dalthauser

Someone on one of my communities posted this. I have some debt issues (nothing that cannot be worked out), and I found this guideline very helpful to get me on the road to overcoming it all.

Total Money Makeover by Dave Ramsey--cliffs notes version.

1. Set a budget. If you're married, agree on a budget with your spouse. Then don't do anything with money that's not on that paper. If something comes up that's not on the paper, call an emergency meeting to consider changing the budget. Both spouses have to agree to the change. You must still balance your budget. Your income minus your outgo must still equal 0 or else you blow the budget.
2. Get current with your creditors. If you're behind on payments, first goal is to become current. If you are far behind, do necessities first which are basic food, shelter, utilities, clothing, and transportation. Only when you're current with those can you catch up on credit cards and student loans.
3. Save $1,000 as a starter emergency fund. If you make less than $20,000 a year use $500 for your beginner emergency fund.
78% of us will have a major negative event in a ten year period. Life happens, so be ready. $1,000 won't catch all the big things, but it will catch the little ones until the emergency fund is fully funded. (this helps remove the false sense of security credit cards give us, because you have real cash to cover your ass) Oh, one more thing. This is not cheat money. It doesn't go toward new clothes, or Christmas, or that vacation. Christmas is not an emergency. Car repairs and kids outgrowing their clothes are not emergencies; they are items that belong in the budget. If you don't budget for them, they'll feel like emergencies, but they're not. Get this money together fast. Work extra hours, get a second job, have a garage sale, sell something. Whatever it takes.
Once you get the starter fund, hide it. Put it in its own savings account. Keep it separate from your checking so it doesn't become overdraft protection.

4. Start the Debt Snowball. Get out a sheet of paper and create a chart that looks like this:

Item Total Payoff minimum payment new payment payments remaining cumulative payments

Then list your debts in order with the smallest payoff or balance first. Don't be concerned with interest rates or terms unless two debts have similar payoffs, in which case you'll list the higher interest rate debt first.
Redo this sheet each time you pay off a debt. Keep the old sheets to wallpaper the bathroom in your new debt free house. The new payment is found by adding all the payments on the debts listed above that item you are working on, so you have compounding payments that will get you out of debt very quickly. Payments remaining is the number of payments remaining when you get down the snowball to that item. Cumulative payments is the total payments needed, including the snowball, to pay off that item. In other words, this is your running total for payments remaining.

Oh, list all your debts except your home. All your debts include loans from friends, or parents, or medical debts that have zero interest.

After you've listed the debts from smallest to largest, pay the minimum payment to stay current on all the debts except the samllest. Every dollar you can find from anywhere in your budget goes toward the smallest debt until it is paid. Once the smallest is paid, the payment from that debt, plus any extra "found" money is added to the next smallest debt. Then, once that debt is paid you take the money that you used to pay on number 1 and number 2 and you pay it, plus any found money, on number three. Keep paying minimums on all the debts except the smallest until it is paid. Every time you pay one off, the amount you pay on the next one down increases. This is why we call it the snowball. Use this to become debt free on everything except your house!

Question: should I stop my 401k contributions to get my debt snowball moving?
Answer: do everything in your power to become det-free very quickly. Stop your retirement plan contributions, even if your company matches them. You'll be able to return to those payments again once the debt is gone.

5. Gazelle intensity. I've heard this phrase before, but I didn't know what it meant until reading the book. It describes a cheetah hunting a gazelle. The cheetah wins lunch only in 1 out of 19 tries. The gazelle outmaneuvers the enemy and runs for its life. You need to be solidly, intensely, totally focused on this to make it work. No cheating.

Question: what if I have an emergency and have to dip into my emergency fund? Which do I do then? Rebuild the starter fund? Or the debt snowball?
Answer: rebuild the starter fund, then attack the debt.

6. Finish the emergency fund. Most people get to this step within 18-21 months of starting this money makeover. When you reach this step you have $1,000 in cash and no debt except your home mortgage. A fully funded emergency fund covers three to six months of expenses. What would it take for you to live three to six months if you lost your income? Now ask yourself what it would feel like to have no payments but the house, and $10,00 in savings for when it rains? Keep your emergency fund in something that is liquid. Liquid is a money term that means easy to get to without penalties. This money is not to make you rich. Dave keeps his in a money market account that pays interest equal to one year CDs. (banks don't have competitive money market account, check the companies who offer mutual funds as they typically also have money market accounts)

Question: what is an emergency?
Answer: An emergency is something you had no way of knowing was coming, something that has a major impact on you and your family if you don't cover it.

7. Serious Wealth Building.
Invest 15% of your income in retirement. Lots of ways to do this. I won't bore you with the details.

8. College Funds for the kids. Determine how much per month you should be saving at 12% interest in order to have enough for college. In today's dollars how much per year the college of your choice costs x 4 years. (hint: $15,000 - 25,000 annually)

9. Pay off the home mortgage. At this point in the money makeover, you are debt free except for the house, and you have three to six months of expenses save for emergencies. You're putting 15% of your income into retirement savings and you are investing for your kids college education with firm goals in sight on both. You're now in the top 5-10% of Americans because you have some wealth, have a plan, and are under control. YOU'RE IN GRAVE DANGER!!! You're in danger of settling for "good enough." Don't.
There's a long chapter in this book about how to pay off the home mortgage. Until I put it here, if you're already at this step in the game, I recommend reading the book. It starts on page 183.

10. Build wealth like crazy. If you've paid off your house you're now in the top 2% of Americans. You're totally debt free, dude. That must feel amazing. Wealth is not an escape mechanism. It's tremendous responsibility. Here are three good uses for money: fun, investments, and giving.