Success has been achieved!  A mountain has been scaled and a once inconceivable objective is now marked done and DONE!

Debt is largely accepted as normal and we’re so easily swept into that mentality.  Often we’re so numbed to debt as normal that thoughts of getting out of it don’t surface until it’s too late. 

Getting out of debt then becomes an impossible task.  It is overwhelming.  It is climbing a mountain, losing weight, and running a marathon at once.  Who can possibly do it?

Well… I know for a fact that YOU can do it.  And how can I make a declaration so bold?  Well, because the old adage rings true, if I can do it, so can you!

That’s right – sorry if I’m being a little circular in my presentation today – We have just in the last 3 days paid off the very last of our household’s non-mortgage debt! 

…Baby Step 2, CHECK!

Such an accomplishment deserves a story, so here’s mine.

In so many ways, I am the picture of average.  I went to college and signed up for a couple easy to get credit cards and I was off.  A super cool stereo was my first really big and really unnecessary purchase.

After grad school I had more than a couple grand on cards and a fresh student loan.  When my classmates were walking the stage, I was financing a motorcycle.  Soon thereafter, I had to furnish a new apartment – college digs simply wouldn’t do in the ‘real world’ and so by the day I showed up for work on the very first day of my career… I was roughly $35,000 in the red.  How could that be?  I was fresh out of school and my starting salary was only $34K.

Only my spending didn’t stop.  More furnishings, and more clothes, and more and more and more.  My debt balance soared to nearly $50k – I foolishly bought a new car when my trusty truck with 140k miles was totaled – before it struck me hard and fast.  I was not going to out earn my spending, especially when every raise was accompanied by a new lifestyle enhancement. 

Something had to be done…

That thought quickly passed with my next raise – a pretty good one actually – and I rethought my thesis.  Perhaps I could earn my way out…. But alas, that proved fool hardy for even as my salary increased the weight of my debt continued to crush.

Budgeting was a big help.  I was able to stem the flood of new debt and I stopped bouncing checks at the end of what felt like every month, but freedom was a lifetime away.

So in proper fashion, I bought a house got married and bought a larger house – keeping (and feeding monthly) the first house as a rental.  I was able to make small strides but I felt ridiculously paralyzed and materially aggravated with my situation.  I was failing.  At least that represents how I felt.

Then a completely incidental, totally disposable conversation in passing planted a seed that triggered a series of events that started to turn the tide.  Most will find this silly but those that know me well will say “bingo”.  A co-worker started talking about her husband’s iPod – something I was wholly against until she started speaking magic words…. Her husband downloads radio programs that he would normally miss while at work and listens to them on his drive to work…. Radio programs you say?  Like maybe even sports radio programs?!?! 

Hook baited, dropped, bit, and set.  Apple reeled me in that night as I went straight to Best Buy and put an iPod Nano on my Amex.  How ironic.

One thing led to another and I was quickly obsessed with finding more abbreviated radio programs to download and that’s when I stumbled onto Dave Ramsey and reluctantly added him to my mix.  Several days went by before I listened to the first show.  I was so sure that he’d convict my approach to finances and I didn’t want to hear it.  That is until one night, in a crappy hotel room in Louisville, KY having run out of sports talk shows, I decided to give it a go.  From the start I was relaxed by his manner and humor and damn there are some crazy broke folks out there.  I listened to several shows over the next couple days entertained, but convinced his message was not for me.  Until one day it dawned on me that his message was directed right at me.

I get that it’s hokey and clichéd but it’s the truest of stories.  I was hooked and within a couple months I sold the rental house and plucked some funds from savings and recalibrated my budget and designed a debt snowball tool and was a fanatic. 

A job transition and period of unemployment halted my progress for a spell.  We suspended the elimination process long enough to replace a failing car but once we got back on track, we were full tilt and here we are.

For years as I lugged around, card hopped, and debt consolidated my way in circles a single thought persisted.  Though I had literally paid it off tens of times over, I continued to view my credit card balances as representing that very first stereo purchase.  Every time I would think of my mountain of debt, I’d think of the purchase that really started it all.

So just this week as I signed the check cutting the debt cord do I feel like I FINALLY own that darn stereo.

And so that’s probably more narrative that I had intended – could you tell I got a little caught up?  But I’m excited about the path I’ve carved and the future I’ve now enabled.  I do think there are a few “how to” nuggets buried in the story to assist your cause.  But more than absolutely anything, I hope you take away the knowledge and understanding that YOU can do it too.  Because I have now done this – and I know how I once thought about this target – I’m certain you can too.

Build both your budget and resolve and get to it.  Meanwhile I’m going downstairs to blast some Zeppelin on MY stereo!

Photo By: rAmmoRRison

Your Turn – If you enjoyed this article, I would personally appreciate it if you would consider commenting below and/or subscribing to our Free Updates via email or RSS updates.  Thanks!

Welcome back to my continuing break down of Dave Ramsey’s Baby Steps.  These are the steps he teaches in his books, and radio and TV shows to millions willing to listen and follow his advice.

I personally find these steps simple and easy to follow but also elegant and effective.

In previous installments I covered:

Baby Step 1 – $1000 Emergency Fund

Baby Step 2 – Pay-Off Debt Smallest Balance to Largest Using the Debt Snowball

Baby Step 3 – Boost the Emergency Fund to 3-6 Months of Household Expenses

Baby Step 4 – 15% Earnings Invested for Retirement

Baby Step 5 – Start Savings for Your Child’s College Education (as applicable)

Baby Step 6 – Pay-Off the House

Today, we’ll examine Baby Step Seven.

Baby Step 7 – Save, Invest, and Get Rich

It’s still early.  The sun is barely denting the dark sky.  My wife is sound asleep and so too are the kids.  There is a stillness in the early morning that calls out to me.  Quietly I steal out of bed so as to not disturb and I make my way to the kitchen to brew a pot of coffee.  Caressing the warm mug, I step out onto the deck and have a seat.  In this calm moment I bask in my accomplishment.  Humble steps in my past have strung together to form a perfect now.  I own this home outright, a growing balance is set aside for my children’s education and what was previously a 6 month emergency fund swelled to well over 12 when the mortgage payment went away.  Sure, I still have wants… that new Harley would look fine in my garage and that trip to Italy may have been put off for long enough.  But those are just checks I can write when the mood strikes strong enough.  For now though, I’m content enough to sip my coffee, reveling in the notion that I am winning.  I have done something good for my family and damn it just feels good.

Ok, so I’m no master fiction writer, but the scene is one for which I long.  And even better, I believe that it exists within my future.

Once the house is paid for and you’ve already been contributing to retirement and college educations, you have the opportunity to amass great wealth simply by continuing to make wise decisions with what now amounts to a significant flow of fully discretional cash.

Your current income CAN make you wealthy!

What’s interesting is that when you start the Baby Steps your mind almost will not allow you to consider this kind of future.  It’s so foreign to our normal that is seems impossible.  But with each new step you’re carried closer and closer to an abundant life.

A life once well outside your reach, exists only Seven Baby Steps away.

Many other skilled and talented writers have dedicated time to dissecting Dave Ramsey’s Baby Steps and I want to share their work for your review as well.  While I certainly hope you’ve enjoyed my treatment of the material, I’m confident you’ll expand your understanding and insights by spending time with the interpretations of others.

Read, Enjoy, Comment, Subscribe!

Bible Money Matters – step 7 

Plonkee Money – step 7

Dave Ramsey – step 7

Photo By: Leo Rynolds

I’ve shared before my opinion on handling frustrating customer service situations – rather than try to reason with a script reading, non-thinker in a cube half way across the country (perhaps half way around the world), if I’m materially aggravated, I’ll draft a letter to the CEO. 

Admittedly my results have been mixed.  The CEO from Six Flags was wildly dismissive, and the CEO from U-Haul delegated his duties to a lackey unable to understand my complaint, but the COO for TransUnion called me directly and invested 45 minutes in discussing the issue and providing me with his personal contact information if I ever experienced another problem with his organization.

So while my outcomes have varied, I’m satisfied in knowing I’ve done everything I can do.  I’ve escalated to the top.  Because I know most organizations have a dedicated team responsible for handling these types of letters, I’m confident I’ll either reach a pleasant conclusion or I’ll identify a company not worthy of my business.  Sorry, Six Flags and U-Haul, my dollars are not for you.

Recently I’ve encountered an interesting cross road between my penchant for letter writing and my motivation for driving this site.  While making extra principle payments against my wife’s student loan (in an effort to get out of debt), I’ve observed a dishonest tactic by Sallie Mae.  It seems that despite very clear labeling, Ms. Mae likes to treat large principle payments as advanced monthly payments – interest and all.  In this way, a large payment pushes out the next monthly payment date (forcing you to pre-pay interest) rather than unilaterally attacking the principle loan balance.

I personally find this a dishonest practice at best and malicious theft at worst.  I’ve also found it cause for another round of letters.

As a set up to the letters below, this nonsense happened just recently (March and again in April), but it also happened multiple times in the fall of 2008 – before my job transition.  So below, to demonstrate a full context, I’m providing copies of my letters from just last week, as well as, the letter from 2008.  Finally, to further illustrate my point, I’ve provided the form letter I customize each time I submit an additional payment – you tell me how they missed my intentions.

How a lending institution could screw this up so badly is beyond me.  How they could do so when provided such clear direction to the contrary is another matter altogether.  Face it, my messages to you only resonate louder against the backdrop of these examples – Debt Sucks.  If sweet sounding Sallie Mae is so eager to screw you over, can you imagine what other lenders have in store for you?

Enjoy, and let me know what you think below:

Letter to CEO Albert L. Lord – April 2010

April 12, 2010

Albert L. Lord – 

I am writing to your office a second time to share my continued disappointment with the significant limitations demonstrated by your organization.

On a number of occasions I have submitted additional principle payments against my wife’s outstanding student loan (account number ##########).  When these payments are processed, they are routinely processed incorrectly and recently a large payment was not credited at all.

My previous correspondence dated December 30, 2008 (enclosed) dealt with the repeated failure of your organization to recognize clearly marked checks as payments against the principle balance.  Instead of reviewing the account records – which so clearly demonstrated a “next payment due” date several years into the future – my wife was met with a terse phone call explaining “her error” and a promise to contact me directly to “help set me straight”.  Not surprisingly I was never contacted and the account information on the web was quickly corrected.  Apologies and/or acknowledgements remain outstanding.

True to form, your organization has screwed up again.

• On March 14 a check for $1000 was mailed and cashed on March 22.  This check and accompanying letter (both enclosed) were clearly marked as principle payments yet processed as monthly pre-payments (screen shot enclosed demonstrates “next due date” of January 2011)
• On March 18 a check for $3036 was mailed and cashed on March 25.  This check and accompanying letter (both enclosed) was not credited against my wife’s account until at least April 9 and not until the payment had been verified multiple times by my wife.  This payment too has been processed as monthly-pre-payments (screen shot enclosed demonstrates a ridiculous ‘next due date” of February 2013)
• During my wife’s follow-ups she was told many conflicting stories.  She was told that the payments were treated as principle payments with no explanation for what your website demonstrated.  She was also told that she was responsible for all interest on the loan regardless of how quickly the loan was paid.  Clearly demonstrating errors in both your recruiting and training processes.

I am mailing a check to your organization this week to pay our remaining balance and forever close my wife’s account.  I require that you promptly and accurately process this payment – steps which have represented significant challenges to your operations team to date. 

As an accurate payoff balance is impossible to glean from your site, given its design to assume interest pre-payments, I also require a prompt return of any overpayments which may be unwittingly included.

I expect all overpayments and documents confirming the closure of this account to be express mailed within 72 hours of the time my check is presented for payment.

In the interest of full disclosure and to help inspire accountability on your side, I will be posting this letter and your response (including its timeliness) on my blog.

Attached you will find the enclosures referenced above.  Please contact me or the loan holder if there are questions, meanwhile, I await your prompt response.

Letter to Payment Center and CEO Albert L. Lord – December 2008

December 30, 2008

Sallie Mae Payment Center – 

HELLO!!!!

Please consider this letter a wake-up call to help you overcome a troubling level of incompetence.

Allow me to explain.  On two occasions in November 2008 I provided checks with accompanying letters indicating that my payments be treated as additional principle payments – I am resubmitting those letters for your re-review. 

However, when viewing the account on-line my payments have been treated as pre-payments – which includes the pre-payment of interest.  A losing practice if ever there was one.

To address this issue, I require the following 4 actions on your part:

1. Immediately adjust the accounting for my additional payments according to both my current and previous requests
2. Make the necessary interest credits to the account
3. Provide me with a detailed accounting of the above steps
4. Provide me with your preferred method of communicating an intent to make additional principle payment as black and white printed letters are not sufficient

 Enclosed please find copies of my original letters from November.  Please contact me or the loan holder if there are questions, meanwhile, I will await your prompt response.

 Additional Principle Payment Template

March 14, 2010

Sallie Mae -

Please credit the full amount of the enclosed check as an additional principle payment against my wife’s student loan.

• Loan Number:   ##########
• Loan Holder:      wife’s maiden name/wife’s married name
•  Current Payment Amount:         $1,000.00

Upon posting this payment, please provide loan holder with an updated payoff balance.

Please contact me or the loan holder if there are questions.

So what do you think?  Is Sallie Mae sinister or just inept?  Am I overacting?  How do you think they’ll respond?? 

I’d love to hear your response and I promise to share Sallie’s response with you.

 Photo By: jk5854

Your Turn – If you enjoyed this article, I would personally appreciate it if you would consider commenting below and/or subscribing to our Free Updates via email or RSS updates.  Thanks!

Welcome back to my continuing break down of Dave Ramsey’s Baby Steps.  These are the steps he teaches in his books, and radio and TV shows to millions willing to listen and follow his advice.

I personally find these steps simple and easy to follow but also elegant and effective.

In previous installments I covered:

Baby Step 1 – $1000 Emergency Fund

Baby Step 2 – Pay-Off Debt Smallest Balance to Largest Using the Debt Snowball

Baby Step 3 – Boost the Emergency Fund to 3-6 Months of Household Expenses

Baby Step 4 – 15% Earnings Invested for Retirement

Baby Step 5 – Start Savings for Your Child’s College Education (as applicable)

Today, we’ll examine Baby Step Six.

Baby Step 6 – Pay-Off the House

I find there is an elegant symmetry in Ramsey’s Baby Steps.  In step 2 you use a snowball principle to eradicate your debt.  You deploy minimum payments in multiple directions while focusing your heavy firepower against a single target.

The second half of the Baby Step set works in much the same way.  You see, Steps 4 and 5 and 6 are meant to be exercised concurrently.  A portion of your income is directed against your retirement – consider it a 15% minimum payment.  Similarly your college savings are incremental deposits against a future need – the age of your children and the amount already saved will help inform that ‘minimum’ payment.

That should leave you with a hearty sum that you begin to focus against what is often considered an unthinkable goal – paying off your home mortgage.

Granted, paying off your mortgage will not happen overnight.  That is why you need to engage the retirement and education savings at the same time.  But it is an attainable goal.

Consider some popular strategies for attacking a home mortgage:

• Make half payments every 2 weeks rather than a full payment monthly.  The trick here is that a 52 week year has 26 two week intervals which equates to 13 payments.  One payment more per year than the 12 month calendar.  On average, this approach will shave 6-7 years from a traditional 30 year mortgage.
• Many folks are electing for a 15 year mortgage rather than the traditional 30 year term.  Given how mortgages are amortized, cutting your term in half does not equate to a doubling of your monthly payment.  Often it is only a couple hundred dollars.  An easy increase to handle if you’ve eliminated your consumer debt.
• Extra payments are valid if you have an irregular income stream or are unable to refinance into a shorter term.  Pay raises, gifts, bonus payouts, etc are easy ways to ply additional dollars against your mortgage.
• Tag Team… imagine paying half payments every 2 weeks against a 15 year term loan and tossing a healthy chunk of your annual bonus into the mix as well.  Suddenly 30 years looks like 15 which looks a lot like 9, which can begin to look even smaller.

In reality, if you’ve eliminated your consumer debt, it may not be unrealistic to shave your mortgage payoff down to a 7 or 8 year term.  When I consider that we’ve already been in our current home for nearly 5 years, I wish I had applied some of this thinking back in the day.

But the beauty is that rather than lamenting previous decisions, I have the freedom to embrace a new decision today.  And I’m certain that once I finish step 2 this spring and then step 3 over the summer, I’ll be excited to start pushing my snowball to where I want to take it rather than to where I have to take it.

Paying off the house… now that’s just cool!

Stay tuned for the final installment in this series:

Baby Step 7 – Save, Invest, and Get Rich

Many other skilled and talented writers have dedicated time to dissecting Dave Ramsey’s Baby Steps and I want to share their work for your review as well.  While I certainly hope you’ve enjoyed my treatment of the material, I’m confident you’ll expand your understanding and insights by spending time with the interpretations of others.

Read, Enjoy, Comment, Subscribe!

Bible Money Matters – step 6

Dave Ramsey – step 6

Photo By: chrisinplymouth

Welcome back to my continuing break down of Dave Ramsey’s Baby Steps.  These are the steps he teaches in his books, and radio and TV shows to millions willing to listen and follow his advice.

I personally find these steps simple and easy to follow but also elegant and effective.

In previous installments I covered:

Baby Step 1 – $1000 Emergency Fund

Baby Step 2 – Pay-Off Debt Smallest Balance to Largest Using the Debt Snowball

Baby Step 3 – Boost the Emergency Fund to 3-6 Months of Household Expenses

Baby Step 4 – 15% Earnings Invested for Retirement

Today, we’ll examine Baby Step Five.

Baby Step 5 – Start Savings for Your Child’s College Education (as applicable)

This may be my favorite single step.  Not because I don’t want to experience the benefits accrued to the other steps – they are all winners – but rather because of what it represents.

I’ll explore this step by elaborating on what this step represents to me.

• Assumed Affluence – face it, if you’re writing checks to send your child to college then you’re doing something right.  You may not be swimming in money, but you’re surely not bouncing checks and worrying about the mortgage each month.  Something may be keeping you up at night, but if you’re taken care of business on this front then it likely is not your cash flow position.  Bear in mind, I’m not saying affluence to suggest flash.  Rather, this is an attained position of financial comfort.
• Love, Sweet Love – who wouldn’t want a couple extra hundred dollars in their budget each month?  That may represent a couple nice nights out with the spouse or access to the latest high tech gadget or (for many) an enhanced car payment.  Or, it could be quietly tucked away in an act of sustained selfless discipline and devotion aimed at your child.
• Shoulders of Others – there’s a certain truth in the idea that each generation wants their children to achieve more than they did.  I know that my father loves me in the way he is so genuinely proud of the success and opportunity I’ve had in my life and career.  Through the years he has made sacrifices to help me along my way.  As a living tribute to his example, and with the hope that my child will one day see my love echoed back onto them, I want to shoulder as much of their educational costs as possible.

The tools for executing against this objective or step are varied and I’ll supply a handful of links to help inform your (and my) research.  However, the mechanics are less the point for this Step – at least in my mind.

Resource Links:

What is a 529?

Comparison of College Savings Plans

What is an Educational Savings Account (ESA)?

Whereas the previous steps have progressively influenced the relative comfort of your situation, In Step 5 you can begin to redirect the future path of your children.  Imagine them embarking on adulthood with no debt.  For so many of us, that’s the starting point we’re still struggling to achieve oh these many years later.  That’s why I want to advance my child’s starting point as far as possible.

That simply is worthwhile.

Stay tuned for upcoming installments in this series:

Baby Step 6 – Pay-Off the House

Baby Step 7 – Save, Invest, and Get Rich

Many other skilled and talented writers have dedicated time to dissecting Dave Ramsey’s Baby Steps and I want to share their work for your review as well.  While I certainly hope you’ve enjoyed my treatment of the material, I’m confident you’ll expand your understanding and insights by spending time with the interpretations of others.

Read, Enjoy, Comment, Subscribe!

Bible Money Matters – step 5

My Two Dollars – step 5

 Dave Ramsey – step 5

Photo By: fabio funkyb

Welcome back to my continuing break down of Dave Ramsey’s Baby Steps.  These are the steps he teaches in his books, and radio and TV shows to millions willing to listen and follow his advice.

I personally find these steps simple and easy to follow but also elegant and effective.

In previous installments I covered:

Baby Step 1 – $1000 Emergency Fund

Baby Step 2 – Pay-Off Debt Smallest Balance to Largest Using the Debt Snowball

Baby Step 3 – Boost the Emergency Fund to 3-6 Months of Household Expenses

Today, we’ll examine Baby Step Four.

Baby Step 4 – 15% Earnings Invested for Retirement

I like to think that when you engage Step 4, you are finally able to deploy your money against your best future.  Sure, playing off debt is a positive action but in Step Two you are simply admitting and owning up to previous mistakes.  Your money is still being used for the enrichment of others. 

In Step 3 you are at least retaining your money, but it is being stacked as defense against an unknown future.

However, when you start socking away 15% of your income against retirement… well, now you’re thinking, planning, and acting with the future in mind.

But Investing is different from Saving.  Money market accounts or even CDs are fine instruments for saving your money – perhaps your emergency fund.  In these accounts you are assuming no risk and ensured only a small return.  These accounts are solely intended to preserve the principle, which make them perfect places to store the money you expect to need within a short time horizon.

Investing is different in that it does assume some risk and more frequently offers a larger return – the stock market is the classic example of investing money.

Now let’s be honest.  I’m not an investing guru and I won’t play one on this site.  However, I will provide some guidelines I use to help plan my investing activity.  Since we’re talking retirement here, I’ll lean in that direction:

• Start with your employer 401k match, if this is an option for you.  Free money is rarely a bad place to start and with many employers matching at least 50 cents per dollars, you’re starting with a 50% gain.  That’s a smart return even before you really start investing.
• Select a Roth 401k if offered by your employer.  If this is not an option, then contribute to the traditional 401k until you max the employer match. 
• If you’ve maxed your employer match but not your 15% target, then direct the balance into a Roth IRA.

“Roth” products – 401k or IRA are beautiful in that they grow tax free, whereas, a Traditional 401k or IRA is simply tax deferred. 

The difference is initially subtle – Roths are funded with after tax dollars while Traditionals are funded with pre-tax dollars.  Those characteristics then trail the life of the product.  Monies accumulated in a Roth are not taxed on the way out because your contributions were taxed on the way in.  Contributions to Traditionals were not taxed on the way in so they are subject to taxation on the way out.

Stated another way, imagine you’re 65 and have a 401k worth $1,000,000.  Would you rather have already paid taxes on your income years and years ago when you were making a modest living (Roth), or would you rather be faced with a tax bill on the cool million – your contributions and growth?

Once you’ve selected your investment tools or structure, now you must consider the investments themselves.  I’ll resume the bullet list here with the same caveat, I’m no Buffet.

• Diversify your holdings – stocks or bonds are fair starting points but I tend to shy away from bonds and individual stocks.  Rather, I prefer to diversify across different types of stock by purchasing different types of mutual funds – Large Cap, Small Cap, International, Value
• Know the fund – pick a fund or fund family with a long track record of success relative to its peers
• Watch out for fees – many funds or managed accounts add significant fees which can significantly impact your overall return.
• Know what you’re doing – invest in what you understand, you may never be a stock market expert but you should never follow someone’s advice on blind faith.  Do a little homework, read the literature, and be an informed investor.
• Set it and forget it – Investing is a long term game.  I personally almost never review my investment statements.  Lately with the high market volatility I could not help but notice the decline and recent increases but they’re only numbers on a page and do little to impact my day to day.  I know I won’t need this money for many years so what happens day over day or even month over month is of little consequence to me.

And that’s the key to Step Four – use a portion of today’s money to fund a wealthy tomorrow.  It’s what smart people do, it’s what rich people do, and that should be enough to validate that it’s what you should do too.

Stay tuned for upcoming installments in this series:

Baby Step 5 – Start Savings for Your Child’s College Education (as applicable)

Baby Step 6 – Pay-Off the House

Baby Step 7 – Save, Invest, and Get Rich

Many other skilled and talented writers have dedicated time to dissecting Dave Ramsey’s Baby Steps and I want to share their work for your review as well.  While I certainly hope you’ve enjoyed my treatment of the material, I’m confident you’ll expand your understanding and insights by spending time with the interpretations of others.

Read, Enjoy, Comment, Subscribe!

Bible Money Matters – step 4 

Enemy of Debt – step 4

DoughRoller – step 4

Dave Ramsey – step 4

 Photo By: L’imperatrice Nocturne

Welcome back to my continuing break down of Dave Ramsey’s Baby Steps.  These are the steps he teaches in his books, and radio and TV shows to millions willing to listen and follow his advice.

I personally find these steps simple and easy to follow but also elegant and effective.

In previous installments I covered:

Baby Step 1 – $1000 Emergency Fund

Baby Step 2 – Pay-Off Debt Smallest Balance to Largest Using the Debt Snowball

Today, we’ll examine Baby Step Three.

Baby Step 3 – Boost the Emergency Fund to 3-6 Months of Household Expenses

Once the debt is conquered it’s easy to plant the flag and count the victory.  But financial success is more journey than destination.  It is tempting to immediately want to exercise some of the pent up spending demand.  Let’s be honest, even though new habits are formed during the early stages, there is still a pull towards a nice dinner out and an upgraded TV and new wardrobe and… hey, someone needs a cold shower.

Knocking out the non-mortgage debt is a nice milestone and should be celebrated.  But it is also a spot on a larger continuum.  Enjoy yourself a surf and turf and then move on.

And that’s where Step Three comes into play.  Properly executed, Step Three is where your life really starts to change.

Using the same aggression you’ve cultivated to knock out your debt – and the hefty snowball you’ve established, your next goal is to assemble a full grown Emergency Fund of 3-6 months of your monthly living expenses.

Note, this is not 3-6 months of your income but your expenses.  Since we’re now living below our means, this target is not a far reach and depending upon your household situation – single or multiple incomes, children living at home, general health factors – you can elect to amass 3 or 4 months rather than 5 or 6.

I personally plan to err on the 6 month side of the discussion and perhaps even larger.  The comfort afforded by knowing that you could support your household for months on end even if no additional dollars were flowing is a unique feeling. 

Trust me the security truly is something else.  Having received a buyout settlement following a job loss in early 2009, I know how safe I felt and how free I was to address my employment situation on my terms.  While I hope to avoid unemployment in the coming years, I do want to recapture the security fostered by a plump cash reserve.

It is at Baby Step Three where the term Financial Freedom fully evolves from an evasive concept to a way of life.  This is when you know you’re starting to win.

Stay tuned for upcoming installments in this series:

Baby Step 4 – 15% Earnings Invested for Retirement

Baby Step 5 – Start Savings for Your Child’s College Education (as applicable)

Baby Step 6 – Pay-Off the House

Baby Step 7 – Save, Invest, and Get Rich

Many other skilled and talented writers have dedicated time to dissecting Dave Ramsey’s Baby Steps and I want to share their work for your review as well.  While I certainly hope you’ve enjoyed my treatment of the material, I’m confident you’ll expand your understanding and insights by spending time with the interpretations of others.

Read, Enjoy, Comment, Subscribe!

Bible Money Matters – step 3 

Enemy of Debt – step 3

Being Frugal – step 3

Dave Ramsey – step 3

 Taking Action to Meet our Savings Goals

Photo By: Divine Films Photo

Welcome back to my continuing break down of Dave Ramsey’s Baby Steps.  These are the steps he teaches in his books, and radio and TV shows to millions willing to listen and follow his advice.

I personally find these steps simple and easy to follow but also elegant and effective.

In previous installments I covered:

Baby Step 1 – $1000 Emergency Fund

Today, we’ll examine Baby Step Two.

Baby Step 2 – Pay-Off Debt Smallest Balance to Largest Using the Debt Snowball

 I find that there is a psychology behind calling these steps “baby” steps.  Why not “Financial Steps”, “Budget Steps”, “Money Steps”, or “Road to Wealth”?  All of those names are accurate and they sound much more sophisticated. 

Baby Steps just seems… basic.

And there it is.  These steps are obvious but not easy.  They are gradual and educational.  As you matriculate through these steps you learn and grow and become more empowered, just as a young child learning to explore their surroundings.

But the Baby Step convention is also a little humbling.  Face it, everyone has a financial plan – good or bad – and subverting that plan to a set of “baby steps” may seem like a covering ground already traveled.

I felt that way when I first heard of the concept.

“Baby Steps to Financial Freedom… ha, I bet I’m already half way up the curve”… and that’s when Step Two kicks you square in the forehead – Pay off all your non-mortgage debt.  What?  That’s the dream and you’re telling me that it’s only the second step?  Wow, this plan is serious.

For too many years the idea of getting completely out of debt was a pipe dream.  Debt is just what we do.  But the more I listened and heard stories of others doing it – it is possible – the more I began to buy in.  The more I wanted in!

But how?

Again, Ramsey’s plan is simple, which makes it an easy target.

Assuming all your debt is current or easily made to be current, Baby Step Two calls for:

• All your non-mortgage debt to be prioritized smallest balance to largest
• Minimum payments are made against all debts
• All extra dollars are plowed into the lowest balance
• As that debt is paid off, those payments are rolled forward into the next smallest balance

And so the debt snowball is born.  Like a rolling snowball picking up more and more snow, the debt snowball picks up more and more dollars as it advances.

The most vocal criticism to this approach is – I think – largely semantic and mostly missing the point. 

For starters, assuming you agree that shedding non-mortgage debt is a good thing, then barking at Step Two is like shunning a super model because of a pimple on her bum.  There’s just too much goodness involved to trip over a minor detail.

But people do what people do and the best I can add to the mix is my opinion, so I will.

The semantic is simple, debts should really be arranged by interest rate and not by balance.  This way you will save more interest over the life of the process.  The snowball still rolls, but from high to low interest rate rather than low to high balance.

OK, on paper that makes sense but it kinda misses the point.  If logic and math are the guides, then why do you have debt in the first place?  Credit cards and car payments and student loans defy logic but define the norm.

Personal finance is personal.  It is not about jockeying a calculator but rather about wrangling the dude in your mirror.  If I could control the guy I shave with, I’d be skinny and rich… so goes the saying.

That’s where starting with the smallest balance make sense because it allows you to experience an early win.  An early diet of low hanging fruit fortifies you for the long haul.  New Presidents don’t take office with a 1200 day plan, but rather a 100 day plan.  It’s an emotional game and we’re emotional beings.  Having an early success nourishes our soul.  It’s primal.

But in the end – smallest to largest, highest to lowest, inside out, sideways, backwards, and upside down – the name of the game is eliminating debt and changing your spending habits.  If you fudge an edge in Step Two that’s mostly ok so long as you don’t lose your way to Step Three.

Stay tuned for upcoming installments in this series:

Baby Step 3 – Boost the Emergency Fund to 3-6 Months of Household Expenses

Baby Step 4 – 15% Earnings Invested for Retirement

Baby Step 5 – Start Savings for Your Child’s College Education (as applicable)

Baby Step 6 – Pay-Off the House

Baby Step 7 – Save, Invest, and Get Rich

Many other skilled and talented writers have dedicated time to dissecting Dave Ramsey’s Baby Steps and I want to share their work for your review as well.  While I certainly hope you’ve enjoyed my treatment of the material, I’m confident you’ll expand your understanding and insights by spending time with the interpretations of others.

Read, Enjoy, Comment, Subscribe!

Bible Money Matters – step 2 

Enemy of Debt – step 2

I’ve Paid For This Twice Already – step 2

 Dave Ramsey – step 2

Photo By: nur- u ay

A read an article the other day from a pretty well respected icon in the blogging game.  Leo Babauta over at Zen Habits has about 160,000 readers – an insane number when you’ve been doing this long enough to know what that really means.

His article was about changing habits and the easiest way we too often derail our efforts to change and improve.

The idea was as simple as it gets.  So simple in fact, that it should not require an article at all, much less a follow-up article espousing his thesis.

Yet it was at once genius and worthy of widespread proclamation.

His culprit as the worst antagonist against our habit forming ideals?  In his wise words, “Not doing the habit”.

And there it is, like a 2×4 in the forehead.  Well of course it’s the biggest obstacle, but… wait for it…. BUT YEAH, it really is my single barrier.

I wish I was able to get up earlier in the morning, but sleeping in until 10 every morning is what I do.

I wish I could drop 20lbs but this restaurant has the best cheeseburgers and fries.

 I want to get out of debt this year but I don’t know where all my money goes.

I want my children to behave better but I can’t bring myself to discipline them.

I wish had gotten that promotion but I begin packing my bags to leave everyday at 4:30.

Tell me when to stop.

This is our life and this is our time.  There are no ‘do-overs’, there is no ‘next time’.  If we want something, we must bend our will in its direction.  We must take action against that objective.  “Tomorrow” will never come, we must start today.

That speaks to the genius behind Nike’s “Just Do It” campaign.  Forget all else and just do that which you aspire to.

One of my favorite quotes I pulled from a Fortune magazine years ago, “a year from now you’ll wish you had started today”.  Human nature being what it is, perhaps truer words have never been spoken.

So consider this your wake up call.  Look in the mirror and decide what you’d like to change, what habits you’d like to establish and then get about the business of getting it done.

Thanks Leo, I needed the kick in the pants.

Photo By: amycaek

This article was feature in The Wisdom Journal’s roundup.

If you happen to follow my rare personal commentaries on Facebook you’ll notice that the title for today’s article matches with the headline I broadcasted Saturday morning.  I’m being repetitive because I’m twice as convinced in the truthfulness of the statement.

For starters, who is David Allen?  Well, I suppose many titles would fit, but I’d define him as a personal productivity guru.  His first book Getting Things Done: The Art of Stress-Free Productivity was released in 2001 and remains a best seller and fuels worldwide demand for his workshops and personal coaching/consulting.  In short, he has established an industry around a simple and profound approach to getting things done – or GTD in the vernacular.

Allen’s concepts while easy to understand are profound in their implementation and application.  By no means am I an expert.  Barely a novice is where I’d start my self assessment.  However, as I listen more and more to his ideas and even start to deploy them in my day-to-day… wow, I’m impressed.

I’m only scratching the surface here, but Allen’s thesis is to clear the mind.  He often says that the mind is a great place to have an idea but a horrible place to store that idea.  He elaborates by suggesting that a task on the mind will consume more thought and mental energy than it deserves.  Rather, those thoughts and ideas and action items should all be captured and processed.

Items determined to require more than 3-5 discreet actions should be logged as projects and each project should reflect a ‘next action’ required to advance the effort.

Actions should then be organized into what he calls ‘contexts’ which speak to when and where they should be completed.  It becomes and activity matrix really, which ‘next steps’ can be performed while making phone calls or online or while out running errands? 

Lists and folders and note pads and pens are the tools that make this system work… and work it does.

For the last several years I’ve deployed parts of his approach without being aware of his larger premise.  For years, every January, I’ve labeled a file folder as “Year XXXX Tax Documents”.  Throughout the year when I collect a document that might influence my taxes – receipts, W-2s, charitable contribution statements – I simply file it away. 

Without realizing it, I had created a context and was filing appropriately.

Allen takes my simple illustration and blows it out times ten.  Everywhere is a context and everything is a project with a discreet next step.  The ubiquitous ‘To-Do’ list then is no longer filled with procrastination begging landmines like “eat the elephant” but contains clearly defined actionable next steps like “take bite” and “chew”.

So why then did I FB “David Allen=Genius” on Saturday and why am I trumpeting it again today? 

The answer – to me – is clear.

On Friday I cleared my schedule and spent several hours identifying all of my projects and open actions.  I pulled from my To-Do list, from actions starred in my notebooks, from phone messages, from actions listed on my white board, and from too many previously ignored emails.

While I didn’t do anything, I organized next steps and pictures of completion for each of 20+ individual projects.  After nearly two months of 60 hour work weeks, I left the office early and with a clear mind.  As a measure of success, Friday night I didn’t bolt up in bed with heartburn AND an urgent thought of an undone work item… and another… and another… and another.  Rather, I slept through the night and the next morning actually remembered parts of my dreams for the first time in too long.

I had no less work to do – probably even more – but I had a true literal handle on the work required.  On Monday morning I was able to pick up any project folder and immediately take action towards its resolution.

To make matters better – do you ever hear that expression – I did the same thing Sunday afternoon for my personal/home projects, about 40 individual efforts.  It represents a ton of activity and finding time to execute against all of them will remain a challenge, but I have more clarity as to my outcomes than I’ve had in a while.  Rather than a mind cluttered by so many concurrent games on pong, I have a mind that is now clear and freed from having to remember such that it can creatively engage.

I like this feeling and have scheduled time with myself to re-establish this baseline each week – called the weekly review by Allen if you’re wondering.  This will keep me honest with my activity and organized against my objectives and mentally free to wander and ponder.

Admittedly I’ve only unpacked the small boxes relative to David Allen’s larger inventory of concepts and principles.  While I hope to engage elements of this approach again in the future as I learn and benefit from them, I don’t want your learning curve to rely on me.  Please visit his site for more information, free newsletters, free podcasts, and free downloadable worksheets and articles.

If you’re interested in any of his books, here are links to help streamline your review and purchase decisions.

Getting Things Done: The Art of Stress-Free Productivity

Ready for Anything: 52 Productivity Principles for Work and Life

Making It All Work: Winning at the Game of Work and the Business of Life

Photo By: Joe Thorn

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