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A financial road map for your journey

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by Tsh

Tsh is the founder of this blog and is currently traveling around the world with her husband and 3 kids. Her latest book is Notes From a Blue Bike, and believes a passport is one of the world's greatest textbooks.

I loved reading everyone’s responses to their most common financial frustrations. I’m not saying I love that many of you have these frustrations, of course, but it is helpful for me to see where this community is financially, and how we can possibly help each other on a solid road to financial freedom.

There were many common issues—how you and your spouse can get on the same page, how to handle retirement and saving for kids’ college, and how on earth to make a budget that’s stick-able.

But first I thought I’d recap our family’s financial road map—how we’re currently managing our money.

None of it is rocket science, but that’s what makes it so beautiful—it’s common sense. It’s a financial plan everyday Janes and Joes can follow. No finance degree required (trust me — I’m horrible at math).

Find your why

Before you decide your financial game plan, you need to have a reason for doing what you do with your money. And it’s important that your “end” reasons not be “means”—getting out of debt isn’t a good long-term financial goal. That should merely be one step that gets you closer to your big picture life goal.

This is where our family purpose statement comes into play, because money is one part of many facets to our life. Creating your purpose statement helps you live simply, because as we believe here at this blog, living simply means just to live holistically with your life’s purpose.

So… What is your life’s purpose? When you find it, you’ll find the motivation you need to live according to your financial plan, even when it’s tough. You’ll be better able to make those daily little choices that ultimately add up to serious financial progress.

Think big…. Where would you like to be in five years? In 10? In 20? How would you like to spend your retirement years?

The “baby steps”

The following is the plan prescribed by Dave Ramsey. I don’t agree with everything he says, but I do recommend reading his main book, The Total Money Makeover and taking his course, Financial Peace University (we took it online when we lived overseas).

Step 1: $1,000 baby emergency fund

The biggest hurdle towards long-term financial freedom is paying off debt. But it’s not smart to pay off debt with absolutely no safety net. That’s why the first step is to very quickly save $1,000 as a baby emergency fund.


Photo from Shutterstock

Yes, this is a safety net with incredibly large holes. It’s not much money. That’s intentional, though. It’s supposed to light a big enough fire under your pants to get you seriously fired up about paying off your debt as quickly as possible. When you know you’ve only got a thousand bucks for a potential emergency, you’ll want to pay off your debt as quick as possible, so you can get on with saving much more money.

There are a few exceptions to the $1K cap. If you know a storm is coming, it’s wise to sock away more money—examples of this are if you’ve got a baby on the way, if the primary breadwinner is out of work, or if someone in your immediate family is chronically ill. In this case, pay the minimums on your debt and just sock away any extra money.

However, when the storm passes, use all but the $1,000 and put it towards Step 2.

Step 2: Get out of debt

Once you’ve got a thousand dollars saved in the bank, it’s time to start paying off all debt but the mortgage. I’ve written about how we got out of debt, so I won’t rehash it here. But I will reiterate, as someone several years on the other side of debt-free living, that it’s so, so very worth it.

When you don’t owe anything to anyone, you’re free to make important decisions based on things other than money. Perhaps you can move somewhere based more on lifestyle choice than job market, or you can take a lower-paying job doing something you love.

When you’re debt-free, you don’t have to live in the past. You can live in the present and fully plan for the future.

The thing is, you have to really and truly want to be debt-free for this step to work. You have to be so sick and tired of debt that you’ve drawn a line in the sand to say no more. It’s not easy because it requires sacrifice. And it’s not a lot of fun.

But it is the grown-up thing to do. It’s financially responsible. And you may be surprised that once you start, the glimmer of spending money dulls. It’s just not that fun to spend money on frivolity. It’s more fun to assassinate those debts, one at a time.

Step 3: Finish your emergency fund

Once you’re debt-free (hooray!), you then return to that baby emergency fund and transform it in to a Big Daddy emergency fund. Typically, this is three to six months of expenses (not income), and it’s the essential expenses at that. What do you need to live on?


Photo from Paul Mannix

I was surprised at how quick this step was for us. Once we became debt-free in April ’09, we planned to fully fund our emergency fund by December. Instead, we were done by August, and continued to save afterward to fund a trip to Paris for that Thanksgiving.

I’ve heard from several people that this steps took less time than they thought as well. Perhaps it’s simply natural to take that intensity, fresh from paying off debt, and aim it towards that savings account.

It was a blast to watch the money, that was just recently leaving our bank account, instead stay in our pockets and pile up. Lattes and eating out could wait just a few more months.

(Steps 3b, c, and so on)

Once you’ve got your fully-funded emergency fund, you can keep saving for additional extras, if you like. This is when we saved for our vacation. You might also want to start saving for a vehicle replacement, a down payment, or home improvement projects.

We found the best way to do this was by opening separate savings accounts for each of these goals, then automatically withdrawing a set amount from our main account each month until we reached the goal (this is also called “sinking funds”).

We use and love Capital One 360 because we can open unlimited savings accounts, and because it’s an Internet-only bank, it’s got a slightly higher interest rate on both savings and checking accounts (though not much).


This is a sample of some of our sinking funds with Capital One 360

Our account names change as our savings goals change, but the idea has stayed the samevarious amounts get automatically transferred to each of our savings accounts, making it super easy to quickly save up for smaller items.

If you don’t yet have an account with Capital One 360 and would like to give them a whirl, head here to get started.

Step 4: Put 15% towards retirement

In Step 4, you start saving 15 percent of your income towards retirement. You’re supposed to put a hold on all retirement contributions during steps 1-3, which should seriously fire you up about plowing through those so you can get back to your retirement contributions.

You can lessen up on your gazelle intensity a bit here, saving for retirement while you work on your sinking funds (steps 3b and on), your kids’ education (step 5 below), and paying off your home (step 6). In other words, now you start the remaining baby steps at the same time.

Step 5: Save for your kids’ education

In Step 5, you start funding your kids’ higher education fund. The directive here is pretty simple, so I’ll just add one thought here.


Photo from Werwin15

Note that although you can do Steps 4 and on simultaneously, retirement does come before kids’ education in the Baby Steps. As a parent, it’s a generous gift to send our children to college, but it’s not a requirement, nor the definition of good parenting. If your kids ultimately have to pay for some of their education out of pocket, that’s okay.

However, no one can save for your retirement but you. Not your children, not the government. In fact, saving for your own retirement is a gift to your children.

Step 6: Pay off your house

After you’ve got your fully-funded Emergency Fund, after you’ve started saving 15 percent of your income towards retirement, and after you’ve started investing in your kids’ education, then it’s a good idea to throw all extra money towards paying off your home early.

Can you imagine having a paid-for home? Think of what you’d do with that money normally put towards your mortgage or rent. Think of how quickly your investments add up.

Another plan, if you love the taste of being debt-free so much you can’t imagine signing on for debt again (even if it is a mortgage), is to save up 100 percent for a house. Yep, a house paid for in cash. Read how Crystal did it.

Step 7: Live like no one else

This is the grand finale. You’re saving up for retirement and your kids’ college, you’ve got a paid-for house, and you’ve got at least six months of expenses in your emergency fund. What do you do?


Photo from Shutterstock

This journey isn’t easy; the character built during the years of sacrifice usually mean that by the time you get to the big goal, your idea of what you’d do with all this disposable income has changed.

So what would you do?

Yes, making these steps require the “b” word—a budget. In order to succeed with these bigger picture goals, you’ve got to make it work day-by-day. Paying off your debt snowball requires snowflakes. And you and your spouse need to regularly communicate about what’s going on with your money.

This is where the rubber meets the road—making healthy choices about how we spend our money.

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Comments

  1. Wow, I had no idea you could do that with the ING savings account! I had always just done it on paper, but I like that so much better. Thanks for the info.

  2. We live in rented accommodation since my husband is in the UK Armed Forces. Our (less than market value) rent, housing taxes and water rates come out of his wages before we get anything, so we don’t have to think about them right now, and the possibility of leaving the army scares us because we aren’t great with money and would have to start budgeting for these too. Needless to say we are only really starting out on our responsible budgeting, saving and debt repayment journey.

    Our longterm goal is to be able to afford a decent downpayment on a house and be able to live on my income plus my Husband’s pension when he leaves the army in 10 years time so that he can choose to go to university or take a job for the enjoyment of doing it rather than the level of paycheck it brings in.

  3. For those out there that might be military with housing and food allotments, don’t forget to take those into account when you calculate your percentage to retirement. I know that for the US military tsp contributions are calculated off your base pay.

    For example: our tsp/retirement contributions are set at 20% of our base pay, but if I add in our housing and food allowance the amount we’re putting away only equals 13% of total pay.

    Just something to remember so you aren’t surprised later.

  4. Such wonderful info. Thank you!

    What are our ‘dream big’ goals?
    The main one is to give…big. We don’t exactly know what that will look like, but that’s the plan.

    We are putting our house on the market soon – to downsize and simplify – to free up more money to pay off debt – and stay out of debt! Which will free up more money for all that giving we feel lead to!

    Thanks so much for sharing all this wisdom. So good.

    Blessings,
    Kate :)

  5. My husband and I are toward the end of Step 2 right now with just the car loan left! What would I go if we were on Step 7? Wow… probably travel–for pleasure and ministry! :)

  6. Great post! Our family follows the Dave Ramsey plan as well. We are debt free except for the house and working on fully funding our emergency fund. It’s taking us a long time to do this b/c of major home and car expenses that keep coming up… just as we are starting to get ahead. We will do it though!

  7. I love this post. My husband and I are leading an FPU class that just began last night, and we are all really excited about it. We only have car loans left, and then we will save a 6 month emergency fund. We have goal to have this done by June and then we are taking a trip to Costa Rica (paid for with cash) to celebrate.

  8. We dream of moving to Costa Rica…at least for a year or so. It would be amazing to be able to save for that. Thanks for the inspiration!

  9. We did Dave Ramsey’s financial Peace course a couple of years ago and made some progress. Unfortunately it didn’t stick. We need to get back with the plan, this post will be motivation!
    I love the idea of the ING accounts!
    Bernice

    • If I understand correctly, FPU alumni can always retake the class. Don’t quote me on that, but you might want to find out if that’s the case. If so, you could always go to another class near you and find your lost motivation. :)

  10. I would love to be able to travel with our children – to show them the world in more than 1 week increments! I think if we had more financial freedom, we would both love to change our line of work and own our own business – it would be HARDER work for less pay, but more fullfilling at the end of the day… hmm.

  11. I think the current wisdom, now that we’ve lived through this recession, is to have a 9-12 month emergency fund because it can take that long, or longer, to secure a new job. I’ve been surprised that Dave Ramsey has kept the 3-6 month rule, although it is surely better than nothing and an improvement for most folks over what they currently have.
    Great post.

    • I think I’ve heard some statistic that only 3% of all Americans have a savings at all. I’m not sure where I heard that (Dave?), but there you go. So you’re right — some is more than the norm.

  12. Thanks for the big picture overview of Dave R.’s ideas. I usually avoid reading his advice because
    1) I don’t like paying for things with cash (hard to keep track of)
    2) Financial advice articles generally leave me thinking that the only way I can fix my problems is to travel back in time 10 years.

    But yours is the first article that tells me we’ve done something right! We do have a “baby emergency fund,” and we’ve used it twice already since I’ve been unemployed/underemployed. (Replenished after using as we’re able, of course.) We’re also trying to get rid of our debt and making that our main priority.

    My husband and I are brilliant at math but terrible at being organized and most financial advice is aimed at people the opposite of us. This general guide is the first thing I’ve read that even us unorganized procrastinators can manage.

  13. I just want to let everyone here know that it is because of you, Tsh, that my family began our journey to financial independence 2 years ago. Next month we will make our final car payment and begin Baby Step 3! Thank you for putting your life and finances out here for all to see. It has truly made all the difference in my life.

    P.S. I, too, am in love with my ING sinking funds. :)

  14. “Babysteps” is an excellent description of Dave’s plan. We all learn by taking little steps, getting positive reinforcement and persevering. That nasty term “self-discipline” is a learned behavior and the only way to succeed, not only with money, but in life.

  15. We are on baby step 6 (paying off the house) and will (God willing) finish that up at the end of the year. Dreaming of baby step 7 has kept me going and we actually get to finalize those plans. Nothing lavish (as Dave’s plan helps change your priorities from the lavish). #1 a new roof and new carpet. We’ve let a few things go to get this far. #2 our family’s first trip to Disneyland (princess viewing is a high priority in our household. #3 bolstering up our budget items (more money allocated to eating out, swim lessons, saving for a car, etc). That’s about it. Our main motivation is that my husband works in a highly volatile industry and has thus-far been lucky to still be employed. His stress level will be reduced to almost nothing if he is not “forced” to be at work for financial reasons. His dream job is to sell his beer in a food cart. So while we have like minds on the budgeting, the dream job thing needs some work.

    • That’s so great, Jennifer! Congratulations on your upcoming milestone. It’s a huge one!

      And yeah… I’ll have to take your side on the dream job thing. Though it’s good he’s thinking about what he loves to do… ;)

  16. We’re still plugging away on baby step #2, but it feels so good to be able to look back and see how far we’ve come. I can’t imagine what life would be like right now if we hadn’t started on this journey. Times are tough all over and I’m thankful that I learned the value of a budget before things got lean for our family.

    Big dreams? Our hope is to be able to live lightly enough so that we can pick up and travel whenever we feel the whim. I want to be able not just to talk with my kids and teach them about the world, but to take them places and show them!

    And, I’d love to leave someone a $1000 tip someday. I heard about that on Dave’s radio show once (I think the person used to give her quarterly bonus as a tip, if I’m not mistaken – anyone else remember that? She and her husband would pray in the parking lot before going in to the restaurant that their server would be someone who really needed the money) and I’ve often thought about what a difference that would make to someone to be surprised like that.

    Thanks for the inspiration!

  17. Thanks for laying this all out so simply. We are in need of a plan, and I haven’t really known where to start. I can actually envision us going through these steps!

  18. I absolutely looooove Dave Ramsey. My sister got me to read his book back in 2001 and I’ve been hooked. My husband and I we got rid of our credit cards before we got married and I can’t think of how many times I feel so blessed that we don’t have those sharks calling our phone.
    We are still on baby step 2 and we are living like no one else.
    Another thing with Dave Ramsey is that when I try to talk my friends into stopping the student loan and credit card nonsense, they look at me like I am from another planet and try to talk me into doing it. I continue to live like no one else and pray that one day they will see the light.

    Great blog

  19. Thank you, thank you, thank you for being such an inspiration in simple living :-)

  20. How do you (and Dave, if you know) address situations where there is a limit to income. For instance – it is unrealistc for me to ever consider 25% of my income toward housing, especially in a 15 year mortgage? Does Dave assume that only higher-end earners want to live debt free and plan for the future?

    I’m a single mother, who earned approx 30k last year. About 40% of my take-home pay goes to the mortgage. With three children (plus me) a one-bedroom apartment simply does not work. I am frustrated by the assumptions that are made regarding income levels.

    On a happy side-note, I am debt free (except for mortgage), have emergency savings (2 months worth and growing it) and do contribute to a retirement fund. We have made serious sacrifices to be in this place financially.

  21. With the help of ‘Project Simplify, I believe it’s truly possible! Every family member should do something as well.

  22. I read “Financial Peace” over ten years ago and we’ve stayed out of debt (except for our mortgage) and had an emergency fund, but I’ve just recently tried using cash envelopes and challenging myself not to buy “stuff” I don’t really need. It’s helped me to stick to my budget and I’m not collecting the clutter that interferes with my desire for simplicity.

    Karen

  23. Thanks for the inspiration Tsh. We have no credit-card debt so I’ve made the mistake of thinking of us as “debt free”…but that’s not really true. We have a considerable student loan that needs to be dealt with quickly because I don’t feel like I’m making any headway with it…I keep paying on it, and I swear, it never seems to shrink at all. I know I need to seriously increase the amount of money I pay on it monthly. I don’t want to be still working on paying off my student loan when my kids go to college!

    I’ve known I needed to work on this for a while but this post is a good reminder to get going NOW!

  24. We are taking Dave’s Financial Peace University right now (we are on week 3) and oh how I wish I had realized how important this was even just 5 years ago!

    For the first time in my life, I’m EXCITED about making a budget (usually that’s my husbands thing) and actually seeing where every single dollar is going to go before it even arrives in our account on payday.

    We’ve got some pretty hefty student loans to pay off and hubby’s car, but are so thankful we no longer have credit card debt and are saving for a down payment on our house, which we hope to purchase in the next month or so (unfortunately we’re not going to be putting 20% down and have the mortgage be only 25% of our income…but we can’t stay where we are any longer and renting an apartment AND saving for a down payment just isn’t going to be happening in Southern California).

    Thanks for the reminders and for the great story! It’s motivating to hear others who’ve been through the battle of paying off debt and have made it to the other side!

  25. We don’t follow Dave Ramsey’s advice to the exact point, but I do agree that it is very inspiring, and something we’re revisiting this year. We had all our debt paid off, but bought a truck this last year and will be working now to pay that off. I’m always glad to see his steps and be reminded of the simple journey it can be. When you really get going, your priorities do change, and that change makes it even simpler to keep going!

  26. Thank you so much for this wonderful post. I’m wondering how you balance finding that extra money with spending time with our children while they are young. My husband has been unemployed this last year after being in school full time for the past 3 years. With 3 young kids I didn’t want to be working full time, and so the school years took all of our savings, and we did have to go into debt. But this year we stuck to a very frugal budget, finding money where we could, and we didn’t go into anymore debt. In fact he just got a job and with the first paycheck we were able to pay off one of our credit cards. It felt GREAT!!! Even though we have HUGE student loans, now that we have money coming in I will be able to revisit our priorities and our budget and figure out how to tackle it all. I want to be debt free so that I can show my children that it is important to live our values and our passions, not because of a paycheck.

  27. Tsh,
    I agree with all of your points except # 6. I’ve got a slightly different view about this one. Here’s why…assuming you have a low interest rate on your mortgage loan, you’re much better off investing the money and earning the difference rather than putting more money into your mortgage. Over the life of your loan, you’ll earn the difference between your invested money and the tax adjusted mortgage rate. Here’s an example:
    If your mortgage interest rate is 5% and your investments are earning 8%, you’re earning 3% more annually, over the life of your loan. With compounding interest, that is a huge amount.

  28. I’m not so sure about they pay off the house thing. I view the house as an expense, a cost of daily life.

    I do put down a little extra each month, but try to put as much into other things as possible. I’d much rather focus on putting some away for a rental property than paying down my mortgage balance. The rental property will be paying my baby’s college tuition.

  29. I like it. Seems simple and I’m ready and committed to make this change.

  30. Thanks for the tips. I will put it to use ASAP as we need to get out from debt very quick.

  31. Excellent Advice…after three severe car accidents put me on disability for the last 4.5 years, and loss of the best job I ever had and depletion of my entire 401k retirement trying to save our home…I wish I’d seen advice like this when we were first married. Losing our home after paying for it three times over what we bought it for due to mortgage fraud and paid over $17,000 in legal fees trying to save our little “House of Dreams”…you can be sure we will keep pursing the recovery of our home, but it really stinks to have to pay rent when we had paid for home three times over. It makes me so darn sad…but I’m not giving up…we’re trying as hard as we can to pay off our son’s funeral/plot/marker and our daughters college debt…those are the only two debts we have left to pay off and it will be a good feeling to have those two behind us…especially since we’ve been paying on our son’s funeral expenses for 5.5 years. That is seriously depressing….This aritcle was timely for me in this place of my life to get back on track…

  32. it looks like the ING accounts you link are now Capital One? do you still like it/recommend it, or have you switched to somewhere else?

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