Monday, November 16, 2009

Dicipline and Six Steps to Living Debt Free

Once you return to work after that long career search, you realize that in the process, you have cut back your spending and have done away with things that once thought to be necessary. Things that you now realize that you can actually do without.

The positive cash flow has now returned and you can go back to increasing your spending dollars, right? Well, if you want to work towards living debt free, then increasing your cash spending is not entirely true. Yes, you can buy a few more groceries and yes, you deserve a night or two dining out (moderately).

It's all about discipline. Before you go back to all the things you learned to do without and discovered that you really don't need, Develop your game plan, working toward living debt free. After all, haven't you realized that's it's all about people and relationships, not material things?

The first decision that you need to make is to pay cash for things or do without them. DO NOT go back to putting everything on those plastic credit cards. I'm not telling you not to use them, but if you do, use a card with a zero balance and only charge what you intend to pay off when the bill comes due. Set a spending budget, and if after a period of time, you've built up extra, sock it into savings.

Then, start working down the list that I mentioned, the SIX STEPS to Living Debt Free.

1. $1,000 Savings Get $1,000 into a savings account as soon as you can. This will establish your survival cash flow. If you use money from it, get it back in there right away.

2. PAY OFF ALL DEBT EXCEPT HOUSE MORTGAGE After you have your cash reserve in savings, work off all of those credit cards and other outstanding debts like car loans. Start with the higher interest rates and work your way down, paying off as much as you can afford to pay each month and meeting the minimum payments on the others. Once the credit cards are paid off, DON'T use them again other than what we discussed earlier.

3. SIX MONTHS SALARY IN SAVINGS Now that you have paid off all outstanding credit except your mortgage, you can start socking the bucks away. Set up a separate savings account if you need to, but save up enough money to cover at least six months of your salary. This will help ease the pain, should you find yourself in career search once again.

4. 15% INVESTMENT - RETIREMENT Once you can help yourself during a career search period, you need to set yourself up for retirement. Fifteen percent of your income should help you toward that goal.

5. CHILD'S COLLEGE Your next investment should be in your child's (grandchild's) education.

6. PAY OFF HOUSE MORTGAGE After all of the previous steps are taken, pay off the house. Then, you can start tucking the majority of your earnings into savings, CD's, annuities, inheritances or other investments that will provide a return that will satisfy your needs. Plus, you can give to and help others.

Depending upon the amount of your outstanding debt, I realize that it can seem overwhelming. There are folks that can help you if need be. But, like I said earlier, it's all about discipline. If you don't have the money for it, don't buy it. Again, NEVER buy it with credit unless you intend to pay it off when the bill arrives in the mail.

All that said, I make one exception, provided that it works within your budget. If interest free credit is being offered for something that you've budgeted for, use it. But, make regular payments each month and schedule to pay if off at least two weeks before the final payment is due. That way, the entire credit amount will be paid off well before the terms of the loan and remove yourself from the possibility of owing the entire interest amount for the length of the loan. Again, it's all about discipline.

Good luck with this and I wish you financial peace and debt free living in your near future.

These steps were notes taken from Dave Ramsey. I've actually added his seventh step into my sixth step.

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