Welcome aboard our travels along the Oregon Trail to Debt Freedom. My wife, Kristi, and I have recently re-motivated ourselves to follow Dave Ramsey's Total Money Makeover to pay off our debt as quickly as possible. This blog will cover any and all topics related to our journey towards our ultimate goal: debt freedom. I'll post about our progress, our trials and tribulations, and our wins. Feel free to follow along, or better yet, hop on board and complete the journey with us. The destination is financial freedom, and the more the merrier on the trip.
The Total Money Makeover
Let's take a quick moment to talk about the Total Money Makeover. The author, Dave Ramsey, will be the first to tell you his idea's aren't new, but they are successful when done right. The key, as Ramsey puts it, is the focus behind the plan. You must be "gazelle intense" for the Total Money Makeover to work perfectly. If you're lackadaisicle, haphazard, or uncomitted, it will fail and you'll end up back where you started. The key principles of the plan are as follows:
- All Debt is Bad: Ramsey believes that all debt is bad, with the exception of a house that's payments are 25% of your income or less AND on a 15 year mortgage. The goal of the makeover is to 1) eliminate the mental reliance on debt, and 2) eliminate all debt from your life.
- Your are the Problem: It's not the car's fault, it's not the credit card company's fault, it's not the bank's fault. You are the cause of your debt, and only by modifying your spending behavior can you fix it.
- Baby Steps are the Key: Ramsey names his 7 steps to financial freedom Baby Steps after the fake book in What About Bob? a hilarious movie starting Bill Murray and Richard Dreyfuss. He quotes the movie and believes "you can get anywhere if you simply go one step at a time." That's the key to the whole plan. Attack each step with incredible determination and unflappable focus and you'll succeed.
- Baby Step 1: Save $1000 Emergency Cash
- Baby Step 2: Debt Snowball
- Baby Step 3: Finish the Emergency Fund
- Baby Step 4: Invest 15% into Retirement
- Baby Step 5: Save for College
- Baby Step 6: Pay off your Home Mortgage
- Baby Step 7: Build Wealth
- Money has 3 Uses:
- Spend: You need to spend your money wisely, on housing, bills, food, transportation, etc. Eventually when you're debt free you'll be able to spend money on FUN things, too. While you're eliminating debt fun is cut way way down, but not to nothing because everybody needs to enjoy life, not be so guilty about going to a movie. As long as it's budgeted for and accounted for, go for it.
- Invest: The second use of money is to invest in your retirement. This is where the phrase Ramsey likes to use comes up often "live like no one else so later you can live like no one else." The first step after you eliminate your debt and build an emergency fund is to invest 15% into your retirement. He loves mutual funds because they have a high average gain over their lifetime. What he also suggests is to learn about investing. Always manage your money yourself, even if you have a broker, always research and be sure the decision is sound before signing the check.
- Give: Ramsey's last use for money is giving it away. Whether that's giving your time at a soup kitchen, buying bikes and coats for kids in need at Christmas, or giving to charitable organizations, the point is to give. The peace of mind you feel from giving helps. I know right now I'm not in the financial position to give money, but I do give blood as often as I can. Hopefully in the future I'll be able to start a scholarship at my high school which is one my dreams.
Those are the key principles that I took from his book, The Total Money Makeover. The book is full of quotable sentences and success stories. At it's core it's a motivational book that seeks to change the readers behavior about and towards money. If you can look yourself in the mirror and change your behavior, you can be successful at anything, especially becoming debt free. Finally, there is one principle that get's it own category:
The Debt Snowball
The debt snowball is Baby Step 2. Baby Step 1 is accomplished by saving an Emergency Fund of $1000. Baby Step 2 is getting rid of your debt once and for all. Many of you already know what the debt snowball method is, but for those that don't here's a quick description:
- List all your debts in order from lowest balance remaining to highest balance remaining. Do not even look at interest rates unless you have two loans that have approximately equal balances, then list the higher balances first.
- Make minimum payments on all of the debts except for the debt at the top of the list. This debt you attack with all the spare money you can muster every month until it's gone.
- As you pay off each debt, take it's minimum payment along with what you were paying on top and apply it to the next one down the list. In this way the payments will grow as you pay off each debt.
- Watch as each month you knock off debts and your payment gets larger and larger, creating a cash snowball that obliterates all debt in it's path.
If you have the determination and the focus, you can pay off a lot of debt in a very short amount of time. That's what we're trying to do now. We've been loosely following this plan for a few months and have paid off some debts, but haven't been as aggressive as we need to be.
We're changing that now. Follow along and see our progress!
