Last year was a big year for us. Of course the biggest and best thing was getting pregnant with our sweet baby boy. But before we were blessed with news that our little man was on the way, we made the decision to pay off all of our debt so that we could start a family. And we did it- we paid off $30,000 in 5 months! It all started one afternoon on the way home from work. My husband and I carpooled together that day and we were just starting to get into podcasts (Serial anyone?!). It was actually the day that we finished the Serial podcast that he asked me to find a new podcast to listen to. I wasn’t quite as into these things as he was. As a property manager for a large apartment community I listened to people talk all day, and I would have loved a quiet car ride home for a change. But I skimmed the podcasts anyway and saw Dave Ramsey’s podcast on the screen. I’d heard of Dave Ramsey and decided that seemed like a fairly tolerable thing to listen to and hit play. And the push of that button changed our lives.
A short five months later we had paid off all of our student loan debt plus our car (purchased brand new several years earlier and was heavily financed. Not our best financial decision!). We both read The Total Money Makeover shortly after we started listening to Dave’s podcasts. I would definitely recommend reading The Total Money Makeover. It’s a quick read that will motivate you and lay out this plan in greater detail. Following Dave’s plan has allowed me to stay home with my baby and soak up every bit of new motherhood. I would not be a stay-at-home mama if it weren’t for Dave Ramsey’s advice. This is not a sponsored post for Dave Ramsey. He has no idea who I am or that I am writing this post- I just believe in his plan and know that it works. I have included affiliate links for products that will help you as you work to pay down your debts.
Below I laid out the plan that changed our lives & helped us pay off $30,000 in 5 months. I hope it changes your life too!
Start Here! Before you start the Baby Steps:
The first thing that you need to do is create a budget. I know, I know. You are so tired of hearing about budgets. But seriously, that is what got us motivated.
The biggest tool that we used to create our budget was Dave’s Everydollar app. This is a free budget that you can set up online, or download the app for iPhone or Android. The big thing here is that this budget is setup to be a zero-based-budget; every dollar of your income is assigned in the budget. It is so easy to use and my husband and I just plug in our spending as soon as we make a purchase. If that seems like too much work, just dedicate a half hour per week to plugging in your spending in your Everydollar budget.
You can imagine our shock (& horror) when we realized that we were spending over $900 a month dining out. That’s embarrassing to admit out loud, but I want to be real with you guys. We decided that $300 would be our new dining out budget- this freed up $600 a month to pay down on our debts.
A budget is useless if you don’t have enough money to cover your current bills and all of your expenses. You need to get current with bills before you can start this process, which could mean anything from cutting back on certain expenses to working a second job. You’ll never get anywhere if you are consistently getting hit with late fees.
Once you have your budget in place and you are up-to-date on all your bills, you can proceed to what Dave calls the Baby Steps.
7 Baby Steps to Becoming Debt Free- How We Paid Off $30,000 in 5 Months
Baby Step 1. Save $1000 For Emergency Fund
Whatever amount of $ you have left from creating your budget, whether it is $5 or $500 you need to put towards your emergency fund goal of $1,000.
We had a leg up on this step because we had some money saved up from selling our first home in Charleston (thanks awesome housing market). But Dave’s plan advises to only save $1000 and put the rest towards your debt to get your debt “snowball” rolling.
Honestly, the thought of not having this extra money scared me! Dave had almost lost my faith in him-and it was only the first step! I was so scared that something terrible was going to happen to us-like our car breaking down and not having enough money to cover it! So we bent the rules a little and increased our emergency fund to $2,000, which we felt would get us through most emergencies. We put our $2,000 in our savings account and chugged along to Baby Step 2.
If you don’t quite have $1,000 (or whatever you decide your emergency fund should be) saved don’t worry! Like I mentioned earlier, just take whatever extra you found after creating your budget and place that in your savings account every month until you get the $1,000 saved. You may be getting discouraged- but don’t. Trust me when I say you will be surprised at how quickly you can save $1,000. Once you set this goal for yourself and really commit you will find yourself saying things like “I can live without that”.
Once you save your emergency fund you are all set to begin Baby Step 2.
Baby Step 2. Pay Off Debt
*All debt except your mortgage, that comes in Baby Step 6
So that brings us to the next step & it’s definitely the hardest step. It’s time to start paying down on your debt. How are you going to do that? You have to cut back and live on less than you make. You need to take a long, hard look at your budget & your dreams. For us, we knew we wanted children. And for me (hubby wasn’t quite aware of this plan at this point) I knew that I wanted the option to be able to stay at home with my baby for a while. So what is your dream? What is going to make these sacrifices worth it? Maybe it is an amazing vacation, your dream wedding, or your forever home. Whatever it is- remember it when this gets hard. Because it will. There will be days you really want to go spend money. During these months I would daydream about spending my day at Target buying new clothes & makeup with a venti Starbucks in hand. But I knew that I wanted a baby more than I wanted anything that Target offered.
The key to success in paying off your debt and sticking to it is following the “debt snowball” plan. The plan is to list your debts in order from smallest to largest and tackle the smallest first, with the largest debt being paid last. Paying off your smallest debt will motivate you to keep going and work even harder to get rid of the rest of your debts. I wasn’t sold on this at first. “But the largest debt is going to accrue more interest”, I said. That’s true- but it doesn’t matter if you never get to paying it off because you get discouraged. The debt snowball plan makes sure that doesn’t happen. It is meant to encourage and motivate you to keep up the good work. We were so proud of each little debt that was paid off and that gave us the motivation to keep on chugging along!
I mentioned earlier about how we drastically cut back on eating out. This might be an area that you can cut down on as well. Remember that every little bit helps, so maybe you only eat lunch out once a week instead of twice? That’s easily $50 a month in your pocket. One of the biggest changes that we made was to cancel our DirecTV subscription. We were already so sick of our bill increasing every few months so we took the leap and cancelled it altogether. We bought a Roku Streaming Stick for $49 and never looked back. We stream Netflix and Hulu from our Roku and can still watch all of our favorite shows whenever we want. This switch easily saved us $80 a month, which we put towards our debt. Another small change we made is to make the thirty minute drive to our closest Aldi to grocery shop every week rather than shopping at our local grocer. This saves us about $100 a month.
You will need to find the areas that you can cut back that work for your family. Go line by line down your budget and brainstorm with your spouse about where you can cut back. Get uncomfortable.
Baby Step 3. Save up a 3 to 6 month emergency fund
At this point you will have paid off all of your debt- congratulations! It is an amazing feeling and you will be so proud of your hard work!
In this step you want to build on your $1000 emergency fund. Your goal is to have 3 to 6 months of living expenses. Calculate how much money you would need to survive for 3 to 6 months. How long you decide to save for is up to you and your family. Maybe having enough savings to live off of for 3 months sounds good to you or maybe you like the idea of having that 6 month savings cushion. Take what you would need each month to live off of and multiply by the amount of months you and your family decide on. This is strictly necessities such as bills, food and gas.
Now work towards saving up this amount. Don’t stress about how long it will take you. But now that you are debt free it probably will be a lot sooner than you ever could have imagined!
Baby Step 4. Invest 15% into Retirement
So this is where my husband and I are in our financial life. We are working on Baby Step 4 & 5. Once you have paid off all of your debt besides your mortgage & saved an emergency fund of 3 to 6 months you are ready to start investing into your retirement. Dave Ramsey believes that the magic number to save is 15% of your gross income every month. If your company offers a matching 401K Dave recommends investing here first, then into Roth IRAs. If your company doesn’t offer a matching 401k, then invest into Roth IRAs.
Baby Step 5: Start Investing for Your Children’s College Fund
*If you don’t plan on having children proceed directly to Baby Step 6
Dave recommends investing in a tax-advantaged 529 plan or an ESA.
Baby Step 6: Pay Off Your House
At this point you will only have one thing standing in the way of being completely debt free- your mortgage. Now is the time to buckle down and work on paying off your mortgage early. It might take you a while to complete this step but just stay focused. Every little bit adds up and can cut years off of your mortgage- saving you thousands in interest.
Baby Step 7: Give
I love that Dave’s plan is centered around love, generosity & Jesus. Once you are completely debt free you can use your wealth to change people’s lives. Donate to your favorite charity, your church, & help strangers. I can’t wait until we get to this step & get to change people’s lives by showing them love.
So there it is- the plan that helped us pay off $30,000 in 5 months. I promise that if we can do it so can you!