arry and I started out our marriage with the desire to live debt free. We did Dave Ramsey’s Financial Peace University before we got married and again after we were married. (Since then we’ve done it a few more times and Barry teaches the class periodically.) We knew it was the way we wanted to live. The only thing we were paying on was a car. So we starting making several extra payments until we had it paid off in less than a year. Then we were debt free! But we wanted to have our own place to live, so we bought a townhouse. Currently, the only debt we have is the house and we’re scheduled to pay it off within the next two years. Every little penny that we get as “extra” we put toward the principal on the house. We cannot stand owing money…..it eats at us. It’s bondage. The Bible says “the borrower is slave to the lender,” and we believe it 100%. So, take a little look with me at the Seven Baby Steps that we’re following from Dave Ramsey and find out that YOU can live debt free too! |
Baby Step #1: Save $1,000 as an Emergency Fund. Yeah, yeah. I know what you’re thinking. Save $1,000!? You’ve got to be kidding! You can’t even save $50 for Christmas. Your savings account is in the negative. Well, if you’re going to turn over a new leaf, this is the way to start! Save every penny. Recycle pop cans. Have a yard sale. Work a few extra hours at work. Babysit. You need this $1,000 to get started on your debt-free living. If you all of a sudden decide to quit using credit cards, but have no cash someone is going to show up – Murphy. Your washing machine will quit working and your dryer will eat your socks……you’ll stop at a stop light and your car transmission will stay there………you’ll get a toothache without meeting your yearly deductable. If you don’t save, an emergency WILL happen. When you have $1,000 extra dollars in the bank, it won’t be a big deal. You won’t have to use credit for an “emergency.” You’ll already have the money. What a relief! It’s not spelled Rolaids…..it’s spelled CASH. And put this cash where it’s not easily accessible. Needing a pair of Sketcher’s Shape Ups isn’t an emergency. |
Baby Step #2: Pay off all debt with the Debt Snowball. This doesn’t include the house. We’ll get to that later. We’re talking about credit cards, car payments, school bills, or anything else that you might have NEEDED and bought without the cash. First, list all your debts from smallest to largest (based on the overall balance – the total amount of the debt, not the monthly payment). Pay minimum payments on all your debts except the smallest one (again, looking at the overall balance). Pay every extra penny you can scrape together toward the smallest one until it is paid off. Don’t worry about interest rates. We just want to see some progress. When you pay the first one off, take the amount you were putting toward the smallest debt (which is now gone!) and use it to add to the payment on your next smallest debt. As you pay each off, you’ll have a larger amount to add to the next one. A snowball, get it? And you thought I was talking about those pink snowball dessert things……man, I could really go for one of those right now. |
Baby Step #3: Save 3-6 months of expenses in savings. Why? Because you want to be prepared for a LARGE emergency. Remember the $1,000 that we saved first? You can add it to this fund. Use all the extra money that you have from paying off your credit cards to fill up this account. This is for medical emergencies, the loss of a job, or an accident. Having this padding will give you some serious security. All women love security. This one won’t take you as long as you think. Because you’ve got the extra money from your paid-off debt, you can save it quickly. Put it into an account where you don’t touch it but it can earn a little interest. Key word = little. Interest rates stink, but $.01 is better than $.00. It needs to be somewhat easily accessible, so don’t freeze it in the deep freeze or bury it 12 feet under in your back yard. |
Baby Step #4: Invest 15% of your household income into retirement funds. Hey guess what? Eventually you will retire. It shouldn’t sneak up on you. It’s not a surprise that you’re going to get old. You will not find the fountain of youth…..old age is going to come. Be prepared. We invest after paying off debt because we want to concentrate 100% on getting rid of the bondage. Find a good investment person. We had to travel a few hours away from our area to find one that we really liked, but it’s worth the time and effort. You want someone you trust and someone who can explain things well. This is when you want to get serious about building wealth. |
Baby Step #5: Start building a college fund for your kids. If you don’t have kids, you can obviously skip this step. Duh. I like stating the obvious. It shouldn’t be a surprise either that your kids are going to grow up and want to go to school. You birthed them. You gave them baths and cleaned up their poo. You knew they were around….it’s not a surprise. You can do this investing with the same person that’s taking care of you for #4. Don’t go into debt or let your kids go into debt for school. It’s not worth it. IT’S NOT WORTH IT! Yes, school is important but a community college is as good as an ivy league for most things. Be prepared. Save now. My parents did it for me and I’m eternally grateful. Getting out of college debt free is an amazing thing! Thanks Mama and Daddy! |
Baby Step #6: Pay off your home early. This is where Barry and I are at right now. And we’re really kicking tail on it. We hate debt. Debt blows! Don’t listen to those crazy people that tell you that you need debt so you have a good credit score. That’s hogwash. Who the heck cares about their credit score if they can pay cash? DUH, you bunch of idiots. “But I need a house payment to write off on my taxes.” Well that’s just about the dumbest thing I ever heard. Any amount you might save on taxes is cancelled out by the amount you’re paying in INTEREST. You’re not getting that loan for free. Find any little extra that you can and pay it toward principal. You’d be amazed at how much difference even $100 a month can make on the length of your house loan. |
Baby Step #7: Build wealth and give! I can’t wait for this part! This is when you really start socking money into investments. Invest, invest, invest! You want to have enough in your retirement accounts so that you can live nicely off the interest and never touch the actual amount in there. You’ll leave money for your children. An inheritance. What could be a better gift to your children? If you need help administering a loved one’s will or there are any questions about your inheritance, you may seek the services of a probate lawyer. And lastly, give. Man, giving is fun. I can’t wait to give like crazy! My big goal is to be able to go out to dinner with Barry and leave HUGE tips for our waiter/waitress. J I love seeing the shocked look on their face as you walk out the door. Imagine what a difference you could make in someone else’s life…..all because you’re debt free.Can you see it now? Imagine how it feels to be debt free? Your grass will feel different when you walk through it……you won’t worry about paying for vacations……..you won’t worry about leaving your kids with nothing. |
| Also, I know this money thing is a big scary monster to lots of you. If you have read all this and still feel overwhelmed or need some help with planning your finances, send me an email. There are lots of other resources out there I can point you toward and, depending on your situation, can help you get connected with a financial counselor. I hope you enjoy reading this series as much as I enjoyed writing it for you. |
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I was reading this and thought to myself, wow, Barry writes alot like Stacy, and then I see it IS Stacy writing 🙂
Quick question: I know the post talks about not paying down mortgages until we have 3-6 months saved up, but we have a mortgage at 6.5% on a rental home, where the PMI will drop off after it reaches 80%. We plan to sock away at that one until the PMI comes off, and then the property will be “less of a negative cash flow” than it is now; we’re not planning on keeping the original mtg pmt to that payment, but that $92/mo to the other debts–this one seems like a no-brainer.
Meanwhile, we have a secured LOC (the 4.5% var APR one) that is secured by our 3-6 months savings in the form of a 1-year CD–it was set up as secured until we earned a reputation and history with this bank, which should be accomplished as it’s been 2+ years. Because our 1st mortgage on our residence that we’d like to sell (and we’re a little bit upside down on) is at 7.25%, would it make sense in our situation to sock down on that before paying off the other “credit” line? As it stands, if we are able to sell it in the next several years, we’ll still have to bring a significant bundle of cash to the table…
Thank you!
Why do you own rental property with a mortgage? Although common, it sounds like that’s a risky proposition in your situation. I believe rental property is a great investment if it is paid for. Otherwise, I’d sell it and wait to buy property for a later date. That being said, and to address your original question, I believe you should still pay down the credit line first, despite the higher mortgage interest rate. Your goal is to get rid of payments entirely, not just save a little on interest rates/payments. Since you didn’t tell me the balances, I have to assume the LOC is a lot lower balance than either mortgage. If that’s the case, the LOC goes first. That frees up your emergency fund to be what it is really supposed to be (an emergency fund), and it frees up a monthly payment that can tackle other issues. Without a crystal ball, that’s the safest play and thus the one I’d make.
Barry, you and Stacy are so prompt with your replies! The rental property is a condo that I owned before hubby and I were married, and I moved to another town to marry him, and we bought a house in which we now live. Unfortunately, even selling the townhome is a non-option at this point–we’d have to bring cash to the table, because the market is so poor there that it recently appraised at less than I paid for it eleven years ago, and I don’t have to tell you that the balance on the original note (95% of purchase price at the time) is CLOSE to 80%, but we’ve got a couple extra payments to go. Using our entire snowball amount, we’ll be below 80% in 2-3 months. We’ve continued to keep our thumb on the pulse of the market, and still the market has not recovered enough to sell, because there is a downpayment-assistance loan (that was supposed to go away, but when the tide turned in 2006, it became a permanent loan and now has to be repaid… Yeah, yeah, I’m a servant to the lender!) as well, and to pay off the 1st and 2nd at this point wouldn’t even be covered by the sale price, and that’s before we make any sellers considerations or realtor fees.
Regarding my original question, the balance on the LOC (about $20k) is the same amount as we would have to bring to the table to close on our residence, if we were to sell it in the current market. As we haven’t been late on any payments, we don’t want to do a short sale, but we do feel that we could pay down the current balance a bit and not have to come up with cash at closing in order to sell next summer; if we pay down the LOC, we have less equity as we go into a sale, and no cash on the table; we’d (GULP) have to consider cranking cash out of the LOC in order to have cash on the table if that was where our extra goes now. We do believe that the emergency fund/CD could be withdrawn without penalizing the LOC at this time (I know, we need to find out for sure!)
Of course, we recognize that God is in control (well, He is NOW. He obviously wasn’t controlling our actions when we blindly got in over our heads) and may just bring a generous buyer or some other blessing–we never know how He’s going to work until He does–so we’ll continue plodding. “Steady plodding brings prosperity; hasty speculation brings poverty” (Proverbs 21:5, LB) We were a bit hasty, and now we HAVE to plod! Thanks so much for your advice!
It sounds like you have a workable plan laid out, although I’d still be very cautious about tying up your emergency fund as collateral support for ANYTHING. If a real emergency comes along, things would be way more complicated. The ultimate goal (as you know) is to avoid the LOC entirely because it is another payment. The goal = no payments! I’m always glad to give my opinion ;0) (aren’t we all?). If either of us can give additional input, let us know.
I like the snowball effect. It’s much easier to envision yourself paying off a $300 credit card when compared to a $3000 one. I like the feeling of saying one down and such and such to go! Even though it may cost a little more interest it doesn’t discourage.
Thanks for sharing this Stacy. It’s a real eye opener for many.
Ok so I have to put my 2 cents in on this one because Justin and I had a HUGE argument about the debt snowball part. I really don’t have to mention it but I won, of course! I know Dave Ramsey wants you to put the most money toward the smallest balance to encourage you to keep on going. I, however, am extremely logical and know my math (I’m a math teacher) and I just could not stand paying a ton of interest. I refused to pay off a small amount credit card that had no interest (I was going to pay it off by making the minimum payments before interest kicked in anyway). I instead made the largest payment to the highest interest card. It doesn’t create the “snowball” effect but the end goal is still accomplished – credit cards get paid off.
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This doesn’t work for everyone. Dave deals with TONS of people, so he does what works best. I agree with him. The amount of interest that you’d save isn’t worth the amount of pride and momentum that you gain when you start knocking those debts out.
Thanks for your “Two cents.” 🙂
I am with you. Statistician. Highest rates go first.
But if math were the sole issue, you wouldn’t have signed up for credit cards at the ridiculous interest rate to begin with. It isn’t a math thing, it is a behavior thing.