Baby Steppin' Our Way to Debt Freedom

Almost two years ago we started on the path to debt freedom. We had tried on our own several times, but never had any traction. In June 2005, we started a program - Dave Ramsey's Financial Peace University - through our church. We really only did it to get to spend time with some of our best friends, but it has changed our lives forever.

Since that time, we have either paid off or cash flowed over $20,000 without incurring any new non-house debt.

We paid off our mini-van at over $6000, paid medical bills and for dental work, our last credit card went good-bye today for almost $4000 and we owe about $1200 on our other car.

We have done this using the baby steps outlined by Dave Ramsey.

Baby Step 1: Get $1000 in the bank. This is "Murphy Insurance". Remember Murphy? "Whatever can go wrong, will go wrong". What Dave has found is that when you have money in the bank, things that used to be emergencies are not emergencies anymore. Tires for the car - easily several hundred dollars for most people - no long goes on the credit card, it can be paid for. It is not an emergency anymore.

Baby Step 2: Pay off all debts, smallest to largest, using the debt snowball. List the debts from the smallest one to the biggest, not including the house. Trim the budget, get a second job throwing newspapers or delivering pizzas or writing for an online website, list stuff on Ebay, whatever you can do to make extra money. Pay minimums on all debts except the smallest and throw every extra penny you can at that smallest debt. When it is paid off, take that minimum payment, add it to the minimum payment for debt #2 and throw those payments and all that extra money at the second debt. Most people can have all non-house debt paid off in less than two years.

Baby Step 3: Get three to six months of expenses in the bank. This is the fully funded emergency fund, what your grandma probably called a rainy day fund. Because it will rain. That is simply a fact of life. Emergencies happen. Cars get totaled, your appendix has to be removed in an emergency surgery, a loved one on the other side of the country dies or falls seriously ill necessitating an unplanned trip. These things just happen. Life happens.

Baby Step 4: Put 15% of your income into retirement. Let's face it, Social Security is not going to be either enough or even there for most of us to retire. I am certainly not counting on the government financing my golden years. Max out any matching funds your employer may have (the match does not count towards the 15% - that is just bonus), then max out any pre-tax options, then go back to your employer's fund.

Baby Step 5: Fund your kids' college funds. If you start by the time they are 8 or so, according to Dave, you should be okay. ESA's or 529's are great options. We decided to put our student loans as baby step 5a. We owe more than $73,000 on student loans and it will probably take us 4 or 5 years to pay them off. We just could not justify to ourselves putting off retirement savings and a fully funded emergency fund that long. It is also more than we make a year at this point.

Baby Step 6: Pay off the house early. We can not wait to get to this point! Can you imagine life with no house payment?

Baby Step 7: Build wealth and give it away. How fun does that sound? You can help out a friend in need. You can help your parents or your kids when they fall on hard times.

Financial Peace is not making it to step 7. Financial Peace is telling your money where to go instead of wondering where it went. Financial Peace is discussing finances with your spouse in a calm, reasonable way rather than fighting about it. Financial Peace is being on the same page as your spouse when it comes to money, making decisions together and significantly reducing your chance of divorcing. Money fights are the number one cause of divorce. When you stop having money fights, you reduce your chance of getting divorced.

FPU was life changing for us. So much so that we have led the course three times since.

It really does bring a sense of peace.

And we're baby steppin' our way to freedom.