As I mentioned in the last part of this series, we aren’t going to become debt free overnight and it’s going to take some really hard work along with some sacrifice. Before you start working on Dave Ramsey’s “Baby Steps” (which we’ll get to in a minute), you want to write down your budget. Write everything down from your rent, utilities, groceries, gas, what debt you have and what you spend money on. Every dollar needs a name, you need to see where your money is going and it’s time to get organized.
Remember when I mentioned that becoming debt free you might have to sacrifice? I’m sure you’re wondering what you would possibly have to sacrifice in order to become debt free. When you write down all your bills, you want to start thinking of ways you can cut some of the costs. Is your electric bill through the roof? Turn off the lights in the house you aren’t using and switch to the energy efficient bulbs. How high is your cable bill? Are you willing to cut the cable for a little while so you free up some cash to pay off a little debt? Have you shopped around for car insurance to see if you can find a lower rate? These are just some ideas to get started. Do you have to do any of these things? No, but if you did you could really free up a lot of money.
The first thing you want to do is pay the four walls… which are your rent, utilities, groceries and gas to get to and from work. Make sure you are current and up to date on all your bills. Start using the envelope system, don’t spend more then you make, and stop using your credit cards.
Dave Ramsey’s Baby Steps:
#1 – Save $1,000 as fast as you can. This is what is called your “baby emergency fund.” This little bundle of savings is for emergencies only! For the unexpected car repair, or if the hot water heater goes out, etc. Do not continue to baby step #2 until you have baby step #1 completed.
#2 – Pay off debt. List all of your debts from smallest to largest (in amount, not by interest rate). The smallest of your debts should be the first debt you pay off. Paying off that first debt will be your first victory. You’ll be amazed at how good you’ll feel for getting that debt paid off. Plus, that’s one debt that you’ll never have to see again and that is motivating. Dave Ramsey says to exclude your mortgage if you have one.
#3 – Emergency fund. This is the time to save for the big stuff, because it’s really not a matter of “if the big things are going to happen” (like a PCS, or something), but when.
#4 – Invest in a Roth IRA. Fifteen percent of your total income should be put in some sort of an account for retirement and Roth IRA’s are the best place to put your hard earned money.
#5 – Save for your kid’s college education. Who wouldn’t want to put their children through college if they can afford it? I personally, would never want my kids to have to struggle to get a college education like I have financially.
#6 – Pay off your mortgage. You’ve paid off your debt, you have a baby emergency fund set up, you have an emergency fund set up of 3 – 6 months worth of expenses (if not more), you’ve contributed to your retirement, you’ve started to save for your kid’s college education… and now it’s time to focus on that mortgage if you’ve got one. Paying off your home early is not something a lot of people can say they have done, and if you’ve used the VA home loan to help get your mortgage, more then likely you can pay that loan off early without being penalized!
#7. “Living like no one else” (Dave Ramsey, 2012). You’re debt free. How does it feel? Are you going to leave a hefty inheritance to your children and/or grandchildren? Are you going to start donating to charities more then you’ve been able to before? Are you going to continue to save?
What helps you save and pay off your debt? Share with us in the comments below…