In review – last week
Last week was our third week in Dave Ramsey’s “Financial Peace University“. The lesson for the week focused on cash flow planning, and was one of the more intense lessons we’ve had as it went deep into putting together a budget, and the reasons for doing so. A few of the important points:
- Spend all money on paper before the month begins. Do a zero-based budget!
- Use the Envelope System for successful cash management. Spending cash vs. credit will mean you spend less.
- Give your budget 90 days to really start working. There are going to be a lot of little tweaks you’ll need to make to your budget.
What was really stressed in this lesson is the need for a written plan, and the need to do a zero-based budget. When you allocate all your money before you even get it, you’ll have a much better idea of where the money is going, and how you can save for that baby emergency fund in step one.
This week – Dumping Debt!
This week our class talked about the one thing that nobody likes having when it comes to money. Debt!
Debt can be a huge strain, and getting out of debt will give you a great sense of accomplishment and freedom once you’re done. This week we focused on dumping debt, and Dave Ramsey’s Baby Step #2 – Paying off all debt using the debt snowball.
Some key points from this week’s lesson:
- Debt has only become accepted as normal in America over the last 20 years.
- Make a commitment to never use credit cards again. This is the first and most important step to dumping debt.
- Remember the keys to dumping debt and the importance of Gazelle INTENSITY!
Debt has become normal in this society
Over the past 20 years debt has become a normal part of society, and it has almost become a good thing in many respects. In past generations people would save up for things, and buy them only when they had enough money. Nowadays we are told that we need to go into debt to build up our credit score. Use credit cards, get a mortgage and get a payment history! You’ll only be something in this society if you spend, and go into debt.
Dave Ramsey talked about the FICO score, and how so many people worship at the altar of the almighty FICO. We’ll do anything to get a good credit score – we think we need it to get ahead and be able to afford things in life. What people don’t realize is that it isn’t a credit score, its an “I love debt score”. Getting into debt so you can get ahead will never be as easy as you think.
Ramsey instead says that we should do our best to get rid of all our debt (except 1st mortgage), and work towards saving for everything we buy. Some people would say that it just isn’t possible to get a mortgage without having a credit score, and that credit cards are to some degree necessary in today’s society. Ramsey’s response is that you can get a manually underwritten home loan. You can use a Visa debit card instead of a credit card. There are options out there, and debt should never be your first option. As the bible says,
The rich rule over the poor, and the borrower is servant to the lender. Proverbs 22:7
Getting into debt is a bad idea, and when you’re in debt you aren’t free. You are slave to whoever you are indebted to, and you will be until you pay them off.
Baby Step 2 – The Debt Snowball
So how do we get out of debt? For some of you there may not be much debt. Maybe a couple of credit cards with a couple thousand dollars debt. For others the debt is rising to the level where you almost feel like you’re drowning in it. The plan for getting out of debt is going to be basically the same no matter your level of debt. It’s called the debt snowball.
Here’s how the debt snowball works:
Step 1 – Make a list of all your credit card accounts, ranked in order from the highest balance to the smallest balance.
Step 2 – Beginning with the card with the smallest balance, pay as much as you can on that card while paying the minimums on the other cards.
Step 3 – Once the card with the smallest balance is paid off, take the amount you were paying towards that card and apply to the card with the next lowest balance.
Step 4 – Keep on paying them off until ALL the cards (and other debts) are paid off.
I have read some criticism of the debt snowball method because it isn’t necessarily the most financially sound way to pay off debt since you’re paying off the smallest balances first, instead of the highest interest rate balance. I understand those criticisms, and to some degree I agree with them. On the other hand, as Dave Ramsey says, getting out of debt is 20% head knowledge and 80% Behavior. Using the debt snowball gives you more of a psychological boost to keeping on track, and rewards the behavior of paying down the debts. If you aren’t seeing as much progress because you’re paying of a higher balance, it can be harder to stick to it. You may end up paying a little more using the debt snowball, but for alot of people, they need that psychological boost.
Keys to getting out of debt
To get out of debt, there are some key steps that you’ll need to take.
- Quit borrowing more money. Don’t take on any more debt.
- Cut up credit cards. Go cold turkey. Credit cards can mess up your budget on many levels.
- Sell stuff. You have more than you need or use, so sell it and put the money towards debt!
- Get an extra job. Take side jobs to accelerate paying off your debts. This can be temporary.
- Debt snowball. Pay off the lowest debt first, then use the amount you were paying for that debt and roll it over to the next debt.
Next week
Next week we look at Credit with a lesson entitled “Credit Sharks in Suits”.
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LINKS:
Dave Ramsey’s 7 Baby Steps @ M-Network Blogs
ChristianPF.com – How to make a budget
Related Articles From Bible Money Matters
- Dave Ramsey's 7 Baby Steps: Step 2 - Pay Off All Debt Using The Debt Snowball
- Dave Ramsey's Financial Peace University: Week 6 - Buyer Beware
- Dave Ramsey Explains Why The "Debt Snowball" Works
- A Commonly Believed Myth: The Little Guy Just Can't Get Ahead
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Woot! I shredded my credit cards in January and it felt great.
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