Getting Out Of Debt With Baby Steps

Step 1.

Cut up all credit cards.
Reason: your credit is already shot and you are not looking for additional debt. What difference does your credit rating, or score, matter now. Temporarily stop contributions to your retirement funds. The main goal now, is to get out of debt. I have somewhat mixed feelings on this step. I understand the importance of saving and building your retirement and the possible lost earnings. If you are devoted to getting out of debt, you could still continue contributing to your 401(k) or 403(b) during this time. Do what makes you feel better. Start looking for ways of increasing your money. Get extra jobs, discontinue extra services, trade down cars (if possible).

Step 2.

Establish an emergency fund.
A good suggestion is $1,000. Get this account established as quickly as you can. Pay minimums on all debt until you get this amount saved. This will not be your entire emergency fund. This fund is designed to cover small emergencies while you are working to get rid of all of your debt. Remember, this is only a starting point. You will come back to this account later.

Step 3.

Start your debt snowballing plan.
List all of your debts, excluding mortgage, ranging from smallest balance to the largest. Keep this list posted on your refrigerator or somewhere else. Just make sure you are able to see it most of the time. Pay all you can on the smallest debt. Concentrate all of your efforts on this debt and only this debt. Pay minimums on all of the rest. When the first debt is gone, put all of that money and any extra on the next debt. Keep doing this until all debts are gone. Get mad and stay mad until all debts are gone. There is no energy in logic, only emotion. The reason for this approach is purely a mind-game. You can see debt going away quicker. Will it make better sense to start with interest rates, probably, but as I said, I want you to see debt going away and get the feeling of accomplishment. By seeing debt going away quicker, you will be motivated in continuing.

Step 4.

Re-visit the emergency fund.
At this point, the only debt you have is the mortgage. We will not touch this debt yet. Now go back to your emergency fund. Build this fund up as quickly as you can. All of the money you devoted to paying off your debt can now be added to this emergency fund. A good rule of thumb is to have at least 3-6 months of expenses saved in this account.

Step 5.

Invest In Retirement.
Fully fund all of your pre-tax retirement options. Max out all you can. You should also take a good look at your insurance needs. Always get level, guaranteed renewable term life insurance. Never get whole life. Your policy should be worth 10 times your annual salary. Why? Your family is accoustomed to living on $50,000 a year. You would want a $500,000 policy. Your family will be going through a hard enough time in losing you. Why also make their financial life suffer as well. Your spouse could invest the $500,000 and at a 10% return, they will still be getting $50,000 a year. With your emergency fund fully funded, look at your auto insurance. Deductibles could be raised. This will save you money.

Step 6.

College for the kids.
Now is the time to start saving for your kid’s college fund. I know you think this should have started a long time ago, but it did not meet your immediate goals back then, when you were in debt. Do not let the guilt of not doing anything for the kids stop you, in fact the guilt should be motivation for you to get to this step even quicker.

Step 7.

Erase the mortgage.
Now is the time to attack the mortgage. Let’s get rid of this as soon as possible and have the biggest mortgage paper burning party your neighbors have ever seen. You may be saying, but why? What would you rather do, send a lot of money to the bank, just to get a little back from the IRS? I do not think that makes good financial sense. Spend a lot to save a little, doesn’t make sense to me.

Step 8.

Now let’s get rich.
You have zero debt at this time. What are you going to do with all of the extra money? Invest to your little hearts content. Very soon, you will be wanting to give away lots of your money to charities. You are now a giver instead of a spender. How much buying power do you have now. Just go to a merchant and offer cash for any item, look at how fast the price drops.

Personal finance is not a microwave, it is like a crock-pot. You can’t get there quickly. Liken it to climbing a mountain. You take very small, careful steps.

By following these steps, you will be well on your way to obtaining Financial Peace.

Ideas for this were taken from Dave Ramsey’s “Financial Peace.” Lampo Press

Author: Jay Jones

Jay is an author, veteran church planter, speaker, and the pastor of the Pentecostals of Kentwood. He's a passionate worshipper of Jesus Christ, a husband, daddy, pastor, and a ‘pretty good guy’. Jay is also an ordained minister of the United Pentecostal Church, where he currently serves as a Presbyter in West Michigan.

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