If you know me, you know I’m really serious about paying off my debt. I sacrifice a lot in my day to day activities in order to reach this goal as quickly as possible. Giving myself 3 years is a reasonable amount of time to pay off my remaining $62,000, but ideally I’d like to pay it off sooner. I keep telling myself “2016…THAT’S GOING TO BE MY YEAR!” But I would love to claim 2013 or 2014 as MY year.
To reach my goal as fast as possible I’ve decided to follow Dave Ramsey’s baby steps to pay off debt and build wealth. I am an avid listener to the Dave Ramsey show podcast, I find him to be helpful, knowledgeable and motivational on the topic of money. Dave is a a self-made millionaire; he didn’t come from a wealthy family. He worked hard, acquired great financial success at a young age and did all the wrong things with his money and went bankrupt. Dave is now a millionaire once again, has attained formal education in finance and is happy to share his lessons learned with money. While I don’t agree with every (non-financial) opinion Dave talks about on his show, I do rely heavily on his financial teachings for my own journey and have found them to be extremely beneficial.
I’ve summarized Dave’s baby steps below:
Baby Step 1: $1000 Emergency Fund
The first step is to quickly save $1000 in a liquid account, most likely a savings account. This will give you ease in the transition of not relying on credit cards. So the next time the car breaks down you can pay for the work out of your emergency fund rather than charging it to a credit card and paying unnecessary interest.
Baby Step 2: Snowball Method to Pay Off All Debt Except the house
Dave suggests listing out all of your debts in order from smallest balance to largest balance. You get your income up as much as possible (taking on extra part time jobs, selling things, etc) and focus on paying the smallest balance off as soon as possible while paying the minimum amounts on all other debts. Once the smallest is paid off you roll over the payment from that debt into the next smallest debt and pay that one off as quickly as possible. Essentially you are gaining momentum after paying off each debt, comparable to rolling a snowball in the snow and it keeps building upon itself and becoming bigger and bigger. Continue this until you are debt free except the house. Click here for a more in depth breakdown.
Baby Step 3: Save 3-6 Months of Expenses in Emergency Fund
After all debt is paid off, you then go back to your $1000 emergency fund and save 3-6 months of expenses to complete your emergency fund. It may be beneficial to use the snowball method to accumulate this fund quickly. So to take the example above, you were paying $700 each month on all your debt, take that $700/month you were using on debt and designate that to your emergency fund until it’s fully funded.
Baby Step 4: Invest 15% of your income into Roth IRA’s and Pre-tax Retirement
If your job matches 401K’s always contribute to the maximum amount matched, that’s free money! Dave Ramsey has a great resource on his website where you can contact his endorsed local providers to get some help with investing.
Baby Step 5: College Funding For Kids
This step should be done while you’re continually funding for your retirement. It’s a good idea to start saving for this even if you don’t have children yet; preparation is key!
Baby Step 6: Pay of the home early
Use all extra money after your monthly expenses and investments to pay as much as you can toward your mortgage. This should be much easier since you no longer have any debt payments eating up your income.
Baby Step 7: Build Wealth and Give
Dave says there are 3 things you should be doing with your money: Saving it, Spending it, and Giving it. Giving it may be the most fun of the three. Be sure to enjoy yourself with your wealth and be sure you are doing ALL three of these things with your money.
Do you have a method or a plan to get your finances in order?