7 Steps to Financial Health
After talking with friends, financial advisors and reading blogs and books, my husband and I now have a financial plan that is more than a stack of monthly bills with a note on it that says “pay these.” Your plan will likely look different based on your situation, values, and dreams but we offer ours here with the hope you’ll find it helpful in devising a plan that will work for you.
Write it All Down
First we created a spreadsheet of all our debts including minimum monthly payments, due dates, and interest rates. We totaled them up and now have a real number to work with. It was a bit of a shock for me to see that number in black and white. Our debts include the following:
- Credit cards
- Business Loans
- Student Loans
- Home Improvement Loan
We are lucky to own our two cars free and clear. Our consumer debt (from overspending) on credit cards is minimal.
Our major financial responsibilities/dreams include:
- Kids’ college funds
- Charitable donation pledge
- Retirement fund
- A year living abroad
Devise a Financial Plan
Our steps are informed by the debt snowball plan from Dave Ramsey. The concept is to stop everything except minimum monthly payments and focus on one thing at a time. After you accumulate an emergency fund, you bring a fierce focus to your debt. Make a list of all your debts from smallest to largest (or however you decide to order them for payoff). Put all of your available resources towards the monthly payment of the first item on your list. Then move onto the next item. The new payment is found by adding all the payments on the debts listed above that item to the payment you are working on. This compounds your payments and gets you out of debt faster.
Baby Steps to Debt Freedom
Here’s our seven step personal debt-free & financial plan. These are listed in order of priority for us.
1. Build a small emergency fund. A few days after we decided to make this our first step in debt reduction we realized we already had a small savings account we forgot about tucked away at an obscure bank. Done! This ended up being a good reason for us to simplify our finances – lest we forget where we put our money.
2. Pay off high-interest debt. We have some debts that will soon roll over into high interest rates so those are our first battle. We set a goal to have those paid off in 18 months. This is where sticking to a monthly budget will be essential. Now we can see the direct correlation between overspending and the time it will take us to pay down our debt or postponing our overseas trip (step #4).
3. Pay off student loans. When I first realized I may not have to carry around student loans for the next 30 years I felt a huge sense of relief. The large chunk that came from graduate school pisses me off every time I see that monthly payment as I haven’t yet realized a return on investment in the form of a bump in income. I expect that when its’ turn comes around in three years this will help when my motivation might be waning. We expect these loans will take us 4.5 years to pay off.
4. Save for a year living abroad. Once we have our high interest and student loans paid off we want to save up for our dream of living for a year abroad with our kids. We’ll take all the money we had been putting towards debt before and sock it away for a year.
5. Save for kids’ college funds. Once we return from the trip we’ll start saving for our kid’s college funds. It’s important to us to help them start out in life debt free. We set a total amount we want to set aside for each of them (equal of course) and we expect it will take 4 years to save for each of them.
6. Retirement fund. A financial advisor we met with recommended we start our retirement fund before kids’ college funds. The rationale is kids can always take out student loans, but we are the only ones who will pay for our retirement. However, we are still relatively young and plan to increase our income with some side projects so for now we have decided to put this off. As the years start ticking away, we may change our minds. When we reach this step, all monthly payments that were previously going to paying off debt or saving for other purposes will now go into a retirement fund.
7. Mortgage and home improvement loans. These are last on our list of priorities as we can cover these loans by renting out our home while we are overseas or selling the home if we need to in the future. Also, the home improvement loan was for a solar electric system. We get a monthly check from our power company for renewable energy credits so that loan basically pays for itself. We didn’t set a deadline for paying off our mortgage, just an agreement to pay off as much as we can as soon as we can.
And then voila! Debt freedom! It looks like a long haul but I’m already sure it will be worth it. How we manage our money during this process will make all the difference to achieving our timeline for debt freedom. In the next post I’ll share tips I have picked up to ensure success.