The nitty-gritty

As a follow-up to this post, I wanted to get into the how of my debt-free journey.  I get my ideas from Financial Peace University and recommend that anybody wanting to get debt-free check out Dave Ramsey’s website for more tools or to take the class (wherever you live, there is probably a class near you…or you can even do it online).  So, here’s the nitty-gritty of getting out of debt.

The Dave Ramsey/Financial Peace/My Total Money Makeover plan works because it gives specific steps to follow.  If you take these “Baby Steps,” then by the end you will be debt-free and be accumulating wealth.  You will not only have more to spend, you will have more to give: to your family, to the community, to whatever or whoever you want to give to.

Baby Step 1: $1000 Emergency fund.  This is not your retirement savings.  This is not your regular savings account.  This is your EMERGENCY fund that you use for EMERGENCIES.  Christmas is not an emergency.  School shopping is not an emergency.  These are things that you knew were coming because they happen every year.  $1000 might seem like a lot to some people, but if you have a minor setback while you are working on Baby Step 2, then you will not be completely side-tracked (if you have a major setback, at least you had $1000 to help cushion the blow).  My hubby and I were lucky when we got started that we actually already had this, so we started out on . . .

Baby Step 2: The Debt Snowball.  This is the hardest step in the whole plan, but it can also be the most fun if you are really into it.  I wrote in my last post about things that we did during this time.  Basically, it works like this: make a list of all your debts from smallest to largest.  Make minimum payments on everything except the smallest debt.  With the smallest debt, do whatever it takes to pay it off fast.  For some it might be having a yard sale, selling a car that you are upside-down on and buying a cheaper one (then using that difference to pay off your debts), getting a second job, or just tightening up your budget).  Maybe you should get a job that pays more, or work harder to get a raise at your current job.  Whatever it takes.  Then, when that first debt is paid off, you take what you were paying on that smallest debt and apply it to the next smallest debt.  As you go, the amount your paying grows like a snowball, hence the name.  When you get to the last item on your list, you should, theoretically be making HUGE payments on your biggest debt, which you can then knock out pretty quickly.

Baby Step 3: 3-to-6 months in your Emergency Fund.  Total up your expenses for a month (rent or mortgage, utilities, gas, other) and save up enough so that, if you lose your job or have a real emergency that takes you out of work for months, then you will be able to live on your Emergency fund.  This includes whatever you must have in order to live and only you can determine that.

Baby Step 4: Fund your retirement.  Dave recommends investing 15% of your income in retirement savings.  Invest in a Roth IRA up to the maximum allowed, then do pre-tax retirement accounts.  The exception would be if your company does a match on IRA contributions, then you should invest to get the maximum match, then Roth, then more in your pre-tax IRA up to 15%.

Baby Step 5. College funds.  The whole point of getting out of debt and building wealth is to make sure that your family’s future is secure, right?  So, once you are out of debt and have emergencies covered, you take care of your future (Baby Step 4) and your kids’ future education.  Don’t use savings bonds or life insurance.  Find a good ESA or 529-savings plan and make some money on your investments.  There are limits on what you can invest in a given year, depending on the kind of account and you need to determine how much your kids will need to pay for their education and make sure that you are investing enough at a good rate to have it there when the time comes.  My husband and I have a Utah 529 for each of our kids.  We often encourage grandparents to contribute if they don’t know what to give as gifts.

Baby Step 6: Pay off your house.  By this point you have probably already relaxed your budget some, but there’s a chance that you still have some extra money coming in, since you don’t have any debt.  Even after investing in retirement and college funds, you probably still have more money sitting around looking for something to do for you (since you probably make more now than you used to, if you got really serious about Baby Step 2).  Use it to pay off your mortgage.  Imagine not having anything holding you back, not even a mortgage.  This is the step I am on.  We relaxed our budget for a while, but we’re back to getting serious about paying off our home.  Can’t wait to be totally free!

Baby Step 7: Build Wealth and Give, Give, Give!  This is the reason I want to be free!  Once you have no debt holding you back, not even a mortgage, you are free to bless people the way you want to.  Your kids worked really hard and bought their first car with money they saved and earned in high school?  Why not buy them a nice car for their graduation?  Want to do something special for your parents’ anniversary?  Send them on a cruise, all-expenses paid.  You want your church to have a new gym?  Donate the money to build it.  The sky is the limit once your money is not tied to paying somebody else.

So, it’s that easy.  No, actually, it isn’t easy, but nothing worth doing is.  Again, I come from humble beginnings.  My husband and I are not wealthy by any sense of the word, but we are rich in blessings.  Why not get started today?  Good luck!

Here are some resources:

The Debt-Snowball Plan

My Total Money Makeover

Financial Peace University

The Great Recovery

By the way, if you decide to get started or if you are already on your way to financial freedom, please tell me your story.  We need to share our stories of hope in a hopeless world.

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7 Comments (+add yours?)

  1. Field of Debt.com
    Aug 16, 2011 @ 04:25:46

    Loved your blog!
    God bless,
    Jen
    http://www.fieldofdebt.com

    Reply

  2. Trackback: In this economy, are there any part-time jobs left to earn extra income? « Field of Debt.com
  3. keepyourgreen
    Aug 16, 2011 @ 15:25:37

    These are GREAT TIPS (facts, commandments, what have you)! In 2009 We owed 84k on our house 10k on our car, 13k in credit cards, 15k in student loans, and then Casey lost his job. We had no savings at all. I was bringing in about 1,000 dollars a month, we lived in the greater Detroit area at the time, and there was no “getting a job” due to the collapse of the big 3. We had nearly 3k going out every month just to survive. We were in REAL trouble. When we got married we had pledged to live debt free, so we took a look at our situation and wondered, “how did we get here”. It was 6 months from the day my husband joined the Army to the day we got our first pay. We survived on my income, and help from family members (humiliating). My sons got NOTHING for their birthdays or Christmas that year. We could literally barely put food on the table (we were collecting cans and bottles to return for grocery money). From his first pay with the Army in Feb 2010 (due to a mistake in paperwork it took the Army over 9 weeks to get us our first pay check) until now we have payed off ALL but 10k of our debt. 18 months, 28k not bad. Our house in Michigan sold within 4 days of being on the collapsed market, a sign to us that we had made the right choice. We joined the Army not simply for stability, but to serve. Now, we are in the process of purchasing a home. I DO thank GOD for the trial, it was incredibly humbling. It has shown me PRECISELY what he is calling me to do. I have continued to utilize the financial lessons I learned by force, to make our lives and money serve God. It feels great to have ONE master.

    Reply

  4. Stacy
    Aug 16, 2011 @ 15:33:03

    That is such a great story. Not that it’s great that you had to go through that, but that God has worked so much in you and through you during your journey. He is so good! Your story can give hope to the hopeless. Thanks so much for sharing!

    Reply

  5. Field of Debt.com
    Aug 17, 2011 @ 20:13:51

    Keepyourgreen, I am getting goosebumps reading your story….that is SO COOL YOU SHARE it!!! I would LOVE to have you share it on our website if you are up for sharing it.
    Stacey, this is so great to see these stories isn’t it? You both are inspiring!!
    Keep up the great work and God bless,
    Jen
    http://www.fieldofdebt.com

    Reply

  6. keepyourgreen
    Aug 30, 2011 @ 18:40:52

    Field of Debt I’d love too. Just tell me where. We need permission to get frugal, and get real with how we’ve ALL been called to live. I think sharing can give others permission and perspective (hopefully).

    Reply

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