I don’t make New Year’s Resolutions; never have. I prefer goal setting and achieving. For me, goals setting is more defined and time sensitive. If I just say “I’m going to get my finances under control in 2016”, that’s too ill-defined and not really time sensitive. If I say instead, “I’m going to create a financial plan to get out of debt and implement it right away”, that’s a bit better. But what’s even better is someone has already set up just such a plan that can be tailored to your situation! I’m using this plan and it works! Let me explain…
I’ve tried, like you I’m sure, many plans to get my finances under control but something always got in the way or I failed somehow. Then I found this plan and it worked as long as I followed it! Things would be going great and then, bam!, I’d get knocked back. It didn’t take me long to figure out what went wrong. I hadn’t followed the steps exactly. Once I figured that out, I never forgot it. You’ll see what I mean as I explain my experience with the plan.
I haven’t told you the plan or its author yet because I didn’t want you to stop reading in case you’d tried it and failed like I did at first. Read my experience with the plan, especially where I failed, and see if you had a similar problem. If so, you might want to give it another try. I’m not affiliated with the author and I’m not getting paid to promote him, I’m just passing on what worked for me.
The plan is Dave Ramsey’s 7 Baby Steps to get your finances under control. The key to the plan is to follow it exactly. This is where I fell down, I thought I was smarter and could do it a little better. Wrong! Once I figured out that’s where I was going wrong, I started again; this time following it exactly. I’m not done yet but I’ve made significant progress and you will too!
Step 1 – Save a $1000 emergency fund. As Dave says, work extra hours, a part-time job and/or sell stuff you don’t need, but get that fund as soon as you can. This will help you when – and it will – an emergency such as a car repair or appliance break down happens. That way you won’t run up more debt and ruin the whole plan.
Step 2 – Pay off all debts. List all your debts, except your mortgage, smallest to the largest. Put all your efforts into paying off that smallest debt first regardless of the interest rate on any of the debts. I know that doesn’t sound financially the way you should do it, but finances are about emotions too. Paying off small debts at first gives you a sense of accomplishment that keeps you going! Here again, if you can, work extra hours, a part-time job or sell stuff you don’t need. As Dave puts it, sell stuff so fervently the kids will be afraid they are next! Every time you pay off one debt, use the money you paid on that debt and add it to the amount you’re paying on the next debt. Dave calls this snowballing your debt payments.
Now, here is where I made two mistakes. I thought I could do Steps 1 and 2 at the same time! You can’t unless you get real lucky. I got hit with an unseen repair and had to use my emergency fund and as I was only half way there, I used most of it up in one go! So I had to start over and in the mean time I made no progress on paying off the debts. At least I had started and had the emergency fund! Otherwise if could have been a lot worse. Ok, lesson learned. Now if I have an emergency in the future, of course I will use some of that money and will have to stop paying more on debts till I get it back to $1000. The difference is, it won’t wipe out my emergency fund completely next time. I’ll still have to stop paying extra on debts till I get it fully funded again, but in the mean time I’ll have some for emergencies. I really sweated it till I rebuilt that emergency fund I can tell you!
Step 3 – Save 3 – 6 months living expenses. Now you’re going to start saving for big emergencies like loss of a job or income. Sit down and figure out what your monthly living expenses are – just make a list of all your monthly bills. For most people the fund will be about $10,000 to $15,000. That way if you do have a big emergency, you won’t have to go into debt to pay for it.
The next 3 steps are about funding retirement, college fund for the kids and paying off your mortgage early. Those don’t apply to me so I’ll leave it to you if you need any help there. You can get the whole plan and more at Dave Ramsey’s site. You’ll be glad you did!
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