Changing our life one baby step at a time...

My wife and I started Dave Ramsey's Financial Peace University two weeks ago. I have been following Dave for the past couple of years but after numerous false starts we finally got on the same page at the same time and decided that if we were going to be held accountable we would need to attend the live group.

Before our class started I sat down and crafted a budget with Shan for the month of February. Surprisingly, it works just as advertised. After never having any money at the end of each month, and basically spending next month's money to cover the current month's expenses, I'm proud to report that we have ended the month with roughly $400 left over! We are so proud! It's going straight to the emergency fund.

Baby Step 1: Build a $1000 emergency fund.

I thought it would take a couple of months to build our fund but the goodness of the Lord led me to some unexpected money sitting in an account with an institution that equalled roughly $580! So it looks like we got our fund a lot quicker than we expected! I've also listed some items on eBay and craigslist to gain some add'l money.

The emergency fund is for life's little "murphies" (Murphy's Law- if something can go wrong, it will) so they do not ruin your progress on baby step 2.

Baby Step 2: Pay Off Debt using the "Debt Snowball"

The debt snowball is a mathematical wonder that allows you to use your current payments (and any little extra you can afford) to attack each debt one at a time. If you continue to pay your debts using just the minimum payments you are diluting your efforts and will never gain any traction. Start looking at your credit card bills now. Thanks to the Credit CARD Act of 2009 companies are now required to tell you how long it would take you to pay off your balance with just the minimum payments. Suffice it to say, depending on your balance, it will generally be ten years or more.
Line up your debts starting with the smallest balance first to the largest balance. Continue making minimum payments on all debts except for the first one, where you will throw as much money at it over the minimum payment as you can. Financial wizards and rational people will tell you to line them up by higher interest rate to lower interest rate to save the maximum amount of money. (You will save money by reducing future interest). But, (and I do attest from personal experience) you DO need some quick wins at the beginning to build momentum and feel accomplished and to have the drive to attack each one and actually finish. As your total debt goes down, those larger balances don't seem as insurmountable as before! Here are two arguments against the interest rate approach:

1.) "Personal finance is 80% behavior, 20% head knowledge." -Dave Ramsey

2.) You would continue paying interest into infinity if you weren't doing the snowball and trying to get out of debt, so you're saving loads by simply being on the program. If a certain approach helps you stay on the program, DO IT!

After formulating my debt snowball (google: debt snowball calculator), it looks like it will take us 36 months to pay down our debt. The emergency fund is there to keep us on track and to allow us to take care of financial emergencies so we don't end up going into more debt to take care of them.

Tomorrow, we do our third class of FPU. We have some great news to share and hopefully we can help others enjoy the same success!


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