Posts
On Tuesday I talked about melting away your debt snowball. Today we'll take a step back, and maybe a few forward, and look at Dave Ramsey's baby steps for getting out of debt. This will just be an overview of the steps, I'll go deeper in depth with them at a later time, but this should be enough information to get you started on your way to financial freedom.
Step 0 - No More Debt
While not an official step, you need to swear off debt if you're going to be able to succeed in this program. The most important part of getting and staying out of debt are having self control.Its a commitment you make to live debt free. Once you're able to make this commitment you can move on to the next step.
Step 1 – A $1000 Emergency Fund
Why do we find ourselves in debt? Because we’ve needed money at different times and we didn’t have it. So what did we do? We went out and put it on a credit card or took out a loan. That’s why having an emergency fund is so important. Its going to protect you in those situations when the car breaks down, the water heater goes out, the kids get sick, and so on.
Step 2 – Pay Off All Debt Using the Debt Snowball
If you read my article on the debt snowball a couple of days ago, you already know all of this.. The basics are you take whatever money you have left over at the end of each month and put it towards your smallest debt. Once that debt get paid off you repeat the process with the next debt. Until all your non-mortgage debts are paid off and then you can take that Hawaiian vacation you’ve always dreamed of.
Step 3 – Save 3 to 6 Months Income
Unless you live in Mozambique or somewhere like that, you probably realize that a $1000 emergency fund will not go very far. What if you get laid off or what if the roof needs to be repaired? There are many situations that will come up in your life were $1000 will not keep you afloat. Its during those times that you will be tempted to go back into debt. That’s why saving 3 to 6 months of your income is so important.
Step 4 – Invest 15% of Household Income into a Retirement Fund
15% seems like a lot of money doesn’t it? But you have to remember that at this point you have paid off all of your non-mortgage debts and you already have 3 to 6 months income saved in the bank. So, in other words, you’re living large at this point. Now’s the time to really start concentrating on your future. Ramsey recommends investing 15% or more in Roth IRA’s and pre-tax retirement.
Step 5 – College Fund for Children
My parents did not pay for my college tuition, because like most parents they couldn’t afford to. I took out student loans from the government which I’m still paying for today. My parents were nice enough to support me financially in other ways, like paying for my food and rent. Thank you mom and dad. But whether or not you pay for your children to go to college is really up to you. If you do plan on doing this the time to start saving is after you’ve accomplished all of the above steps. Don’t sacrifice your retirement to pay for college.
Step 6 – Pay Off That Mortgage Early
A mortgage payment for most people cost 35-40% of their monthly income. Can you imagine the freedom it would give you to pay that off early? Imagine the flexibility you would have in your life. Has your wife always wanted to stay home with the kids, now she can. Have you ever wanted to trade in your job that you hate for the opportunity to follow your dreams, but you were scared because it didn’t pay as well? Guess what? Now you can.
Step 7 – Build Wealth and Give It Away
Now that you have all those debts paid off, you have the kids college paid for, you have your retirement funded, now you can start to build some serious wealth. Take some of your money and start investing it. It can be in real estate, in mutual funds, in index funds, whatever you prefer.
Dave Ramsey advocates tithing 10% throughout all the baby steps and I agree with him on this. Personally I want to give back some of what God’s blessed me with, so He can bless others. Now whether you feel that way or not is totally up to you. But I believe we can all agree, that if we’re able to help those less fortunate than us, we should.
I hope if you haven’t got a plan to get out of debt, you’ll seriously consider this one. It’s a very good guide to getting out of debt, building wealth, and finding financial freedom. If you goal is get out of debt, this is a great place to start.
Step 0 - No More Debt
While not an official step, you need to swear off debt if you're going to be able to succeed in this program. The most important part of getting and staying out of debt are having self control.Its a commitment you make to live debt free. Once you're able to make this commitment you can move on to the next step.
Step 1 – A $1000 Emergency Fund
Why do we find ourselves in debt? Because we’ve needed money at different times and we didn’t have it. So what did we do? We went out and put it on a credit card or took out a loan. That’s why having an emergency fund is so important. Its going to protect you in those situations when the car breaks down, the water heater goes out, the kids get sick, and so on.
Step 2 – Pay Off All Debt Using the Debt Snowball
If you read my article on the debt snowball a couple of days ago, you already know all of this.. The basics are you take whatever money you have left over at the end of each month and put it towards your smallest debt. Once that debt get paid off you repeat the process with the next debt. Until all your non-mortgage debts are paid off and then you can take that Hawaiian vacation you’ve always dreamed of.
Step 3 – Save 3 to 6 Months Income
Unless you live in Mozambique or somewhere like that, you probably realize that a $1000 emergency fund will not go very far. What if you get laid off or what if the roof needs to be repaired? There are many situations that will come up in your life were $1000 will not keep you afloat. Its during those times that you will be tempted to go back into debt. That’s why saving 3 to 6 months of your income is so important.
Step 4 – Invest 15% of Household Income into a Retirement Fund
15% seems like a lot of money doesn’t it? But you have to remember that at this point you have paid off all of your non-mortgage debts and you already have 3 to 6 months income saved in the bank. So, in other words, you’re living large at this point. Now’s the time to really start concentrating on your future. Ramsey recommends investing 15% or more in Roth IRA’s and pre-tax retirement.
Step 5 – College Fund for Children
My parents did not pay for my college tuition, because like most parents they couldn’t afford to. I took out student loans from the government which I’m still paying for today. My parents were nice enough to support me financially in other ways, like paying for my food and rent. Thank you mom and dad. But whether or not you pay for your children to go to college is really up to you. If you do plan on doing this the time to start saving is after you’ve accomplished all of the above steps. Don’t sacrifice your retirement to pay for college.
Step 6 – Pay Off That Mortgage Early
A mortgage payment for most people cost 35-40% of their monthly income. Can you imagine the freedom it would give you to pay that off early? Imagine the flexibility you would have in your life. Has your wife always wanted to stay home with the kids, now she can. Have you ever wanted to trade in your job that you hate for the opportunity to follow your dreams, but you were scared because it didn’t pay as well? Guess what? Now you can.
Step 7 – Build Wealth and Give It Away
Now that you have all those debts paid off, you have the kids college paid for, you have your retirement funded, now you can start to build some serious wealth. Take some of your money and start investing it. It can be in real estate, in mutual funds, in index funds, whatever you prefer.
Dave Ramsey advocates tithing 10% throughout all the baby steps and I agree with him on this. Personally I want to give back some of what God’s blessed me with, so He can bless others. Now whether you feel that way or not is totally up to you. But I believe we can all agree, that if we’re able to help those less fortunate than us, we should.
I hope if you haven’t got a plan to get out of debt, you’ll seriously consider this one. It’s a very good guide to getting out of debt, building wealth, and finding financial freedom. If you goal is get out of debt, this is a great place to start.
0 comments:
Post a Comment