As I have mentioned previously my husband and I are embarking on a journey to financial freedom using Dave Ramsey’s seven baby steps system. I know that some of you may already be familiar with Dave and his financial advice. This next series of posts however is for those who are not so familiar and for those who may need a refresher course. At it’s core the seven baby steps are a simple guide to getting your financial house in order and back on solid ground while becoming totally debt free.
Baby Step One: The Emergency Fund
This is the foundation on which the Total Money Makeover is built. The first of the baby steps is to save $1,000 as quickly as you can from the very start. The baby emergency fund is there as a safety net, and is only meant to cover unexpected emergencies, such as needing to get your car repaired, unexpected home repairs, or even a trip the the emergency room. It is there so that if you have one of these emergencies then you wont be tempted, or more importantly need to use your credit card to cover them going further into debt. You may be wondering how you are supposed to save up this amount when you live pay check to pay check. A few suggestions include have a yard sale, sell stuff on eBay, stop eating out, and simply stop spending unnecessarily in all areas that you can! I have personally made over $2,000 in a single year from selling things I didn’t need or use at a yard sale, and you can too. If you already have $1,000.00 or more in savings then you can proceed right to baby step two.
Baby Step Two: Pay Off All Consumer Debt
The first step in baby step two is to list all of your debts from smallest to largest, don’t worry the about interest rates. This is the order you will be paying off your debts, from smallest to largest using the debt snowball method. It is important to list everything, don’t leave anything out. If you need some memory joggers, your debt list should include: student loans, outstanding medical bills, credit cards, bank loans, home equity loans, second mortgages, car loans (list them separately), etc. Dave Ramsey recommends only keeping a baby emergency fund of $1,000.00. If you have more then that saved he then recommends using that to pay off part or all of your smallest debt, or however many debts it will cover. The reason being is that if you are saving that money and not using it to pay off debt then it really isn’t “your money” it is instead a loan to stay in debt, at a high interest rate. I know it is a scary feeling, but the idea is to get out of debt as quickly as possible so that you can begin to build wealth, and you can not do that while paying the bank or credit card companies interest. There is an exception to this rule however, and that is if you see a financial storm headed your way. These storms would be a impending lay off for the main income earner for the household, a new baby on the way and mom’s income will take a hit, or disappear all together, etc. This however does not include a cruise you were wanting to go on or elaborate Christmases gifts for family and friends. If a true financial interruption is headed your way then you need to continue to save and only pay the minimum on your debts until the storm has passed. When things go back to normal use all but the original baby emergency fund to pay off your debt. These first two baby steps are your pathway to debt freedom. By the time you have completed baby step two you will be totally debt free, something my husband and I are still working on. The next four baby steps are equally as important, however, they are what you do once you have paid off all of your consumer debt (excluding the house).