I discovered Dave Ramsey and his baby steps to financial peace by downloading The Total Money Makeover from Audible in September 2011.
The book spoke to me. “The borrower is slave to the lender” How true is this? How often have I felt controlled by debt in the past. I’ve gotten it under control but that straightforward view of debt clarified alot for me.
We have been brainwashed into thinking that debt is a normal and nessecary part of life. This is not true.
So – in September 2011 I started my journey to become completely debt free.
Baby Step 1 - $1,000 Emergency Fund – DONE September 2011
This one was easy since I was using the YNAB financial software. (<– That’s a referral link. By using it we BOTH get $6) By using this software I already had a month’s buffer of money in my checking account. Furthermore, I had a money market emergency fund already with a balance of $20,001.19 that I had been building for a long time since I’m self-employed and my pay is quite variable and more un-guaranteed than most people.
I didn’t need Ramsey to tell me about an emergency fund. When your line of work has you looking for another gig every month – you learn to build up a nice sized emergency fund very quickly.
Baby Step 2 – Pay off all debt using the Debt Snowball - DONE April 2012
This was my debt (besides the mortgage) in September 2011:
- AmEx Gold Charge card $1,535.04
- Student Loan $14,745.1
- Nissan Leaf $22,203.50
The AmEx was easy as the money was already allocated via YNAB so that was paid off (besides you HAVE to pay the balance every month with this card). I still use my AmEx gold for all internet purchases though. I believe it’s much safer – and since I’m using YNAB the money is already allocated. (it’s hard to go into more debt using YNAB - if you don’t have the money you can’t spend it unless you cheat)
Now for my wife’s student loan. The monthly payments were $163.50 – very reasonable. But I hated this loan – the interest was in the 7%s and I calculated we’d be paying this thing for another 10+ years with the regular payment. No way. I started throwing everything at the loan – $2,149 one month, $2,538, etc… I know Dave tells people to just take money out of the emergency fund and leave the $1,000 mini-emergency fund but I just couldn’t do that since I’m self employed… seemed like too much risk.
Thankfully – even though I’m self employed and the pay is irregular – when I do get paid – I do get paid a nice amount – so I kept throwing everything at it – going seriously gazelle intense – until in March 2012 I made the final transfer of $6,542.94. I can’t tell you how happy that made me feel. I really detested that loan.
Now my Nissan Leaf. I absolutely love that car. Silent, quick (very), fun, and it only costs $40/month to run in electricity. There was no way I was going to sell this car off. I was going to pay for the whole darn thing. It was going to be probably my last new car purchase – and I love it so much I hope to keep it until it’s wheel’s fall off.
By now I had the paying off debt fever in me. It seriously gave me such an awesome feeling paying off that first debt. Dave is certainly correct about the psychology of it all. Once you get that first debt paid off - especially if it’s one you really don’t like – it’s hard to stop.
In April of 2012 I had a remaining balance of $18,687 on the car loan. I went seriously gazelle intense again, taking all the extra money that I was already paying to the student loan plus the car loan and made an extra $5,000 payment. Then I saw my emergency fund balance of $20k and my car loan balance of $13k and said screw it and transferred the $13,181.04 to pay the loan off in April of 2012.
Now I was finally debt free. BUT I only had a balance of $6,796.56 in my emergency fund and being self employed and looking for my next gig every month – that made me VERY nervous. BUT the feeling of elation of knowing that I have no more debt and the knowledge that I’m never going to take out a loan again (besides refinancing the house) made me ecstatic.
SEVEN MONTHS after starting my snowball I was finished. I was fortunate in having some very well paying gigs at that time… but I was gazelle intense. I really threw everything I could at it. I’m sure my wife thought I was insane. But maybe not – since we’re now debt free! Yay!
Baby Step 3 – 3 to 6 months of expenses in savings -
DONE October 2012
Since I’m self-employed – having just under $7k in my emergency fund made me really nervous. I wanted to get it to even higher than what it was. Dave says in his book if you’re nervous about what number to save to – choose the higher number. So I set my goal for $30,000. So again – I went seriously gazelle intense and a little insane. Since I was still working on that very well paying gig – in just another six months I was able to get it to that number.
UPDATE 03/28/13: Of course Murphy is smiling at me and the same day that I post how I’ve gotten to Step 6 I find out that I didn’t give enough to Mr. Tax Man. My emergency fund is now back down to $19,174.91. Gah!!! Back to being Gazelle Intense.
UPDATE 04/19/14: Due to other crazy expenses and time where I couldn’t work.. our e-fund is down to $10,754.97. It should be going back up pretty quick soon. My goal is to get it back up to $20 or $30k.
Baby Step 4 - Invest 15% of household income into Roth IRAs and pre-tax retirement ONGOING
I had stopped doing this for way too long – probably ever since the crash in 2008 – which was idiotic because if I kept investing after the crash I would have had a boatload of money by now. Oh well. But I started this up easily since I wasn’t paying off my debt like a crazy person anymore.
UPDATE 03/28/13: Stopping this until E-fund is built back up.
UPDATE 04/19/14: Even though my e-fund isn’t where I want it to be I’m still maxing out my 401k now to play catch up with the lost 30s and also to bring down my MAGI.
Baby Step 5 - College funding for children ONGOING
This I never really stopped doing during the debt snowball. Since my two boys were born I’d been putting $100/month into each of their 529s. I decided to boost it to $166.67 each for an even $2,000 a year.
UPDATE 03/28/13: Stopping this until E-fund is built back up.
UPDATE 04/19/14: This hasn’t stopped. I’m doing $166.67 per kid each month for a total of $500. (3 kids)
Baby Step 6 - Pay off your house early
This is what I’m on now if you haven’t guessed. If I could go seriously gazelle intese I could get it paid off much quicker – but that would mean not following step #4 – which is not what Dave recommends.
Soon also my wife will stay home with our third baby and we want to buy a bigger new (used) car to replace our small honda civic. So that’s some new expenses. I’ll need to get seriously intense to pay this thing off. Let’s do it!
Baby Step 7 - Build wealth and give!
I hope to get there one day!