A Proven Plan for Financial Fitness
Animated video summary by the Swedish Investor
Key Takeaways
Do things right the first time! If you will live like no one else, later you can live like no one else.
1. No More Denial!
If you drop a frog in hot water, he will jump out. However, if you drop him in room-temperature water, he will swim around and he will be cheerful, and gradually you turn up the temperature. He will fail to notice the change and eventually he will be lured to his death.
How do people lose their physical fitness and how do they lose their financial fitness? The answer is: Gradually.
There are many similarities between a great physical health and a great financial one. There are no quick and easy solutions that will make you lose 40 pounds in a week or become a millionaire overnight. No matter how much the late-night infomercials wants you to believe that!
You are where you are, both financially and physically, because of a series of decisions that you made in the past. The first part of anyone’s money makeover is accepting that there is a problem. This is where the similarities between your physical health and your financial one can differ.
If you’re out of physical shape, it’s difficult to be in denial. Heavy breathing and massive sweating when taking the stairs? Well – out of shape! Had to buy a whole new wardrobe this year, adding one more X before L’s to all your outfits? Out of shape! People will notice, and you will.
With money, it’s more difficult. You can easily fool everyone else, and possibly even yourself, into thinking that you are in a good financial shape. Just drive around in a luxury car and live in an upper-class neighborhood. Almost anyone can manage to do this – if they use enough debt.
But reality will catch up sooner or later and reality will HURT. Would you be able to keep up your current lifestyle for at least three months if you were fired from your job tomorrow? (without using credit, of course)
If not, you’re financially out of shape! Do you have more debts than you have assets? Out of financial shape! It’s time to face reality, and to make some changes around here! It won’t be easy, but it will be worth it!
A motto that Ramsey repeats throughout the book is this: If you live like no one else, later, you can live like no one else. I wouldn’t walk across hot coal because I think it’s fun, but if I know that the rewards on the other side are great enough I’d say: “Bring out the coal, damn it!”
2. Get an Emergency Fund
Your first step towards getting into financial shape is to get an emergency fund. According to Murphy’s Law: Anything that can go wrong, will go wrong. For some reason this seems to be even more true if you come unprepared.
On your journey towards financial awesomeness, you must take baby steps. As I stated earlier, you are not going to change your financial life overnight. And don’t let the late night infomercials tell you otherwise, because it will just end in loss of money and tears.
The first baby step is to save $1,000. After that, you continue to baby step number 2, which is in the next takeaway, and then you come back to building your emergency fund into a more robust one.
A healthy emergency fund should allow you to keep your current lifestyle, even in the unexpected events of you getting fired, for at least three months. Your emergency fund must always remain available to you – stocks is therefore a big no-no.
The same goes with real estate. At the same time as the assets must be liquid, you can’t have them too easily accessible. If you keep them in cash on your kitchen table, burglars will sniff their way to your house faster than you can say “I’m calling 9-1-1, okay?!”
Or worse: You spend them all on non emergencies, such as tailor-made suits, kitchen makeovers and and your Ben and Jerry cravings. Well, this sounds like a catch-22. Can the assets be both liquid and not too accessible at the same time?
This calls for some creativity. One of Dave Ramsey’s students bought a frame and stacked the cash inside. Inside the frame, she wrote “in case of emergency, break glass”. She then hung it behind coats in her closet. Remember if you live like no one else, later you can live like no one else.
3. Get the Debt Snowball Rollin’!
So, after you’ve acquired a $1,000 emergency fund you have arrived at Ramsey’s most famous baby step. It’s called the “debt snowball”. Your income is the most powerful ally in your wealth building process. Your most fearsome enemy, is debt.
If you can get rid of debt payments your income will turn into a financial force to be reckoned with. The most efficient way of taking on your fearsome enemy, Mr. Debt, is by using the debt snowball. List all the debts in order from smallest to largest payoff. Wait with the mortgage until you have completed what I’m about to present in takeaway number 4.
You start this debt snowball by doing everything that’s in your power to pay back the debts on top of the list. You might want to avoid criminal activities, and you’re absolutely forbidden to use the emergency fund for this!
We are not to focus on the debts with the highest interest rate first, even though that would make sense from a mathematical standpoint. Why? Because let’s face it. We need some quick wins! If you go on a diet and you lose weight already during the first week, you will stick to it. The same goes for our Money Makeover.
Once you’ve crossed out the first item on the list, you will feel a great sensation. This is actually working! As if that wasn’t enough, now is where the snowball will start to work in your favor. Once you’ve paid off the first debt, you must no longer pay interest for it. This means that you’ll have more income that can be focused on paying off the next item on the list.
The snowball is now getting up to speed. And what seemed to be a tiny, tiny snowflake at first, will eventually turn into a freaking avalanche! Typically, it takes somewhere between 24 and 30 months to complete the emergency fund and the debt snowball. Did I mention that if you live like no one else, later, you can live like no one else?
4. Be Financially Healthy For Life – Maximize Retirement Investing
You now have an emergency fund for a rainy day, and you’re almost debt free, except for your mortgage. It’s time to make sure that your financial health will remain (well) your whole life.
Similarities between physical and financial health could be seen again. Once you get fit, you only need simple maintenance to keep it that way. To make sure that you’ll be prosperous your whole life, you should invest 15% of your income in retirement. I’m referring to the before tax, gross income here.
The process on how to do this is country specific. First, you should make sure to maximize any savings where you have a company match. So, if your company doubles the money that you invest in your 401(k) up to, say 3% of your gross income, use that to your advantage.
After that, max out your Roth IRA, where money will grow tax-free, and then you put the remaining percentages, if you aren’t at fifteen yet, in your 401(k) again.
5. Reach Financial Independence
When you reach this step, it’s time to aim for the finish line – becoming financially independent. You should have a lot of capital to spend as you have no debt payments any longer.
Ramsey suggests using this capital to invest in four different types of mutual funds:
1. Growth and Income Funds
2. Growth Funds
3. International Funds
4. Aggressive Growth Funds.
5. He also suggests doing debt free investing in real estate.
These investments will make a lot of money for you after a while. When your money makes more money than you do, you are officially wealthy. If you can live off 8% of your money nest egg, you never have to work again, if you don’t want to.
Go ahead! Calculate where that point is for you with your current lifestyle. When you reach this point, congratulations! Now go out and enjoy the freedom, self-confidence and feeling of security that such a financial state brings. Also, don’t forget that giving away some to people who are in need can be a great experience for both the giver and the receiver.
If there’s one thing that you should remember from this video, it’s that if you live like no one else later, you can live like no one else. If you follow these steps you will for sure become rich. It’s a proven method, and it absolutely works!
But there are many temptations along the journey which makes it more difficult, and the people surrounding you will most likely try to pull you back down into financial mediocrity with them.