Step 4: Invest 15% in retirement

You have been winning with money. You have paid off all your debt and also built an emergency fund. We have been taking baby steps. Remember, this is not a get rich quick scheme.

The best way to get rich is to get rich slowly. Half the battle has already been won. Now we go after our future by investing in retirement.

Investing for retirement should not be about quitting a job you hate. If you hate your job then now is the time to change. Retirement is more about security and your money working harder than you do.

You do not want to end up being normal when you retire. Normal is not being able to write a check for $700 or working because you have to. Investing is something that everyone needs to do. You do not want to be normal.

Invest 15 percent of before-tax gross income annually toward retirement. Do not worry about doing more as you will need some income for the next two steps. It is also not a good idea to do less, unless you want to retire broke like most people.

“But I will have Social Security when I retire.” You cannot count on your government to take care of you. Only three out of 100 people are financially secure upon retirement.

The U.S. government’s track record for helping citizens with retirement is horrible. Social Security will not be around forever, and even now is not a great system. So why would you trust your government for retirement.

You make your own decisions so you cannot blame anyone for lousy retirement planning. Planning early is the best way to ensure that you will retire with dignity.

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Step 3: Finish the Emergency Fund

Before you get to step three, you should breathe a sigh of relief. By this time you will be debt free, except the house (if you own one). You will have no payments and $1000 in an emergency fund.

Now that the debt is paid off the next step is to have an emergency fund of three to six months of expenses. This step should probably take a few months, maybe less.

Remember this account is only for true emergencies, such as losing a job. This emergency fund will also minimize the damage done by a real emergency. What used to be a financial crisis will be more of an inconvenience.

If you have no debt and an emergency of three to six months of expenses you may not worry too much about an $850 car repair. Although when you have lots of debt and no savings this can be a nightmare. Expenses like this probably would not even need an emergency fund since you have no debt. You could easily afford something like this in your normal budget.

If you do not own a home you could start saving for a home. The best option would be to buy a home in cash. Buying a house with cash can be a blessing. How awesome would it be if you could buy a house with cash? Not many people can do that.

So in two steps you are debt free and the third step is just building up emergency savings. What about the other four steps? The next steps deal with wealth building. Are you ready to build some massive wealth?

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Debt Snowball Continued

So how do you get the debt snowball rolling? You need to get intense. Do you really want to be debt free? Are you sick and tired of being sick and tired? Are you willing to make sacrifices? You should have said yes to all three questions in order to make this work.

You will probably make sacrifices to get the debt paid off as quickly as possible. If you get really intense about debt freedom your life will change for the better. How would you like to live without payments and have loads of cash? How about never having to borrow money again or living paycheck to paycheck? Are you getting excited yet? You should be.

You may need to sell some stuff to get the snowball rolling initially. This is only a short term option, unless you have lots of stuff to sell. If that is the case then this may be the only solution to eliminate the debt and start building wealth. Another option is to increase your income.

Increasing your income is the solution of choice if you are wanting to get long term results. How do you increase your income? Get a part-time job. You may have to work lots of hours and sacrifice some social aspects of your life to get this debt eliminated.

That may not sound good to most people. Most people do not want to sacrifice to beat the debt. Of course, most people are in debt up to their eyeballs. The way I look at it is I could sacrifice for a short amount of time and live debt free for the rest of my life, or struggle all my life with no money and no sacrifice. Which would you choose?

As I said in the last post, April and I are currently on this step. We both work full-time jobs, but I wanted to get intense about the debt snowball so I took on a part-time job. Unfortuately it was only project work, so I am currently not working two jobs. However, my goal is to get another part-time job that is long term.

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Step 2: The Debt Snowball

Now that you have your $1,000 saved we are ready to pay off the debt. The process is simple, but requires a huge amount of effort. First, list all your debts in order of smallest balance to largest, except for the house. Paying off the house will be another step. Make sure you list every debt, even if there is no interest.

Why not list smallest interest to largest? The main reason for doing it from smallest balance to largest is that there will be some quick payoffs. Also the interest paid will not be significant once the debt snowball is rolling. This is more of a change in behavior rather than mathematics.

By getting a few small debts paid off quickly you will be more likely to stay on the plan. This should also get you excited since you will be paying off debt faster than you could imagine.

After you have your debts listed, pay the minimum on all debts except the smallest. Put as much money as possible into the smallest debt. Once the smallest is paid, the payment from that debt plus any extra money is added to the next smallest. Then when the second debt is paid off, the payment from debt one and debt two plus any extra money is added to debt three.

Every time you pay off a debt the next debt payment is increased. Just as a snowball increases in size as it rolls down the hill, your payment will increase on the next smallest debt until all debts are paid off. You will begin to start paying over $1,000 per month on debt. That should get you really excited.

Now if you want to get out of debt, this is the way to go. April and I are currently on this step and we have knocked off lots of small debts. I have even discussed my progress in previous posts. We currently have four creditors to go. We have two car payments and school loans. Since starting this plan we have knocked off about five debts.

After this step you should be debt free, except for the house.

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Step 1: Save $1,000 as a starter emergency fund

So what do you do when you have created a budget and are ready to tackle your debt? The first step in this process is to save $1,000 to start an emergency fund.

You may have thought that paying off the debt would be the first step. We will get to this in step two, but we need to have money saved first. The main reason for this emergency fund is because of Murphy’s law.

Murphy’s law states that “Whatever can go wrong, will go wrong.” Most people are familiar with this quote and end up going into debt because of it. People will use credit cards for life’s emergencies. The biggest time this happens is Christmas.

Christmas is not an emergency. It comes on the same day every year. Most people wait until December to begin thinking about Christmas and max out credit cards that never get paid off.

Having an emergency fund in place will catch the small emergencies. Murphy may not be gone completely, but you can at least handle a real emergency while you are paying off your debt.

Be careful what you consider an emergency. A job layoff is a real emergency. A leather couch on sale is not an emergency. Another reason for an emergency fund is to stop the dependence on credit cards.

You should save $1,000 as fast as you can. This step should not take very long. If you dip into the emergency fund while on step two, then go back to step one until the $1,000 has been replenished. This will keep you from borrowing money to cover emergencies.

April and I have completed step one. When we first started we would dip into the fund often. Every time we did this we would build up the emergency fund before moving on. Now we rarely touch the money.

We have learned to budget better and stopped borrowing money. We use debit cards so that the money comes directly out of our checking account. This makes a big difference on how much we spend.

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Step 0: Create a written budget

Dave Ramsey talks about seven “baby steps” to financial freedom. You need to crawl before you can walk. Walk before you run. There is no quick way out of debt and no quick way to become wealthy.

I learned the hard way about “get rich quick” schemes. I fell for these scams and my bank account was drained as a result. “Work three hours a week and make millions.” This is very unrealistic, but I was a sucker for this in my younger years. Nobody gets rich by working only three hours a week. People make six figure incomes by working hard, not hardly working.

Before I go into the baby steps let me first discuss a tool that everyone should be doing, creating a budget. This is crucial to eliminating debt and building wealth. For this reason I am calling this step 0. Making your money work for you is what a budget is all about.

This is also something that should be done every month. Would you build a house without a blueprint? Hopefully you said no. The same idea goes for wealth. You cannot build wealth without a written plan.

April and I create a budget every month that we both agree on. This part was not easy at first, but I assume the same goes for most couples. Once our budget is made, we stick to it. That is the most important part. Without focus the budget is just a piece of paper.

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Facing the debt problem

April and I have already taken the first step in eliminating debt, realizing that there is a problem. We have even gone through the denial phase thinking that we were on the right track to pay off our debt. We were wrong.

Money is the number one reason for divorce and this is not a path that I want to go down. April and I used to fight when the topic of money was brought up. We had different thoughts about dealing with money. We got to the point that we would not even bring it up.

During the past two weeks we have freely discussed money and no longer fight. We now act like adults when it comes to money and our debt. Our future looks much brighter without payments to the bank.

I wish I knew how to handle money while I was in high school. I would have no debt and would be on my way to becoming a millionaire. Unfortunately, I made lots of mistakes with money and was on my way to the poor house.

I got April to start listening to The Dave Ramsey Show with me. We both deal with our finances so it makes sense for both of us to listen to the show. At this time we only listen to one hour of the show as a podcast. Eventually we will listen to all three hours without commercials when we join My Total Money Makeover.

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Postings are now categorized

I have made updates to my site.

• Post titles are now clickable as the permanent link
• The time of the post has been included in the date
• Each post has been filed under a specific category
• Categories have been added to the home page

I hope the changes make navigating my website easier.

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