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. :)

another one bites the dust!

I had my eye exam on Friday and discovered that I don't need new glasses. The glasses that I have are my current prescription.  It hasn't changed in seven years!  New glasses have now become a want rather than a need, so they're going to wait.  The money I had set aside to pay for my glasses has now been applied to my debt!  I have paid off three creditors this month and have $1,000 in the bank for emergencies!

Store Card 1 - $323
Direct Deposit Advance - $220
Credit Card 1 - $350
Line of Credit - $465
Credit Card 2 - $685
Student Loan 1 - $1,640
Store Card 2 - $2,800
Student Loan 2 - $3,145
Auto Loan - $4,005
Credit Card 3 - $4,470
Credit Card 4 - $4,910
Student Loan 3 - $5,615
Student Loan 4 - $6,025
 
According to the Debt Snowball Tracker that is part of my budgeting software, I have paid off $1,303.15 of my debt since I committed to this journey.  This includes both the larger payments I've made to pay off creditors as well as my regular payments to those still in progress.  I still have a long way to go, but this is an amazing start.  Next up is my Line of Credit.
 
I am using an envelope system for categories in which I tend to overspend the most or spend without thinking.  I have envelopes for groceries, restaurants, clothing and entertainment as well as one for fun money.  I have two checking accounts.  One of these is now being used solely for gas.  The reason for the gas account is that it makes it much easier to get gas when I don't have to take a pair of three-year-olds out of their car seats and into a store full of candy to pay for it.  That account is, essentially, my gas envelope.  The other checking account is being used to pay bills.

I'm still tweaking my budget with every paycheck.  I have discovered that I spend less on gas than I thought I did.  It's getting easier to admit that I don't have the money to do some things.  It's also very exciting to have money set aside to have some fun.  The girls and I are getting back into the habit of going to the library on our weekends together.  They love it and it provides entertainment for several weeks in the form of books and movies.  Gabe and I often cook as a form of entertainment and just generally enjoy each others' company.  I have maintained my Netflix account as an inexpensive form of entertainment as well.  We only get one DVD at a time and unlimited streaming movies online, so there is always something to watch if we're lacking things to do.  When we do go out, it's far less expensive with Gabe than most of my social life had been prior because there is no drinking on his part and very little on mine.  I used to buy friends drinks if I was getting myself one so the expense of one drink often doubled or tripled.  They're not cheap to begin with, so this is probably saving me more money than I even realize.

Things are great. My valentine's weekend was low-key and wonderful.  The girls and I are taking a road trip tomorrow to see Grandma Char and Grandpa Doug.  It'll be fun to spend some time with them and the girls always have a great time.  See you soon, mom and dad!

i've hit the gas pedal!

I'm happy to announce that I have already paid off my first two debts! Store Card 1 and my Direct Deposit Advance were both paid off this week, never to be seen again.  This is where I'm at (yes, these balances are the same as the last post as these posts are being made on the same day).

Direct Deposit Advance - $550

Store Card 1 - $323
Credit Card 1 - $400
Line of Credit - $510
Credit Card 2 - $685
Student Loan 1 - $1,951
Store Card 2 - $2,800
Student Loan 2 - $3,148
Auto Loan - $4,140
Credit Card 3 - $4,577
Credit Card 4 - $5,150
Student Loan 3 - $5,614
Student Loan 4 - $6,048


I have also ordered new tires for my car and have an appointment to get new glasses and will be paying cash for both of those expenses. Whatever is left of my tax return after I get my glasses is going to be put toward my next debt. I'm incredibly proud of myself for accomplishing so much in the last few weeks.  I debated buying a Wii with a piece of my tax return, but have come to the conclusion that maybe that would be a good reward when I get everything paid off.  It's too much money to put toward something that will only make me want to spend more money.  Come to think of it, maybe it would be a bad idea to ever get a Wii. :)