Becoming Debt Free - How to Reduce Debts Dave Ramsey Style

Are you tired of being in debt? Are you scared to answer your telephone because you know it is another collection agency trying to harass you into paying something you simply cannot afford? The stress and frustration associated with being in debt can be overwhelming.

There is a solution if you are willing to listen. Becoming debt free is not some mythical concept reserved for the rich; the upper echelon of society. It is something that can be accomplish much more quickly than you may believe, but it does some dedication and sacrifice. More importantly, it requires a plan!

Enter Dave Ramsey

Dave Ramsey is a nationally syndicated talk show host who is well known and respected as 'the' authority to common sense money management. He has helped thousands of people just like you and me to get out of debt and obtain the life we have always desired for ourselves and our families.

Teaching from a Christian perspective, he truly wants only what is best for you. Mr. Ramsey does not simply focus on eliminating credit card debt. He is focused on eliminating ALL of your debt. The bible says:

The borrower is slave to the lender.

Basically, what this means is that as long as you owe money to someone, you will never know real financial peace. During his career as a personal financial adviser, he has refined his process of becoming debt free into what is now known as The Baby Steps.

What Are The Baby Steps?

Dave Ramsey's Baby Steps is quite simply the best plan I have found to help you get back on track financially. Each step builds upon the previous step in a logical way. This common sense approach helps eliminate information overload that sometimes is associated with people who want to learn how to get out of debt.

1. Start a Small Emergency Fund - The first thing that you should do is to establish a small emergency fund of $1,000. This step is crucial to your overall success as it helps you avoid incurring additional debt.

Most people find that they have a ton of 'stuff' lying around the house that they no longer use, need or want. Take some time and sell these items on eBay or Craigslist. Once you run out of stuff to sell, get a part time job. This job can be anything from bagging groceries at your local grocery store to delivering pizzas after your day job or even beginning your own online affiliate marketing empire.

Once you have managed to save this money, put it in the bank for real emergencies. Do not use it for a new set of golf clubs. Do not use it a new designer handbag. Set it aside for life. I can almost guarantee a real emergency will occur (your car breaks down, you need a root canal, etc) and having this money set aside will mean that you will have the ability to pay for it WITH CASH, instead of putting it on an already maxed out credit card.

2. Create a Debt Snowball - This step actually separates those who truly want to become debt free and those who blame society for their problems. Baby Step #2 takes a lot of hard work and dedication by all members of your family. Everyone must be on board with this plan or it may not work.

Here are the basic guidelines for you to follow:

• Create a list of ALL of your debts from the smallest amount to the largest amount. This list includes everything, not just your credit card debt. The only debt I would not include in this list is your mortgage (if applicable) as this debt will be accounted for later in the process.
• After you have paid for all of your necessities (food, clothing, transportation and shelter), pay the minimum payments required on all of your debts. If you are not current on all of your debts, do not begin your debt snowball. Get current first, then come back to this step and proceed.
• During the month, any extra money that you can manage to squeeze from your budget should be applied to your smallest debt (do not consider interest rates when determining which bill to pay extra on). This is extra money on top of the minimum amounts that you are already paying. This focus is what helps your snowball gain some momentum.
  
• Once this smallest debt is completely eliminated, move on to the next smallest debt. For this debt you should now be paying the normal minimum payment PLUS the amount you were paying towards the now eliminated debt. Once again, pay any extra money to this debt until it is also completely eliminated.
• Repeat this process until you are completely debt free (except for your house).

3. Finish Your Emergency Fund - While having $1,000 in the bank is nice, it will not protect you against a major emergency. Step #3 will help provide that security.

A fully funded emergency should cover anywhere from three to six months of expenses. In our current economic environment, you may even consider increasing that amount to nine months of expenses.

Having a fully funded emergency fund is so much more fun than paying credit card debt. This is the step where you secure your financial freedom from money-hungry lenders. Imagine how well your spouse will sleep at night knowing that if you were to lose your job, or get in an accident, you could easily pay your bills until you either find a new job or recover.

4. Save for Retirement - Step Four is the step in which you finally start saving for your retirement. At this point, you should have a fully funded emergency fund and be debt free, except for maybe your house.

You should now begin to invest 15% of your gross income in some form of retirement plan. If your company has some form of retirement match, do not include it in your calculations. Invest 15% and consider anything extra as a bonus.

5. Save for College - If you have kids, this is the step some of you have been wondering about. According to Dave Ramsey's latest book, The Total Money Makeover, 68% of Americans have not saved anything for their child's college education.

Before even having a chance at a debt free life, these students incur massive student loans which seemingly NEVER go away. When you reach this step, begin saving for your kid's education. Research educational savings plan such as ESAs and 529s. Find yourself a well respected financial planner and ask them questions until you could explain it to a six-year old.

6. Pay Off the Mortgage - This is the step I dream about at night. If I did not have a mortgage payment, I could literally do anything, be anything that I wanted to be. I would not 'have to' go to my job if I did not choose to.

Becoming debt free means that you do not have to worry about your debt. The day to day bills seem to take care of themselves. Fights about money disappear and life seems that much sweeter.

7. Build Wealth (And Then Give It away) - This process can seem extremely long and difficult, and it is. Getting to this step can take up to ten years or more. Before you get frustrated, consider this -

If you do not start this process RIGHT NOW, I can promise you that it will take you longer to become debt free.

Imagine waking up knowing that you owe nothing to anyone. Imagine deciding what you want to spend your money on each month. Imagine building your nest egg to the point where you do not have to worry about your children's future. Imagine being able to give it all away.