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|
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!