Budgeting

Let me preface this post by saying, I am definitely not an expert on this topic and I've been struggling like crazy since we decided that I would be staying home to work out a budget that is right for us.

Mike and I have been discussing getting out of debt so that we can buy a house for quite a while, but we haven't taken the steps to do so yet. Beginning this month we've decided to start the journey using mostly Dave Ramsey's method to do so. It really seems like the best/most logical way to do so.

We actually watched this video on YouTube together -  there is also a book called The Total Money Makeover that you can get to explain the method in much greater detail.

If you aren't familiar with Dave Ramsey's method I'll explain it briefly. His method works on baby steps - very similarly to those on a ladder. You do not go to the next step, until you complete the current step. I should also add that if you aren't making your bills now, you should stop and re-evaluate your money to try to come up with a budget that you can stick to before you start the baby steps! Make sure all of your money has a place and none of it is "free" money. If you want to allot $50/month to hobbies, then that gives it a purpose. Now on to the steps.

Baby Step 1 is to get a $1,000 Emergency Fund as soon as possible. With tax season, right around the corner, this step should be easy enough for some people. This money should NOT be easily accessible, but you should be able to get to it if you needed it for a catastrophe.

Baby Step 2 is paying off all of your debt using the Debt Snowball. Meaning, you should list all of you debts from smallest to largest and pay at least the minimum payment to all of them. Any extra money should go to the smallest debt so you can pay it off first. Once it is paid off you take that dollar amount and move it to the next one up the list, and so on, until you have them all paid off except the highest. Basically any money you are no longer paying to a paid off debt IS NOT free money and should move to another debt to help you pay more off faster. Really this is common sense, but some how we completely missed it. *(insert eye roll here)*

Baby Step 3 is to get 3-6 months of expenses in your savings account. This is where buying a house comes into it. He says not to buy a house until you have completed this step and get a mortgage that is only a quarter of your monthly income.

Baby Steps 4-6 should be completed at the same time. Contradictory right?! Except not so much, because when you see what they are it makes sense.

Step 4 is to invest 15% of your income towards retirement. Simple enough.

Step 5 is to save for your kids' college education. Dave suggests an ESA, or education IRA, because they are TAX-FREE and you can add $2,000 per year. For us, this is a very important step. We want to be able to help our children pay for college without struggling.

Step 6 is to pay off your house early! Every bit of money that you have that doesn't already have a purpose, should go to paying your house off. He says DO NOT keep a mortgage for the tax deduction. When you do the math, it just isn't smart.

Number 7 is a no brainer for us. Build wealth and give. To quote Mr. Ramsey, wealth is not an escape mechanism, it is a tremendous responsibility and you should have three types of money when you make it to this step - Fun, Invest & Give money. Do the right thing and share the wealth.

Who else is on the path to being debt free this year? What methods are you using? Have you tried the Dave Ramsey method? I'd love to hear your thoughts below!

Hugs!