In March 2006, my husband and I experienced a revelation that there had to be a better way to manage money than what we were doing. We were normal; 3 kids, a mortgage, a car payment, a home equity line of credit along with several other loans. We were broke, or at least felt like we were. We could pay our bills every month but it always seemed like there was more month than money. And, heaven forbid, if something broke because we had almost no money in savings.
We had been married almost 20 years and were earning considerably more money than in the early years but still lived paycheck to paycheck. We felt like we were spinning our wheels financially and just knew there had to be a better way.
We had heard of Dave Ramsey before. I remember hearing him late at night on the radio thinking he was some kook. He had some pretty radical ideas. A friend of mine at work had mentioned him a few months before. I am not sure what guided me back to him. Maybe, this revelation of ours got us thinking that we needed something radical to get out of this 20 year rut we were in.
At the time, my husband and I both spent a fair amount of our day in the car so we began listening to his radio show (which now airs during the day). We got his book, The Total Money Makeover. I read it cover to cover in one evening. It is a very easy read and extremely practical.
We began working his program of baby steps. I will share with you the impact each step (that we have accomplished so far) has had on us.
- Put $1000 in the bank to cover any emergencies that come up while you are paying off debt.
We had never saved that much before. This gave us the peace we needed to really get intense about the next step. We knew that if the car or the water heater broke, we would be able to fix it without derailing our plan or adding to debt by using a credit card to pay for the repair.
- Pay off debts, smallest to largest.
This is the hard part and takes the most time. It is also the most rewarding that we have experienced so far. At the time, we had 2 or 3 small balances on credit cards and a home equity line of credit. In most cases, the debt snowball works well because you focus on the smallest debt and when it is paid off, you take that payment and add it to the next debt’s payment, and so on, so that the payment you are able to make keeps growing with each debt retired. For us, we quickly paid off the small debts and their payments did not add much to the HELOC payment. We had to be patient and persistent. In 25 months we paid off almost $76,000!!! I am not bragging here, I am just saying that if we can do it, anyone can! I cannot convey with words how it feels to not have any debt except our mortgage. As the bible says, “the borrower is slave to the lender,” and we had just been set free!
- Finish building an emergency fund of 3-6 months of your family’s household expenses.
We are on this step again. You see, after we paid off our debt, we began saving with the same intensity that we had been paying on debt. We had a fully funded emergency fund. And then we moved to Texas. That was a trying time for my family in many ways. My husband, who is a skilled carpenter, could not find work for a year and a half. He as able to get small jobs here and there but nothing substantial. By the time we moved back to South Dakota, 3/4 of our savings was gone. Although the “Texas experiment” as I like to call it set us back financially, that is not the message here. What I want to convey is that we were only able to make it through that time because we had the emergency fund. It kept us afloat and that is what it is for. Who can say that they survived over a year without a job and didn’t end up with collection agencies or a foreclosure? We are now almost back to a fully funded emergency fund and excited to move on to the next steps.
- Invest 15% of your income for retirement.
I am anxious to get going on this. We are not so young anymore.
- Build a college fund for your children.
I really wish we had been managing money this way from the beginning of our marriage. Our daughters are both in college, paying their own way (with some help from us) and taking on student loans. Don’t get me wrong, I think it is important for kids to pay for some of their education but if we had saved something, they would not have to take out loans. Our son, who has autism, will likely not need college so we will be skipping this step.
- Pay off your home early.
Excited to get to this one!
- Build wealth and GIVE!
Two of the key principles of making the plan work is monthly budgeting and controlling your spending by using cash. Come back for future posts on these very important practices.
Update 7/2015: We were very foolish and are slaves once again. In 2014, we really wanted to start camping. We discussed our options of saving up and paying cash for a camper or financing it. If we saved, we would have to wait until 2015 to begin our adventures. If we financed it, we would get to enjoy it that year and not have to wait. Besides, we were making enough money to make really big payments and have it paid off by the time we put it in storage for the winter. Well, we learned that life does not always go as planned. Our repayment went a little slower than we planned and then in October of 2014, my husband lost his job. We have learned a very valuable lesson as we are still working on paying it off. We decided not to use our emergency fund as this really was not an emergency. We were able to pay our bills and make at least minimum payments on the camper. I am so glad we didn’t because in February of this year, my husbands truck DIED! We used 2/3 of our emergency fund to buy him a replacement. Whoa! So we are back to baby step 2 then on to step 3. As I got ready to post this article, I hesitated about including an update. As hard as this is to be honest about (lots of guilt and shame here), I thought it was important to include so that others could learn from our mistakes.
So, don’t let your baby steps look like this. That does not get you were you want to go.
Have a success story or experiencing financial trouble? Leave me a comment or email me; I would love to hear from you.