If you haven’t heard of Dave Ramsey, he is a financial advisor that offers down-home, simple advice to take control of your finances. You can learn more about his philosophy by catching his television call-in show on the Fox Business Channel, his radio call in show or by reading his books. I listened to his book, Total Money Makeover, 4 years ago during my commute to and from work. My husband and I quickly became hooked and we decided to drag ourselves out of debt following Dave’s plan. At the time, I had read the books of a number of financial advisers and Dave’s program seemed to make the most sense for us.
His mantra is to pay cash for what you have, live within your means and stay debt free. Sounds easy, right?
The very simplified version of Dave’s plan includes 7 “baby steps:”
Save $1000 as a beginners emergency fund
Pay off debt using Debt Snowball
Build Emergency Fund up to 3-6 months expenses
Invest 15% in retirement accounts
College fund for children
Pay off Mortgage
Build wealth and give to charities
At the time we started, we were engaged with no children and had a good income. We had also just purchased a $280k home with nothing down, nothing in savings and had gotten accustomed to spending whatever we earned. When we started the snowball, we owed about $12,000 on 2 cars, about $10,000 in credit cards and about $17,000 in student loans. Ouch.
In about 18 months we paid off almost all the debt. Here’s how:
1. We started living on a budget. Looking back we could have saved so much more! We weren’t ready to give up shopping, vacations, eating out etc… This was way before I learned to coupon and not only did I pay for shampoo but it was $20 salon brand to go with my $150 highlights.
2. We got serious about the snowball and decided to face our debt. We taped a plain sheet of paper to the refrigerator with a running total of all the debts. Every time we made a payment I would update the total. It was so satisfying to see the balance get lower and lower- I became pretty addicted. If we got a $100 incentive check or $50 from an aunt for a birthday I would immediately pay the credit card. I paid our cards so often that the credit card company actually limited me to how many payments I could make in one month! The sheet confronted us every day and served to really keep debt reduction front of mind. We kept it up even when friends were over because we made the decision to stop pretending and to be honest about our challenge. Most people made fun of us or worse- called me tacky, money obsessed, cheap etc… but I believe that being honest about money is the only way to gain control.
3. We paid off the cars, paid off the credit cards and started working on the student loans. I used to have a stack of preaddressed envelopes with notes inside that said “Please credit the enclosed check for $x.xx to account #…” I put those right by my keyboard in my office and every single payday I would send as much as I could to my loans. Some months it was $20 and some months it was $500. Every penny counts when working toward a goal!
During that time, we also got married and had a wonderful honeymoon, furnished a 2000 sq foot home, I got my MBA and we started planning for a baby. We stayed out of debt during that entire process which was another major accomplishment. I am proud to say four years later we own our cars outright and haven’t touched a credit card.
But then we slipped.
I highly recommend getting on board with Dave’s program and have two of his books on my Amazon sidebar. I recommend starting with Total Money Makeover. You can read the book or listen to the audio version and it breaks everything down in very clear terms.
(Stay tuned for part 2 with how we thought we were smarter than Dave and fell off the wagon and part 3 where we are today.)