Total Money Makeover

Seven steps to financial freedom, according to financial guru Dave Ramsey

Are you in need of a financial makeover?

Makeovers aren’t just for reality TV contestants who suddenly discover the magic of a good haircut and a wardrobe that fits. Your bank account deserves a glow-up too! A total money makeover isn’t about putting lipstick on a financial pig — it’s about ditching bad money habits, reshaping your spending mindset, and strutting into financial freedom like you just got a professional styling session. Ready to turn that financial “before” picture into a masterpiece? Let’s get to work.

American financial guru and self-made millionaire Dave Ramsay has a seven-step process for you. These are explained in his book, The Total Money Makeover. Here, he advocates a specific process to become financially secure. Despite the book's “snake-oil” sounding title, the steps are generally sound.

These seven steps can be applied in different ways, so to help you on your financial journey, here at Become Wealth we’ve taken the liberty of adding our own comments to each of Dave Ramsey’s steps.

By following the seven steps in sequence — to put it plainly, not moving on to the next until the current step is complete — you will gradually progress from debt to wealth. Let’s take a closer look.

Step One: Starter Emergency Fund

Before you do anything else, Ramsay suggests saving $1,000 cash as a starter emergency fund. This money is to be used only for emergencies: car or appliance repairs, unexpected dental bills, and so on. This cushion of cash will ensure that life’s mishaps won’t force you deeper into debt, and you’ll be able to recover more quickly.

If you’ve already got that step covered, then move on to Step Two.

Become Wealth comment: With the utmost respect to Dave Ramsey, one of the cornerstones to building long-lasting wealth and financial freedom is overlooked by him throughout the initial steps: boosted earnings. You can only save so much: you still have to feed yourself, clothe yourself, pay for shelter, and so on. But, with dedicated time and effort your earnings are potentially infinite. Especially if you’re many years from retirement, one of the first steps you should take is to invest in yourself and your own skillsets with a view to making yourself as valuable as possible as an individual. Your increased earnings can then be dedicated to the activities outlined in each step on this list.

Step Two: The Debt Snowball

Once you’ve built a small emergency fund, it’s time to tackle bad debt. Financial guru Dave Ramsey is a strong advocate of the debt snowball method, a tactic designed to build momentum and keep you motivated. Here’s how it works:

1. List your debts (excluding your mortgage and interest free student loan) from the smallest balance to the largest. This includes car loans, credit cards, consumer loans - pretty much anything.
2. Make the minimum payments on all debts except the smallest one.
3. Attack the smallest debt with everything you’ve got. Every spare dollar goes toward wiping it out (so long as there are no penalties for early repayment).
4. Once it’s gone, roll that payment into the next debt. Keep your total repayment amount the same but now apply it to the next lowest balance. This is where the "snowball" effect kicks in — your payments grow larger as each debt disappears.
5. Repeat until you’re debt-free. As each loan is eliminated, your repayment power increases, and soon enough, bad debt will be a thing of the past.

The beauty of this method isn’t just the mathematics — it’s the psychology. Knocking out small debts quickly gives you a sense of progress and keeps you motivated to stay the course.

Become Wealth comment: The debt snowball is a mildly controversial part of Ramsey’s plan, as it is only one of the two usual methods to deal with bad debts. The other approach is the “debt avalanche” method, where you pay extra money toward the one debt with the highest interest rate, not with the lowest balance.

Both methods still require that you list your debts and make minimum payments on all but one debt.

The logic behind the debt snowball method is based on gaining the mental advantage of having less debts to repay, as Ramsey explains: “The reason we list smallest to largest is to have some quick wins”. Naturally, you can choose either based on what might work best for you.

Step Three: Finish the Emergency Fund

Your $1,000 emergency fund was only a start — after you’ve eliminated your non-mortgage debt, it’s time for you to grow a better backstop. Ramsey’s advice is standard on this point: accumulate three to six months of living expenses. For most people, that’s $10,000 or so.

The easiest way to do this is to simply take the regular cash surplus you were applying to your debt snowball and convert it into a savings snowball. If you were paying $500 each month toward bad debts, now put that regular sum into a high-yield savings account.

Soon enough, you’ll have a great buffer to ride through any of life’s inevitable curveballs.

Step Four: Invest 15% of Your Income Towards Retirement

While you’re completing the first three steps (especially the first two), Ramsey recommends suspending all investment activity, which even includes suspending contributions into the US equivalents to KiwiSaver. He saves investing for step four, only once good habits have been established, a safety net built in the form of an emergency fund, and all bad debt repaid.

According to Ramsey, it’s true that you’ll give up a few years of compound returns in your retirement accounts, but that’s okay in the long run. By following the first three steps, you will have developed smart money habits and a strong saving ethic, so that it won’t take much effort to catch up.

Now that you’ve paid off your debt and saved for emergencies, Ramsey says to invest 15% of your income into managed funds. He recommends diversifying this particularly well, first into the equivalent of a KiwiSaver Scheme to maximise the benefits available, then put the rest of the 15% wherever it makes the most sense.

Become Wealth comment: Ceasing KiwiSaver contributions while you repay debt and build up an emergency fund risks missing out on some of the benefits of KiwiSaver (such as matching employer contributions) and risks that you’ll have lost momentum and won’t restart contributions again. This means it’s unlikely that “one size fits all” in this area.

Ramsey is also a big advocate for retirement savings accounts, but this might not apply for Kiwi investors because Ramsey is talking to a US audience who have some more appealing investment choices in this area. That’s because in the US, common options for retirement investing offer substantial tax advantages, allowing savings to grow tax-free until retirement. US retirement accounts also usually have looser withdrawal rules, which means funds can be more easily accessed, albeit with potential disincentives for doing so. KiwiSaver, New Zealand's equivalent retirement savings vehicle, does not offer the same tax benefits, has a negligible Government Contribution of $521 per year, and comes with a key drawback of rigid withdrawal conditions. Therefore, New Zealand investors might be wise to invest extra sums (that is, beyond the usual minimal contributions to KiwiSaver) in flexible and accessible investment solutions such as managed funds, real estate, or directly in the stock market rather than investing everything into a KiwiSaver account.

Step Five: Save for Your Kid’s Studies

Once you’ve begun saving for your retirement, you can turn your attention towards your children. Ramsey writes, “Saving for college ensures that a legacy of debt is not handed down your family tree.”

Ramsey also emphasises how kids can work their way through college to minimise student loans they need to take out.

Become Wealth comment: With New Zealand’s taxpayer-subsidised university education system, which is not the case in the US which has far higher tuition fees, most Kiwi families might not see this as the top priority that Ramsey does. That said, perhaps a priority for New Zealanders with kids might be to build a similar fund that can help your children buy first homes instead. Or, if not, head straight to Step Six.

Step Six: Pay Off Your Home Mortgage

Once you’ve taken care of everything else, it’s time for a final, giant step. Ramsey advocates prepaying your mortgage.

Become Wealth comment: Many people might take more comfort from repaying the mortgage on their own home before Steps Four and Five, that is, before investing for retirement or saving for your children’s education. This all comes down to the person’s present-day situation, future goals, and risk-taking appetite.

Step Seven: Build Wealth

If you've checked all the major financial boxes — wiped out your debt, built a solid emergency fund, invested 15% of your income, have invested for your kid’s education should you choose too, and repaid your home mortgage — you’ve positioned yourself for serious wealth-building, says Ramsey. By mastering the foundational steps, you’re already ahead of the pack. But now comes the fun part: enjoying the rewards of your discipline and hard work.

This is where financial freedom truly kicks in. You can give generously to causes you care about, retire early if you choose, and, most importantly, live life on your own terms. Whether that means traveling the world, starting a passion project, or yes, even buying that dream boat, the key is to do it debt-free. After all, wealth isn’t just about numbers in a bank account — it’s about the freedom to live life without financial stress.

Let’s recap Dave Ramsay’s seven steps to totally makeover your money:

1. Starter emergency fund
2. Use the debt snowball
3. Finish the emergency fund
4. Invest 15% for your retirement
5. Save for college
6. Repay the home mortgage
7. Build wealth

The Bottom Line: Money Makeover

Like any good makeover, the goal isn’t just a temporary glow-up — it’s a lasting transformation. You don’t want to be the person who gets a stunning new look only to go back to sweatpants and bed hair a week later. The same goes for your finances! Stick to the plan, avoid old habits like they’re last season’s fashion disaster, and watch your finances strut confidently into a wealthier future.

If you’d like to book a confidential and complimentary initial chat with a professional who might be able to help you with your own money makeover, then simply get in touch.