Dear Dave,
A friend told me about y our Baby Steps plan, and after years of living paycheckto- paycheck and running up credit card bills, I’m ready to get control of my finances. I just have one question. Baby Step 1 is saving $1,000 for a beginneremergencyfund.Do you recommend getting current on past due bills before starting Baby Step 1?
Miles Dear Miles,
Congratulations! I’m glad to hear you’re finally sick and tired of being financially sick and tired. This is the perfect question for someone is your situation, because it gives me a chance to walk you all the way through the Baby Steps. So, let’s go!
First, make sure all your necessities are taken care of. By necessities, I’m talking about food, clothing, shelter, transportation and utilities. Then, get current onanythingyouowe,ormake payment arrangements for past due bills. After you’ve done this, it’s time to take your very first Baby Step.
You’ve already mentioned getting $1,000 in the bank for a starter emergency fund. That’sBabyStep1.Afterthat comes your debt snowball, which is Baby Step 2. Here, you’ll pay off all your debts from smallest to largest—except your home. Attack the first balance on your list by paying as much as you can each month, while making minimum payments on the other debts. When you’ve paid off the first one, add what you were paying on it to the payment on your next debt and start attacking it. As the snowball continues to roll over, you’re picking up more and more money to apply to your debts.
In Baby Step 3, you’ll save money and increase your emergency fund from $1,000 to a full three to six months of expenses. You’re going to be surprised how fast you can save money when your income isn’t flying out the door to pay off debt every month.
Now, it’s time to really start looking toward the future. In Baby Step 4, start investing 15 percent of your income for retirement. College funding is next in Baby Step 5 for any kids you have, or plan on having one day. And here’s a big one. Baby Step 6 is where you pay off your home early. How great will that feel?
But Baby Step 7 is the real deal. Now, you start building wealth and giving with outrageousgenerosity.When you’vecompletedalltheother Baby Steps, and are able to do these two things, you’ve achieved the pinnacle of smart money management. Or in other words, you’ve reached the point of financial peace.
Makeithappen,Miles.You can do this!
— Dave Dear Dave,
I’ve made a lot of stupid money mistakes in the past. Even though I finally paid off six figures in debt a few years ago and am in control of my finances for the first time in my life, I’m having ahardtimeforgivingmyself for all the dumb things I did. I have an emergency fund and other savings set aside, and I’m almost ready to buy a house. But it seems like there’s still a cloud hanging over my head from all my bad decisions. How do I stop obsessing over my past financial mistakes?
Brea Dear Brea,
If you’ve had enough determination to pay off six figures’ worth of debt and to build savings on top of that in the last few years, you’re doing a phenomenal job! Most people would just make excuses or give up, but you educated yourself, put your head down and stomped out all that debt. I’m very proud of you, hon. What you’ve done speaks volumes about your character and self-discipline.
The late Maya Angelou once said, “Do the best you can until you know better. Then when you know better, do better.” That’s the key for you, I think. Doing dumb things doesn’t always meanyou’readumbperson. Sometimes, we just don’t havetheknowledgeorguidance we need to do things the right way. But once you learned a few things and saw there was a better way—a smarter way—you jumped in and made incredible things happen. You cleaned up your finances, andyouchangedyourentire future for the better. I think that’s pretty cool. And you know what else? It makes you a pretty smart lady.
I think part of your struggle may be the fact that you’ve spent more time makingthewrongdecisions with money than you’ve spent making the right ones. That’s understandable. But time will help heal that struggle. It’ll distance you emotionally from the old you until you’re confident in the new you—not just in your actions, but in your heart and mind. I mean, think about it this way: If you violated trust with a friend, how would you rebuild it? First, it would take time. And second, it would take a series of trustworthy actions.
Let’s say someone had a drinking problem for a long time, but they’ve been dry for three months. After three months, their spouse still might not trust them with the checkbook. I totally get that. It’s a good start, but it’s not like they haven’t had a drink in three years. That’s where time comes into play. The more time they demonstrate a solid pattern of not going back to the bottle, the more evidence they create for why others should trust them.
I think you’ve developed a pretty good track record of being smart with your money,Brea.Socutyourself some slack. If God is willing to forgive us for the really bad things we say and do, youneedtobeabletoextend a little grace to yourself for the dumb things in your financial past.
— Dave