Meet Dave

Now that you all have your debt lists done, it’s time to meet the man who inspired me to get out of debt for good.  Author of The Total Money Makeover, Dave Ramsey.  *Gasp, shudder.*

He may not be everyone’s cup of tea, and he can be ornery, but he is the only financial guru in America that will tell you to your face that all debt is a terrible idea.  Every other financial expert out there will try to convince you that there is good debt.  I have to tell you, after finally paying off my credit card in October and now working on my car loan, I never want to be in debt again.  It eats away at your income, which is the best tool we all have to build wealth.  I want to do fun things with my money, like travel or give it to someone in need, not give my dollars to a banking executive.

Just a quick back story on Dave Ramsey: he went broke about 25 years ago after becoming a millionaire in real estate (on borrowed money).  After he filed bankruptcy, he starting looking at what old rich people were doing to hang onto their money.  Eventually he starting following their principles, and he came up with 7 steps to get out of debt and build wealth (today he’s worth about $55 million).  Here they are:

The 7 Baby Steps

  1. Save $1000 in an Emergency Fund
  2. Pay off all debts using the debt snowball method
  3. Complete Emergency Fund to cover 3-6 months of expenses
  4. Invest 15% of income in retirement accounts
  5. College Fund for children (if you don’t have kids, skip this step)
  6. Pay off your home early
  7. Build wealth and give!

You’re probably wondering why we start with a $1000 emergency fund instead of starting to attack our debts right away.

If you start throwing all your extra money at the debt and your car breaks down, where will you get the money to fix it?  Bingo, the credit cards.  The same usually applies to any unexpected event – repairs to the house, loss of a job, ect.   While $1000 will only catch the smaller emergencies, it will still be a buffer between you and adding more debt to what you already have.

A few months back when I first heard of Dave’s baby steps, I had a few cavity fillings that needed to be replaced, which cost me about $200.  Thankfully, I had already started my emergency fund that very same month, so I was able to pay cash at the dentist’s office.  The old Joti would’ve just handed over her credit card, but I decided with that purchase that I would never charge up my credit card again.  You have to decide what your turning point will be.

How to save $1000 if you’re already cash-strapped?  Well, it’s going to be hard.  There isn’t any trick to get out of debt – it’s just you doing the work, making sacrifices, cutting back expenses and making a budget.  I had already started tucking away 10% of each of my paycheck, so it only took me just over a month to save my $1000.

Here are some ideas to help save $1000:

  • sell things online or have a garage sale
  • sell your car and get a beater
  • part-time job
  • look at reoccuring expenses (i.e. car insurance, utilities) to see if you can go with a cheaper company/plan
  • Work overtime
  • Find a job making more money

I thought hard about selling my 2010 Corolla a few weeks ago.  At the time I owed close to $6000 on it and I knew it would allow me to pay off my student loans that much quicker.  I decided against it because the vehicle isn’t extravagant for my $40,000 income – it cost just under $12,000 when I bought it used in 2013.   Most importantly, when it’s paid off this June, it’ll be a good, reliable vehicle for the next 7-10 years while I save up for my next car.  I followed Dave’s rule: if you can’t pay off your vehicle in 12-18 months, sell it.

The point is, you have to be willing to do just about anything (short of selling your body) to get that $1000 saved.  For those who are natural savers, you’re done!  Except this: anything you have over $1000 should to be put towards your debt.  This might sound scary, but think of it this way: would you borrow $10,000 just to have it sitting in your savings account?  Of course not!  It’s the same concept.  For example: if you put $50 in savings this month on top of the $1000 instead of paying on your credit card, you are unnecessarily borrowing $50.

I have to tell you, now that I have $1000 set aside just for emergencies, it takes a huge weight off.  I know that if I run into a financial emergency, I have the money to take care of it.  That feeling is priceless.

Here’s a little something to get your butt in gear:

Joti’s Debt Update:  As of last Friday, I only owe $4,900 on my car loan!  These steps really work!

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