The Total Money Makeover

Nate and I just finished reading this book and spent all last night working on our budget. I was first impressed with Dave Ramsey's plan when I heard that he advocated the Debt Snowball, which I first heard advocated by Elder Marvin Ashton (I'll explain what it is below). As Nate and I have been working on this, I've been really pleased. Not that I was excited to learn we have more debt than I realized, but I am excited about working on our finances together and working to make sacrifices that will greatly benefit our family in the long run.

So here are his seven steps to becoming completely debt free and building wealth:

Step 1: Set aside $1000 for an emergency fund. The goal is no longer use credit cards for anything, so you have to have an emergency fund to pay for a real emergency and not use the credit cards.

Step 2: The Debt Snowball. Write down a list of all of your debts from smallest to largest (don't factor in interest rates because part of the point is to have some early successes paying off debts so you'll keep at it and don't include the mortgage). Make minimum payments on all of your debts but the smallest, and put as much as you can on the first. Once you've paid that first one off, use what you were paying on the first to add to the minimum payments on the second until you've paid that off. Then add the accumulated payment to the third and so on. He says that most people who are really committed are able to finish this step in 18-24 months. All extra money made by supplementing income or selling things should be used to pay off the debt.

Step 3: Fully fund your emergency fund. Once all of your debt is paid off, use those payments to build your emergency fund so it equals 3-6 months of what you would require to live on. Again, this step is right in line with what the church says (the new emergency preparedness guidelines include 3 months of food that your family already eats, a 3-6 month financial buffer, and then long-term storage).

Step 4: Invest 15% of your income toward retirement. He says you should put whatever your company matches into your 401K and then put the balance into an IRA. We're still learning about investing, but we have already been contributing heavily to the 401K at IMFT.

Step 5: Invest in education funds for your children's college, so they can go to school without being in debt. We are lucky in Utah because the state and the church heavily subsidize tuition to make it much more affordable. Additionally, Utah has one of the three best 529s in the country (you can invest in any state's plan, but it's cool that ours is so good).

Step 6: Pay off your mortgage. He suggests only ever getting a 15-year mortgage, and we're looking into seeing whether it would be worth refinancing at this point depending on the interest rate and closing costs. People who are really committed to the plan pay their homes off in an average of seven years. I am very excited about this step; I watched my parents become wealthy for the first time once they paid off their house.

Step 7: Build your wealth. This involves charitable giving, investing, and spending some for fun.

So this is our plan. We will be living very frugally for a while, and it will be challenging, but I have decided that this is just pushing me to be more creative in terms of shopping, etc. Can we do this? Yes, we can!

Btw, it has come to my attention that some people reading would like to make comment but don't know how. At the end of every blog is a little link that shows you how many comments there are. Click on it, and it will take you to a screen where you can read what has already been written and make your own comments.