Here's a Tip Tuesday!
This week's tip revolves around finances! (chirp, chirp).
You know, when I first tried getting a credit card it took me a long while before someone would give me one. I have never been more thankful for that because God knows I would still be paying off the damage I could have done with a credit card in college!
When I met Jason 2 years ago, one of the first things I learned from him was how to get a grip on my finances. I had maybe $800 on my credit card and that was literally all the debt I had, but I was not doing anything about it. I was still spending money on other nonsense and not taking care of the things I had already purchased. I needed to become financially fit and knowledgeable before I dug myself a hole I would struggle to get out of.
He introduced me to this man:
and his book:
Today's tip: The overview of the 7 Baby Steps of Dave Ramsey's Total Money Makeover.
Step 1: Establish $1,000 in an emergency fund.
That's it. You need to get the money moving to other areas before you start saving it. You have obligations to things you have already paid for, now it's time to pay them off. This will be enough to cover an unexpected trip the repair shop, or a flight home for a family emergency. THIS IS FOR EMERGENCIES ONLY.
Step 2: Pay off all debt except your home, beginning with the smallest
If you have a credit card with $500, a student loan for $7,000 and a car loan for $3,000, start with the credit card. It is important to build confidence in paying off debt. If you tried to tackle your largest first, you wouldn't see results right away, leading to ALOT more time to get discouraged. Start small, remember, baby steps.
Step 3: Three to six months of savings in a fully funded emergency fund.
At this point you are debt free (minus the your house) and you are having the cash flow you have worked so hard for. Now, it's time to start putting money toward the future, so you can prevent becoming in debt again. THIS IS ONLY FOR EMERGENCIES. Do not start paying off your house, or investing in retirement, or throwing money into your kid's college fund. You need to have this cushion.
Step 4: Invest 15% of your household income into Roth IRAs and pre-tax retirement plans.
Now that you have 6 months worth of income reserved, you can start to place your money elsewhere. Like most parents, you want to put your kids first. In this case, DON'T. Do not sacrifice your retirement fund to fund college. There will be a time when you reach retirement age and there is nothing you can do about that. There are other avenues for college such as scholarships, part-time jobs, etc. Think about it, if you put your money into college for your children and not for retirement, you will more then likely have to be depending on your children in your later years, a situation neither of you really want.
Step 5: College Funding
Anything after the 15% of income going towards your retirement can now go to the college fund for your wonderful children!
Step 6: Pay off your home early. (and the helicopter haha)
After your college fund is established, start kicking that money to your mortgage.
Step 7: Build wealth and give.
Life is good. You are now debt free with your home paid off. All of that money you were once using to fund those things are now at your disposal. Keep investing in your retirement, and remember to give back :)
If you want to read more about this process, I highly recommend his book, or there are tons of websites that go over his theory. I am personally still working on Step 2 (since I bought a car) but hope to have it paid off by the end of 2010, which is 2/12 years early!