typical debt-ridden family or individual is to get with the program to become Arnold Swarzendollar. I kid you not…

His approach to getting yourself and your family’s finances back into shape is to follow the 7 Baby Steps:

1. Save $1,000 cash as starter emergency fund
2. Start the debt snowball
3. Finish the emergency fund
4. Invest 15% of your income in retirement
5. Save for college
6. Pay off your home mortgage
7. Build wealth

Baby Step #1 - Emergency Fund

When I visit many financial portals such as SgFunds or HWZ’s Money forum, many newbies like to ask how to start investing. The advice that tends to come first is to build up your emergency fund. This is also what Dave Ramsey advocates that we should set up our emergency fund at 3-6 months of your income (or living expenses). The average American in his book earns USD 40,000 a year, so 3 months is about $10,000. But the $1,000 is a pyschologically more achievable target for many who are so in debt that even saving a few dollars after paying the bills seem impossible.

The reason why you should have an emergency fund is because, “duh”, emergencies DO HAPPEN in real life and you need to have a buffer so that you won’t rack up NEW DEBT or dip into INVESTMENTS when it strikes. It is pretty common-sense and yet very true. Most investment books advocate that you should have some cash as part of your portfolio for that bit of liquidity.

For those who are just starting out your investments capital. Do start an emergency fund first. I personally also keep a emergency fund that varies from 3-6 mths of my income to buffer for unforseen expenses. It also allows me not to cash out my investment in stocks and shares should I need urgent cash for a major outlay that is unplanned.

An emergency fund looks easy but is not for those who are used to living BEYOND your means at TO THE LIMIT of your means. I count myself fortunate to have parents who were rather frugal and their frugal habits rubbed off onto me as I grew older and started working and earning an income.

To set up your emergency fund is to live within your means to build up the savings.

Delaying gratification is increasingly one of the great challenges to our consumer culture.

Be well and prosper.