Saturday, February 5, 2011

Debt Free Dreams

Ever since Don and I read "Total Money Makeover" by Dave Ramsey 6 years ago, we have been inspired to become debt free. We sat down and really talked about where we were financially and where we wanted to be. We decided that our "dream home" that we lived in wasn't within our means after all. We were paying 50% of our paycheck to the mortgage company...that did not include our utilities either. Most finance experts suggest not exceeding 28% of your income including utilities.Our realtor talked us into purchasing the most expensive home we could possibly afford with the hope of eventually being able to afford it. This seemed logical to us at the time, but after reading countless finance books, we were just delusional to think this was going to work. We decided 6 years ago to find a house that we could live in within our means. It took 5 years of scouring our city to find one fit into that 28% with utilities and one that we both agreed on. We did things a little backwards though, we found the house BEFORE selling our old home. This was part in compromise to Don, he didn't want to have to rent or move our stuff twice, and also because our new home was bank owned and they didn't accept contingencies. We both agreed this was foolish and will never do that again.
With all that now behind us we still have credit card debt and a car loan to payoff. The first thing Dave recommends doing is establishing an emergency savings fund in the amount of $1,000. We have done that and we are on the second step which is creating a debt snowball. This is achieved by attacking your smallest debt and making minimum payments on your other debts and applying any extra funds to that smallest one until it's eliminated and then moving up to the next smallest one and applying all those same funds to that one debt and so on until they are all payed off. The next step is to save 3-6 months of living expenses in savings. This will help if there are layoffs or unexpected illness or any other curve balls life should throw at us. After that 15% of income should be allocated to retirement. Then comes college funding, paying off your home early and finally building wealth so you can give like never before. The cool thing is that it's all biblically-  based. I am excited to coordinate a Financial Peace Course at our parish coming in March, it's a great opportunity to help others while at the same time helping ourselves through the awesome support that the classes provide. One of the most inspiring results of FPU was it's affect on Habitat for Humanity. They had a 33% delinquency rate from their homeowners making their very modest mortgage payments. They have now required that every client attend FPU, their delinquency ratio is now 0%. The program changes lives, I am blessed to have had friends go through the program and tell me about how they have completely changed their futures and the future of their children. Dave's motto is "If you will live like no one else, later you can live like no one else!"


  1. that is interesting that you pay off the smallest debts first. I would think attacking the bigger ones with higher interest would be the ones. I am glad to see so much good come from this program/and Dave Ramsey's advice!

  2. Josette, this is why,
    Myth: I should pay off the debt with the highest interest rate first to get out of debt quickly.
    Truth: You should pay off the smallest debt first to create the greatest momentum in your debt snowball.

    The math seems to lean more toward paying the highest interest debts first, but what I have learned is that personal finance is 20% head knowledge and 80% behavior.You need some quick wins in order to stay pumped enough to get out of debt completely. When you start knocking off the easier debts, you will start to see results and you will start to win in debt reduction.

    Based on simple logic, this program works and it has a wonderful history of changing lives. If you have ever heard him on the radio, you know what I mean.

  3. Josette, I just wanted to add that your question was a very good one, and that if someone is very motivated and had the self discipline to keep themselves going, you could certainly pay your debts in whatever order you wanted to. I know that for me, it's nice to make things more simple to have less payments overall to have to keep track of by getting rid of all the little ones first, but we are going to tackle our credit card first before our van loan because of the interest rate...but they are not too different in what we owe. I appreciate your question because I know I will have to answer many questions soon enough.