Sunday, October 25, 2009

Our Total Money Makeover

Yesterday we had the opportunity to meet our hero - Dave Ramsey in Portland. In January of this past year we were introduced to the Total Money Makeover and jumped right into step 2 of his program - Paying off all debt. We worked very hard the first six months of this year to pay off as much as we could, even with the glitch of Peter being laid off for 6 weeks - it did not stop us! We ate beans and rice for lunch and dinner for the first 6 months of this year. We made some sacrifices but were able to pay off around $15,000 in debt in just 6 months! The debt reduction has kind of come to a stand still as we felt lead to adopt and adopting is kind of expensive :)

Dave's principles are pretty simple and kind of a no brainer, but we need it to be a no-brainer. It is by no means easy, but I think that anyone can succeed by following his principles. We hope to work our way through his ENTIRE program and someday reach the coveted 7th Step - Build Wealth and Give.

Here are some startling facts:

If a 30 year old couple made 48 grand a year and saved 15% in a 401K at 12% growth at 70 they would have: over 7 million dollars!

That same couple could fully fund a Roth's IRA at only $5000 a year at 12% growth at 70 they would have (tax free at that) almost 1o million dollars!

If they did both of these things they would have almost 17 MILLION DOLLARS!!

70% of consumers live paycheck to paycheck
The average American household has $91,000 in debt
In 1929 only 2% of homes had mortgages (by 1962 only 2% did not have mortgages)
60% of baby boomers will not have the means to support their standard of living after retirement

Here's a quick rundown of the Total Money Makeover

Step 1 - $1000 in an Emergency Fund

This one he really encourages people to finish in about a month. Sell stuff, get another job, do whatever you have to do to get this one done as fast as possible. We were fortunate enough to have this one completed before starting the program!

He went off about buying new cars and yes I am guilty of that one, but I will never make that mistake again. Most millionaires drive used cars - that is a fact. Obviously they know something. The average new car loses $360 worth of value per month!!! That is crazy. That is more then our car payment is!!!

If I did not have a car payment and I invested the money I spent every month on my car payment instead of blowing it on something going down in value - I would be rich in a matter of 10 years! I hate thinking about that. Our debt we are working on right now is our car and I cannot way to have that one behind me. He has no problem with people who have the cash to buy a nice car buying a nice car, but when you actually look at the numbers - buying a new car and paying on it every month is a really stupid thing to do.

Step 2 - Pay off all Debt

This step usually takes people a couple of years to complete. We have a good 6 months of hard work on this one (and $15,000 less debt!) Whenever we are able to start back up on this one we are going to work hard and hope to meet that 2 year goal! This one has taken a lot of hard work on our parts to stay on it and get this debt paid off, but at the end of the month it is exciting to sit down and get to see the numbers drop!

He recommends starting with the debts you owe the least amount of money on and only pay minimums on all other debts. As soon as you pay the small one off, pay off the next largest and the next largest until you are eventually to your biggest debt and throwing all extra money at it! We have our car payment (grrrrr) and then one very large student loan and then we will be able to call Dave Ramsey and yell "WE'RE DEBT FREEEEEE!!!"

Step 3 - 3 to 6 months in savings

Dave says this is the most important step to wives and I feel that way about this one. Women need to feel secure financially or we stress out big time. He says as soon as your wife knows this one is fully funded he promises that her personality and emotions will change. Dave says this step usually takes 6 months to a year to complete. It will be nice to have an umbrella over our heads someday!

Steps 4 and 5 go together:

Step 4 - Invest 15% of income in an IRA or pre-tax retirement plan

Without having debt, it is easy to put money in investments. He says this one can be a lot of fun and he preaches diversity and starting as young as possible on this one.

Step 5 - College Funds for children

This step is something I never thought would be possible for us to do, but our kids not having to deal with student loans is important to me and if we can help them get an education then I would love to do this one.

70% of students have to take out student loans so I know it is a very "normal" thing to do, but how nice would it be to not have that hanging over you for ten years after you graduate? As long as we start a fund before our oldest is 7 years old Dave says we should be able to fully fund a college account for them!

Step 6 - Pay off your home early

As much as I would love to think this is the house we will be in for the long haul, I am sure we will outgrow it. If you don't have other debts to pay it shouldn't be too hard to pay a lot of money on your home loan. Dave says it take the average person around 7 years to pay off their home.

Now we will probably have to move again before this one is complete, but his recommendation if we must take out a mortgage is only to take out a 15 year mortgage and spend no more than 25% of your take home pay on your mortgage. Hope our real estate agent can help us get a steal on a house next time ;)

Now for the one one that I really really want to get to:

Step 7 - Build wealth and give!

Money is not evil. Money should be fun. Dave says the best part about having lots of money is giving it away to people who need it. The idea of being financially secure at a young age and being able to help others - help the poor, help the homeless, and to help the ORPHANS - that is where our heart is really at. Trips, jewelry, nice things - yeah that all sounds wonderful but we truly do want to help others. We would love to start a non-profit and help families adopt, or help open orphan homes around the world. It all takes time, which when you have bills to pay, you gotta work all the time - and it takes money.

I have already seen amazing blessings poured out on us from God as we started this program in January. God does not desire for us to be indebted to anyone so now that we see some of the stupid choices we've made - we want to change course and He is helping us out of this hole we dug. It is not easy, and it is taking daily sacrifices and saying no to buying things that we would love to have.

We feel like as much as we look stupid to others around us and people made fun of us as we ate beans and rice all the time - but $15,000 were paid off the first half of this year - who's getting the last laugh? If normal is going farther in to debt and filing bankruptcy and spending more than you make, and buying cars that lose value faster than you pay for them - then I am okay with being weird!!!