It's been a while since we've had a financial-type post.
Ruth and I like Dave Ramsey's book "The Total Money Makeover." Dave has 7 "Baby Steps" that he uses in helping people get out of debt and onto the road to "Financial Freedom". Here are some of my thoughts on each of these baby steps.
Step 1. Have an Emergency Fund of $1000.00. There will always be emergencies that arise, and when we are trying to get out of debt, those emergencies may seem even more "dire", because it doesn't seem like we have the cash on hand to deal with them. If you have an emergency fund, then you don't have to stress out about trying to figure out how to pay for the current crisis.
Step 2. Pay off All Debt Using the Debt Snowball--this is really simple, take your smallest debt and put any extra money you have on that debt until it is paid off. Then you take the amount you were paying on that debt and start paying it on the next smallest debt. This continues, like a ball of snow rolling down the hill until it gets bigger and bigger and the debts are all paid off.
Step 3. Save 3 to 6 Months of Expenses for a larger Emergency Fund--this emergency fund is awesome! Any major expense that comes up, can pretty much be covered by this one. Of course the fund has to be rebuilt once you tap into it, but think of the peace of mind this fund can bring! We've replaced air conditioners and furnaces twice (two different houses), covered big car repairs, and replaced vehicles without going into debt. Just this last month we had to replace our dishwasher, a water heater and an exterior door. The list could go on and on. It seems something happens, that we aren't expecting, every single month. Do we have bad luck? No. Did I stress about these "emergencies?" No. We had the funds to cover them. Stuff just happens. That's life.
Step 4. Save 15% of income in Roth IRAs and pre-tax retirement--pretty self explanatory. You can pretty much count on Social Security to NOT be available for us when we retire (those under the age of 50), so save, save, save, for retirement.
Step 5. College Funding for Kids--college rates have been increasing at a steady rate of 6% each year. Ouch! If you don't save something for your kids for college, it might be really hard to pay for it with cash when they get to that point.
Step 6. Pay off Home Early--Think of what you could do if you didn't have a house payment each month?! Obviously you will still need to pay taxes and insurance on your house, but if that was all you had to pay, what could you do with the income that is freed up? Go on, do the math. Have a napkin handy in case you start to drool a bit. If you are at this point in your financial plan, reevaluate your budget every so often, to see what you can pay extra on your house, then head over to this mortgage calculator and figure out how soon you can pay off your house. It is fun to play with the numbers. After you figure it out, set a goal. When you pay off your house what do you want to do? Do you want to take an awesome family vacation? or get some new furniture? how about updating the kitchen? Obviously the ideas are endless.
Step 7. Build Wealth and Give--at this point you can seriously start investing your money by maxing out retirement accounts and investing in growth stock mutual funds. You can also give to those in need and be more generous with your money. A few years ago we were at Cracker Barrel because our kids had some meal coupons to spend. I can't remember how many kids we had at the time, but there were probably five of them. It was a hot summer's day. I was complaining to my husband about how expensive the food was. I don't know if I could be overheard by anyone else or not. It was not my intention. Anyway, we got our food, ate and then asked for our check. The waiter said it was already taken care of. We were a little confused, and actually talked to the manager. He said that our meal had been paid for by another couple. I was kind of embarrassed at this point because 1. we had coupons for the kids' meals and 2. did they overhear my complaints about the prices? But regardless of all that, it was really cool that somebody could pay for our meal, without us knowing about it, and someday, I want to be that kind person who does that for someone else.