the baby steps

I've mentioned that I'm following the incredibly simple debt-reduction plan taught by Dave Ramsey.  To give you an idea of what exactly that plan is, here is a list of the seven "baby steps" he teaches as a means to get out of debt and build wealth.


Baby Step 1
$1,000 to start an Emergency Fund
Dave frequently refers to this Emergency Fund to as "Murphy Repellent," meaning that Murphy's Law ("Anything that can go wrong will go wrong.") seems to apply far less to those who are prepared to deal with the unexpected.  It is crucial to keep perspective on what is truly an emergency when considering using this money.  Is it really an emergency?  Could I save money to cover this expense rather than pulling money from my Emergency Fund?


Baby Step 2

Pay off all debt using the Debt Snowball

The Debt Snowball pays off all debts except a first mortgage.  Dave suggests paying off the lowest balances first.  Pay the minimum on everything except the lowest balance and put everything you can toward that creditor until it is paid off.  Then take the amount you were putting toward that balance and attack the next lowerst balance.  As each balance is paid off, the snowball grows and more money is available to pay toward the lowest balance each month.  Learning to live on a budget and within your means (living on less than you make) is the only way to get out of debt and stay out.

Baby Step 3

3 to 6 months of expenses in savings

After the debt is taken care of, it's time to beef up the Emergency Fund.  More savings means you're better prepared for bigger emergencies should the arise.

The next several steps overlap or occur simultaneously. With the first three steps, you are digging out of a hole and ensuring that you are prepared to handle emergencies without incurring debt. The remaining steps are about building wealth.


Baby Step 4

Invest 15% of household income into Roth IRAs and pre-tax retirement

This is just the start of retirement preparation unless you're already on the verge of retirement.  Once the rest of the Baby Steps are complete, more may be invested.  My company matches 401(k) contributions, doubling the first 1% and matching the next 3%.  That means that if I put in 4% they will put in 5%.  That's free money!

Baby Step 5

College funding for children

R and K will be starting college at the same time, so this step is a little intimidating.  R declared the other day that she wants to be a doctor.  Later the same day, we were driving past the private college that I attended briefly and she told me that was where she wanted to go to school.  Granted, she is not even four years old yet, but I want to support her big dreams.  After all, I want to be in a nice nursing home someday!

Baby Step 6

Pay off home early

Home mortgages are the only type of debt that Dave Ramsey understands as a necessity for most people.  He would prefer that everyone pay cash but that's not an option for most people.  He provides some guidelines for those looking to buy a home:

1. Utilize only 15-year, fixed-rate mortgages.
2. Your monthly payment should be no more than 25% of your take-home pay.

Using these guidelines helps you to keep the cost of your home within your means and if your payments are reducing your mortgage balance at a faster rate, equity in your home is built more quickly.

Baby Step 7
Build wealth and give!

With the first six steps out of the way, you can invest more in your retirement if you'd like.  You can give more to the philanthropic organizations that are important to you.  You can even add more cash to the fun envelopes!  A fortune cookie I got recently said it best: 

"If you continually give you will continually have."

So those are the Baby Steps!  That's not so hard, is it? :)

This blog is now open to the public.  Feel free to pass it along to anyone you think may enjoy or benefit from it.  The links over there ---> might help me pay my debt down faster if I find myself with some followers who click on them now and again.

I'm adding labels to my posts so specific topics can easily be found.  I've also added a net worth tracker.  It's not much to look at right now, but it'll be fun to watch it change.  I'm a nerd for math, graphs, and spreadsheets so all of this is kind of fun for me.  I like paying bills.  How weird is that?

Please leave your answer in the comments below. :)

the approach

How do I keep it going?
I'm taking a few approaches to keep myself excited about paying off debt.  I want to stay focused so I'm trying to spend some time every day working on my finances in one way or another.  I look at my budget every time I recieve a bill to determine when it will be paid.  Because I'm in my first few months of using a budget, it is going to require some regular tweaking before I get it just right.  I am also listening to financially-focused podcasts on a daily basis to learn more and hear about the experiences that others are having paying off their debt.  Right now, I listen to The Dave Ramsey Show and Rebound.  I have also subscribed to MyTotalMoneyMakeover.com and am using the money tools there to help me in this process.  I'll blog more about that soon.

Why do I want to pay off my debt?
At this point, I spend about a third of my take-home pay on debt repayment.  That's ridiculous!  If I was able to save that money every month, I'd have the girls' college funds fully funded well before they were in high school.  I could afford to have them in preschool.  I could spend money on piano lessons.  And for me, I could contribute to a retirement fund and purchase stock at the company I work for.  I could buy new clothes when I lose weight.  I wouldn't be stressed out about how I'm going to pay for car repairs when they're needed.  And there is the fact that I hated going into my first marriage with debt.  I do intend to marry again someday and I don't want to bring financial baggage into the relationship.  I am currently dating an absolutely amazing man that has the desire and ability to be an entrepreneur.  Business ventures require capital.  I'd love to be a help rather than a hinderence in those ventures if we should end up marrying someday (and I hope we do <3).