Getting into Good Financial Shape

George is Keeping an Eye On You!
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When I moved to Brunswick I incurred between $7,500 and $10,000 in debt. This was the first time I really lived on my own, so I needed to furnish an apartment. I let my mother help, so I spent more than I probably would have on my own, but I didn’t have too make to many trips. I was making more money than I’d ever made, so the payments were easy to make. However, I like plans and this amount of debt called for a plan and a strategy to eliminate it quickly. Enter Dave Ramsey.

What Dave Recommends:

Dave Ramsey has a simple 7 baby step plan for getting in good financial health.

  1. $1000 starter Emergency fund
  2. Pay off all debt using the debt snowball
  3. 3 to 6 months of expenses in savings (Full Emergency Fund)
  4. Invest 15% of income into retirement savings
  5. College funding for yourself and/or kids
  6. Pay off home early
  7. Build wealth and give

Read more about the 7 baby steps in The Total Money Makeover: A Proven Plan for Financial Fitness

The prerequisite for the baby steps is: you have to stop spending more than you earn.

Let me explain a few terms so we are all on the same page:

The debt snowball step states you should pay off the smallest debt first while paying the minimal on the rest of your debts. In other words put all your extra money towards paying down your smallest debt. After the smallest debt is paid off you take the payment you were paying to the smallest debt add it to the minimal payment on the next smallest and start paying it off. The payments get bigger as you pay off more debt and you are able to pay off the larger debts much quicker now that you don’t have to pay on the small ones.

The full emergency fund should contain all the money you will need to continue living as you are now for 3 to 6 months if you were to lose your job. For example: if you have $1500 in bills every month and you want to have a 6 month E-Fund you would need roughly $9000 in savings. Dave recommends this being in a liquid money account such as a money market or regular savings. Shop around and see where you can get the best interest rates. You should be able to build this emergency fund quickly as you have all the money from the debt snowball to start putting into this account.

What I’m doing:

I wish I would have read The Total Money Makeover before I started paying off my debt because I wouldn’t have made some of the mistakes I’ve made.

I’ve always been a fan of pouring money into my IRA or 401k, so the first thing I did after I was eligible was start putting 8% then 15% of my paycheck into my company 401k. That was a mistake. I should have put the money towards my debt. It probably cost me a few thousand dollars. How you ask: my company offers matching up to 4% on contributions to my 401k, but that doesn’t start until you work with them for 1 year. My first year I was paying into my 401k with no matching and making small payments on my debt. The interest on my debt probably cost me a few hundred dollars there. After reading and deciding to follow the 7 baby steps I stopped contributing to my 401k and paid off my debt. (except one “same as cash” deal which I can afford while contributing to my 401k). It took about 9 months to pay down the debt. Thats 9 months I could have been receiving 4% matching. That cost me thousands of dollars up front and even more if you count the interest that would have been generated on that money.

I am working on my Emergency fund now and will have it filled by June 2014. It has over $6000 in it now and I am trying to contribute $500 to $1500 a month to it. I hope to have it filled way before my deadline hopefully before christmas 2013. If it is not full by then I will stop investing in my 401k and pour all my money into it. I am breaking from Dave’s recommendation of keeping the money in liquid assets by putting the money in the stock market. I am doing this because I can afford the risk, I hope. I have no family and no house. So if I lose my job and my E-Fund I can cut my bills drastically or even move in with my parents if needed.

I am now contributing 8% to my 401k to get the 4% matching.

My strategy for investing in my 401k and my E-Fund is very similar: Indexing. My 401k is 100% equity with vanguard index funds. My E-Fund is 70/30 Bonds/Equity ETFs. With the super low expense ratio and predictable returns this is as close to a guarantee in the market as you will get. I am not smart enough to come up with this plan, but I am smart enough to know to turn to others for help. So I’ll recommend to you the same book I read to understand how this investment strategy works: The Elements of Investing: Easy Lessons for Every Investor.

I have found my life to be much less stressful once I made a plan and started following it. Now I don’t have to re-evaluate the big picture every week. I can just hit my short term goals and take a look at the big picture a few times a year. I recommend you read these two books and get on your way to financial security and a less stress way to manage it.

Books to read:

One comment

  1. […] have a CC that is not same as cash that I need to pay off. Instead of taking the money out of the E-Fund I think i’m just going to pay it off next month instead of contributing to the […]

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