2014 is my year for a Money Makeover - what about you?

A few weeks ago, I decided to head to the library to borrow a book.  It had been so long since I had been to the library that they had discontinued my account and I had to sign up for a new one.  It was a small step in the right direction of being more financially responsible this year.  Staring at my book shelf of half unread books, I decided that I could do the same for free by borrowing books from the local library.  Of course, the goal is always to read them.  

As I was browsing around the different areas of the library, I found myself in the Finance/Business section and came across a book by the title of "The Total Money Makeover: A Proven Plan for Financial Fitness" by Dave Ramsey.  I must admit, I had never heard of the man before.  The cover of the book caught my eye as it was listed as being on the "New York Times Bestseller" list and his radio show had 3 million followers.  However what really caught my attention was "Hundred of thousands of ordinary people have become debt-free - here's how you can to".  I picked it up.

I have to admit, I have numerous financial books - Suze Orman, Gail Vax-Oxlade and David Bach, these are a few of the unread books that sit on my shelf.  I always have good intentions but never ever seem to get through them. Perhaps this is why it's taken me this long to get serious about being financially responsible and becoming debt free sooner rather than later.  

Since the downturn in the economy in 2008, North Americans have been struggling to get ahead.  I think people have also begun to believe that being in debt is a part of life.  Having car payments, house payments, credit card payments have become the norm.  After reading the book I realize this isn't the norm and shouldn't be the case.  Dave's motto is:  If you will live like no one else, later you can live like no one else.  I'm taking that to heart and getting serious about my financial future this year.

It took me the weekend to read it cover to cover.  What helped were the inspirational stories weaved throughout the book of every day families.  I've shared it with a number of friends in person and they all wanted to learn more, so I thought it would be great over the next few posts to share the baby steps I learned and some of my insights.    

First and foremost, if you've never had a budget it's time to get on one.  For a few months time, track every single dollar and penny you spend on a spread sheet.  You'll be shocked at how quickly those coffees or weekly lotto tickets add up.  Also if you've never sat down and looked at how much your household brings in, maybe now is the time.  Another shocker is that most people have no idea how much money is coming into the house, so how are they supposed to keep track of what goes out of the house.  Only then can you create a budget and have hopes of sticking to it.

Now onto the baby steps that will help you get to financial freedom. 

Baby Step #1:  Save $1000 Fast

A study that was done in the US by the National Foundation for Credit Counselling found that 64% of the population did not have $1000 cash saved up for an emergency.  Most would have to turn to friends & family; credit cards or loans; selling or pawning possessions or missing payments on other bills to find the money.  When you think about it, most emergencies are likely going to be more than a $1000 - losing your job, getting pregnant unexpectedly or your car dying on you.  But having this rainy day fund will at least help with the smaller unexpected emergencies that may come up.  Of course this doesn't include a new pair of shoes or an expensive night out on the town!  This $1000 also puts it out to the universe that your ready to take your plan of financial freedom seriously.  So whether it's working a few extra hours over-time or finding a part-time job to get that $1000 in an emergency fund get it done ASAP.  Check out this link to see what helped me get my $1000 fund kick-started, but rather than a $1/week, I decided to save $10/week.  

Baby Step #2:  The Debt Snowball

Lots of people have opinions on this one, but I love Dave Ramsey's plan.  List your debts in order with the smallest payoff or balance first, irregardless of the interest.  The reason being is that paying off your lowest debt is sure to give you a sense of accomplishment and the motivation to move onto the next debt.  Do what you need to do in order to get the first bit of extra money onto the debt and get it paid down.  Once that first debt is paid, whether it was $25, $50 or $100 you were paying onto it, take that money and apply it to the next and so on and so forth.  Make sure to keep your tally sheet in a visible area so that each time a debt is paid down you can put a big fat X on it.  Of course cut up the credit cards and cancel it so you don't end up with the same problem again in the future.  You will love the feeling of shredding your credit card up!  It may also spur additional cost-saving habits.  Once I cut up my credit cards I was on a roll, I looked at my house-hold expenses and decided to get rid of unnecessary bills such as the house phone, magazine subscriptions etc.  We're even contemplating getting rid of the cable but haven't yet gotten there.  

Baby Step #3:  Finish the Emergency Fund

I'm sure you've heard it before, but in reality, how many of us actually have an emergency fund.  If $64% of the population don't have a $1000 fund, even less will have a 3-6 month emergency fund.  The funds that are needed if one were to fall ill, lose a job or unexpectedly get pregnant.  If your wondering how to save up for this emergency fund, you'll be surprised to see how quickly you can accumulate savings once you don't have payments going towards debt.  If you have a relatively stable job, such as in the government or in education aim for 3-months of expenses.  If you have a commission-based career, it's probably smarter to have a 6-month emergency fund.  Make sure to put it into an account that you can quickly access without any penalties for taking out your money.  In Canada the Tax Free Savings Account (TFSA) is a great place to do this, because it can do double duty - save money for the emergency fund, but also start your investments for perhaps long term financial planning. 

We're currently at baby step #2, but I'm more than excited about the future as I realize that once you have complete financial freedom you really are free to live how you want.  My husband and I are passionate about travelling so I'm dreaming of a time when I can explore the world and discover new cultures without having to put it on the credit card!  

I'll leave you with one tidbit that will help put it into perspective.  Most people carry a car payment their entire lives, paying about $378/month.  If you were to invest the same amount from age 25 to retirement (65) on average it would amount to more than $4 million.  Which would you prefer?