Financial Freedom

Ever think about how much you spend when you use a credit card? Ever tell yourself that you’re going to pay it off at the end of the month anyways, so it doesn’t really matter, and then finding out that you can’t quite pay it all off “this month” but tell yourself you’ll get it next month? Lastly, ever go back and figure out how much you’ve spent in finance fees, just for using your credit card? That’s money that you have to pay back eventually, but you’re paying the back to use is now. Ever get tired of paying the bank for using your money?

It’s no wonder our country thinks that it is in a recession. Look at the number of people that have maxed out all of their credit cards and can’t make the payments. It’s ridiculous. The fact that their cards are maxed out doesn’t slow them down from going to Wal-Mart though does it? I say that and you think that it is only a certain class of people (call them the Wal-Mart class) that are in financial strife because they’ve spent more money then they have and continue to do so. But how many people do you know that don’t necessarily belong to “the Wal-Mart class” that are scraping by because they’ve got everything maxed out? Everybody is always trying to keep up with the Jones’s.

Last year the Army handed me a bonus, just for committing to a couple more years. Sandy and I didn’t know what we were going to do with this cash, as we’d never had that much on hand at one time. That’s when our friends JD and Bonnie told us about Dave Ramsey.

Dave has his own website and has turned the idea of not using credit cards into a business. That’s right, NOT using credit cards. I’m not being paid to say this, I promise, but I want to tell everyone I know to listen to him. Many people have heard about him through their church, or they’ve at least heard of Financial Peace University. If you know Sandy and I, you know that we’re not that churchy, but it doesn’t really matter at this point. We listened to Dave’s free podcasts and have started paying our debts off. When I say started, I mean that we’re down to nothing left but student loans, and it feels awesome! We should be done with the student loans by this summer, and then we can start our money making more money, just for us. We’re pretty excited.

We’ve both read Dave’s book, The Total Money Makeover, and I’m going to sum some of it up here. First, credit is bad. Think about when you buy a car, you negotiate and haggle down to what you think is an acceptable monthly payment. Now, you’re usually only thinking about how much your monthly payment is, and never actually add up the $575 (or $425 or whatever) for 60 months. The dealers don’t want you to because you’ll realize how much you’re actually committing to spending on that car/truck/SUV. It is way more than you thought.  Stop using credit cards or taking loans, unless you really need them.  Sandy had a friend that would put her cards in a cup of water in the freezer.  Makes you really think about it while you’re waiting for the cards to thaw out before you can use them.  Just don’t use them or, better yet, get a plastictomy.  Destroy those puppies and don’t look back.

Second, make a budget. On paper, on purpose, every stinking penny that you’ve got coming in. Once you know exactly where each cent is going, you might be surprised what things you don’t “need” all the time anymore. Sandy and I found roughly half of my paycheck was just petering away every month.  We’re still not sure exactly where it all went, but we know where it is going now.

Third, build an emergency fund. Things are going to happen (ref. Murphy’s Law) and you’re going to need cash that you initially had budgeted for something else. For most people, $1000 is enough. For some, you can get by with just $500. Get this saved up and put it in a separate savings account and don’t touch it unless you truly need it.

Fourth, start paying things off. This is the debt snowball. We call it a snowball because you start paying off the smallest debt first (i.e. the $225 Home Depot credit card), and once you get that paid off, you work your way up until you get to the biggest debt you’ve got. It’s weird, but you start finding more money as you go. After figuring out our budget, we started finding cash so we could pay more things off more quickly. You may think that paying off the $225 Home Depot card first violates some common sense because its at zero percent for 6 months, but it has a lot to do with changing your attitude and mindset towards money. Sandy and I wrestled with this one quite a bit. “Such-n-such is at a higher APR, shouldn’t we pay it off first and then pay off the smaller one.” NO! Attack the debt, pick on the little guy until he’s gone. Pay the minimums on everything except for your smallest debt and work your way up the food chain. The shovel you’re using to dig yourself out of debt will grow as you go, and you’ll start digging faster. (Caveat, a mortgage is not included in the debt snowball. Its too hard to feel like you’ll never get everything paid off if you’re looking at the 6 digits of your mortgage too.)

Fifth, build your emergency fund up more. The $1000 got you through the snowball, but you don’t want to end up needing more and resorting back to credit cards. $1000 was just temporary to get you through while you were digging yourself out of debt. Now build up 3 to 6 months worth of your paycheck and put that into a savings account or something with no risk.  Since Uncle Sam pays me, Sandy and I are probably just going to put enough away for 3 months pay. This is the “oh crap, I just got handed walking papers and don’t have another job lined up” emergency fund.

Sixth, start using your money to make money for you. There’s a lot more to this part, but if you’ve gotten this far, you should be listening to Dave’s free podcast or have read his book by now. Our copy is loaned out right now, but you can borrow it if you want to. Trust me, I’m really tired of paying the bank. They need to start paying me.

Sandy and I are really excited about getting things paid off. I really wish that we had gotten smarter about all this when we were younger. My economics instructor told me this when I was in college, but I didn’t listen then. I think I’ve paid enough for not listening, but now I’m trying to get everyone else to listen to me.

When you don’t have debt, things are a lot easier. Debt collections is one of the fastest growing industries in the U.S. They aren’t calling our house though. If for some reason you don’t think that credit is a problem, check out the documentary Maxed Out. Here’s the link, (when I originally posted this, you could watch the video for free online, apparently things have changed). Sandy and I watched it as part of her Freshmen seminar class last fall, and it scared the crap out of me. It is a little bit long if you don’t like sitting through documentaries, and you’ll see some of Dave in it too, but it is really interesting if you’re worried about your credit/debt/life.