[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 2005 I organized the financial information for my 2004 tax return.
To my amazement, I found that my wife and I had a pre-tax income of just over $ 100,000 in 2004. I have added up our joint income for the previous years from 1999 to 2004. It totaled more than $ 540,000.
I was shocked.
Where did that go to over half a million dollars? What did we have to show?
As far as I could tell, it was debt. How did we get into this mess? Why were we always broke? When we added up our debt, it was over $ 68,000 excluding the home mortgage.
When Barbara and I got married in 1992, we kept our finances separate. Since I divorced my first wife, I had debts and alimony payments. Because of these issues, we decided to keep our finances separate. Since my income was higher than Barbara’s, we split the bills proportionally according to our income.
We both had car payments, so each of us paid our own car license. Since I made more money, I paid the house receipt and bought the groceries. She paid the utility bills and paid household items and supplies. We each paid our own car insurance.
The separation in our separate finances resulted in us building separate lines of credit and separate avenues to debt. This separation had made each of us believe that our debts were under control because we did not know what debts the other had accumulated.
At some point, around 2002 or 2003, Barbara decided to get an additional job. I thought it was to make extra cash for Christmas spending. Little did I know it was about masking expenses. I had amassed credit card debt on household items for repairs, and my hobbies were woodworking, golf, and liquid libations. But I thought I could handle the extra debt. What I didn’t expect was the steady rise in interest rates on my multiple cards from single digits to double digits, some of which reached as high as 27%.
I thought I could borrow a way out of debt. So I took out lower-rate credit unions to repay higher-rate credit cards. But all I did was extend the time I was in debt and I still had the credit card and personal loan debt.
Looking back in ’05, I heard finance guru Dave Ramsey on the radio. I had seen him on a CBS feature as he really started the new year by getting your finances in order. I was so fascinated by it that I had to learn more about how to control my finances and not let them control me.
Dave Ramsey prescribed what he calls Baby Steps. The Baby Steps are not a quick fix. They take 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 debt-free financial lives.
To start the Baby Steps, we first had to commit to living on a budget and learning how to use budgeting tools. I also took an additional job working to reduce debt by working part-time at Radio Shack. We have found that controlling your finances also has a spiritual component.
Below are the baby steps in case you are not familiar with them. I’ve added a few scriptures to illustrate the point.
# 1. $ 1,000 in an emergency fund
After the initial budget, save $ 1,000 ASAP. Simply attend to the essentials (housing, supplies, transportation, food and clothing) and make the minimum payments on your debt until you have saved that $ 1,000.
Why an Emergency Fund?
An emergency fund will help you stay afloat while you are out of debt. Once you start this journey, life will happen. Murphy’s Law goes into effect. Murphy could even move in with you. For example, your fridge could break, but guess what? They have an emergency fund to take care of it so you don’t have to stop your debt snowball.
“We should make plans and rely on God to guide us.” – PROVERBS 16: 9 TLB
# 2. Pay off all debts (except the house) with the “debt snowball”.
The debt snowball is simple, yet effective. First, list all of your smallest to largest debts. Next, make minimum payments on all but the smallest of debts. Put as much money as you can on this debt.
As soon as the smallest debt is knocked out, carry the money you put on your smallest debt to the next smallest debt and attack it. In time, you will reduce debt after debt until it’s all gone!
“The rich rule over the poor and the borrower becomes the lender’s slave. The master will open his good warehouse for you … bless the whole work of your hand … you will lend to many nations, but you shall not lend” (PROVERBS 22: 7, DEUTERONOMY 28:11 NAS).
# 3. 3-6 months saving costs for emergencies
Once your debt is gone, build a larger emergency fund of 3-6 months. This emergency fund is important as it will help you if you lose your job. With this fund you can go on living as you are without stress or fear. You have time to choose your next step and workplace. It allows you to stay on track.
“A prudent man foresees difficulties and prepares for them. The Simpleton continues blindly and suffers from the consequences. “- PROVERBS 22: 3 TLB
# 4. Fully fund 15% in pre-tax retirement plans and ROTH IRA if eligible
Once you get to that point, it’s time to retire a little! Use your company’s 401k if you have one. Put money in mutual funds … whatever it is, just start putting away 15% of your income.
“There are precious treasures and oil in the abode of the wise, but a foolish man will swallow it.” – PROVERBS 21:20 NAS
# 5. College funding
You have children Guess what … graduation is coming before you know it! What better gift for your kids than college education? You may not understand now, but one day they will!
“Don’t let each of you look to your own interests, but to the interests of others.” – PHILIPPIANS 2: 4 NRSV
# 6. Pay home early
It’s time to own a home! At Baby Step # 6, pay off your home asap. Put as much extra cash in as you can on your home payment.
Once the house is paid for, you just gave yourself a raise for having NO PAYMENTS, BABY!
# 7. Build wealth and give!
Keep putting away money and making it work for you so you can withdraw with dignity. Guess what happened when you hit Baby Step # 7? You lived like no one else so that later you can 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 even realizing it!” – HEBREWS 13: 2 TLB.
The Baby Steps are not a quick fix. They take a lot of hard work over a period of time. But if you work on the plan, it will work for you.
And trusting us, being debt-free, being on the other side – is a wonderful feeling. It is all worth it. I received a letter of discharge today because of the COVID-19 pandemic and I don’t know when I’ll be back to work. If I hadn’t paid off my debt and didn’t have an emergency fund, I’d be in a bad position.
(Please note that I’ve been getting a pension since I retired in 2016 and I’m now also a part-time tax advisor so I don’t have any income. You can find my website here if you live in the Ohio area and need help – ThomasTax1040 .com)