Now that you’re working on that budget, (please read my post on budgeting 101 before proceeding) let’s go ahead and touch briefly on a great man who helps millions reach their financial goals via radio, books, live events and his online website. For those of you who have no idea who Dave Ramsey is and care to find out you can learn about him here.
Here’s what I love about Dave Ramsey’s 7 baby steps to financial freedom and why most of my advice to you will be based off of his ~ he doesn’t just give you a solution for getting out of debt. He is giving you a solution to a new way of life that allows you to save for emergencies, your future, and have NO monthly payments. I mean it. The last step includes getting all that extra money you saved because you’ve paid off all your debts and turning it into your dissolving that mortgage payment. But I am clearly getting ahead of myself.
So now that you have a budget, and it includes socking money aside every month, let’s get started:
Baby Step #1:
Some of you may already have this accomplished. The first goal whether it will take you 3 months or 12 based on your budget, is to sock $1,000 away into a savings account that is to be used as an emergency fund. Let me be clear. Unless an emergency occurs, this is money that should not be touched while you’re working on the other steps. It should not be used for non emergency home improvements, tinting your windows because you “have the funds” or anything of the sort. It should go into an account not to be thought of again until that dreaded emergency hits. And we all know that Murphy’s Law says that emergency will hit. This sounds simple enough, right? Great. Let’s move on to step #2.
Baby Step #2:
Pay off ALL debt. What? All of it. Yes, all of it. Dave Ramsey refers to this method as using a snowball to eliminate all of your debt so that you can have true financial freedom. Yes, this sounds a bit more complicated. So I’m copying, pasting AND citing! LOL.
“List your debts, excluding the house, in order. The smallest balance should be your number one priority. Don’t worry about interest rates unless two debts have similar payoffs. If that’s the case, then list the higher interest rate debt first.
The point of the debt snowball is simply this: You need some quick wins in order to stay pumped up about getting out of debt! Paying off debt is not always about math. It’s about motivation. Personal finance is 20% head knowledge and 80% behavior. When you start knocking off the easier debts, you will see results and you will stay motivated to dump your debt.” ~http://www.daveramsey.com/new/baby-step-2/
Are you wondering how to do this? In my opinion I really feel like this is why it’s step 2 and not step 3. You’ve got your emergency fund, so as I stated before you’ll LEAVE THAT MONEY ALONE but if you don’t have other ways to bring in the income, or adjust your budget? I would suggest using what you’ve been allocating towards savings, and allocate it towards your snowball. If you’ve been putting $300 a month into your savings, and you have a couple of small $300 bills? You’re paying off a new bill each month! Wouldn’t that be great? And think about how it will impact your credit if that is an issue. I promise from personal experience, it feels amazing. On to #3.
Baby Step #3:
The next step is all about truly building an emergency fund. What would happen if you or your spouse lost your income? At today’s date (April 27, 2012) it takes 6-10 weeks just to be deemed eligible for unemployment in the state of North Carolina. You’re already planning on living on a tighter budget, and the money isn’t going to be retroactively paid. Now that you’ve got your debts paid off, it’s about saving 3 to 6 months of your operating expenses.
What does that look like? Well, fortunately by now you have a budget that’s pretty accurate. So you really just need to bust that out and decide whether you want to save 3x that amount or 6x that amount. And in my opinion, because you’re out of debt, what’s the harm in socking 6x that amount? I didn’t see anything wrong with it either.
Here’s the fun part, if you’ve paid off monthly payments that were included in your budget while you were doing step #1, now you’ve got the money (let’s say the $300) you were socking into savings, AND the money on any of those payments you were still making on time to go towards this. It makes it a quick and painless process because you’ve already been allocating that money, so you don’t miss it. And that’s why it’s so important to allocate every dollar you receive on a monthly basis.
I’m going to take a break from the steps for now and leave you with some personal advice. As I stated in my budget post ~ while you’re working through this process you need to be able to reward yourself. If you have to cut back on your cable and only keep the Netflix and the internet? Don’t cut out your entertainment budget completely. Go out (within your means) and celebrate with dinner when you get a ticket item knocked off your list. It really does help.
Also, one thing that I always recommend that I haven’t seen touched on in the 7 baby steps is a separate savings account for those “not if but when” automobile expenses. I sock aside money every month and put it into a separate savings account that is only for my vehicle. This way when I need to pay my car tax, or replace the tires, change the breaks or register my vehicle? I’m not looking for the money. They’re yearly or bi-yearly expenses that we know are coming. Why not have something a little extra set aside in case the radiator breaks?
Another thing to add to this ~ I like having newer vehicles. So when I don’t have a car payment? I continue to pay that savings account the car payment I was making so that when it’s time to upgrade, I have a nice chunk of down payment that comes from no other savings funds to purchase the new vehicle that I need. This is what makes me less of a person than Dave… haha, it most likely will be more of a want than a need.
Please let me know if you guys have any questions or if there is anything I can help clarify for you. Also, if you’re still struggling with that budget? Drop me a comment and let me know to get in touch with you. I’m here to help.
Sincerely,
~Nikki
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