Wednesday, April 27, 2011

Guest Blogger - We're Debt Free!

The fabulous Bonnie from The Sometimes Single Mom graciously accepted another request to guest post for me! This is a post for my "frugal living" series, and she is seriously fabulous! *I added links to Dave Ramsey's website and Facebook page for your reference.

We’re Debt Free!!

I’m sure the title of this blog post grabbed your attention, and you’re probably thinking “There is no way she’s debt free.” And you would be right. We are not debt free… yet. We have been diligently working on getting our debt paid off for nearly two years now, and I am proud to say that the only things we have left to pay off are our military credit cards (aka Star Cards) and my student loans.

I would like to talk to you about the ‘Dave Ramsey Program.’ This guy is very common sense orientated and not living above your means. When I first came across this program I thought it was a joke, I didn’t think that debt could be paid off any faster then we could accumulate it… and then we found out we were pregnant with baby #2 (baby #3 for Husband)… how were we going to afford another child? And all the things that go along with having another child?

That is when I bought “The Total Money Makeover.” It has changed how I spend money, it has changed how I save (and how much I put in savings), and it has been a true blessing. Dave Ramsey makes a lot of Biblical references in his book (I prefer the audio book) and a lot of the analogies really just click and make total sense.

Most military families don’t have a budget, a savings, and they have debt ranging from “small” to much more then they can afford. In my opinion, no one can afford to have debt… especially in light of the government almost shutting down and our service members not getting paid.

Let me give you a small overview of the Dave Ramsey Program and how it works in case you’re interested… and if you’re not interested, I’m hoping it’s because you truly are debt free.

First thing is first. You need to make a budget.  You need to calculate exactly how much money is coming in each month. Then you write down all your “fixed” expenses (mortgage, rent, car loan, insurance, phone, internet, etc.), then you need to write down your expenses that are varied each month (utilities, water, etc.). The last part is your variable expenses like gas, groceries, vehicle upkeep, etc.

Once you have your budget set up, you’ll need to make sure you have a “sinking fund” for recurring expenses. You can set up an envelope system and label each envelope with a specific thing and put how ever much in each envelope each paycheck. You also need to make sure you are current with all your bills. This is not counting the debts that you have in collections. Whatever monthly bills you have, make sure they are all up to date.

Once you’ve got that stuff done, it’s on to the fun part. If you want to get your debt paid off as fast as possible, Dave suggests that you have a yard sale and get rid of things that you do not need (or use), drop your cell phone plan and switch to prepaid (sure, while it’s “x” amount of money to cancel a contract, it’s cheaper in the long run then paying “x” amount for the duration of your contract… unless your contract is almost up. He also suggests shopping around for cheaper car insurance, selling your cars that still have loans and getting something that you can buy in cash. Now you don’t have to do all or any of these things, but they are suggestions).

Dave refers to his steps as “baby steps” and that makes things seem a little easier.

Baby Step 1 – Save $1000 as fast as you can. This is your baby emergency fund. This gives a small cushion in case something happens so you do not use your credit cards. If you want your baby emergency fun to be a little larger then $1000, that’s ok… but make sure you reach your savings goal before moving on to baby step two.

Baby Step 2- Pay off all your debts except for your mortgage using the “debt snowball.” This means, list your debts from the smallest amount to the largest amount owed (not by interest rate).  Once you’ve got your debts listed, scrape what you can and attack those debts. Start from the smallest debt. Once you have your smallest debt paid off, use that money plus whatever else you can scrape together and get on that second debt. It’s motivating to get that smallest debt paid off, and will help you keep that motivation when you continue to pay off those debts.

Baby Step 3 – Increase your emergency fund to cover three to six months of expenses. You want enough to at the very least cover the minimum expenses. A lot of people that follow the program put a little more then their minimum monthly expenses in this category and that’s ok.

Baby Step 4 – Start saving 15% of your income towards retirement. It’s up to you whether you save 15% net or gross pay, but it’s important to start saving for retirement. This is also the step that you want to start looking into Roth IRAs

Baby Step 5 – Save for your children’s education. Now I know not everyone has children, but if you ever plan on having kids, start saving. Remember when you had to pay out of pocket for your education and start your adult life off in debt? Do we really want our kids starting off like that? If you don’t ever plan on having kids, skip this step.

Baby Step 6- Pay off your mortgage early. Dave doesn’t really advocate buying a house unless you can put 20% down and get a 15 year mortgage, but let’s face it… that isn’t always possible for every family. A lot of people also don’t know they can’t pay off their mortgage early without a penalty… so if you have a mortgage, check to make sure you can pay it off early and get to work on it. For those of us who are planning on buying a house soon (or in the future) make sure your contract states there is no penalty for paying off a mortgage early! I know, 30 years seems like a lifetime, but when you don’t have any debt but your mortgage why would you give your finance company all that extra money in interest when you can pay more and it go to the principle of your loan? I know I don’t want to give anyone any extra money if I don’t have to.

Baby Step 7- Build wealth and give.  :)

Now there is a lot with the Dave Ramsey program that I didn’t cover… mostly because we’d be here all day and all night. I hope this gives you a little hope and motivation to get that debt paid off and money in your savings. Ultimately you know exactly what is best for your family and how to make your budget work for you.

The Sometimes Single Mom


Dr. Army Wife said...

My school loans are, to put it gently, astronomical. It actually makes me nauseous just thinking about them. I have to start paying them back very soon and I need to come up with the right plan. What I find interesting is that step 2 says to pay loans from smallest to largest balance regardless of interest rate. I have been told by numerous financial advisers to always tackle loans with the highest interest rate first regardless of the balance. This saves you a lot of money in the long run.

Sarah said...

Regarding baby step 6, did you know that just one extra mortgage payment per year can make a HUGE difference in the interest you pay in the overall life of the loan. YUP! YUP!

These are great tips! My husband is oh so lucky I'm a whiz with the checkbook.

Debt free here, with the exception of student loans and a mortgage. :)

Cat said...

We're completely debt free here as of this year (we don't own a house), and it is a fantastic way to live! Dave Ramsey has some great info on digging yourself out of the debt hole.

Also, if you're a milspouse and need help making a budget, Navy-Marine Corps Relief can help you. They also offer no-interest loans that come as an allotment out of the paycheck if you're in a major bind.

The Sometimes Single Mom said...

Cat, the Army has ACS (Army Community Service) and they offer the same things :) Building a budget, etc. We're planning on buying a house at the next duty station later this year, but we will only buy if we can get a lower mortgage payment then our BAH so it covers most, if not all, of the utilities. :)

Dr. Army Wife, your student loans would be one of your "regular" monthly payments. My student loans make me cringe every time I think about them also and I've only got my Associate's Degree (and the VA didn't come up with the Post 9/11 until I was almost finished with my Associate's, but I'm using that to pay for my Bachelor's). I can see how paying things off with the highest interest rate makes sense, but if you've got a high balance with a high interest rate, and another debt with a much lower balance- I don't know why anyone wouldn't pay off the lowest balance first.

The Sometimes Single Mom said...

And thank you 'Sailor's Wife' for having me guest post again <3

Tara O said...

Great post!!! We are one credit card away from being debt free now. YAY.

Dana @ WhatWereWeThinking? said...

We are debt free except for the house & about to tackle Baby Step #5. it's an awesome feeling! Great post, Bonnie! You have been doing a great job. (also, thanks for showing me another great milspouse blog!)

@Dr Army Wife - according to Dave, and I agree 100%, becoming debt free requires a change in your whole mentality about money. By paying off the smallest debt first, you get a "reward" sooner than if you pay off the highest interest first. That first debt that gets knocked out registers as a success. Then, you snowball that payment onto your next lowest debt & it gets knocked out more quickly...and the snowball builds.

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