Attacking Debt: Learning to Walk Before I Run
In my opening post, I mentioned that I think attacking debt will open up my path to financial freedom. In my efforts to learn more on this topic, I purchased the book The Total Money Makeover by Dave Ramsey, which has some tips that I will put in motion. Also, I took the free financial assessment offered on the Dave Ramsey website.
According to the financial guru’s 7 Baby Steps to financial freedom, I started running before I learned to walk. Based on the financial assessment results, I am only on Baby Step 2.
I was a little confused at how I was supposed to proceed. I thought I had a good handle on my finances, and would only need to make a few tweaks. However, this suggested plan has me starting at practically the beginning.
The 7 Baby Steps to Financial Freedom
For those of you who are not familiar with the 7 Baby Steps, I summarize them below. So that you can understand what I mean by saying that I was a bit confused about how to process the results, I have colored the text green for the ones that I am currently doing/achieved, and regular black text for those I am yet to start.
- Save $1,000 for your starter emergency fund.
- Pay off all debt (except the house) using the debt snowball.
- Save 3-6 months of expenses in a fully funded emergency fund.
- Invest 15% of your household income in retirement.
- Save for your children’s college fund.
- Pay off your home early.
- Build wealth and give.
As you can see from the above, my path to financial freedom is a bit split. Therefore, rather than using a million other resources, I decided that I’ll try to get back on course using the Ramsey method along with my own discretion in attacking debt.
The Debt Snowball: Attacking Debt and Building Momentum
In short, the concept of the debt snowball is to rank debt in size from smallest to largest, regardless of rate. It is implied that you will not be taking on anymore debt from this point forward! Once you’ve identified the smallest debt, execute a targeted plan to pay it off as quickly as you can, and then begin attacking the next debt.
The psychology around this is that once you pay a debt off, you’ll be proud of the accomplishment. From that point, you’ll gain the momentum needed to tackle the next debt.
I appreciate that in Baby Step 2 Ramsey pushes people to be fierce and wage war on debt. This would mean taking odd jobs, overhauling the lifestyle, and doing whatever else it takes. A real ruthless approach. I must admit that I am not there yet, but I’m willing to explore. I am reading Multiple Streams of Income after all!
In my situation, my student loans would be classified in Baby Step 2, and my rental property mortgage and current home mortgage would fall under Baby Step 6.
Decisions, Decisions
Because I clearly have done some of these baby steps out of the suggested order, I have some difficult decisions to make.
One of these decisions is regarding my giving. I have decided that I am not going to give up on my giving as I work my way through the plan and to the coveted Baby Step 7. My giving is very much tied to my faith and important to me. While I am not yet a philanthropist, I have been giving at least 10 percent of my earnings to charities since I started working, and I do not intend to stop during this journey.
Another decision that I need to make is whether or not I will stop investing 15% of household income into retirement investments until I have conquered Baby Step 2. Ramsey suggests that taking a break from retirement contributions for some time, if you are “radically gazelle-intense”. In my case, I don’t think it is likely that my payoff approach will be that intense. Using the student loan payoff calculator, paying an extra couple hundred per month will shave only a few years off of roughly a 15 year time horizon.
The Best Option for Me
Given what I know about the law of compounding interest and my time horizon to paying off my debt, I am leaning more towards maintaining my retirement savings contributions. Also, I get my company’s match on the first 5%.
I think the best path for me is to keep doing all I can to pay off the student loan debt, and continue to save for retirement. With a little more analysis, I may consider reducing my contributions to my retirement account for a temporary period. This would give me a bit of an extra push in paying off my student loans. However, I would need to find the right balance to do this.
While I may not be following the Baby Steps to the letter, I think that I am settling on a plan that works best for my situation.
Are you processing how you’ll approach the Baby Steps? What challenges are you having?
