Now that you have made financial goals and set a budget it’s time to live debt free! I won’t lie to you, the path to living debt free is not easy and its going to take a lot of hard work. You can do it!
The first step in your debt free plan is to understand Dave Ramsey’s 7 Baby Steps. (Even more information at his website, here.)
- Save a $1,000 emergency fund. Your emergency fund is there to keep you from going into debt for emergency expenses, but you can only use it for emergencies.
- Pay off all debt except for your mortgage using the snowball method.
- Save a 3-6 month emergency fund. This should equal all of your expenses for 3-6 months. Suddenly out of work or unable to work because of a medical emergency? You have 3-6 months of cushion.
- Start investing 15% of your total income towards retirement. (I recommend finding a great financial adviser to help you decide how to invest.)
- If you have have a kid or kids, start saving for their college education.
- Pay your mortgage off early.
- “Build wealth and give generously.”
Okay, so we are clearly focusing on Baby Step #2. So what exactly is the snowball method? First, order your debts from smallest to largest. Pay the minimum monthly payment on all of your debts except the smallest debt. Throw ALL of your extra money towards the smallest debt, i.e. any income above and beyond your budgeted amount should be applied to your smallest debt. Once you have paid off your first debt start applying the money you had been using to pay off your smallest debt in addition to the minimum monthly payment you have already been paying. The more debts you pay off, the more money you have to apply to the next debt.
The hard part is strictly following your budget, or even revisiting your budget to reduce it further. The more money you are applying towards your debts, the sooner you won’t be paying on debts at all because you will be debt free!
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