Thursday, March 09, 2006

TASK #72 (2) Have Enough Money to Do All the Things on This List

First – free your money

So far, the simplest and best system I've discovered to free my money has been Dave Ramsey's baby steps to financial freedom. This guy really knows what he's talking about, and I suggest you listen to his podcast or checkout his site as soon as you can, if you have any debt or concerns about your future finances.

Here are the baby steps (We're on step 2 if you're curious):

  • Put away $1,000 into an Emergency Fund (Money Market or High Yield Savings Account)- if you can believe it, we had no money at all in the bank specifically for emergencies. Getting this together required tapping into some savings we had for our daughters which was gathering practically no interest – we’ll replace in a later step. I discovered an online bank HSBC that offers 2 to 3 times the interest as our local banks, and free services all around. This way, the money is liquid but working for us as best as we can expect. If you don’t have money to reallocate for this, start selling stuff!

  • Pay off all debt using the Debt Snowball - this is the best part of this system and the one that really gets your momentum going to save more, cut spending, and grow wealth. Here's how you do it -

  1. -List your debts in order of smallest to largest (all debt, no matter how little.) -Reduce your payments to all of your debts (credit cards, etc) to the bare minimum payment - except the smallest one. -That smallest debt, you attack with a vengeance, using all the money you've freed up, until it's paid.

  2. -When that one's paid, take the big payments you were just making to kill off the 1st debt and apply it to the second smallest debt on the list + the minimum payment you were just making on the second debt. -

  3. Once that's paid off, use the same lump sum from the 1st + 2nd to pay the 3rd + the 3rd's minimum.

See how it's building! And so on - until your debt free! It's amazing how fast this all gets. And the excitement you generate from getting debts paid creates momentum like you wouldn't believe. Couple this with listening to Dave's show, where he has people call in when they're done and scream "We're debt free!" (with Braveheart's Mel Gibson screaming "Freedom!" in the background) and you'd have to be dead not to get charged up.

  • Put aside three to six months of expenses in savings - once you're debt free (except for your house) this should be easier, because you've freed up so much monthly cash and established the habit of focusing your money. Budget This is a good time to put together a simple budget. How else are you going to calculate your monthly expenses? Here is a nice template I found on Microsoft’s site.

Direct Deposit Another important principle you need to apply is here is the practice of "paying yourself first" Always, always, pay yourself first. If it's through a 401K or Roth IRA or investment account, make sure you get it direct-deposited straight from your check. You'll learn to live without it while continuously contributing to your investments. Your goal should be to automate things any way you can!~

I'll post the rest of the steps in my next post!


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