Finances 101

I have had a few people ask me about our debt reduction plan - so I thought I'd dedicate a post to it.

A few months after I became pregnant we started looking into daycares. Some coworkers had alot of trouble finding a daycare without a waiting list so we decided to look early. I was shocked at the price, it was like sticker shock. I started reading more and more about daycare and realized I would really just love to stay home with the baby.

After doing some research and going over our budget we realized we needed to pay off our bills first. Along the way I found Dave Ramsey(DR) and his Total Money Makeover (TMMO).

His financial solution includes 7 'baby steps' - and after reading his book and talking to people that subscribed to his ideals I began to realize just how easy it would be!

Step 1: $1,000 to start and emergency fund.

This is to cover any and all problems that may arise while you are paying off your debt. If you make under $20k make it $500 and over $80k make it $2000. We're a year in and we have yet to touch this. We put it in an ING account that generates 5.5% and its so neat to see our money make money for us!

Step 2: Pay off all debt using the debt snowball

The premise behind this is easy. Pay off all your debt (minus the mortgage). For a detailed description of the debt snowball please read here. It can be very confusing, but it really works!

When we got to this step I sat down with all our bills etc. and realized we had alot of debt. Between school loans, personal loans, car payments and credit cards we had $48,763.82 in debt! I couldn't believe it! How could we live in such denial for so long? How could we, two working people, have such a huge negative net worth? So, needless to say, staying home would not be an option until debt was paid off. Currently we have one credit card and the two, fairly new, cars to pay off - new total: $24,993.31. We have paid off $23,470.51 in one year - and that includes having a very premature baby and buying our first home. Thats looking pretty good to me! I'm very proud of us!

Step 3: Three to six months of expenses in savings

This will be a fun step, when we get to it at the end of the year. We will finally have savings! We won't touch it because the interest generated from 6 months of expenses will fund Arianna's college savings account! 6 months of expenses for us would be $25,576, which when placed in a 5.25% savings account will generate $1,406.69 in interest that we can put into Arianna's college savings (Step 5)! If we keep it there we can essentially fund her college education for FREE - how cool is that?!

Step 4: Invest 15% of household income into Roth IRAs and pre-tax retirement

When we started this debt reduction plan we stopped our retirement contributions in order to maxamize our debt payoff - this is a DR supported tactic. Since we would be in Step 2 for less than 24 months we decided this was the fastest way to get out of debt. Once we are done with step 3 (February of 2009) we will step our retirement contributions to 15%. This will be also be fun, building our net worth! WoO hOo!

Step 5: College Funding for children

Although Shawn and I are still currently deciding how much of our children's college education we will pay - we will plan to pay some of it. My parents were not prepared (nor willing) to help me with college and due to finances I had to drop out (but I returned later) and I don't want to put my children in that position.

Step 6: Pay off mortgage!

There are people who have paid off their mortgage in 15 years following TMMO. Because I live in New England and have such a HUGE mortgage, this is not a big priority for us. We would rather... live a little... and we do plan on purchasing a bigger home eventually. But we will, at least, pay one extra payment per year toward paying off the mortgage - this alone will take 6 years off your mortgage!

Step 7: Build wealth and give!

Sounds good to me!


I created a very elbatore excel spreadsheet to track everything - we have several savings accounts that I put money into for lots of 'expected bills' such as car tax, water bills, cat care etc. I've never had money put aside for things like that before!

In addition we now follow a 'zero based budget'. This means that every single dollar we make is given a home. We follow a strict budget and stick to it. We also went to 'all cash' to avoid mistakes. We pay cash for everything - I use my debit card once a week, at the ATM to get cash! haha We cut up our credit cards and don't use them anymore - and won't get new ones! (*gasp* I know it sounds crazy!) I actually feel guilty using my debit card - this plan has changed the way we look at money and has literally changed our relationship - we don't fight over money anymore and we are so positive about our financial future! Today, for instance, is Friday - payday and I will go to the bank and take out cash for what we need to buy this week; Gas for the cars and Groceries. We will spend NO other money. This week I am also taking $5 so I can have coffee with my friend Karen.

We don't spend ANYTHING outside of the budget. It took a while to get both Shawn and myself on the same page, but now that we are we're crusin'! We follow a strict plan and don't have spending money but we know its only temporary and that when we are out of debt we will not only be doing so much better than 90% of people our age but we will be 1000% better than where we were when we started - and that is going to feel so much better than buying 'stuff'.

This plan has changed our lives. We know exactly where we are - no more paying bills late, no more bouncing checks and no more hoping and praying we can pay the utilities/mortgage/car payments. I can't help but scream from the roof top about how Dave Ramsey has impacted our lives - its absolutely amazing. I believe ANYONE can benefit from his advice. His radio show (which you can access from his website or on a radio station near you) runs every day and is incredible uplifting and motivating!

Ok now, at least, my family/friends know why we can't go out to dinner! LOL!