It's All About the Baby Steps
As I'm sure many of you know, we have been coordinating Dave Ramsey's FPU at our church for a couple of years now. One of the keys to Dave's program is the Baby Steps.
To get out of debt, Dave and his wife, Sharon, did things this way. They worked for him and have worked for hundreds of thousands since – including us.
So - the Seven Baby Steps are…
Pre Step One:
Okay, okay – before you can take even the tiniest of baby steps, you have to be able to stand up. This is where you sit down and do the dreaded BUDGET! We'll talk more about that another day, but this is when you do it. Once you have it down on paper, make sure all your bills are current. If not, that's your first priority. Thanks to God, we've never been behind on anything [oh sure, the occasional 'forgot to mail the check' but not really]. This isn't our area of expertise by any means, but we'd be happy to try to help if we can.
Baby Step #1: $1000 in the bank.
You might be thinking, "But I have $20,000 in credit card debt, why would I put money in the bank?" The answer? It's "Murphy Repellant". You know Murphy and his law: Anything that can go wrong, will. Just one thousand dollars is enough to catch most emergencies. So first thing to do, put $1000 in the bank. Then when you need a new radiator [like we will soon], you just write a check. You don't have a car crisis and a money crisis at the same time. What a relief!
Baby Step #2: Pay off your debts from smallest to largest using the Debt Snowball.
Have you ever watched cartoons? Remember when one character pushes a little tiny snowball down the mountain and by the time it reaches the bottom, it's huge? Complete with another character or two sticking out of it. The same principle applies here. Write your debts down in order, from smallest to largest. Pay the smallest one off as quickly as possible. Now, take that minimum payment and add it to the minimum payment of the second debt. Now your 'minimum' payment is bigger – it's picked up more snow! By the time you work your way through your debts, that 'minimum' will likely be pretty big. Anything extra you can swing goes here too. A second job or selling some stuff on EBay – whatever extra money you can bring in, toss at your current target.
Baby Step #3: A Fully Funded Emergency Fund – 3 to 6 months of EXPENSES in the bank.
For most people, this is between $10-15,000. Note that it says expenses and not income. What would happen if you lost your job? Sorry, Mediacom – I'm going to have to cancel that cable. And retirement? Well, we probably should stop that for the moment. If you tithe to your church… well, 10% of nothing is… erm, nothing :). So expenses, not income.
Baby Step #4: 15% of your income into retirement.
This doesn't include any matching your employer might do. That's gravy. Fully fund your company's program, up to the matching percentage [for many this will be somewhere between 3-6%]. Then fund your Roth IRAs, if you qualify. Then back to your employer's account.
Baby Step #5: Fund the kids' education.
But WAIT!!! Shouldn't that come BEFORE retirement?!? Nope. As much as we love our kids and hope that we'll be able to provide a college education for them, our retirement has to come first. Either that or we'll be living in their dorm room with them ;-)!
Baby Step #6: Pay off the house early.
Dave recommends a fixed mortgage at no more than 15 years. Don't have one? That's okay. If you already 'own' a home, look into refinancing an ARM or balloon mortgage. If you have a standard 30 year mortgage – send in extra towards your principle. Talk to your lender to make sure you do so properly – some of them have funny rules about how extra principle payments work.
Baby Step #7: Build wealth and give it away!
I think this step is pretty self explanatory and I can't wait to get here!!!
Okay – so where does buying a house come in if you don't already have one? Somewhere between steps 3-5. Get at least 3 months of expenses in the bank, then save up 20% for a down payment. Get a 15 year, fixed mortgage. Depending on how long it will take you to do that – you may want to have retirement going at the same time.
Did we do everything 'by the book'? No, not quite. As I said before, we want to be transparent here – and we will be, but I'll save that for another post. We did a few things a little bit differently, but for the most part, we've stuck to the plan – and it's working! It's working for other families we know. One family we know took the class about 2.5 years ago and now, she's able to stay home full time after the birth of their second child!
So – there you go! Dave Ramsey's baby steps. Make sense, don't they? As Dave says, "It's the same advice your grandmother would give you, only we keep our teeth in!"