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

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

Money is important.  It is the lifeblood of our society.  It is our economy.  In the context of our modern culture it is a requirement for our day to day living.  If you doubt this notion, imagine yourself penniless for the next 30 days.

Money also is dynamic.  It is huge in the context of government spending programs or corporate initiatives.  Equally so, it is small measured against our next meal or gas tank top-off.  Money is even tiny as it collects nightly in our change cup.

A former teacher oft shared a story of 3 blind men describing an elephant.  The man at the trunk reported an animal significantly different from those reporting from the side and tail of the animal.  All reported a piece of the truth but not a whole truth. 

Money operates in our lives in a very similar manner.  Many of our views on money are technically correct, but lacking a grasp of the greater whole.

Last week I wrote about viewing our spending on a day over day basis and last year I penned an entry on viewing our incomes as annual rather than hourly inflow.  Both stances are valid and accurate and true and both articles garnered interesting responses.  While no one outright disagreed with my position in those articles, many shared an alternative visual.

Across this two part series I want to reconcile several views to ensure that we keep each in proper balance.  If we skew too hard in one direction we’re likely to end up with a distorted picture of reality. 

The key to our money, as with many things in our lives, is proper balance.

Today we will examine:

View 1 – Income and Outflow:  Objective Setting

View 2 – The Short View – Simple Cash Flow

View 3 – The Mid View – Advanced Cash Flow and Budgeting

View 1 – Income and Outflow:  Objective Setting

The starting point is obvious but important.  Money is like water.  It flows into our lives as income and out as spending or expenses.  An important first lesson is that we can control the rate of each flow.  The type of job we have, the hours we work, or even a second job; all drive the income equation.  How we spend that money is the outflow. 

The question we need to consider is how we want to engage this flow.  Do we want to forever swim in the steady but potentially uneven flow of money or do we want to dam the waters and build for ourselves a reservoir as fortification against future uncertainties.

The answer here is pretty obvious but our decision point should then project itself throughout our other vantage points.  That is where the idea of reconciling these views comes in handy.  Are our actions congruent with our objectives?

View 2 – The Short View – Simple Cash Flow

The Short View of Money is often the earliest lesson we learn and in that way is the easiest and least mature.  That is not to say that it lacks value, but that this should not our landing spot – though, unfortunately, it is for many.

Our earliest jobs in high school and college are simple time exchanges for money.  I trade one hour of attendance for a set number of dollars.

If, as we progress into higher payer jobs and even careers, we maintain only this simplistic point of view, then we often see our monthly income as a to-do list rather than a resource.

Rent – Check; Food – Check; Utilities – Check… and down the line until we discover that there’s a full $500 left at the end of our income.  To this mentality, that starts to sound like a new car and payments on a flat screen TV, still with a few dollars left over for a minimum payments against a credit card or two.

This view and approach leaves us perpetually stuck in neutral, which probably does not reconcile well against your goal from View 1.

A popular personal finance book, Your Money or Your Life adds a level of sophistication to the Short View.  The thesis of the book largely agrees with the idea of viewing our income as an hourly exchange but only as a perspective rather than a way of life.  If we acknowledge that our lives are finite, then each hour we engage in an activity is an hour forever gone.  In this context then we should consider both our income objectives – think early retirement on the beach or unencumbered time with loved ones – and our spending patterns – think 6 hours a week to hump a stinking car note.

View 3 – The Mid View – Advanced Cash Flow and Budgeting

In combat, the simplest rule of thumb is to control the high ground.  While I can envision fighting ‘downhill’ as easier, the objective is to have an advantaged point of view.

In this view we shift our money thinking from hourly wage, weekly paycheck, and even monthly checkbook balancing to annual planning.

While annual planning certainly requires a working knowledge of monthly incomes and expenses, it also anticipates events over a longer time horizon. 

Anticipating an annual car repair is not itself unreasonable, but too many people forget that Christmas comes every December and thereby create a deficit that is otherwise fully predictable.

The key then to the Mid View is to plan your income and expenses (monthly, irregular, and unknown), for the entire year.

A straightforward method for this is to craft monthly budget templates for the entire year while being sure to incorporate a monthly (1/12^th) allocation for Known Annual expenses (insurances, HOA dues, Holidays/Birthdays, etc), and an allocation into savings for buffer against future unknown expenses (car repair, hot water heater replacement, other).

Dave Ramsey’s popular book The Total Money Makeover is a perfect discussion in the How-To and Why-To elevate into this line of sight.

Getting to this point is a significant accomplishment for many and in that way it can easily become a plateau.  That can be ok, but advanced prosperity requires still more advanced thinking.

Come back next week for Part Two in the series where we’ll review:

View 4 – The Long View – Net Worth Planning

View 5 – Mosaic View – Balanced Perspectives

View 6 – The Lost View – Opportunity Costs

Photo By: lincolnblues

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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

Today I’m launching a new series. Actually it is the very first installment of what I envision as an ambitious 3 series set in which I plan to cover some personal finance basics from different angles.  Call it a “Back to the Basics” bundle if you will.  I expect this series to take shape over the next couple months so stay tuned.  I hope you’ll enjoy and engage the discussion.

In some ways it’s curious that I waited so long to offer up a series on Dave Ramsey’s Baby Steps.  I suppose too, in other ways, it is obvious.  While originally inspired by Dave Ramsey, this site has hopefully developed a voice of its own.  Not deviant from Ramsey’s mission as much as unique in its own. 

In that way, if my first articles out of the gate did not include a true Baby Step breakdown – though it did  pay homage here and here – then it is no surprise that it would take some time to revisit those grounds. 

But better late than never I guess… here goes:

The first series is a breakdown – my breakdown – of Dave Ramsey’s Baby Steps and to kick off this series we’ll start at the most logical place, Step One.

Baby Step 1 – $1000 Emergency Fund

It is temptingly easy to out think the room on this one. Rebuttals interestingly enough come from dueling interpretations of the same question – Why?

• Why is it a full one thousand dollars?
• Why only one grand?

Is it simple genius when your naysayers are so evenly divided into opposing camp?  Opposing not just your plan but also each other?  Me thinks so.

Let’s take each question in turn as a means of supporting this launch point.

Why is it a full one thousand dollars?

The lyrical refrain on this complaint typically follows… I’m trying to get out of debt here and $1000 can go a long way towards that end.

True.  A grand is a good start and might actually help knock out some of your smaller debts.  But the trick about being in a hole is to learn to stop digging.  Without some reserve your only option when the air conditioner, car, washer, hot water heater, dryer, stove, or whatever else breaks down – and it will – is to turn to debt to bail you out.

With $1000 on standby, you can let cash – your cash – bail you out.

The lesson here is subtle but profound.  You start to learn; start to teach yourself; that YOU are your bailout and not some silly plastic card.

Why only one grand?

The dueling banjo then asks why isn’t the reserve even more?  The reasonable question in response is “are you expecting an emergency?”.  Is the wife pregnant, are there layoffs at the plant, is there a specific and known emergency lurking just beyond the bend.  If so, then the Baby Steps are not for you.  You’re in an emergency now and need to stash cash towards that end.

If that’s not the case, and in most instances it is not.  Then the slight nervousness you feel is now called your motivation.  You want to shed your debt with a quickness.  You want to recognize your debt for what it really is – RISK.  Reducing debt equates to reducing risk.

Sitting on a pile of cash next to a hole of debt represents a failure in connecting your financial dots.  By experiencing that tinge of concern as you start to fill that hole from your pile, you are actually activating something deep with you.  You’ll want to fill the hole faster and you’ll appreciate that the next time you’re sitting on a pile of cash, it’ll really be your cash.

And so between the differing objections is the perfect middle ground.  $1000 represents an amount better than most nagging household “emergencies” but is not enough to keep the world at bay for any significant length of time.  Rather, it is quick and it is temporary and it is Baby Step One.

Stay tuned for upcoming installments in this series:

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

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 round out your understanding and insights by also spending time with the interpretations of others.

Read, Enjoy, Comment, Subscribe!

Bible Money Matters – step 1 

Enemy of Debt – step 1

 Gather Little By Little – step 1

 No Credit Needed – step 1

 Dave Ramsey – step 1

Photo By: CRAZYME

This article was featured in the Carnival of Debt Reduction

This article was featured in the Money Hackers Carnival

So, when was the last time you cheated on your spouse?  What?  It’s a fair question, no need to get all bent out of shape.  We all cheat on our spouses from time to time.  Heck, I know I’ve done it twice, at least that I can recall.  Some folks consider it sport or simply a normal way of life.  That’s just how some households roll.

Now to be sure, I am not talking about marital infidelity.  That is a serious and life altering violation.

Rather, I’m referring to infidelity as it relates to the household budget.  How many times or how often have you made significant purchases outside the bounds of spousal approval or review?

I know I’ve done this twice – my wife may well remind me of other times when she reads along. 

I once spent the lion’s share of a tax refund to carpet the basement and another time bought and installed a surround sound unit while she was out of town.  In both instances I felt the purchases were necessary but hindsight does allow validity for my wife’s assertion that we could have used the money in other more pressing ways.

In fairness, my transgressions were minor and directionally aligned with improvements for our shared space, but the execution was poor on my part.  I surely could have, and should have, involved my beloved in the decision making process.  It is a lesson I’ve since learned and we now enjoy more frequent and open communication on the topic of our finances.

On another end of the continuum, I remember a couple years ago listening to Ramsey read a letter from a listener.  In the letter the writer conveyed the story of his wife opening numerous charge cards and racking up tens of thousands of dollars in charges.  The man woke up thinking he was free of all non-mortgage debt and ready to enjoy his life’s diligence only to find that his household was actually buried under nearly forty-thousand dollars worth of credit card debt.  I recall being horrified at the prospect which only begins to approximate how he must have felt. 

Betrayal, damaged trust and respect, and anger so commonly associated with one form of infidelity certainly apply here as well.

So how do we confront or combat this behavior before it gets out of hand.  I can think of 3 easy ways to get started.

Grow-up – Let’s be honest, my purchases were impulsive and rooted in a sense of entitlement.  I am the primary earner in our home and I allowed that fact to direct my actions with only slight regard for the opinions of my wife.  I look back now and recognize my behaviors as silly and childish.  And now with a much more collaborative bent towards our finances, I know the prudence of making these decisions as a team.

Communicate – In a marriage there is no such thing as too much communication.  As a man, I may find there to be instances of too much chatter but open and honest and connected communication represent prized moments.  Sharing from our broad financial plans to our mundane monthly budgets to our ever evolving “list” of next-in-line home projects ensures that we’re both pulling in the same direction.

Allow Wiggle Room – The easiest way to have freedom within the constraints of a budget is to build it into the process.  Matching his and her ‘blow’ money line items allow flexibility for smaller impulse purchases which often scratches the psychological itch enough to empower restraint against the larger budget busting spin outs.

So now you’ve been both warned and equipped, keep your wallet in your pants and the salesman out of your purse – all in the name of enhanced harmony at home.

Photo By: fpsurgeon

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