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A few weeks ago, we did something big: we paid off our minivan.
That may not seem big, but to us, it was tremendous. It represented the last of our debt (minus our mortgage). Between student loans, car payments, and medical bills, we have been in debt of one kind or another almost our entire marriage.
Now, Phillip and I were raised knowing that debt was something you try to avoid. But we also have viewed it as a necessary evil. We tried to be prudent about our debt (not buying the nicest car on the lot or choosing an elite, expensive graduate school), but we accepted it as just a part of life.
We made the required payments each month while simultaneously building our savings account in order to avoid going into more debt in the future. We were proud of ourselves each time we spent less on groceries in a month and put the small remaining amount towards whatever we owed.
Little did we know that we were going about it all wrong.
In doing some research on frugal living and budgeting, I came across Dave Ramsey’s book, “The Total Money Makeover.” I got two chapters in, looked at Phillip, and said, “I think we need to drain our savings account and put it all towards our car.”
What I had learned in those first two chapters (and in the following ones as well) was that you will not have much success in your finances if you are trying to work on multiple areas at the same time. We couldn’t build our savings account and pay off debt at the same time, all the while expecting it to be extremely successful.
Dave Ramsey, a former real estate man, once had to declare bankruptcy. That journey prompted him to learn the principles of financial security that are universal. When Phillip and I began working on the seven baby steps to financial security, we literally jumped years ahead in our financial goals.
These 7 steps, when performed in this order, will put you on the path to financial stability and independence. Some steps take longer than others, and you may even go back a step at times, but they are possible!
1. Save $1,000 for an Emergency Fund
This the first step. Before you work to pay off debt (aside from making the minimum payments to avoid interest accrual), you need to establish a savings account with $1,000.
You want to accomplish this goal as quickly as you possibly can. We had a garage sale and de-cluttered our home, which brought in about half of what we needed.
Are there any side gigs that you could do? Is child care a possibility? Are you good at creating or baking, and could you sell them?
Make sure you also take a look at your budget. (If you don’t have one yet, you need to make one.) Are there any expenses that you could trip down to contribute to building this fund?
2. Pay Off All Debt (Minus the House)
This is the step we have been working so hard on! Making that last car payment was a thrill. Your mortgage (if you have one) will be a later step because that is a different kind of debt entirely.
Once you have your emergency fund, start putting all extra money you get to the the smallest debt that you have. Once it is paid off, you move on to the next debt. This is called the Debt Snowball Method, and you can get more details about it on this post here.
You may wonder what to do if an emergency comes up and you have to use some of your $1,000. If that happens, you stop working on step #2 until you re-fill your emergency fund with step #1.
Once you’re out of debt, do not go back into debt if you can avoid it. Don’t purchase anything unless you have the funds in the bank to pay for it.
3. Save 3-6 Months of Expenses
Now that your debt is paid off, you can really start saving! Take all of the extra money you were using to pay off your debt, and start putting into your savings account that has your $1,000 fund!
This step, along with step #2, may end up being the steps that you are in for the longest amount of time, depending on how much extra income you have compared to your expenses. It’s the step that we’re currently on.
Remember that this savings account can vary in how much you put in. Dave Ramsey leaves it vague for a reason; we all have different expenses and incomes. The purpose of this account is to handle life’s surprises without going back into debt for a car repair (or even a car purchase!). Do not use this money to pay for a trip to the Bahamas! That should saved for in a part of your budget.
4. Invest 15% of Income in Retirement
Now that you have a nice cushion in reserve in case of emergency, take the money you were setting aside for savings and start investing it as a way to plan for your retirement!
Many employers have a 401(k) program where they match a certain percentage of your contribution (which is tax-free!). Phillip’s company, for example, will match up to 3% of his paycheck that is invested. It’s basically like getting a 3% job raise – you just don’t spend it right now.
Invest the remaining percentage (in our case, 12%) in a Roth IRA – one for you, and one for your spouse. If you aren’t able to afford investing a full 15% of your paycheck, just start with what you can do. Each time you get a raise or pay increase, immediately use it for investing instead of expanding your budget.
5. Save for Your Child(ren)’s College
If you don’t have any children, then this will be the shortest step you do!
If you do have children, you may want to start saving for their college education now. How much you save is entirely up to you and your spouse. Even if your children have a genius IQ, they may not all get full-ride scholarships or be in the position to work and pay for college themselves.
For example, when I was in college, I worked two jobs every summer (one full-time, one part-time) for more than minimum wage. I also worked part-time at my university to pay for living expenses. In spite of that, I still never made enough money in the summer to cover a full year of tuition. My parents knew how hard I was working, so they supplemented what I was unable to pay.
When I came home from my mission, I had six weeks until classes started – not enough time to get a job to pay for my senior year of college. My parents hired me to help with the special needs children they adopted while I was gone, and they paid for my tuition that year so I didn’t have to take out student loans. When my last semester at college resulted in a student teaching assignment to a place where there were no buses, my parents purchased a frugal, used car with a salvage/rebuilt title.
I am extremely grateful that my parents had saved enough money to help me out. While they were very clear that I was expected to work hard and provide for myself, they also recognized the value of hard work and the way the economy was. They also appreciated my desire to serve a mission and didn’t want my schooling to be postponed due to the Lord’s timing of my call.
While these may not be your exact circumstances, having a savings account that you can draw from to help your children as adults is worth having. You never know what the future holds – your child may have an accident, a job loss, or even a health diagnosis that would necessitate financial support.
6. Pay Off Your Home Early
Now that you’ve secured the future for yourself and your children, you can work towards paying off your mortgage early!
If you currently are in a 30 year loan, consider re-financing to a 15 year loan. It’s incredible how much you would save in interest! If you can’t afford that at the moment, then when you reach this step, put as much towards your principle as you can.
7. Build Wealth and Give
You did it!! You’re prepared for the future, your children are secure, and you have no house payments!
Once you reach this step, you are completely independent financially. Keep investing your income, and then use the wealth that you’ve gained to help others who are at the beginning of these steps.
The Lord has blessed you so much to get to this point, and He would expect you to use those blessings for the benefit of others.
You can do it!
While this last step may seem like so far away, and the first steps seem enormous, I promise you that they are achievable. I know that because we are doing them!
If you feel as though this isn’t for you, or that these steps don’t make sense (or if your spouse is saying that), I highly recommend reading “The Total Money Makeover.” My husband *cough* Doubting (Phillip) Thomas *cough* was extremely skeptical, but by the second chapter, he was right there with me. And you know what? It has been liberating.