Sunday, March 28, 2010

Dave Ramsey's Baby Step One (more than just $1000 baby emergency fund)

Baby step number one in the Dave Ramsey plan is more than just a $1000. A lot of people don't realize that, but it is.

Baby step zero is getting current on everything.

Baby step one, is $1000 plus a written budget, cut up credit cards, and a commitment to being gazelle intense with getting out of debt. If you don't have all those, then don't lower your emergency fund down to $1000!

There's more to it too, if you have special family issues.... say health issues, job problems, pregnancy, or anything like that, then you need more than $1000 emergency fund.

The $1000 fund is also not a fund to cover life events. Kids out growing clothes, car repair etc. As Dave sarcastically says, "Who could see that happening!" We've all got cars that needs maintenance. So put it in the budget. Some of us have kids that are outgrowing clothes faster than we can put them on them, so budget for it.

$1000 isn't a lot. In fact, a lot of ridicule against the Dave Ramsey plan is that $1000 won't cover much. That's right, it won't. So be gazelle intense and get to your fully funded emergency fund (FFEF)as quickly as possible. Be proactive. If you can see the tires are going bald, that means you need to save up money to fix them. If you think that you or your spouse might lose your job, then you need to stop the debt snowball, go to paying minimums on everything and then start saving for the potential storm.

Being on Dave's plan is being pro-active with your life. Looking ahead, and thinking about your money.

Special notes about the Baby Emergency Fund:

1. If you make under $20,000 a year Dave says to have a $500 beginner fund.
2. Keep it liquid.
3. With your spouse, decide what an emergency is in your family.
4. Don't touch the Baby emergency fund (BEF) unless it is a true emergency.
5. If you have to use your emergency fund, then you need to go back and refill it asap.
6. Page 142 of the Total Money Makeover (3rd Edition) says, "I don't suggest you clean out your savings if everyone isn't having a Total Money Makeover. I also don't suggest you clean out your savings if you are planning to be on Baby Step Two (Start the Debt Snowball) for five years."

He also emphasis that most people take 18 to 24 months to get out of debt. if your plan looks like it will take longer, DON'T DESPAIR. The more you focus on getting out of debt the sooner it will be done. You can do this!

Monday, March 22, 2010

I can't do a budget, because the numbers won't fit

Would you believe that people actually come to me for financial tips now?
I know crazy.

A while ago there was a couple that came over and she was asking for tips on how to make their money stretch further. I suggested the basics, get on a budget, use the envelope system [I'll write more about the envelope system later] save for emergencies etc.

Meanwhile her husband is sitting there and I can just see him rolling his eyes. They (according to him)don't make enough money to make ends meet.

So what is a budget and why do you need one?

Let's look at it this way, money is a resource. The book "The Four Laws of Debt Free Prosperity" compares money to water. If you don't control it, it goes away.

A budget is like the pipes in our homes that lead water to where we want it to go.

Similarly, a written budget, shows us how the money comes in and then we decide where that money is going to go.

When you have a low income, and high expenses, or a high income and even higher expenses, it is vital that you tell your money where to go instead of just letting it go wherever.

Can you imagine trying to get water to your house without using pipes?

Well then don't manage your money that way!

To be clear I didn't look at this particular couples budget. I really don't know if they had the income to cover their necessities or not. But here's what happened:

Earlier that year four of their kids and the father had gotten sick. They had a total of $220 that they needed to pay out of pocket for their co-pays and deductibles.

He was left out of work for a few days.

When I suggested that they save a baby emergency fund (first step of the Dave Ramsey plan) he didn't think it could be done with their income.

And of course at the time they didn't have the emergency fund anyway, so it was too late to change that.

So then what happened?
Well, currently they are making payments on their medical debts.

So what he was telling me was that they couldn't save the money for an emergency, but once the emergency occurred, they could make payments on it.

I'm just saying, if money is tight, then you need a budget. Personally I think everyone needs one, but it can be extremely daunting to make a budget when the numbers don't fit.

Look, if the numbers don't fit, then make a priority list. "We only bring in "x" amount therefor we can only afford rent, utilities, food, and fuel.

Sorry kids, but we're not eating out this month."

When we first did a real written budget, we were sure the numbers wouldn't fit. We were lucky, they did fit, but things were tight.

I'm not saying everything will turn out okay if you do a budget. Honestly, your expenses might exceed your income! But if that is the case, then that is something that you truly need to be aware of.

So if you think the numbers aren't going to fit then you definitely need to have a leak proof budget. You can't afford not to!

Sunday, March 21, 2010

The Millionaire Next Door & The Millionaire Mind

What do most Millionaires have in common? Would it surprise you to hear that most of them are completely debt free house and everything? (According to the Millionaire Mind)

I was telling a friend that the other day and she said, "Of course! Why would you have debt if you had that much money?"

If you are thinking that same thing then you're a little bit off. You see, according to the Millionaire Next Door, 80% of Millionaires are first generation rich!

What does that mean for you? Well if you want to become well off, do what Millionaires do and avoid the things they avoid.

What I'm talking about, is of course DEBT!

Millionaires don't do debt! But I'd imagine it's more than that. Successful people know how to put off pleasure! They wait to buy things until they can afford them. They work before they play. Extremely successful people make their play into their work.

*Find something you enjoy doing and then find a way to make it profitable.
*Be patient.
*Sacrifice so that you can have more later.

Remember the marshmallow story? I'm not sure on the exact study of it, but if I recall correctly they put young kids in a room with a marshmallow on a plate. They would put the kids in the room one at a time and tell them if they can wait a certain amount of time and not eat the marshmallow then later they could have 2 more marshmallows. The kids that waited got more marshmallows! The ones that didn't wait only got one.

Sometimes we have to wait to have the nice things in life. Just remember that it will pay off in the end!

Saturday, March 13, 2010

Shoppping with Mom and Dad

Do you remember shopping with Mom and Dad? Those $100 jeans sure looked good when someone else was paying.

It's funny how we change our way of spending when we are out on our own. Maybe TJ Maxx will do instead of Abercrombie. After all we are spending our own money.

What some of us didn't realize is that spending with a credit card has similar results as shopping with mom and dad. The only problem is that the credit card companies send you a bill for it.

A Dunn and Bradstreet study shows that we spend 12 to 18% more when we use a credit card vs. using cash. So even if we're paying off the credit card every month, and getting 5% cash back, you're not really winning, you're over spending. Yikes.

When we use a credit card, we act like someone else is paying. Hey, Visa is picking up the tab on this one. Sorry guys, Visa will be sending you a bill for that little convenience.

And if we don't pay it off they'll charge us an average of 16.70% APR.

Switch to cash to save money. And for sure get on a written budget to save even more money.

Why Budgets Work

As many of you know I am majoring in personal finances so I get the opportunity to take Financial Peace University (Through Dave Ramsey) as well as piles and piles of personal financial classes from our local University. Here are some interesting things I've learned:

According to my text book (Consumer Economic issues in America) three out of four purchases are impulse purchases.

Having a budget eliminates those impulses. You actually start to think about what you are going to buy, how much you are going to spend, and more importantly how much you can afford to spend.

Now that you have a written budget, how often would you say you impulse buy? My husband and I were estimating that we impulse on maybe 1 out of every 100 purchases! So we're not perfect, but we do get to enjoy huge savings.

Also according to my text book (Consumer Economic Issues in America) when you actually plan your budget out you get more Utility from the things that you do purchase than those that just spend without a plan. *Utility means satisfaction.*

On average you either spend 20% less when you have a budget and plan your expenses, or you are able to buy 20% more value than you would if you didn't have a plan. Again that's from my Consumer Economic text book. You get more 20% more bang for your buck just by planning ahead.

Plus you aren't as pressured by sales people, discounted items that you don't really need etc. If it's not in your budget, you don't buy it. And if you want to buy it, you put it in the budget.

Just thought I'd share some interesting tidbits from all these classes I am taking!

Thanks for reading :D

Dave Ramsey's Five Steps to getting out of Debt

1. Quit Borrowing more money.

I know this one is a "duh" but seriously it needs to be done. And more than that, you and your spouse need to commit to never again borrowing money. You can't borrow your way out of debt. My husband and I have tried it several times and every time it ended up costing us more money.

Here's an example:

When we first got married my Father in-law gave my husband a broken down Cadillac that needed $3000 worth of repairs. So we borrowed $5000 to get the car fixed. I remember when my husband came to pick me up from work, we were so excited! So of course, we had to go out and eat in order to celebrate and of course we used some of the $5000 to go out to eat. We even used some of it to pay our rent that month.

Last year after starting Dave Ramsey's plan (and committing to not borrowing any more money) our transmission went out. Once again the cost was $3000, but this time we didn't borrow money to fix it. We did some pretty radical things to save up money, but when we finally had the money to go fix the car, we didn't want to pay $3000 for it! Heck, it's our money, and $3000 is a lot of money to our family, so we shopped around. We ended up getting a better transmission plus lower labor cost for $1800. Saving our family $1200. That's the power of cash... and commitment.

2.) You must save money.

Don't skip baby step one ($1000 emergency fund)! It is really important! I know some of you have some good examples of why not to skip step one! In order to break the cycle of debt we have to start relying on ourselves to fix our problems. That means having a baby emergency fund.

Also save money for things that are coming up. Look ahead. If your tires are going bald, start a new tire fund and start saving for it. Right now we're looking at Summer semester and thinking, gee that's going to cost us more than we're budgeting for. So we temporarily have to slow down with paying off our debt, and pile a little more cash up for that.

Don't forget to save for Christmas too.

3.) Prayer really works

I'd just like to add that changing your thought patterns really works too. Get your mind (and your family's thought process) to change to, "Get out of debt," "Get out of debt," Get out of debt." You will find tons of ways to cut back. And when you get that surprise $20, or that surprise bonus, you won't be as tempted to blow it, you'll just put it towards debt.

4.) Sell something

Dave often compares getting out of debt to losing weight. Selling something is like dropping a surprise 5 pounds just by cutting out the jelly beans. So look around your home and see if there is anything you can get rid of and put it up for sale.

5.) Take a part-time job or overtime (temporarily.)

You can truly do anything if it's for a short amount of time. And I'd like to add, that you can do anything if you know how long it's going to take. So set a goal on this. Say for example: I am going to work a part time job for 3 months, and that will pay off $2000 of our debt. Or whatever your example is. It sucks, but then while you're going through it you can think, okay only 10 weeks left, we're now half way through, this isn't forever. And you can also see your debt being reduced.

Then of course, pay off all debt except the mortgage using the debt snowball.

The debt snowball is paying off your debt smallest to largest regardless of interest rate. Why?

Well remember when we were comparing debt to losing weight. That's why. Very few of us can keep sacrificing if we're not seeing results. So paying off that $100 balance on a 0% credit card is seeing results. You're more likely to keep at it if you know it's working.

Keep it short too. If you are going to sacrifice, you might as well put forth your full amount of effort so it takes a shorter amount of time. You can do this! It takes time, it's hard, and sometimes it down right sucks. But if you follow the steps you will get there.

Hope this helps, thanks for reading.
Feel free to add your thoughts.