Our family is currently in Baby Step Three. For me, it has been a long journey through Baby Step One ($1,000 starter emergency fund in the bank) and Baby Step Two (Pay off all debts smallest to largest with the debt snowball). In fact, it took me 43 years but I spent the first 30 getting into debt. I began my journey to financial wisdom alone in 2003 but it really started to take off in 2005. Then I added a family in 2013–more like 2012 when I started dating my wife, Leah and her family. When you date a girl with kids, you date the whole batch.
It was about that time that I came across Dave Ramsey. Yeah, I heard him mentioned in church probably beginning in 2008 but I’ll use one of my frequent sarcastic quotes in response to that “I’m not dumb I’m just slow.” I spoke earlier about not joining his class and getting his book Total Money Makeover and learning a ton and trying to find the love and ability to share it with Leah. As I was reading, I tried to drop ideas that I liked and came across with Leah. With my passive aggressive nature–He’s still healing that–I finished the book and left it by her favorite chair and continued dropping the ideas from the book. Then one day she started adding her own discoveries from the book.
We discussed balanced budgeting and started to work together on the debt snowball and in February 2015 we cleared the last debt, the school loan. That is where we started Baby Step Three:
Baby Step Three: Fully funded emergency fund of three to six months expenses
It feels great and it is an awesome victory to have no debt except for our home and a good start on an emergency fund. Our debt snowball–the amount of money budgeted each month to conquer the debt–has grown as we rolled one payment into another. It is so freeing. Here we had to apply one of my favorite productivity hints 24-hour reset from Jonny Nastor | Hack the Entrepreneur. In short, when I have a great victory and a horrible failure, I have 24-hours to revel or cry then it’s time to reset and keep going.
So we keep going and continue to work and follow the plan. I didn’t expect this part to take so long. As I said before, we’re still in Baby Step Three. At the beginning, we looked at our budgets and whittled them down to the bare essentials to find the minimum amount we could survive a month on and multiplied it by 6. We chose 6 months for our emergency fund because of the size of our family and to ensure we can cover most emergencies with little to no effect on the children. We also chose 6 months because of my background and recovery. Now we continue to apply the entire debt snowball each month towards our emergency fund. It constitutes about 20% of our gross income.
I want a fully funded emergency fund now. But it is taking time. We take three steps forward and one step back so we’re trucking right along. I informally plan to have this Baby Step completed by the end of June if we don’t experience any “emergencies.” Then we take that 20% debt snowball and apply it to first to Baby Step Four:
Baby Step Four: Invest 15% of pretax income into retirement savings
That will leave us with 5% to apply towards Baby Step Five and then Six as our income grows:
Baby Step Five: Invest for kids college savings
Baby Step Six: Pay off the house
And finally we’ll enter Baby Step Seven:
Baby Step Seven: Build wealth and give a bunch away
And we’re looking forward to that. We’ve been working on our “Why?” Knowing what our “Why?” is and having one that is big enough makes all the work and discipline worth it.
Next week I’ll be giving a tutorial on using Mint.com to budget and track expenses.