[Morning! Please welcome to the site today, Larry Thomas, who shares his financial recovery going through Dave Ramsey’s baby steps program. If you can believe it this was actually a *comment* left in response to our post on 6 things Dave Ramsey is Wrong About, but had to share it here in the form of a blog post as I thought it made for an excellent counter-perspective. Here’s his note below briefly edited for clarity. Thanks, Larry!]
In January of 2005 I was organizing the financial information for the preparation of my 2004 tax return.
To my amazement, I found that during the 2004 year my wife and I’s income was just over $100,000 before taxes. I proceeded to add our joint income for the previous years from 1999 to 2004. It came to more than $540,000.
I was stunned.
Where did that over half a million dollars go? What did we have to show for it?
As much as I could tell, it was debt. How did we get into this mess? Why were we always broke? When we added our debts together they totaled over $68,000 not including the house mortgage.
When Barbara and I were married in 1992 we kept our finances separate. Since I was coming off of a divorce from my first wife, I had debt and alimony payments. Because of these issues, we decided to keep our finances separate. Since my income was more that Barbara’s income we divided the bills proportionately according to our incomes.
We both had car payments, so each of us paid our own car note. Since I made more money, I paid the house note and purchased the groceries. She paid the utilities and paid for household items and housewares. We each paid our own car insurance.
The disconnect in our separate finances caused us to build separate lines of credit and separate paths to going in debt. This disconnect had each of us thinking our debt was under control because we did not know what debts the other had accrued.
At some point in time, about 2002 or 2003, Barbara decided to work an extra job. I thought it was to earn extra money for Christmas spending. Little did I know that it was to mask over spending. I myself had run up credit card debt on household items for repairs and my hobbies of wood working, golf and liquid libations. But I thought I could handle the additional debt. What I did not expect was the continuous increase of interest rates on my multiple cards from single digits to double digits, with some of them reaching as high as 27%.
I thought I could borrow my way out of debt. So I took out lower interest credit union loans to pay off higher interest credit cards. But all that did was extend the amount of time that I remained in debt, and I still had the credit card and personal loan debt.
Looking back to ’05 I started listening to financial guru Dave Ramsey on the radio. I had seen him on a CBS feature on starting the New Year right by getting your finances in order. It intrigued me so much that I had to learn more about controlling my finances and not letting them control me.
Dave Ramsey prescribed what he calls the Baby Steps. The Baby Steps are no quick fix. They involve a lot of hard work over a period of time. But in order for them to work, both Barbara and I had to work together and combine our financial life sans debts.
To start the Baby Steps, we first had to commit to living on a budget and learn how to use budgeting tools. I also took on an extra job to help pay down debt by working part-time at Radio Shack. We have found that there is also a spiritual component to controlling ones finances.
Below are the Baby Steps in case you’re not familiar with them. I’ve added some bible passages to go along with them that help illustrate the point.
#1. $1,000 in an Emergency Fund
After you do your first budget, save up $1,000 as fast as you can. Just take care of the essentials (housing, utilities, transportation, food, and clothing) and make the minimum payments on your debt until you get the $1,000 saved up.
Why have an Emergency Fund?
An Emergency Fund will help you keep your head above water while you’re getting out of debt. As soon as you start this journey, life will happen. Murphy’s Law goes into effect. Murphy might even move in with you. For example, your refrigerator might break down but guess what? You have an emergency fund to take care of that so you don’t have to stop your debt snowball.
“We should make plans–counting on God to direct us.” – PROVERBS 16:9 TLB
#2. Pay off all debt (except the house) utilizing the “Debt Snowball”
The debt snowball is simple, yet effective. First, list all your debts smallest to largest. Next, make minimum payments on all the debts except the smallest one. Put as much money as you possibly can on that debt.
Once the smallest debt is knocked out, carry the money you were putting on your smallest debt up to the next smallest debt and attack that one. Over time, you’ll knock out debt after debt until they’re all gone!
“The rich rules over the poor, and the borrower becomes the lender’s slave. The Lord will open for you His good storehouse… bless all the work of your hand… you shall lend to many nations, but you shall not Borrow” – PROVERBS 22:7, DEUTERONOMY 28:11 NAS.
#3. 3-6 months expenses in savings for emergencies
Once your debt is gone, build a larger emergency fund of 3-6 months. This emergency fund is important as it will serve you in case loss of employment occurs. This fund allows you to continue living the way you are without stress and fear. It gives you time to choose your next step and place of employment. It allows you to stay on the plan.
“A prudent man foresees the difficulties ahead and prepares for them; the simpleton goes blindly on and suffers the consequences.” – PROVERBS 22:3 TLB
#4. Fully fund 15% into pre-tax retirement plans and ROTH IRA, if eligible
Once you’ve reached this point, it’s time to put a little away for retirement! Take advantage of your company’s 401k if they have one; put money in mutual funds… whatever it is, just start putting away 15% of your income.
“There is precious treasure and oil in the dwelling of the wise, but a foolish man swallows it up.” – PROVERBS 21:20 NAS
#5. College funding
You have kids? Guess what… high school graduation comes before you know it! What better gift to pass on to your children than a college education. They might not understand now, but they will someday!
“Let each of you look not to your own interests, but to the interests of others.” – PHILIPPIANS 2:4 NRSV
#6. Pay off home early
It’s time to own a home! On Baby Step #6, you pay off your home as fast as you can. Put as much extra money as possible toward your house payment.
Once that house is paid off, you just gave yourself a raise because you have NO PAYMENTS, BABY!
#7. Build wealth and give!
Keep socking away money and making it work for you so that you can retire with dignity. By the time you hit Baby Step #7, guess what has happened? You lived like no one else so that later you could live and give like no one else.
“Don’t forget to be kind to strangers, for some who have done this have entertained angels without realizing it!” – HEBREWS 13:2 TLB.
The Baby Steps are no quick fix. They involve a lot of hard work over a period of time. But if you work the plan, it will work for you.
And trust us, being debt-free, being on the other side – is a wonderful feeling. It’s all worth it. I just got a layoff notice today amid the COVID-19 pandemic and don’t know when I will go back to work. If I did not have my debts paid off and have an emergency fund I would be in a bad situation.
(Though please note, I get a pension since retiring from the city in 2016, and I am also a part-time tax preparer now so I am not totally out of income. You can find my site here if you live in the Ohio area and need assistance – ThomasTax1040.com)
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