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Introduction – Dave Ramsey’s Baby Steps – The Decision to Become Debt Free
Step 1 – Save $1,000 Fast – Build a Small Emergency fund
Step 2 – The Debt Snowball – Pay Off All Debt
Step 3 – Finish the Emergency Fund – Save 3 to 6 Months of Expenses
Step 4 – Maximize Retirement Investing – Invest 15% of household income into Roth IRAs and other pre-tax investment vehicles
Step 5 – College Funding – Provide a ‘Paid For’ Education for Your Children
Step 6 – Pay Off the Home Mortgage
Step 7 – Build Wealth Like Crazy – Then Give It Away

Additional Steps (optional)
Helping Your Snowball Gain Momentum

Baby Step #3 – Finish the Emergency Fund

Once you have completed your debt snowball, it is time to provide your spouse with a little piece of mind. Truth be told, I wish this step was the first one because it really would have made my wife feel more safe and secure.

Your initial emergency fund of $1,000 performed its job adequately but now it is time to really prepare for a major emergency. A fully funded emergency fund should cover three to six months of expenses. As this amount is completely dependent upon how much money you earn, I cannot provide the exact number that you need to save.

Additionally, as our economy falls deeper and deeper into the global recession, six months may not even be sufficient. Once we have successfully completed our debt snowball, my wife and I are going to save 12 months of expenses just in case.

The most difficult part of this step is to avoid spending your emergency money. It is so easy to simply think that you can buy whatever it is that you want and replace that money next paycheck. What happens when that emergency you were saving for occurs right after you spend $500 on a new set of golf clubs? What would you do then?

It is important to note that these steps are not meant to make you miserable. Most likely, you have done a pretty decent job of that all by yourself. No! This process is laid out the way that it is because it works.

According to Dave Ramsey’s Total Money Makeover, 78% of Americans say that they would simply borrow money from a credit card if a real emergency ever occurred. While this was once the attitude that I had myself, I honestly hope that I never go there again. It is way too stressful.

One last thing to note is that your emergency fund should remain liquid. By liquid, I mean put your money somewhere that you can get it anytime you want with absolutely no penalties. Additionally, you should avoid putting it in the stock market, mutual find or even bank CDs.

The purpose of a fully funded emergency fund is to provide cash when needed to satisfy an obligation deriving from a real emergency. If you place your funds in a mutual fund, you may be tempted to charge the cost of your emergency to some credit card if the mutual fund you purchased has gone down in value.

Having a fully funded emergency fund can sometimes seem like some unrealistic concept. Imagine the piece of mind provided by knowing that if something major were to occur, you could survive for many months.

Do you have a fully funded emergency fund? How would you survive a real emergency?

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Last time we examined Baby Step #2, The Debt Snowball. In this step, we are methodically attacking each of our debts from the smallest to the largest. Proceeding in this manner, allows us to achieve minor victories almost immediately. Fueled with our recent success, we become more confident, more focused and are on our way to becoming debt free. As a quick refresher, here are the steps we have covered so far:

Introduction – Dave Ramsey’s Baby Steps – The Decision to Become Debt Free
Step 1 – Save $1,000 Fast – Build a Small Emergency fund
Step 2 – The Debt Snowball – Pay Off All Debt
Step 3 – Finish the Emergency Fund – Save 3 to 6 Months of Expenses
Step 4 – Maximize Retirement Investing – Invest 15% of household income into Roth IRAs and other pre-tax investment vehicles
Step 5 – College Funding – Provide a ‘Paid For’ Education for Your Children
Step 6 – Pay Off the Home Mortgage
Step 7 – Build Wealth Like Crazy – Then Give It Away

My Snowball Won’t Roll

When my wife and I started step two, we could not get any momentum. It seemed like all we were doing was paying the minimums on all of our debt. We knew this was not going to get us anywhere very fast. As the leader of our house, I knew it was up to me to take action. And man did I hate it!

I grew up in the early 80s. As a kid, I absolutely love Star Wars. I wanted anything, and everything, that I could get my hands on. I collected the action figures, glasses, posters, patches, vehicle etc. I loved it all. As I grew older I got rid of most of it, thinking it childish owning toys. Once I graduated from college, and got my first decent paying job, I tried buying back my lost childhood toys. I would surf eBay at all hours of the night, looking for deals and bargains to complete my collection. By the time my wife and I enrolled in FPU, I had at least one of 99% of the Star Wars action figures ever made.

Needless to say, our debt snowball crushed my collection. I took each and every toy I had acquired over the past 10 years and auctioned it off on eBay. When all was said and done, we had knocked out approximately $7,000 of debt. Did it hurt? Absolutely! Do I regret it? Never.

Having my wife sleep better at night was worth way more than the joy those toys brought me. Now I just need to get the courage to sell off some of my comic books. I am such a little boy

If you are having a difficult time getting your snowball rolling, try selling a few things that you no longer use. You do not have to sell any prized possessions, although it worked well in our situation. If you do not have anything to sell, consider getting a part time job during your free time.

I do not have much free time and the free time I do have I absolutely refuse to spend away from my family. This is one of the reasons I started writing for eHow. I knew that it would take three to six months before I would start to see decent earnings, but I knew I could do it. Eight months later, I am making over $100 a month, mostly from articles I wrote months ago. Each month, we throw these eHow earnings into our emergency fund. Truth be told, we should be paying down our student loan (our last remaining debt) but having an established emergency fund makes my wife feel more secure.

Lately, I have been spending time creating a few One Week Marketing campaigns. I view this stream of income the same way that I viewed eHow in the beginning. I know that it will take months before my campaigns mature enough to start seeing consistent income. Until then, I plan on plugging away.

The point is that it is up to you to start your snowball rolling. Whether you get a second job, create online income or sell stuff on eBay is up to you.  Just do something!

What did you do to jump start your debt snowball? Did you sell anything you later regretted?

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Last time we examined Baby Step #1, building a small emergency fund of $1,000. Building this fund is important because minor emergencies are a part of life. No matter what we do, something will come up that is outside your monthly budget. If you do not have money set aside for these circumstances, you will be forced to use a credit card; which is directly opposite our goal. As a quick reminder, here are the Baby Steps.

Introduction – Dave Ramsey’s Baby Steps – The Decision to Become Debt Free
Step 1 – Save $1,000 Fast – Build a Small Emergency fund
Step 2 – The Debt Snowball – Pay Off All Debt
Step 3 – Finish the Emergency Fund – Save 3 to 6 Months of Expenses
Step 4 – Maximize Retirement Investing – Invest 15% of household income into Roth IRAs and other pre-tax investment vehicles
Step 5 – College Funding – Provide a ‘Paid For’ Education for Your Children
Step 6 – Pay Off the Home Mortgage
Step 7 – Build Wealth Like Crazy – Then Give It Away

Baby Step #2 – The Debt Snowball

Once you have fully funded your initial emergency fund of $1,000, it is time to start tackling your debt. We do this in Step 2 – The Debt Snowball.

I am not going to sugar coat it. This step is a challenge! So much so that my wife are still in this step, 8 months after starting our Total Money Makeover. If you have large student loans (like we do), a few car payments or high credit card balances, it may take you as long as three years to finish this step completely. If not, consider yourself extremely lucky.

So exactly what is a debt snowball and how does it work?

Have you ever seen an avalanche on TV, maybe the discover channel or something? It typically starts with a small amount of snow. After a few minutes of rolling down hill, it picks up more and more snow, and speed, until finally, it is a massive wall of death and destruction. This is kind of what we are going for when using a debt snowball. We are going to start small and build upon each of our tiny victories.

Before you begin formulating your plan of attack, make sure that you have completed a written budget. It will be impossible to successfully completed your debt snowball without one.

 The Debt Snowball

• Make a list of all our your debts from the smallest amount to the largest. List ALL of your debts, except for you house (this debt actually is accounted for later on).
• After all of your necessities are paid (food, shelter, transportation and clothing), pay the minimum amounts on all of your debts. As a side note, you should be current on all of your debts before you begin this step. In fact, I think you should be current on all of your debts before you complete your initial emergency fund.
• Any additional money that can be squeezed from your budget should be applied to your smallest debt. This is extra money, in addition to the minimum payments that you are already paying. Do not consider interest rates when determining which bill to pay extra on. Pay off your smallest debts first and ignore the mathematics involved.
• Once you have completely paid off the smallest debt, put all of the money you were paying on that debt on the next smallest debt.
• Repeat this process until you are debt free, except for your mortgage.

Successful implementation of this process involves effort. It will not happen overnight. You need to get on a written budget, get current on all of your bills before you start and follow the plan. Some people suggest paying off the debt with the largest interest rate first. To be honest with you, the accountant in me wanted to do this as well. Once we started paying off tons of little bills, however, I could see the value in starting with the smallest one first. It is extremely motivating to have three or four less checks to write at the end of the month.

Have you completed your debt snowball? How good did it feel to finally say ‘no thanks’ to being in debt?

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