The Total Money Makeover Workbook

1. Confront Denial and Take Responsibility for Your Finances

"If you will live like no one else now . . . later you can live like no one else."

Face financial reality. Many people live in denial about their true financial situation, often believing they are better off than they really are. To achieve financial fitness, you must first confront the reality of your current financial state. This involves taking a hard look at your income, expenses, debts, and savings.

Take full responsibility. Recognize that your financial situation is ultimately your responsibility. Avoid blaming others or circumstances for your financial problems. Instead, focus on what you can control and take action to improve your financial health.

• Common signs of financial denial:
  • Avoiding looking at bank statements or credit card bills
  • Regularly using credit to cover basic living expenses
  • Believing that more income alone will solve financial problems
  • Comparing yourself to others who appear to be doing well financially

2. Dispel Common Money Myths and Avoid Debt Traps

"Debt is (not) a tool."

Debt is not a wealth-building tool. One of the most pervasive money myths is that debt is a necessary tool for building wealth. In reality, debt adds risk to your financial life and often hinders wealth accumulation. Avoid using debt as a shortcut to acquire things you can't afford.

Beware of debt traps. Many financial products and services are designed to keep you in debt. Be cautious of:

• Credit cards with high interest rates
• Payday loans and cash advances
• Rent-to-own agreements
• Home equity loans used for consumer spending
• Car leases or long-term auto loans

Instead of relying on debt, focus on saving and investing your income to build wealth over time. This approach may require more patience, but it leads to greater financial security and freedom in the long run.

3. Create a Written Budget and Stick to It

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

Develop a zero-based budget. Create a written budget each month that allocates every dollar of your income to specific categories. This ensures that you have a plan for all your money and helps prevent overspending.

Make budgeting a habit. Stick to your budget by tracking your spending and regularly reviewing your progress. Be willing to adjust your budget as needed, but always maintain the principle of allocating all income.

Key budgeting tips:

• Use cash envelopes for discretionary spending categories
• Have regular budget meetings with your spouse if you're married
• Prioritize necessities (food, shelter, utilities, transportation) before wants
• Include savings and debt payoff in your budget
• Allow for some "fun money" to maintain motivation

4. Build an Emergency Fund for Financial Security

"An emergency fund turns a crisis into an inconvenience."

Start with $1,000. Your first financial goal should be to save $1,000 as a starter emergency fund. This provides a buffer against small unexpected expenses and helps break the cycle of relying on credit cards for emergencies.

Expand to 3-6 months of expenses. Once you've paid off all non-mortgage debt, increase your emergency fund to cover 3-6 months of expenses. This larger fund provides security against major life events such as job loss or prolonged illness.

Emergency fund guidelines:

• Keep the fund in a liquid, easily accessible savings account
• Use the fund only for true emergencies, not for regular expenses
• Replenish the fund quickly if you need to use it
• Adjust the fund size based on your job security and family situation

5. Use the Debt Snowball Method to Eliminate Debt

"Focused intensity over time, multiplied by God, equals unstoppable momentum."

List debts smallest to largest. Write down all your debts (except your mortgage) in order from smallest balance to largest. This arrangement provides quick wins to build momentum.

Attack the smallest debt first. While making minimum payments on all debts, put every extra dollar toward paying off the smallest debt. Once it's paid off, move to the next smallest, applying the freed-up payment from the previous debt.

Debt snowball benefits:

• Provides psychological wins to maintain motivation
• Simplifies your financial life as you eliminate individual debts
• Creates momentum as you apply larger amounts to subsequent debts
• Typically results in faster overall debt payoff than other methods

6. Invest 15% of Your Income for Retirement

"If you will live like no one else, later you can live like no one else."

Prioritize retirement savings. Once you're debt-free (except for your mortgage) and have a full emergency fund, invest 15% of your gross income for retirement. This ensures you're building wealth for the future while still allowing for other financial goals.

Use tax-advantaged accounts. Maximize contributions to retirement accounts in this order:

1. Employer-sponsored plans with a match (e.g., 401(k))
2. Roth IRA
3. Additional contributions to employer plans or other retirement accounts

Investment strategy:

• Focus on growth stock mutual funds with a long track record of success
• Diversify across four types of funds: Growth, Growth & Income, Aggressive Growth, and International
• Avoid trying to time the market; instead, invest consistently over time

7. Save for Your Children's College Education

"Providing for your children's college education is a blessing if you can do it without sacrificing your financial health."

Start early if possible. If you have children, begin saving for their college education after you've secured your own retirement savings. The earlier you start, the more time your money has to grow.

Use tax-advantaged accounts. Consider using Education Savings Accounts (ESAs) or 529 plans to save for college. These accounts offer tax advantages when used for qualified education expenses.

College saving tips:

• Aim to cash-flow college expenses if possible, avoiding student loans
• Explore scholarships, grants, and work-study programs
• Consider less expensive education options, such as community colleges or in-state public universities
• Encourage your children to work and save for their own education expenses

8. Pay Off Your Home Mortgage Early

"The paid-off home mortgage has taken the place of the BMW as the status symbol of choice."

Accelerate your mortgage payments. Once you're investing for retirement and saving for college, put all extra money toward paying off your home mortgage. This can save you thousands in interest and provide incredible financial freedom.

Avoid refinancing traps. Be cautious of refinancing to extend your loan term or take cash out of your home equity. These moves often cost more in the long run and increase your financial risk.

Strategies to pay off your mortgage early:

• Make extra principal payments each month
• Apply windfalls (bonuses, tax refunds, inheritance) to your mortgage
• Consider switching to a 15-year fixed-rate mortgage if the numbers work
• Avoid taking on new debt that could hinder your mortgage payoff progress

9. Build Wealth and Give Generously

"There's no energy in logic. You have to get fired up."

Continue building wealth. Once you're completely debt-free, including your home, continue investing and building wealth. This allows you to secure your own financial future and make a positive impact on others.

Practice generous giving. As your wealth grows, look for opportunities to give generously to causes and people you care about. Giving not only helps others but also brings personal fulfillment and perspective to your financial journey.

Ways to build and share wealth:

• Increase your retirement savings beyond 15%
• Invest in non-retirement mutual funds or real estate
• Start a business or side hustle to generate additional income
• Create a giving plan to support charities and individuals in need
• Consider establishing a family foundation or donor-advised fund for structured giving

Last updated: September 22, 2024