Financial Preparedness: Step 4: Pay Off The House!

Well here we are at Step 4 of our Total Money Makeover. (If you missed the previous steps, you can find them here: Step 1; Step 2; and Step 3). So far we have built a small emergency fund, attacked our debt with the debt snowball, and then built our larger 3 to 6 month emergency fund as well. Now it is time for Step 4: Pay Off The House!

This step in my total money makeover, is where I deviate from Dave Ramsey in his steps to a total money makeover. If we were following his steps exactly, this part wouldn’t come until step 6 (after investing for retirement and saving for the kids college). The reason for my deviation is twofold:

  1. I don’t believe our economy is strong enough to sustain our dollar for much longer and I want to be completely debt free before the ‘poop hits the fan’. I believe my money will serve me a lot better by paying off the house and allowing me to be financially self-reliant than by sitting in a very fragile stock market *hoping* that it will make some money instead of crashing (which I’m betting will happen again soon).
  2. I’m taking my order of priority from a different source. I am choosing to listen to the counsel of spiritual leaders who have repeatedly told us to get out of debt and live within our means. Based on that, I do not feel it is appropriate to keep myself in debt simply so that I can work on giving my kids a free ride through college (they can definitely work their way through if need be!) nor to give myself a cushy future. I can work my way through life if need be too! It is more important to me to work on ridding myself of any debt so that I am not beholden to anyone. Then I can work on securing a cushy future for my children and myself.

So now that all other debts are paid and we’ve got a little nest egg set aside to save us on those rainy days, any extra money at this point goes to paying off the house! Let’s get rid of that mortgage!!

A few things to consider to move this process along:

  1. Would it be wise to refinance? There are some super low interest rates available right now that may make refinancing a wise decision. Just remember that it costs money to refinance (they add the cost back into your total home mortgage amount), so make sure that you’re saving enough to counterbalance the costs of refinancing. We refinanced a few years back and figured we would need to live in our house for at least 5 years in order to make that money back (which we anticipated doing). So make sure you weigh the costs versus the benefits.
  2. Pay something extra each month. Try getting in the habit of adding an extra principle payment each month. It could be $10 or $1000. But the habit of adding extra principle will help to keep your goal fresh, keep your motivation up, and it will keep you aware of the progress you are making. I do not have my monthly payments set to auto-draft from my checking account because I want to have to think about this payment each month. I want to remember that it is my goal to pay off this debt and then I can add any extra payments for that month that I am able.
  3. There may be some whose home mortgage is crazy out of reach. Perhaps ‘we’ weren’t quite in our best financial state of mind when we purchased a mansion on a teacher’s salary (no, I didn’t do this… I’m just sayin!). Perhaps we bit off a bit more than we could chew. For those in that situation, it would be wise to refocus and start again. Sell the house, and buy one that is affordable. Yes, it is hard to sell a house in this economy. Yes, you will likely take a hit on your home. But it still may be the best thing to do (again, this is for if you are wildly out of your league). Talk with a financial advisor to find the best option for you. Your monthly home mortgage payments should not be more than 25% of your monthly take home pay (not your gross pay, but your net pay).
  4. OR, if you’re feeling REALLY ambitious about having no debt, sell your house, move into a rental property and then just SAVE until you can pay CASH for a home! (You may even be able to pay cash for a home right NOW if you were to downsize!) Remember, your first home does not have to be your dream home. It just needs to be something affordable. And as you save more and more, you will eventually be able to move up to your dream home.

Remember the financial golden rule: If you will live like no one else, then later you can live like no one else! Make the sacrifices needed now so that you can enjoy wonderful financial freedom in the years to come!
Good Luck and Happy Savings!


Financial Preparedness: Step 2: The Debt Snowball

Okay, considering the current state of affairs with our economy and the world, I don’t want to drag my feet in getting through the Dave Ramsey steps to financial freedom. We’ve already covered Step 1: Getting an Emergency Fund, and hopefully you’ve had a chance to work on that and get that done. So let’s move on to the next step… GETTING OUT OF DEBT! (Wahoo!!)

Step 2: Paying Off All Debt Using The Debt Snowball

Here’s how it works. Start off by listing every single debt you have (excluding your house) in order of smallest balance to largest balance. Cars, credit cards, medical bills, personal loans, etc. List them all. Do not worry about which ones have higher or lower interest rates unless there are two balances that are the same (in the which case, list the one with the higher interest rate first). Otherwise, we’re strictly looking at balance amounts.

Here is a form you can use to help organize your process:
The Debt Snowball Plan Form

Why lowest to highest balance? (I know you math wizards out there are thinking it would make more sense to go by the interest rate instead of the balance.) Well, because as Dave Ramsey points out, getting out of debt is not always about numbers. It’s about attitude and motivation as well. As you start knocking out your smaller debts, you will get more pumped and motivated to continue in your efforts. By getting some quick returns on your efforts, you are MUCH more likely to stay focused on reaching the end goals. This is as much a psychological battle as it is a financial battle. So don’t doubt the system. Know that it is a PROVEN METHOD and just go with it!

Okay, once you’ve got all your debts listed from smallest to largest, list your minimum monthly payments (the amount you’re required to pay each month) for each one.

And now the fun begins.

Okay, now you know exactly what you owe and exactly what you have to pay each month. And every month you are going to pay the bare minimum on all of your debts except for the first one on your list. The first debt on your list you are going to ATTACK!  You are declaring WAR!
Find every spare penny you can in your home. Start selling things on craigslist or ebay. Have a yard sale. Reduce your monthly bills. Cut the cable. Get rid of your cell phones (or land phone). Get a second job. FIND ANY WAY YOU CAN (ethically and legally of course!) to get extra money in your hands and put it ALL to that first debt. ATTACK! FIGHT! THIS IS WAR!
And guess what? You will be AMAZED at how quickly that debt will be vanquished! SUCCESS! You’ve done it!
Now, with that same intensity, attack the second debt on your list! And the bonus? Now you have all that extra money from the first debt that can now be applied to your second debt! So if you were paying $150/month to your first debt bill and only $30 to your second debt (because that was the minimum payment), you can now add $150 to your $30 to get a new monthly payment of $180/month for your second debt. Do you see how the snowball has already started? And before you know it, that second debt is history as well!
And when the second debt is paid off, you add that $180/month to your third debt on the list. And it just gets going faster and faster with every debt that is paid off!
It will honestly amaze you how quickly you can actually pay your debt off if you focus and dedicate yourself to it. Dave estimates that it takes the average person who uses this method about 18 months to get completely out of debt (besides the house). That’s amazing!!! FINANCIAL FREEDOM IS IN YOUR REACH!! YOU CAN DO IT!!!! So go get to it!!! 😀

Good Luck, Best Wishes and Happy Prepping!! 😀

Financial Preparedness: Step 1: Emergency Fund

Alright, ladies and gentlefolks. It is time! Time to jump into the steps to FINANCIAL FREEDOM!! As promised, we are going to start breaking down the steps laid out by Dave Ramsey, in his book ‘The Total Money Makeover’. Again, if you haven’t had a chance to read his book, go. check. it. out. from your library! I will not be able to do the book justice as I lay these steps out, but I want to at least help reinforce his plan in any way I can. So are you ready to do this? Are you ready to take the steps toward being debt free?! It’s not an easy road and you’re going to have to be focused and dedicated. You’re going to need to sit down with yourself, your spouse, your family and make sure everyone is ON THE SAME PAGE! (An absolute MUST!) It’s going to take sacrifice! But remember the motto: If you will live like no one else, then later you can live like no one else!

So here we go!

Step 1: A $1000 Emergency Fund

Quick! As fast as you can, get $1000 together for an emergency fund.
Are you wondering why you’re collecting money to put aside somewhere when you’re trying to pay off debts? Well, that is because, as Dave lays out in the first part of his book, you are giving up a life of borrowing. (Let me say that again…) Give. up. a. life. of. borrowing! That means credit cards! (I’ll address my take on that later, but…) if you are in debt (other than your house), get rid of your credit cards NOW! Take them out of your wallet, cut them up if you have to in order to keep yourself from using them. THEY ARE A LIFE OF SERVITUDE!

Now, since we are no longer using credit cards,we need some sort of emergency fund prepared so that when an actual emergency comes a calling (Dave likes to call them the ‘Murphys’ of life, i.e. Murphy’s Law) we will not resort to borrowing again in order to take care of the emergency (remember: we have given up a life of borrowing!!)
{And Dave makes this very clear… when he says ‘emergency‘, he is not talking about the pizza man showing up at the door and your realize you don’t have enough cash. This is NOT an emergency and you do NOT have permission to get into your emergency fund for such a situation!}

You will need to sit down with, again, yourself, your spouse, your family and determine what constitutes an emergency. You need to BE CLEAR on when it is okay to access that fund.

Put that money in a place where it is difficult to access, but accessible. This means that having money in a 401K does not count as your Emergency Fund. True the money is there, but you would be more likely to use your credit card again to pay for an emergency, than you would be to take the money out of your 401K. A savings account set up for your fund would work (but be sure your checking account is not set up to overdraft from that savings account), or you could have it in cash and set aside somewhere you cannot access easily. One example Dave gave in his book was of a woman who collected the $1000 in cash and then framed it and glued the frame together. She wrote on the front of it, ‘In case of emergency, break glass’. 🙂 So, the money is there, but she’s not likely to go breaking into it when the pizza man shows up. Very clever. 🙂

I know $1000 isn’t a huge emergency fund (it definitely would not cover the surprises we’ve had in our family lately), but we’ll build a larger fund later as we progress through the steps. In the meantime, while the main goal is to get rid of debt, $1000 will do.

So okay! You have your goal: $1000 set aside strictly for an emergency in some designated location that is not easily accessible, but still accessible. Ready. Set. Save!