In 2010 the total amount of consumer debt in the United States was nearly $2.4 trillion! That’s $7,800 of debt per person. That is an alarming statistic and purpose of this article is to give you some useful information on how to get out of debt.
First an foremost, I am not debt-free…but am working on it. I am trying to follow some common-sense principles that have been proven of getting others, like me (and probably like you) of getting free from the bondage of debt. When we try to better our condition you can guarantee that curve balls will come your way to try and strike you out.
In order to get out of debt, you need to takes things one step at a time and take these steps in a certain order. First we need to stand and make sure we’re stable. Then we put one foot in front of the other. Taking baby steps is the key and financial guru, Dave Ramsey, gives us those steps.
By the way, before beginning these steps, Dave recommends that you are first current on all of your bills and that the three basic necessities are taken care of: shelter, clothing, and food.
- $1,000 in a “baby” emergency fund.
Pay the minimum on everything until you get $1,000 in savings. Go crazy and get this money in the first month of your plan. This savings is the first level of the emergency fund to protect you from little emergencies. If your income is very low you may settle for $500 or if your income is over $70,000 you might use $2,000. Remember, this first level fund is only for emergencies.
- Use the Debt Snowball to pay off debt.
Now is the time for killing all debt. Implement the debt snowball, and pay off all personal debt except your home. Get mad and stay mad until you get out. Remember, there is no energy in logic, only in emotion. What is the Debt Snowball?
- 3-6 months expenses in a fully funded emergency fund.
At this point, the only debt you have is your home. So now it should be easy to save the rest of your emergency fund. The correct amount is three to six months of your expenses. Keep this money in a simple money market or bank account, but do no investing with this money. It is only to protect.
- Invest 15% of income into Roth IRAs and pre-tax retirement plans.
Save 15% of your gross household income in retirement plans. You should begin with 401(k)s or 403(b)s up through the match, then fully fund Roth IRAs. If your 401 or 403 doesn’t match then begin with Roth IRAs. These should all be invested in good growth stock mutual funds. The total saved in all plans should not be more than 15% of your income.
At this Baby Step you should also review all your insurance to make sure you have enough coverage of all types. Also, with that emergency fund in place, it is easy to have $500 or $1,000 deductibles, which will drastically lower your premiums.
- College funding.
Now and only now is it time to start college funds. You feel guilty – I know – but don’t you dare do college funding until you get the first four steps completed. I know those little brown eyes make your blood run cold when you know that the college fund isn’t there, but the only way to build a strong house is to lay the proper foundation first, and guilt is not a building block. Just let those little brown eyes be a motivator to run – I mean, sprint – to this step.
- Pay off your home early.
I love this one. It is now time to pay all the extra you can scrape together to pay your house off early. It may be two, three, even four years to get to this step, but when you do you will be able to knock that house debt off very quickly.
- Build wealth and give.
Let’s get rich, so rich that we spend our time trying to give it all away. With no payments and great basic savings plans in place, there isnothing left to do but build wealth and give it away. Using real estate, more mutual funds, variable annuities (for the tax deferral), and opportunity money, you can now be the rich getting richer. When that $100,000 deal can be bought for $50,000, you will be there with the cash. Welcome aboard.
This formula for success has been used by thousands of people all across the nation! They have been able to break the bondage of debt and are truly experiencing FREEDOM!
Now it is time. It is time for you to decide. Are you going to change the way you do things, or are you going to exit out of this page and never think about it again? Human beings resist change, and it takes a conscious and determined effort to make even the slightest changes in our lives.
Dave Ramsey is a best-selling author, and I recommend going to his website or purchasing two of his books to aid you in your efforts to get out of debt.
Both of these books have helped and are helping me to become debt free. It may take awhile and nobody is perfect. We may even have a lot of ups and downs along the way, but as you persevere you will find financial peace.
Remember, YOU have the CHOICE to make it a GREAT day!
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