Before reading this article on how to start paying off your debt, make sure you read the introduction to why you should pay off your debt, okay?
The Total Money Makeover
by Dave Ramsey
“Baby Steps” means that we can do anything financially if we do it one little step at a time. I have developed the Baby Steps over years of counseling one-on-one, in small-group discussions, with real-world lives, and by answering questions on our radio show.
When you try to do everything at once, progress can be very slow. If you attack several areas at once, you don’t actually finish anything you start for a long time. That makes you feel that you aren’t accomplishing anything. If you feel that nothing is getting done, you will soon lose energy for the task of money management altogether.
The power of focus is that it works. Things happen. You check stuff off your list. The power of priority also causes the Baby Steps to work. All of the steps build on one another; therefore, if done out of order, they do not work. You have to be patient!
These steps are the proven plan to financial fitness, and they are in the right order for everyone. Focus exclusively on the Baby Step you are on, even if it seems to be a temporary detriment to other areas of money.
Before we get to Baby Step #1, you need a written budget every month. You can create one free here! Virtually none of those who have been successful in paying off their debt have done it without a written budget. You have to tell money what to do or it leaves!
According to Brian Tracy, a study of Harvard grads found that after 2 years, the 3% who had written goals achieved more financially than the other 97% combined!
2. Spend every dollar on paper before the month begins.
3. If you’re married, agree on your budget with your spouse. If you aren’t working together, it is almost impossible to win.
4. Stick to the budget.
5. If an emergency comes up, change the budget only if both spouses agree to the change and you still end up with a balanced budget.
Personally, we use Dave Ramsey’s online budgeting software. He also has software that you download to your PC (not Macs). It’s very user-friendly and follows the format that he will recommend in later steps. My sister used Mint.com and it was hard to translate Dave’s budget categories into that program. But Mint.com is free and Dave’s isn’t.
No matter how you do it, create a budget. If you need suggestions to make sure you’ve thought of all the different expense categories you may have, feel free to let me know in the comments below and I’d be happy to email you!
One Last Thing Before Baby Step #1
If you are behind on any of your payments, the 1st goal will be to become current. If you are far behind, do necessities first, which are basic food, shelter, utilities, clothing, and transportation. Only when you’re current with the necessities can you catch up on credit cards and student loans.
Okay, some of you just thought about quitting here. You’re behind on lots of payments. You can do it! Can you make minimum payments on everything? If not, can you call the companies that you owe and ask them if it’s acceptable to send them $5 a month for now? You have to be bold. You have to be be brave. Do not give up. Sticking your head in the sand will only make the problem worse, compounding your anxiety.
Life happens, so be ready. This is not a surprise. You need an emergency fund. Saving $1,000 is just the beginning of the emergency fund, but it’s at least a start.
This $1,000 is only for emergencies. It is not for vacations. It is not for Christmas. It is not for new clothes or car maintenance. It is only for true, unexpected emergencies.
The beginner fund will keep life’s little emergencies from turning into new debt while you work off the old debt. If a real emergency happens, you have to use the emergency fund. No more borrowing! You have to break the cycle.
Work overtime, have a garage sale, return some clothes you just bought. Quickly get your $1,000 together. Get crazy. And if you already have $1,000 saved, good for you! Take it out and set it aside.
My husband started to get scared of me as we started this step. He’d see me rifling through the attic and his office. It made him nervous. It made me excited. We sold lots of stuff and quickly got our $1,000 together. How are you doing to do it?
What if you get to Baby Step #2, and you use $300 from your emergency fund to fix the alternator? If this happens, stop Step #2 and return to Step #1 until the full $1,000 is replenished.
Now for Baby Step #2…