If you have been following this blog, you must know what I believe about financial wellness. In this post, you will get a peek into what I do and have been doing, the plan I have used to get to financial wellness. Prior to the plan, I had very few money goals. I made a b*dget, I saved pennies, I had a retirement fund, a college fund for my son, a small student loan from a graduate program I didn’t finish, and a 401k loan to fund my CPA preparation course. I had at least 15 credit cards, (I proudly called myself the Credit Card Queen). I was three years into a seven-year car note. I was giving something to the church, and I was able to occasionally loan out some money. Besides the credit card management, I really was not intentional about what I was doing. I knew that what I was doing didn't get me the results I desired, so I began to follow a new plan.
I have been following Dave Ramsey’s Baby Steps to Financial Peace for about 18 months. Click here to learn more about them.
Step 1: Establish an emergency fund of $1,000 (or $500 if you make less than $20,000)
I had about $2,000 in the bank, so I set $1,000 aside and used the rest to pay down debt. If you do not have any money set aside, seriously consider adjusting your spending so that you can save something for an emergency fund. Have a garage sale, pick up extra hours, REDUCE YOUR SPENDING, and/or get a part time job.
Step 2: Pay off all non-mortgage debt
I paid off all non-mortgage debt of $19,273.45 (credit cards, 401k loan, car note, timeshare loan) in about 11 months and this is how I did it:
I sold any and everything around the house and used the money to pay down the debt exclusively.
I stopped 401k contributions. This step hurt pretty badly, because I felt my future was suffering for my present choices. This act felt so unsafe, and it contradicted everything that I learned in college about the time value of money and the importance of saving for retirement. And that’s exactly why I did it. I wanted to hurt, because pain often serves a very effective warning to NOT do something again.
I stopped creating debt! I cut up all my store bankcards and began to use either cash or my debit card almost exclusively for purchases. This change hurt the absolute worst—I took pride in “getting over” on credit card companies by switching balances to avoid paying interest, racking up balances to take advantage of travel points, and getting cash back at the end of every month. Having to abandon that feeling of “winning” was a huge blow to my ego, but once I stopped, I realized how much more time I had! I wasn’t scouring the credit card websites looking for the next deal, I wasn’t keeping up with a hundred different due dates for balances, and I wasn’t managing cash on a daily basis trying to ensure enough was there to cover payments.
I also never realized just how difficult it is to spend money once I started to use cash to pay. I felt the weight of those purchases immediately, instead of waiting until the bill was due to somewhat feel how they affected my finances.
If you find yourself relying on credit cards to maintain your lifestyle, I want you to consider this: the Bible tells us to, “Let no debt remain outstanding, except for the continuing debt to love one another, for whoever loves others has fulfilled the law.” Another version reads this way, “Owe no man anything, but to love one another, for he that loveth another hath fulfilled the law.” The significance behind these words means so much more than just financial debt, but for this season in my life, I took a literal translation and committed to not leave any debt outstanding, and to quit playing the credit card game altogether. The Bible is full of invaluable instruction that will similarly inspire you in a very specific way, based on what you need in your life. You just need to read it, and I am confident something will speak to your spirit and allow it to govern your actions.
I got a promotion, raise (Hallelujah), and then used the increase to pay down the debt exclusively. I believe that when you decide to follow a God-led plan, doors will begin to open for you that will allow you to achieve that plan. Everyone’s situations and needs are different; perhaps His path to bring your financial life in order will look nothing like mine. Just have faith that God knows exactly what you need and when you need it.
I started speaking with a few good men about my mental health. I do not think any of this could have been made possible unless I talked to the men I did. I put so much pride in how I handled money, because I did not have much pride in how I did much of anything else. When I was able to value myself correctly, I could admit that even though I was “good” at credit, I had a hard time saving any money, I wasn’t giving money away like I wanted to, and I was taking too much time and energy into playing the credit card games. Once I felt that doing something "wrong" didn't reflect poorly on my value, I could much more easily change my behavior to do what is right.
Step 3: Save 3 to 6 months of living expenses to fully fund your emergency fund
Once I saw how easy it was to pay off debt, I was hooked, so this next step was a breeze. As a single mom of one pre-teen kid, I determined I needed about $2,500/month, or about $15,000 to fund my six months emergency fund. This step took about five months. Please note that this amount means foregoing certain luxuries such as eating out or giving money away freely, but I could live. Your number might be higher or lower, but that does not matter. What matters is that you know pretty accurately how much money you need to spend to survive if you lost your income.
I took the $1,000 from step one, in addition to a bonus from work (Hallelujah!) and began to fully fund my emergency fund. All the money I was paying towards credit cards and loans and a car note was now going into MY bank account, and that felt great. I did not let up on spending cautiously and I continued to sell as much stuff as I could.
It is important to note that once you let go of debt, the monthly amount of income you need to cover your required expenses will likely drastically decrease. Prior to paying off debt, my monthly expenses were well over $3,300. This meant I was spending $800 on debt alone. Just by paying off debt, I gave myself an instant $10,000 raise.
Step 4: Invest 15% of your income into retirement savings
Once I had no debt, it was easier to set aside such a large portion of my income for retirement savings, so I went back to contributing to my 401k loan at this level. Consequently, I bring much less money home, but since my non-mortgage debt level is 0, this money is being invested into my future, and not a bank’s bottom line.
Step 5: Save for your children’s college fund
I was blessed to graduate from undergrad debt free, thanks to a merit based scholarship. I would love to pass along this gift to my child, so I have no problem investing in his college fund. I do not save a lot, but every little bit helps! If you have children, I encourage you to ask friends and family members to donate to your child’s college fund in lieu of birthday or holiday gifts. College funds can be used for universities, trade schools and other post high school training programs. It will not be money wasted.
Step 6: Pay off the house early
Because I do not have any other debt, I can pay off my house debt a little quicker. Thanks to just paying about $100 month on my mortgage, I have shaved off five months of payments. It may not sound like a lot, but every little bit helps!
Step 7: Build wealth and give
Giving is the best part of financial wellness. To know that God has chosen me to manifest a portion of His goodness on earth is humbling and exciting. God’s work will be done regardless if I am on board, but it is nice to know that I can be trusted with His resources to do what He has called me to do. For me that is true wealth. As an added benefit, I am able to comfortably take care of my family and I can occasionally have nice things. To God be the glory.
I hope my level of transparency will cause you to earnestly look over your own spending habits, and consider utilizing Dave Ramsey’s plan. It can and will work for all income levels, as long as you know that your value comes directly from God and not the money or things you have, and if you trust Him you will have all that you need.
I am thankful for incremental successes because through this process, I am learning to appreciate all that I have, and all that the work done to get this far. If my debt were to have magically vanished, I would not have gained the discipline required to control my spending behavior, and in no time, I would probably be right in the same boat of financial hopelessness.
What are your thoughts on this plan? Do you have something that has worked better? Do you need any help to get started? Login and share your thoughts below!
