7 Steps to Financial Freedom

My husband and I recently took a class at our church called Financial Peace University, which is a set of eleven videos done by financial guru, Dave Ramsey. On The Dave Ramsey Show on Fox Business Channel, he says, "Debt is dumb. Cash is king. And the paid-off home mortgage has taken the place of the BMW as the status symbol of choice." Dave Ramsey is all about financial freedom and not being a slave to debt, and his plan really works. These steps must be done in the proper order, or it messes with the flow of finances and leaves you vulnerable to failure. Read ahead, and see for yourself!

Step #1: $1000 in the bank

Before doing anything else, even before you start paying off debt, you must get an "emergency fund" started of $1000 in the bank. Get this money however you can, even if it means delivering newspapers or pizzas on the weekend. This money is for emergencies only, like if your car breaks down, or something of this nature. Buying a big screen TV does not qualify as an emergency!

The second part of this step is to create hour household budget, and totally go to a "cash only" system. Once you decide what your expenses are, you can start taking cash out of the bank each month to pay for things such as groceries, restaurants, gasoline, and whatever else you spend during the month. This helps keep you from overspending on things because once the money is gone for the month, it is gone, and you have to wait until the beginning of the next month to get more money out. In the way of groceries, if you run out of grocery money, then you just have to start getting creative with what food you have in your house. It also "hurts" more paying with cash, so every single purchase you make, it really makes you think about whether or not it is work forking over actual money for. Just this cash system alone has helped with overspending in our house, and I know it can do the same for you.

The idea ultimately is that you should never take out debt for anything. If you cannot afford to pay cash for it, then you should not be buying it. In Proverbs 22:7 it says "The borrower is slave to the lender." Dave Ramsey often uses the analogy of a person borrowing money from their parents, and how even this is bad because it changes the relationship from parent to child (even if that "child" is an adult). He says that Thanksgiving dinner tastes a whole lot different at your master's table than it does at your dad's table, and how true that is! Think about it.

Step #2: Pay off Debt using "Debt Snowball"

Dave Ramsey explains in Financial Peace University how to pay off debt (everything EXCEPT the home mortgage) using the "debt snowball". He says that debt is probably more a mental problem than an actual money problem, and the debt snowball addresses that. He says to list your debt from the least amount owed to most amount owed. You start with the smallest because you can pay it off soonest. He says to make minimum payments on all other debt in the debt snowball, and pay as much toward paying off that smallest amount until it is paid off. Then you move onto the next payment, putting everything that you were paying towards the smallest amount then towards that next debt in line. Each time you pay off a credit card, get it cancelled and cut it to pieces! The debt snowball really does work, and because you are paying things off, it feels as though you are making progress, which makes paying off the bigger amounts seem much more manageable.

Step #3: 3-6 Months of Expenses in Savings

Once all of your debt (except the home mortgage) is paid off, in the Financial Peace University videos, Dave Ramsey says that you should then build the rest of your emergency fund, which is 3-6 months of your expenses. All you have to do to figure out the amount is to look at your monthly budget (which should have been created several steps ago!) and what you spend each month on things like your mortgage, electricity, etc., and put that much in the bank. This emergency fund is for major catastrophic things like someone losing their job. With this emergency fund in place, that allows you to be able to find a new job, take up to 6 months to find a new job, and not change your lifestyle whatsoever. Job interviews go a whole lot more smoothly when you are not desperate to take the first job that gets offered. Six months really allows you to find a job that will not only pay the bills, but that you may actually like too.

Step #4: Retirement

Dave Ramsey teaches in Financial Peace University that the ultimate goal in investing is to invest a total of 15% of your household income into various accounts for retirement. The first thing that you should invest in is your 401K program at work. Put as much into that as your company will match. Then you put whatever is left leading up to investing a total of 15% into a Roth IRA. This account can be set up through a financial advisor, and if you go to Dave Ramsey's website, you can find financial advisors in your area that are certified through Dave Ramsey's program.

Step #5: College Funding

College funding comes after investing for retirement, which I found odd at first, but it really makes sense why when you think about it. You really need to take care of your own future needs that you will have after retirement BEFORE you can worry about your child's education. There are lots of options out there for education saving, and Dave Ramsey really warns against things like the Gerber Insurance and education plan. He says that this money should be put into something like a 529 plan, which most states have available. These are similar to IRA's in that they are diversely invested and pretty low risk, but certainly a higher return than just a standard savings account. And again, this kind of an account can be set up through a financial planner.

Step #6: Pay off Mortgage

Once everything else is taken care of, then Dave Ramsey tells that you should be systematically paying extra money each month to pay off the mortgage early. If a mortgage ever has to be taken out on a house, he says it should be for 15 years or less. It does not add that much more to the monthly payment, and over time, you could be paying hundreds of thousands of dollars LESS on the house.

Step #7: Build Wealth and GIVE!

This is, of course, the last step, and it was my personal favorite of the lessons in the series Financial Peace University. It was so inspiring finally hearing that we do not build up our wealth to hoard it, but to give it away. Dave Ramsey used God as the example, and how he gave up his one and only son - he gave the ultimate gift! - and we should be doing the same with our money.

I also found it very fascinating to learn in Financial Peace University that most millionaires do not hoard their money, but that a commonality among them is how generously they give their money away.

Where I Am and What I Have Learned

My husband and I just recently started a college savings fund for our son, so we just completed step #5. I guess technically we should be paying off the mortgage, but there are some things we are going to do before we start tackling that. In about a year, we are going to be start the process for an international adoption (we want a baby girl from Ethiopia), and we are going to pay cash for it. When we first started going through Dave Ramsey's Financial Peace University plan, I was all on board - until I realized that it is actually going to push back our plans to adopt by almost a full year so that we can save for it!

I decided to pray about this, and prayed for God to just change my husband to see that it would not be the end of the world if we took out a loan to adopt. We feel as though God is calling us to adopt, so what harm could come from taking out a loan? So I prayed really hard for about two weeks for God to change my husband's mind. Then it was as if the Lord himself spoke to my heart and explained to me that yes, He is calling us to adopt, and yes, I could take out a loan to do it, but that would be wrong. He is preparing a very special little girl for us, and if we were to take out a loan, it would start the adoption process too soon, and we would get the wrong child. Then when our baby girl is ready to be adopted, we would not be in the adoption process anymore, and we would miss her completely. How tragic!

So we diligently stick to our cash budget. We live in a house with no credit cards and no debt, other than our mortgage. We continue to save for our adoption. I know that once our money is all saved up, my baby girl will finally be ready for us. So hang in there! God has great things in store for you, too, and if you be patient and do life at your actual income level, God will bountifully bless your life, just as ours is already so very blessed. God will bless you more than you ever thought possible.