- Develop a budget.
- Establish an emergency fund of $1000.
- List debts from smallest to largest.
- Cut unnecessary expenses.
- Pay off the smallest debt first, then move that money into the next debt on the list.
Using this method, you will wipe out the debt from your
life. Once you do this, celebrate your achievement (not a trip to Europe because that will only create more debt!). Something
a little less extravagant like a dinner with your family or significant other
at your favorite restaurant (something you have been holding off on because you
have been scrimping to pay off debts).
After you have enjoyed a hearty meal and patted yourself on
the back, you will get back to the business of saving. I know what you’re
thinking: “What??? But I thought I accomplished my goal.”
You have accomplished one
goal. Getting out of debt is freeing and empowering, but imagine the kind of life
you can lead if you had enough money. If you won the Lotto, what would you do
with your life? Retire? Travel? Become a foster parent? Run a literacy program?
Write the next great American novel? Learn to play the electric guitar?
Volunteer at a homeless shelter?
I’m not advocating for playing the Lotto because of the
odds. But there is a way to have the financial freedom we are talking about
and Dave Ramsey’s book is the roadmap to get there.
After your debts are eliminated, increase your emergency
fund from $1000 to 3-6 months of average expenses (remember you don’t have debt
so this won’t take as long as you think). How much do you need in the emergency
fund? Look at the budget
you’ve created and see how much you spend every month. Then multiply that
number by 3 or 6 depending on how safe you want to be. Why is this necessary?
Because you want to be a Boy
Scout (motto: be prepared) when life happens. An emergency fund is essential when Murphy
comes calling.
In my next post, we will discuss investing your money to
have the kind of future you dream about.
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