Creating and Sticking to a Budget: Starting our Dave Ramsey journey

by Melody on February 2, 2012

Now that we have discussed gathering your information for your written budget and gone through how our family manages our budget, I thought I would share the path we took to start paying down our debt.

As most of you know, our family has been following Dave Ramsey’s Total Money Makeover (Amazon) since 2007.  He recommends the following “Baby Steps”:

  • Step 1: Save $1000 for your Emergency Fund
  • Step 2: Pay off your debts using the Debt Snowball (lowest $$ amount debt first)
  • Step 3: Put 3-6 months expenses in savings
  • Step 4: Invest 15% of income in Roth IRAs and pre-tax retirement
  • Step 5: College funding for children
  • Step 6: Pay off home early
  • Step 7: Build wealth and give

My husband and I, in the beginning, decided to follow these steps to the letter.

Baby Step 1: Save $1000 for your Emergency Fund

Once we got our budget written out, we did everything we could to get that $1000 saved up.  I struggled with the idea of putting $1000 straight into savings, especially now that we realized how much debt we actually had.  I struggled with it for a long time, always wanting to pull the money out and use it.

Looking back, this is probably the step I am most grateful for.  There are definitely times when we have had things come up.  If we didn’t have the Emergency Fund, we would have fallen right back in to the credit card trap.  It’s not a huge amount of money, but enough for a little peace and security while we carried out the rest of the journey.

Baby Step 2: Pay off our debt using the Debt Snowball

This is a pretty basic theory.  Write down all the debt you have, from smallest to largest.  Tackle the smallest debt first.  This one seems to cause a lot of controversy, due to the fact that he doesn’t recommend paying off the debt with the highest interest rate first.  I can 100% understand why people feel like this is bad advice, however, we still chose to pay off our smallest debt.

We needed a “quick win”.  We needed to physically cross a debt off our list and see our journey progressing.  If we had tackled a larger debt first, it may have felt like spitting into the wind.  Similar to a weight loss goal, do you think you would stick with it more if you started with a 5 pound weight loss goal rather than 100 pounds?  Some people definitely have the willpower to do it in a way that makes more financial sense for them, but make the choice for your family that will keep you motivated.

We finally paid off the last of our debts in December of 2011.  Almost 4 years on the nose from when we started.  For the most part, every extra penny we could squeak out of our budget went to whichever bill we were paying off at the time.  We would pay the minimum payments on our other bills while trying to hammer out our “bill of choice”.   We definitely took trips down Distraction Lane, what with having two babies and all.  A trip to Vegas here, a very necessary upgrade in cars there.  We were not a beans and rice type budgeting family, we did choose to spend a little money frivolously now and then.

Here’s where we chose to do things a little differently.  We chose to start funding our children’s college education funds last March.  The program we wanted to get involved in was changing its terms and conditions for 2011 and we significantly benefited from getting in before the change.  This definitely bumped us back a little as far as paying off our debts, but we felt that the return in our investment would be worth it.

I honestly felt like it was easier to pay off our bills than decide where we wanted to go next.  When you have something specific to pay off, it’s easy to decide where your money will go.  After that, it feels like there are 275 different things that need/want your money.  Retirement, extra life insurance, more college funding.  What’s a frugal family to do?  The next post in this series will be all about where we have decided to go next in our journey, including our decisions for our retirement, saving for large purchases and what in the world to do with our house.

Please ask questions.  This is a HUGE topic.  I can only touch on so much in one post without getting overwhelming, especially since everyone’s situation is so different.

What is your biggest challenge in budgeting?  What has been your greatest success?

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{ 10 comments… read them below or add one }

Sue February 2, 2012 at 5:49 pm

My biggest challenge is when we have NO income–my husband owns his own business so when theres no work theres no income. But we own our home and cars and don’t have credit card bills (we never have used them) so we are in a much better position when there is no income. Plus I’ve always had a stockpile to raid.

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Carrie February 2, 2012 at 9:30 pm

In early 2011 I started to feel like my job was not stable, and a lay off was near. Over a 4 month period my family saved over $7,000 to pay off a truck loan (using a snow ball method of payment). I can’t believe what a difference couponing, and being frugal has made in our lives. I only wish we had done this years ago. My next goal is to pay off the house once I am back to work!

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Emilie February 3, 2012 at 4:58 am

That’s our next goal too, it’s so exciting, isn’t it? Good job!

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Karrie February 2, 2012 at 11:40 pm

My question is a little bit of a strange one, but also one you will understand. I did read the Dave Ramsey books and also want to get started doing everything he suggests. However with income like ours (blogging) you just never know what you are going to get every month via paycheck…so I am wondering how you factored that into your budget you made up? I am really struggling with that…and every penny needs a place. I cannot wait to read more from you Melody…thank you!

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Melody February 3, 2012 at 5:12 am

That’s a really good question and I’m sure one that many people face. It’s actually pretty easy for us. Before I left my job in 2008, we tried our best to live solely on what my husband was making. We were able to get our bills down to the point where we could live on his income alone, so everything I make (big or little) is considered “extra” and goes right into savings. I’m actually interested to read the articles Emilie posted as I’m not sure I would know how to answer it otherwise.

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Emilie February 3, 2012 at 4:58 am

Karrie and Sue – These articles might be helpful to you. I give them to clients when I do financial coaching and people have irregular incomes.

http://simplemom.net/budget-on-an-irregular-income/

http://www.daveramsey.com/article/how-to-budget-an-irregular-income/lifeandmoney_budgeting/

Loving these questions!!!

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Sue February 3, 2012 at 6:35 am

Thanks! I will read them.

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Miss Jay February 3, 2012 at 1:17 pm

One of the commenters at simplemom.net had what I thought was a particularly simple solution. As stated in the blog, you list your expenses by priority, and pay them that way. Then on a flush month, you help fund the “budget shortfall fund” of a couple thousand dollars. (could be more or less depending on the size of your monthly budget and the extent the income fluxuates). This fund is separate from your emergency fund. On a short month, you pull money from the shortfall fund, and then when the bigger checks come back, you replace the money.

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Lora February 5, 2012 at 10:06 pm

We have always had an irregular income. What works for us is having and extra $1000 in savings (our emergency fund) so we have $2000 total (it took us quite a while to get there, but it works great now). We fill our envelopes and pay bills as we can when we get paychecks. When a bill is due or I need grocery money and we haven’t received a paycheck to cover it I use some of the extra money from our emergency fund. Then when the next paycheck comes in I reimburse the fund so that it has $2000 again. We also have the Irregular Income Planning Sheet (by Dave Ramsey) filled out so that we have a place for any extra money that comes in above our budget amount. We do our monthly budged based on our average income. I love the Budget Shortfall idea above as well!

Also, since our paychecks come in irregularly we fill our envelopes that go with our budget as we get paychecks.

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Lora February 5, 2012 at 10:08 pm

Oops! I forgot to erase that last sentence!

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