Steps to Financial Freedom

Hi Friends!

Yesterday seemed like such a short day – Daylight Savings Time seems to just throw me off, even though it is only one hour difference. I was tired all day and felt like I was rushing around and not doing much. Oh well – hopefully today I will feel better!

This week I want to focus more on paying off debt/budgeting/etc, so today I thought I’d share with you the “Baby Steps” to getting out of debt and living in financial freedom. These steps are all from Dave Ramsey’s book The Total Money Makeover. I’ll also explain how Jason and I followed the steps and where we are today. You can also read more about them on his website.

***I’m not sure if this needs to be said, but I am not a financial counselor — Jason and I read Dave Ramsey’s book and followed the guidelines he suggests. I only speak from personal experience. ***

Step 1: Baby Emergency Fund of $1000

Save up $1000 as quickly as you can. This should be money you can access if need be – this is not money tied up in CDs or other investments. Jason and I had a few hundred dollars that was a great start to our Baby Emergency Fund (BEF) – as for the rest of the money? We had a garage sale and made almost $1000 dollars. We were able to finish off our BEF and we had money leftover to pay on one of our credit cards.

Step 2: Pay off debt using Debt Snowball

I’ll explain more of this tomorrow, since it will take me a while to explain. But basically, it is a way of listing out your debts: credit cards, student loans, car loans, personal loans, store credit cards, etc. List them in order from smallest balance to largest balance – do not include your mortgage, but you could include things like a second mortgage, Home Equity Loans, etc. (Some other debt payoff ideas have you look at interest rates and pay them off according to the highest rates, but Dave’s plan has you list them according to balance amount only – this is how we did it as well). Here is an example:

Debt Name Balance Due Minimum Payment
Macy’s Card $2000 $100
Visa Card $5000 $150
Car Loan $25000 $400
Student Loans $50000 $200

Briefly, this is how it works: Since Macy’s is the lowest balance card, any extra money you have each month would go towards paying the Macy’s card. If you sell something on Craigslist – use that money to make an extra payment on your Macy’s card. Attack the debt. Get rid of it. I’ll share more of the methods we used to earn extra money – that post should be up on Wednesday. The Debt Snowball will make more sense after I explain how we budget our money (Tuesday’s post).

The idea is, once the Macy’s card is paid off, you would then start paying $250 as your minimum payment on the Visa ($100 Macy’s payment that no longer exists + $150 Visa minimum payment) – that is the “snowball” effect — you are building and building. After the Macy’s, Visa and Car loans are all paid, you will be paying AT LEAST $850 per month on your student loans (plus any “extra” money you find when you make your monthly budget). If you are confused about where to find this “extra” money – I will be explaining how we set up our budget tomorrow which should answer many of those questions.

Jason and I have paid off our credit card debt ($35,000) but we still have our car loans – which we are attacking like we attacked the credit card debt.

Step 3: Finish off your Emergency Fund

Now that all of your debt is paid off (Dave says this could take a few years depending on your situation) – now is the time to finish off your Emergency Fund. Your goal is to have 3 to 6 months of expenses in savings. Follow the same method as the Debt Snowball, but instead of paying bills you will be putting that money into savings.

Jason and I technically are done with this step – we paid off our credit cards and then switched to Step #3 – we did this because there was a chance that Jason’s job was going to be moved to a different city which would require us to move. We wanted to have more money in savings in case we needed to move/rent an apartment in the new job’s location, etc. Now that we have our Emergency Fund stocked, we are back to paying extra money on the car loans (step #2)

Step 4: Invest 15% household income into Roth IRAs and other pre-tax retirement options

We are not at this step but we look forward to it. I’ll be honest and say I don’t have anything to say about this step – the book explains it, and I need to reread those chapters when we get closer to Step #4.

Step 5: College funding for children

Now that you are investing money into your retirement, you can start investing in your children’s future education. The Total Money Makeover book gives details about this step.

Step 6: Pay off the mortgage!

By this point you will be debt free (except for your house), your retirement accounts will be filling, any college funding will be put into place, and now you can focus on paying off your mortgage. I cannot wait until we have no mortgage payment!

Step 7: Build wealth and give!

This is an exciting step – being able to give money, donate to people/organizations/churches who need it. How awesome would it be to be able to give money to a children’s hospital, to help your church build a new building, to donate money to the Red Cross, or the Salvation Army, or to any other organization that you are passionate about.

*

I know this post may seem a bit overwhelming, but I hope it gives you a good overview of what the book details, as well as what you can do to get yourself to Financial Freedom.

Any questions – please feel free to email me at couchpotatoathlete (at) gmail (dot) com.

Enjoy your day!

~Holly

Advertisements

43 Responses to “Steps to Financial Freedom”

  1. blackhuff Says:

    Very good advice. Just one thing I never ever agree with these Financial planners is that they make it the parent’s problem to make sure there is a college fund for your children. Many people from where I am, either don’t have the money ever to invest in a college fund monthly or their believes are that children should work while in college or University to pay off the study monies themselves. I fall into the second category. It taught me valuable lessons when I had to pay my own way for college and that I want my children also to learn.

    • Holly Says:

      Marleen — I also paid for my own college tuition each semester. I didn’t take out any loans. I worked 2 jobs and went to school and made it work. My parents didn’t pay for any of it — and yes it was helpful (for me) to learn how to work, earn money, pay bills, save, etc.

      I don’t think there is anything wrong with paying for (or paying some of) your children’s college tuition — it all depends on the parents, the children, and how they treat money — is this a handout or are there some expectations? (will the child have a job, pay for their own car, get good grades, volunteer, etc?)

      • bakebooks Says:

        Very smart. I wish I had done that. But honestly I did work during my undergraduate but my Master’s program was too extensive and required clinical work that was non-paid but required which didn’t allow me to work. I was too concerned with grades and learning…I did work part-time but it was basically just spending money for events or to fly home.

        Do you mind if I ask how you accrued your credit card debt?? Most of my debt is all from schooling and student line of credits – NEVER get one of those!! And a car of course..;) (I subscribe to your comments but don’t get them…maybe I should email…)

      • Holly Says:

        Please let me know if you are getting this message — I’m emailing it to you and posting it here on the blog. I’ve had messages to your gmail address bounce back to me — not sure what the problem is?

        Nope, I don’t mind talking about how we got so much debt — the short story is this: we spent way more than we earned andJason was unemployed for a few months when we were first married. I’ll go into more detail later on this week. There is too much to tell 😦

      • bakebooks Says:

        Your a doll Holly 🙂 Your the second person that said email was sent back…hmm – I’m going to have to change that darned gmail address.

        I actually paid off my credit card a little while ago – wow – it was almost $10,000.

        But that’s nothing compared to the other stuff! With my student line of credit, loans and car – it’s about $160,000 (or a little more…). I’m already doing everything I can – trust me – I don’t buy clothes, hardly go out (no life at all) and work in the evenings for extra money.

        That’s the killer. I don’t have time to try to explore what makes me happy – like the blogging or creative writing.

        My only choice is to find MORE income…but that’s the other killer. Because I think you know how much I hate my job and field…suck it up? Sure. Of course. But I don’t think my mind is going to be able to do that much longer…

      • Holly Says:

        I’m just curious — is your current job in the field you went to school for?

        I only ask because I’m in a completely different field — I realized my Univ education was great, but not what I want to do with the rest of my life. Letting go of that helped me find the job I have now.

        That is great about paying off the credit card debt!

  2. Averie (LoveVeggiesAndYoga) Says:

    “I was tired all day and felt like I was rushing around and not doing much.”–

    Amen. Posted about that too!

    Great post, Holly. Thank you for the review of his book and putting it all on the line with your own personal situation and what’s worked for you guys.

    I am so happy for you that you two feel so good about where you’ve come…rightfully so given the great changes and things you’ve accomplished.

  3. Hollie @ Lolzthatswim(andRun) Says:

    Oh my goodness. Yesterday evening I fell asleep at like 9pm, since my body thought it was 10 ha.

    My parents were really good about saving for my education and I cannot thank them enough. We also give money to charity to the Salvation Army and animal shelter.

    • Holly Says:

      That is awesome Hollie — I just love being able to donate money and not feel like I can’t help at all. Even small donations make a big difference — but until we started setting money aside we never gave any of it away.

  4. 1970kikiproject Says:

    WAY TO GO HOLLY AND JASON!!! wow, you have really paid down your debt and been very responsible and determined. full congrats. thanks so much for sharing these tips and the steps to take. good, solid advice.
    will be nice to have daylight into the evening tonight! have a great day!

  5. Alaina Says:

    My husband and I did those steps!! And we’ve just finished step #4. #5 won’t be for a while. 😉

    Congrats on paying off the debt!!!

  6. Lisa Says:

    This is such great advice. I think focusing and having a good (what step you’re working on) seems so helpful. I feel like I’ve just stayed at the debt-free-but-not-saving-anything in a focused way step!

  7. Beth Says:

    I’m so excited about this series on your blog Holly! I think with any major thing in life, attacking it with a step-by-step plan is the way to go. I love that he suggests saving $1000 first because that seems do-able, before you attack all your credit cards. Looking forward to the rest of the weeks posts!

    • Holly Says:

      Thanks Beth!

      And yes, I liked that his plan had an emergency fund, because there were times when we’d “try” to pay off debt, but then an emergency would come up and we’d have to charge it! What a pain.

  8. Dorry Says:

    I love your review! I got out of debt in the past year and it was such a great relief – since now I can actually save a lot more.

  9. the neurotic yogini Says:

    Thank you for this! Looking forward to the upcoming advice!! 🙂

  10. Christina @ Food.Fun.Fabulous. Says:

    Loved this post! I am definitely planning on buying that book now – thanks for sharing!

  11. Katie Says:

    Um, I just sold stuff on Craiglist….and I bought an iphone with the money. 🙂

    Great job, I know how hrd you worked to get out of debt and how great it must feel.

    This is totally unrelated, but Hunger Games….http://jezebel.com/#!5781682/the-imminent-whitewashing-of-the-hunger-games-heroine

    • Holly Says:

      Thanks for the link! And I’ll take any Hunger Games related links in the future. It doesn’t matter if it is on topic or not 🙂

      How do you like your iphone?

  12. Sarena (The Non Dairy Queen) Says:

    We are actually working on debt now. We are in the process of finding ways to simplify life and make the money we do bring in go towards savings and paying things off. This is not a short process, but I think if we can figure out a way to “start over” we will be a lot better off. We need to be saving for college…our oldest will be there in 5 years. Not to mention the cars that we will have to buy in the next couple…it just keeps adding up!

  13. Maria @ Oh Healthy Day Says:

    I love these tips and have been using them to control my student loan and car loan debt. The hardest thing for me was getting used to having a savings (my Baby Emergency Fund) with only 1k – 1.5k, when I’m used to having more in there as a cushion. None the less, I just paid off a rather large student loan and not seeing it on my mint.com account just makes me happy. On to the next!

    • Holly Says:

      Maria that is wonderful! And yes, we use mint.com too — what a great site.

      When we started the steps, I remember wanting to have $5K as the emergency fund — but instead we decided to trust Dave’s system and just stick with the $1K. It worked out well and we’ve never had to dip into it, which has been great!

  14. Parita @ myinnershakti Says:

    I love hearing and reading about how to save money. You wouldn’t believe how many young people I’ve met recently who save NOTHING…absolutely nothing! They admit to living beyond their means and overspending. It shocks me every time, so your method is absolutely refreshing and very inspirational!

  15. emily (a nutritionist eats) Says:

    I seriously can’t wait to read more. Thank you for doing these posts!

  16. Laury @thefitnessdish Says:

    Great Post, Holly! Lord knows i need it! Bookmarking this and going to read it over more and reference it!

  17. Toni Says:

    Brilliant post!!! I love the “snowball” effect the best. Funny though, most financial planners suggest you pay the “biggest” debt first and not the smallest. Thanks for sharing!

    • Holly Says:

      I’ve also heard of financial planners telling you to attack the highest interest rate debt first — Dave’s book explains that you knock off the smaller debts and build some momentum that way.

  18. Fit Chick Britt Says:

    Thanks for posting this. My sister got out of a great deal of student loan debt through dave ramsey and swears by it. Fortunately, I learned a lot from my sisters example and have learned how to, atleast somewhat :-), budget my money.

    P.S. I bought one of those race medal holders you posted about and I love it.

  19. Christin@purplebirdblog Says:

    I am so impressed by your story, thank you for sharing this information so openly! 🙂

  20. Sara @ OurDogBuffy Says:

    The snowball effect really seems helpful. Love it! I will have to assess our debts this week!

  21. Stephanie Says:

    Love this post! Dave Ramsay’s baby steps make so much sense. It can just be so hard to get your other half on board so that the program really works.

  22. Angela (the diet book junkie) Says:

    what great and practical tips, thanks so much for the review! congrats on paying off your credit cards, btw, that must’ve felt really good. 😉


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: