Debt is the worse thing to have. It lingers over your head, stresses you out and you feel like your never going to get out of it. Here are 7 baby steps to help you get out of debt….
It took me several times before I learned my lesson with credit cards. It may be good to have a credit card or two in your wallet but if you don’t respect them, then they will ruin your life. I’ve been in debt and completely debt free, to only be in debt a year later. That is not a good feeling to have.
I have taken some advice on several famous money advisers out there and Dave Ramsey has been the best so far. I like how he sets it up so you feel like your accomplishing something quickly.
Today I am sharing his 7 baby steps that I am currently working on. Hopefully these will help you if you need help paying down your debt. You can also find his books pretty much anywhere now. I do recommend you reading them.
Step 1: Emergency fund
You want to start saving an emergency fund of $1,000 in a separate account. This money is for emergencies only! You lost your job or the car broke down, whatever the emergency is, you will be prepared. You will have that money saved up and won’t have to go into debt.
If you use this emergency fund then you have to make sure the $1,000. is back in the account before you continue the steps. Always have $1,000. in this account at all times.
First you want to write ALL of your debts on a piece of paper. (Be honest ) You want to place them in order from smallest to largest.
If you have 2 debts with the same amount owed, then look at the interest rates and place the higher interest rate first.
By paying off the smaller debt first, you will be motivated (believe me you will be) to continue with the process. Its a sense of accomplishment that keeps you going.
You want to pay the minimum on every bill you have. Whenever you get any extra cash, you want to put it towards the smallest bill you have. When the smallest bill is completely paid off, you will take the minimum you were paying on that bill and add it towards the next bill on the list. So now you are paying the minimum on that bill plus the minimum on the first bill. This will allow you to pay off the second bill that much faster.
Then just repeat with the third debt on your list and so on
After all your debt is paid off, you want to start saving 3 to 6 months worth of expenses. You want to make a list of your monthly bills along with anything else you pay every month.
Example: If you spend $1,500 a month on all your bills then you want to have in that account $4,500 – $9,000.
This is in case you loose your job you will have at least 6 months saved up to get you through without going into debt again. You will have enough savings to cover your monthly bills and try to find another job without having to stress over paying your bills or how you are going to feed the kids tonight.
Step 4: Invest
Now that you have paid off all your debt, saved 6 months worth of living expenses, now its time to invest. You want to invest 15% of your household income into Roth IRA’s and pre-tax retirement.
You should not invest more then 15% of your income because you still have a couple more steps that money will be used for.
Step 5: College Funding for Children
In order to have enough money for your children’s college tuition, you will want to stay ahead of inflation. Determine how much per month you should be saving at 12% interest in order to have enough for college. If you save at 12% and inflation is at 4%, then you are moving ahead of inflation at a net of 8% per year!
You NEVER want to save using these:
- Savings bonds (only 5-6% growth)
- Zero-coupon bonds. (only 6-8% growth)
- Pre-paid college tuition (only 7% inflation rate)
The best way to save for college is with Education Savings Accounts (ESAs) and 529 plans.
I never saved for my children’s college funds cause we never had enough money to or just never thought of it being a necessity. My oldest child is in her 3rd year of college right now (she is 18) and she has no college debt. All her classes, books etc were paid off in cash.
I have done my best to teach her about debt from my past experiences and so far I think its working. She has no credit card debt or college loans, she owns her own car but has no car debt. I am very proud of her!!
Step 6: Pay off the house early
Now that all your debt is paid off, you have 6 months worth of monthly savings, invested and started saving for your children’s college fund, its time to pay off that beautiful home of yours.
Can you imagine no more mortgage payments? Now you can take big chunks of money and start paying off that house early, just like you did in step 2 with the snowball effect.
Step 7: Build Wealth and Give
Wouldn’t it be nice to leave your children a nice inheritance. Take some of your money and help out a charity or someone in need without having to ask for it back? Now you can if you just do these seven baby steps