Wednesday, December 10, 2008

Our Debt Reduction Plan

So far, I have talked about two different Debt Reduction Plans which are prominent among people today; Crown Financial's Money Map and Dave Ramsey's Baby Steps. Now I'd like to tell you what my husband and I decided to do.

We combined elements of both and decided to move forward with what could be considered a Hybrid debt reduction plan. We both liked the foundational principles Crown had to offer so we set about accomplishing those as soon as possible. That means that we went out and had a will written up, made sure we were in the habit of tithing, got a clear picture of our net worth, and made sure we were covered by the right types and amounts of insurance. We decided not to follow some other items that were suggested, such as contributing the match amount on our 401K. Instead, we opted for the Dave Ramsey approach in that area and threw the whole thing at debt to get it paid off as soon as possible.

Another thing we liked about Crown's plan was their first real step. Start using a spending plan (they don't like the term "budget"). I know when we started really taking a look at where our money was going it was an eye opener.

The next point under Step 1 for Crown was the same as Step 1 for Dave Ramsey, creating an Emergency Fund and putting $1000 into it. Something we did as soon as possible.

Step 2 for both types of plans deals with paying off debt and I like Crown's approach on this more than Dave's. In Crown's plan, step 2 focuses on credit card debt specifically, Dave's focuses on all consumer debt. I think the fact that this is split up into two different steps on Crown's Plan is an advantage because it makes it feel like we've accomplished more.

We also like Crown's idea of saving money in your emergency account while also paying down debt. My husband prefers to save our money while I prefer to use it to pay down debt so this solution keeps us both happy.

Just as a refresher, we're on step 2 for each plan right now. We do have our credit card debt paid off but we're still working on getting that first full month of emergency fund saved up and the rest of our consumer debt paid off. That means that our next steps are 3 and 4 on the other two plans. It's at this point that we start shifting over to using Dave's Plan more than Crown's. Just a note, these steps might change since we're not there yet but as of right now here's what our next steps are:

Step 2) Pay off consumer debt/Save up 1 month's worth of Emergency Fund.

Step 3) Save up 6 months of living expenses in our Emergency Fund.

Step 4) Max out Roth IRAs and put in the company match amount for our 401k.

Step 5) Pay off our Mortgage.

Step 6) Start maxing out our 401K as well.

Step 7) Start saving any extra towards large expenses such as our next vehicles.

We also decided to take a page from Dave's book. Dave Ramsey is all about keeping you motivated to hit a particular goal. I don't know about most people, but I at least feel like indulging myself once in a while. In order to allow for some indulgences my husband and I decided to reward ourselves for completing each step along the way. As a reward from completing our next step we plan to save up for a trip to Ireland and a Patio Door. After completing step 3 we plan on remodeling our Kitchen or Bathroom (perhaps both). And so on and so on...

Once we hit Step 7 I would say we could count our selves as financially free. It will be great to be able to give more money away to charities or pay for another table's bill at a restaurant or leave a huge tip for a waitress/waiter who did a great job. Those are just some of the fun things I look forward to doing when we are financially free.


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