Today I'm going to talk about the hush, hush topic of finances. I think one of the best things that happened to us can be summed up in two words: DAVE RAMSEY. Seriously, have you heard of the guy? He has his own radio show, and the thing about Dave (yep we're on a first name basis) is his story and how he can really relate to everyone. He was he was a millionaire, yep millionaire by the age of 26, but lost all of it. While he and his wife crawled back from the depths of despair and rock bottom they discovered a system that worked for them and then committed themselves to helping others.
Back when I was about 7 months pregnant with Baby Fox, Mr. comes to me and says, hey do you want to take a financial class? I said sure, thinking a one day class, nope it turned out to a an actual class that lasted 13 weeks! He got me with the technicality of what a class is, but I think it was one of the best things we've ever done together.
Backing up a bit, from the time we got married, we saved, saved, saved, everything that we didn't spend went into savings. Savings for what you ask? A house of course. We lived in a condo Mr. bought when he was 22. From the time we got married, we saved, we saved everything. Don't get me wrong, we were young professionals with no real responsibilities other then ourselves, we spent a great deal, but we were also able to save a lot too.
The problem with save everything is that we didn't really do anything. For example I would want some new furniture or drapes for the condo, and we couldn't buy anything too expensive because we were in the process of saving. Okay, not a big deal, I could handle that, but then we bought the house.
And we had no furniture, we went from a small condo to a relatively large house, we had enough furniture for maybe 2 rooms. We were always in save mode, but why, we had our house now...now what were we saving for?
We would get in little arguments about me wanting to spend some of our savings and him wanting to keep saving. Enter Dave Ramsey, seriously I don't want to be bold and say it saved our marriage, but he certainly helped to alleviate a lot of potential fights in our future.
Part 1 - Financial Peace University
Step 1: Emergency Fund - $1000
This is the first and most important step to do. Save $1000, you read that correctly, $1000. This will give you some breathing room, your car breaks down and it's $800? Look there, you have $1000 in your emergency fund, you can now get your car fixed and not have your budget go down the toilet because of the huge hit.
Step 2: Pay off all debt using debt snowball
Put all of your debt in front of you, what is the smallest? What is the largest? Put them in order of smallest to largest, and that's how you're going to pay them off. If two of them have the same amount, do the one with the higher interest rate. Dave's philosophy is to have small wins to keep you pumped and on track. So even if that $20,000 credit card has a higher interest rate then your $500 credit card, pay off the $500 one and check that off the list of one less thing you're in debt for.
Snowballing: What is it?
I'll use an example, because that's just easier. Say you have 3 credit cards and this is how they break down as follows:
Credit Card #1 (CC#1): $500 @ $50/min. monthly payment
Credit Card #2 (CC#2): $1,500 @ $100/min. monthly payment
Credit Card #3 (CC#3): $5,000 @ $200/min. montly payment
So you've done your budget and you see that you have $50 extra in your budget to put towards your credit card debt. So this is what you're going to do. Pay the minimum on CC#2 and CC#3, then put that extra $50 towards CC#1, so you'll be paying $100 towards CC#1. In roughly 5-6 months you'll have paid off the debt on CC#1, yay win, one less thing in debt, then you'll take that $100 and "snowball" it towards CC#2, so now you'll pay $200 for CC#2, pay that off in another 6-7 months, then "snowball" the $200 towards CC#3, so you'll be paying $400 towards CC#3, pay that off in a year or so. So in two years with just $50 extra dollars you'll have paid off your debt.
Step 3: 3-6 months of savings
After you've paid off your debt start saving for 3-6 months of living expenses. Decide how much you need to live each month, and then save that for however many months you think it will take you to find a new job or get back on your feet. Save it, just having it gives you peace of mind, knowing that you have that in case something happens and someone loses a job or can't work.
Step 4: Invest 15% of pre-tax money to Roth IRA or pre-tax retirement
This is self explanatory right?
Step 5: College fund for kids
You're debt free, saving towards retirement, now lets take care of the kids and their education. Unless you have smarty pants and they're going to get a scholarship.
Step 6: Pay off home early
Pay off your house. I mean just think, you enter retirement (hopefully well before that), with no mortgage, how much more financial peace do you need than that?
Step 7: Build wealth and give!
Now you can afford to put away money for future generations, give money to all of those causes you've been wanting to help but couldn't because of other financial obligations. You now have all the power to do what you want.
I think that's enough info for one session don't you? Next time I'll talk about how we incorporated into our lives.
Until then, do you have a budget?
If you don't, start keeping track of what you spend, every single dollar coming in and going out, for the next month or two, having real data is the best way to start budgeting.