leasing vs buying a car pros and cons

Leasing Vs Buying A Car Pros And Cons

When it comes to their money, some people do inexplicable things. I came across an appalling figure the other day. The average length of a car loan today is 70 months – nearly six years! Now couple that stat with the fact that, on average, people only keep their cars three to five years. If you do that, it doesn’t take a calculator to figure out you’re digging yourself into a hole.  Now lets look at leasing vs buying a car pros and cons.

Upside Down

Being ‘upside down’ is the term used to describe when you owe more on something than it’s actually worth. When you’re talking about cars, it can happen surprising easily.

As a rule, new cars immediately lose value as soon as they’re driven off the lot. It takes several months or even a year of payments to owe less than the resale value of the car. For that period of time, you’re upside down. The longer your loan term, the longer it takes to get to the break-even point.

So it seems that what more and more new car buyers are doing is not entirely paying for a car before they turn around and sell it. Then they buy another car and roll the old loan balance into the new loan. After a few cycles of this, you’re driving a Chevy with a Mercedes-size loan.

The Numbers

To put numbers to the point, let’s say you want to buy this nice new Toyota Camry with a loan of $25,000. If you finance for five years at 5.09% (what my bank offers), you’ll be paying $3,369 in interest over the life of the loan. If your loan term is three years, total interest is $2,789. Financing for the longer term nearly doubles the interest you pay.

If you decide to trade in that car after four years, you still owe over $5,520 on the loan. No problem – just roll that into the loan for your new car.

Do this a couple of times and you’ll quickly be driving a car worth half what you owe on it.

Lease Instead

Since evidently a great many people are doing just that, it seems they should be leasing instead of buying. At least at the end of a lease you don’t owe any money (assuming you fulfill the terms of the lease). Not only that but you’ll be able to afford more car than you would by buying outright.

Like I said, people do unbelievable things when it comes to money.

Personal Money Management

Why Personal Money Management Is Important

In order to understand why personal money management is so important consider the following questions.

  1. Do you ever worry about money?

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  2. Does it ever seem like your money just disappears and you have no idea where it all went?
  3. Are you now on your own (or soon will be) and you have no idea how money really works?
  4. If you’re married, do you and your spouse ever have tense conversations (or flat-out argue) about money?
  5. Would you like to know how much money you can safely spend before your next paycheck and still be okay financially?
  6. Do you have hopes and dreams that are bigger than your bank account and you wonder if you will ever be able to achieve them?
  7. Do you have a tendency to spend money on things that you can’t afford?
  8. Despite big plans, do you always have trouble coming up extra money to save or invest?  Would you like to know what it will take to make that happen?
  9. Does it seem like you never make any headway paying off your debts (or worse, they continue to grow)?
  10. Have you ever felt overwhelmed by the thought of what it would take to get your finances organized?
  11. Does it seem like you’re never getting ahead despite the passage of time and all of your hard work?
  12. Do you sometimes feel tossed about as external events crash upon you, feeling that they are in control of your financial destiny rather than you?

If the answer to any of these questions is “yes” then I would suggest that personal money management is very important to you.  Then you’ve come to the right website.  Keep reading!  We have a number of different articles to help you become financially independent!

Related Articles and Information on Personal Money Management

If you have not already done so, reading the following articles will enhance your understanding of the concepts presented in this one.

Budget Planner Template

Using A Budget Planner Template

I recently received an email from John about using a budget planner template.  He wrote:

“Hello, I’m feeling a little lost and have some questions in regards to budgeting and saving.  1. Which budget planner template should I use?  2. From the total salary what percentage is ideal to spend for various needs, and how much to be saved for future?  Any insight would be greatly appreciated.”

It’s a question that we all must answer. Even if some of us would prefer to ignore it! Because, with rare exceptions, we all have to deal with having just so much money to cover all our expenses. And, if we spend more than we take in for very long we get into trouble.

Let’s look at a “typical” budget planner template. Then we’ll discuss it.

Category % of Income
Housing 35%
Food 15%
Auto 15%
Insurance 5%
Entertainment 5%
Clothing 5%
Medical 5%
Everything Else 5%
Savings 10%

Understanding The Budget Planner Template

The first thing you’ll notice is that I didn’t include any taxes (either income or Social Security). You can choose to do that if you like (in fact, it’s a real eye opener). But for our purposes it’s easier just to deal with your ‘take home’ pay.  The second thing to notice is that this is a guideline, not a straight jacket. The truth is that very few of us will fit into this exact framework.  So if your spending doesn’t match, don’t despair! Analyze the situation before you panic!  Try our excel budget template!

Customize the Budget Planner Template To Fit Your Wants & Needs

For instance maybe your entertainment spending is closer to 10%. Is that a problem? Maybe not, if you’re young, single and sharing an apartment with three friends. In that case what you save on housing is going for entertainment. So overall you’re not spending more than you’re making.  Or you may be a city-dweller where housing is very expensive (think NYC). But because of public transportation you don’t own a car. So the extra you spend on housing is offset by the reduced spending on transportation.  You get the idea. Tailor your spending plan to your needs. And, adjust it as you go through life and your needs change.  One other thing to notice is that housing, food and auto make up the lion’s share of the expenses. That’s true for almost everyone.  It’s in those three areas that most families get into trouble. Most often by buying a home or vehicle that they cannot afford. But once the commitment is made it’s very hard to undo.

Categorizing Your Expenses

You might wonder where a certain expense goes. For instance, household cleaning supplies. Many people buy them at the grocery store. So are they a housing or food expense? The answer is: it doesn’t much matter. Put them wherever it seems best to you. The key is always putting them in the same place, so you can compare results from month to month.

Another common question is what should I do with charitable contributions. You can either take it off the top (like taxes) or create a separate category for it. If you believe that contributions should come before your expenses you’ll want to take it off the top. If you think that it’s part of your regular spending then include it as another expense category.  For a budget planner template to be effective you must continuously follow your progress.

How Much Should You Save?

Finally, let’s look at John’s question about saving. There probably isn’t any single right answer, because saving isn’t really an expense. It’s an investment for a better future.  So I prefer to think of savings in terms of priorities. Before I can put money aside for savings I need food and a reasonable shelter. Probably also need dependable transportation to get to my job.  But after those basic needs are met, it’s time to begin saving some money. Not necessarily the 10% in our guidelines, but 2, 3 or 4%. Enough so that there’s some money set aside for the so-called unexpected expenses that happen to us all (dead appliances, home and auto repairs, unexpected sickness, temporary lack of work).

One other comment about savings. Paying off debt (especially credit card debt) is a little like savings. Consider payments used to reduce the amount owed as if they were savings or a Bank CD.  Finally, for those of you who don’t want to bother with any of this. I know what you’re thinking: I’m fine and don’t need any help monitoring my money. Just remember that most people who are in trouble today said the same thing when everything looked good to them.

 

How Do Credit Cards Work

How Do Credit Cards Work?

A Credit Card is a Means to Borrow Money

How do credit cards work?  When you boil it all down a credit card is simply a convenient means to borrow money.  In other words, when you use a credit card to pay for something it’s not really you that’s paying for it; the credit card issuer (the bank or financial institution that issued you the credit card) is paying for it.  That means when you use a credit card to make a make a purchase the seller is happy, because they get their money.  However, the transaction isn’t over as far as you’re concerned because now you owe the credit card issuer.  In summary, when you use a credit card you’re borrowing money from the credit card issuer pay for things, and then you’re obligated to pay off your credit card balance.

Payment Options

When answering “How do credit cards work?” keep in mind your credit card issuer obsesses over how much money you owe them.  Without fail every month they’ll send you a statement listing each of your charges as well as any unpaid balance that carried over from the previous month, and then they’ll then offer you payment options.  On the high end you can opt to settle all of your outstanding charges by paying your credit card balance in full.  On the low end you can make the “minimum payment,” the lowest amount the credit card issuer will accept without penalizing you according to the terms of your credit agreement.  Finally, if you can’t pay off your credit card in full but you can make more than the minimum payment then you are free to do so.

Some credit cards will charge you interest starting from the time you make a purchase (I’m not a big fan of these credit cards).  Fortunately, however, most credit cards won’t charge you interest (or “finance charges”) on your purchases as long as you pay your monthly balance in full and on time and you don’t have any carryover charges from the previous month.  Said another way, credit card charges are generally interest free as long as you pay your balance in full and on time. Related Article: Improve Your Credit In 5 Easy Steps.

Credit Limits

How Do Credit Cards Work Credit LimitYour credit limit is the maximum amount of debt that you can charge to your credit card.  For example, if you have a credit limit of $5,000 then you can either make a one-time purchase of $5,000 or you can make a combination of smaller purchases equal to the same amount.  You’re said to have “maxed out” a credit card when you reach your credit limit, meaning that you can no longer make any purchases with it until you’ve paid down your balance.  In other words, if you charge $5,000 one month and then pay your balance down to $4,000 then you charge another $1,000 until you reached your $5,000 credit limit.

Sometimes your credit limit is automatically set by the credit card issuer.  For example, they might say, “Here’s a credit card and, based on your salary, credit history, etc., you can charge up to $5,000.”  Alternatively, you can ask for a certain credit limit when you apply for your credit card (or you can ask for the credit limit to be increased for a card you already have).  Either way, you should not make purchases that would exceed your credit limit.

What happens if you do exceed your credit limit?  First of all, you may not be allowed to in the first place.  Remember, whenever you buy something with a credit card it’s run through a payment processor (or it will be verified online if you’re making an Internet purchase).  Thus if you attempt to exceed your credit limit your purchase may be denied.  However, if you do happen to make charges that exceed your credit limit then your credit card issuer will likely charge you penalties for doing so.

Cash Advances

In a typical credit card transaction you’re paying for things, but you never actually take possession of any cash.  For example, if you use a credit card to buy a computer for $1,000 you never take physical possession of the $1,000; that money is paid directly by the credit card issuer to the computer vendor.  However, in addition to using a credit card to charge purchases, you can use it to get a cash advance.  This can be accomplished in one of three ways.How Do Credit Cards Work Cash Advance

  1. You can use your credit card to get cash from an ATM (contact your credit card company if you don’t know your card’s PIN).
  2. If your credit card was issued by a nearby bank you then you can go to one of their branches in person and get cash directly from a bank teller who will charge it to your credit card.
  3. Finally, you can get a cash advance from your bank in the form of a cashier’s check (but again, it has to be the bank that issued the credit card).

Benefits – How Do Credit Cards Work With Cash Advances?

The benefits of the first two options are obvious; you can use your credit card to actually get cash.  But why would you want to use your credit card to get a cashier’s check?  To illustrate, my wife and I once had a car suddenly die on us.  After some searching I found a used car that we had enough money set aside to pay for.  The problem was that I couldn’t access the money immediately because it was in an investment account, and if I didn’t move quickly I was afraid we might lose the opportunity to buy the car.  To solve the problem I went to the bank and got a cashier’s check and charged it against our credit card.  I then used the cashier’s check to pay for the car.  Finally, after the money from our investments became available a few days later I used it to immediately pay off our credit card.  Thus, by using a credit card to obtain a cashier’s check we were able to move quickly on purchasing the car we wanted (which ironically turned out to be a terrible car…but that’s another story).

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Annual Fees

How do credit cards work with annual fees?  Well, some credit cards charge an annual fee and some don’t.  If that’s the case then why would you ever get a credit card that has an annual fee?  Generally you wouldn’t.  However, some credit cards provide special benefits and incentives, and if the value of those benefits and incentives exceed the cost of the annual fee then it’s worth considering.

What’s In It For The Credit Card Issuer?

How do credit cards work for the credit card issuer?  To have a balanced understanding of credit cards it’s important to know what’s in all of this for the credit card issuer.  Well, if you carry a balance on your credit card then it’s pretty obvious: they’re going to make a financial return of 18%-22% on the money they loaned to you.  Ouch!  But what if you pay your balance in full and on time every month and you never owe any interest?  Does that seem too good to be true?  Are you ripping off your credit card issuer, or is it just that they’re lulling you to sleep, waiting to hit you with some hidden fee or penalty?

Well rest easy, because your credit card issuer is making money when you use your credit card whether you carry a balance or not.  How?  For every purchase you make the merchant has to pay about 1%-3% in credit card fees (and sometimes even more on top of that).  As a result, as long as you use your credit card responsibly and pay your balance in full and on time then both you and your credit card issuer are getting something out of the deal: you get a safe, convenient means to borrow money in the short term and they get steady fees from merchants when you make purchases.  It’s when you carry a balance that things get out of whack, because then you’ll pay exceptionally high interest rates, and if you fall behind then a whole train of penalties and interest will follow as well.

Top 5 Frugal Living Tips – Living On A Budget

Why Frugal Living? Many couples are now deferring becoming parents and instead opt for getting a mortgage, traveling and preparing for retirement before junior arrives. The reason is the economic cost of passing up double wages and living on one income.

How do you do it?

Well, if you’re reading this for the first time scratching your head and pondering this very question understand that you’re not the first. And you most certainly won’t be the last couple to face this dilemma. It’s a big decision and you are probably already adding up all the creature comforts (the daily latte, magazine subscriptions, 2-door coupe) that are going to be side-lined when you start on your frugal living path.

But it doesn’t have to be all bad! Reducing the working hours of one partner can free up some more lifestyle choices as well. Holidays are easier to juggle (albeit harder to pay for), socializing time is freed up and odd jobs around the house can be accomplished without spending weekends rushing around.

If you planning on living on one income in the near future you might want to peruse the 5 frugal living tips.

5 Frugal Living Tips

Frugal Living Tips BudgetAddress The Budget – Procrastinate in creating a budget will only mean delayed, and harder, results of limited spending. You can’t keep the same spending habits when your family income goes from 100K to 50K. Some immediate savings are going to come from work-related expenses for the partner who has left the workforce such as parking, transport fees, fuel, cafe lunches etc. Other areas that might need to be pruned are non-essential items such as the weekly manicure, daily newspaper, cable-TV subscription. It may seem like you’re giving up a lot but in essence your just removing what you filled your double income up with.

Consolidate Any Loans or Credit Cards – this is an area where you can make huge immediate savings. If your mortgage length is 25 years try extending it over a 30 year time span. Of course you will end up paying more interest but it is better to have a mortgage that is achievable than default on one that’s not. Provided you don’t fix the interest rate you can supplement payments as and when you receive extra monies.

Frugal Living Can Be Painless

Buying in Bulk & Thinking Ahead – This seems like one of the most obvious frugal living tips, but the mind set of most individuals is well it’s only $1… that’s not going to make a difference. Let’s say you purchase two diet cokes every day at work from the vending machine for $1 each. We’ll assume you work 5 days a week for the whole year (260 days). You’re spending $520 a year on diet coke from the vending machine. Now assume you purchase the diet coke from the store when it’s on sale for $4 for a 12 pack. Now you’re average price per diet coke is $.25, so you’re spending $130 annual. You’d save yourself $390 a year. Being prepared and buying in bulk is one of the best frugal living tips, since it doesn’t impact your life style.

Find Supplemental Income Sources – there are so many opportunities today for stay-at-home mums or dads. Be creative and use your time well. Even an extra $50 per week can help out the family budget.

Increase Your Salary Insurance – the risk losing one salary while both partners are working isn’t too detrimental. This should only be considered if you’re only living on one income. Salary Insurance protects the main income in case of death, disablement or if the breadwinner has contracted a terminal illness. Work related accident insurance is covered by your employment (unless self-employed) but Salary Insurance protects against things you can’t.

Make some wise choices and frugal living on one income shouldn’t be too hard. Ignore the fact that your lifestyle will need to change and you will find that problems will continue to mount regardless of your nonchalance.

Credit Score Myths & Credit Report Facts

Common Credit Misconceptions

There are many myths and misconceptions associated with credit and FICO scores. We’re going to clear up credit score myths and credit report facts. The following is a list of the most commonly held with a brief explanation of what is actually true in regards to these.

 

5 Credit Score Myths & Credit Report Facts

1. The FICO Score is Solely Determinate of Whether a Loan is Granted

The truth is that, while important, a FICO score is just one of many factors that lenders consider when judging whether or not to extend credit. Some of the other factors generally taken into consideration are the amount of debt the borrower can handle based on income and other current debts, employment history, credit history, and various policies unique to the specific lending institution. A low score does not automatically disqualify a potential borrower, nor does a high score always guarantee acceptance.

2. A Poor Credit Score is a Permanent Black Mark

A credit score is essentially a snapshot in time. It is made up of several constantly fluctuating factors as consequently will change over time to reflect these factors. As time passes negative entries in a credit report will have less and less effect. Sometimes a significant improvement to an individuals score can occur in as little as a year or two.

3. Credit Scoring Discriminates Unfairly Against Various Minorities

This is not true. Race, gender, age, religion and marital status are prohibited by law from being included in FICO scores or being used as determining factors when evaluating credit worthiness of a prospective borrower. Studies have shown that FICO scores are an accurate measure of someone’s credit worthiness irrespective of their minority status.

4. FICO Scores Are An Invasion of My Privacy

Actually the opposite tends to be true. All of the information used to compile credit scores is already available to lending institutions. Remember a FICO score is merely a number used to quantify the various factors used to judge credit worthiness. Typically, lenders give enough importance to the score that they will ask for LES personal information on credit applications.

5. Applying For New Credit Will Lower a Person’s Score

Generally this is not true, as a result multiple inquiries could possible indicate higher risk, but if there are multiple inquiries from mortgage or auto lenders in a short period of time it is considered to be a single inquiry and will not affect someone’s credit score.

Now we know the credit score myths and credit report facts, it’s time to get working on your credit score! Check Out: How to Improve Credit Score in 30 days!

Improve Your Credit In 5 Easy Steps

Are you ready to improve your credit in 5 easy steps? You may be thinking “Improve your credit in 5 easy steps? I have bad credit… Is this applicable to me? Will this work?” Yes! Improving your bad credit score is possible with very little effort. Let’s get started on improving your credit score!

Improve Your Credit In 5 Easy Steps

Improve Your Credit In 5 Easy Steps

Improve Your Credit In 5 Easy Steps

1. Improve your payment history:

This one is obvious but is so central to restoring a good credit rating that it merits mentioning. There are some simple steps that you can take to help you maintain a timely payment history. Write the due date on the front of the envelope. Just the mere act of writing the date down will help formulate it in your mind and elevate its prominence. Set a specific time each month for paying bills, for example, the second and forth Sunday of each month. By setting aside a time devoted to paying your bills you will avoid a payment slipping your mind. Another benefit of scheduling payments in this way is that it will be easier to set and meet your personal budget. Pay by automatic electronic transfer or by going online. If possible have a reminder sent to you by email, most companies now offer this service and many do it by default.

2. Reduce the amount you owe:

Keeping balances low on revolving credit is very important. The higher the percentage of the balance you owe versus your available credit the worse it is for your FICO score. Try to keep your balances at 10% or less of your available credit. Reducing the amount you owe will also reduce your monthly payments, which will make it easier for you to make timely payments. Transferring your account balances to credit cards with lower interest rates is certainly helpful but remember that paying off debt rather than just moving it around is always preferable.

3. Keep your “length of credit” high:

The higher the average age of your accounts is the better. With all other factors being equal an account that you have maintained for ten years will have a greater positive effect on your credit score than an account which you have had for only one year. Also, keep in mind that if you open too many new accounts all at once the average age of your accounts will drop, which will lower your score.

4. Apply for new credit within a confined time period:

When applying for new credit, if you submit multiple applications to different sources do so in a short period of time, this way they will all be counted as a search for one single loan. If you spread the applications out over an extended period of time they will appear as separate loan inquiries, which will have a negative impact on your score.

5. Maintain a small number of credit cards:

Improve Your Credit In 5 Easy Steps Credit Cards

If you presently do not have any credit cards try to obtain a limited amount of credit cards and make timely payments on them. Having no credit cards at all will have a negative impact on your FICO score. If need be, set up a secured credit card or two. They are very easy to obtain, as they are seen as having an extremely low risk from a bank’s perspective.

How To Stop Impulse Buying

How to stop impulse buying?

I’ve received a lot of question about “How to stop impulse buying?” Everything about shopping is designed to make us feel delicious. The bags and boxes, labels and logos all add up to a dizzying experience. Slide in lights, music, colors, shapes, smells and designs and it’s little wonder we succumb. It’s all a science of course, a science whose only purpose is to part us with our money.

It begins with the way things are named and packaged. There are no accidents at the perfume counter or Apple Store. The shapes, names, and images that underpin these objects of desire are chosen for their power to enthral. The pinlights in the ceiling, the fleeting flashing graphics and the artfully arranged displays have all been tested, evaluated and scored. When we walk into a shopping center or department store our path has been planned. The aisles are laid out so as to lead us deeper and deeper into wonderland – Until we land with a bump at the end of the month and realize we’ve hammered the plastic again.

Why do are we predisposition to impulse buying?

how to stop impulse buying shopping

When we were children we went shopping and wanted everything. Now we’re grownups we can go shopping and have everything, at least until we hit our credit limit. Shops are enemy territory. 98% of what they sell ends up as landfill. And yet that New Thing compels our attention. That “New Thing” is the thing we now can’t live without. We didn’t know about it until today but now; now we can’t live without it.

In our hearts we know that nothing we buy ever keeps its promise of fulfillment but we carry on believing the spiel over and over again. It’s almost like we’re hypnotized. In a way, some of us are. Some of us are wired to get out of feeling rotten by buying stuff. It doesn’t work, at least not in the long term. A better way to get out of feeling rotten is to prove to yourself that you’re actually quite clever. If something is truly desirable today then it will be equally desirable next week. Rather than snapping everything up immediately put a shopping together and study the retail cycle. Plan a bit. Remember, 10% off doesn’t amount to much if you’re paying 27% interest.

How to stop impulse buying? Recognize you have a problem

If you’re a shopaholic, recognize that it’s an addiction. Other people, people you don’t know, can press a button in your head and make you spend right up to the limit. Impulse buying fills our cupboards with stuff that’s never quite as wonderful as it seemed in the shop. It gives us a momentary rush now, and a comedown at the end of the month. Like all addictions it borrows fun from tomorrow to enjoy today. Like all addictions the buzz never makes up for the payback. And, like all addictions, it can be kicked.

Alcoholics avoid pubs. Shopaholics avoid shops. There’s a life beyond retail. Start enjoying it. Stop shopping.

Debt Free Living

Steps To Becoming Debt Free

Steps To Becoming Debt FreeIs Becoming Debt Free Possible For Me?

YES!! There comes a time when most sane people have had enough….Enough stress and embarrassment….Enough collection calls and harassment…. Enough being in debt! Living the lifestyle that you think you have to live simply because others expect you to is foolish. It is time to grow up and to finally start acting like an adult.

No matter what you may hear from the popular newspapers, your debt problems
cannot be traced to anyone but you. The economy did not cause your problems. George Bush did not cause your problems. You did. You signed that stupid car loan at 12% interest. You signed up, and subsequently maxed out, those credit cards. No one else did it for you.

If you are finally tired of the mess that you created, there is a way out. Becoming debt free will allow you to start living the life you have always wanted. All it takes is a plan.

Enter Dave Ramsey!

Dave Ramsey is a well respected, nationally syndicated radio talk show host and TV personality, who is quite simply ‘the’ expert with respect to personal money management. Over the past few years, Dave has helped thousands, if not tens of thousands, of people get their debt under control and changed their lives forever. Additionally, Dave has helped people understand the true power of passive income. I am one of these people.

What I like most about Dave Ramsey is his straight talking, in your face, attitude who will blast apart any objections that you may have. Teaching from a Christian perspective, he truly has your best interest at heart, even while sometimes appearing cruel, or downright mean. Over the course of dispensing financial advice, he has developed what he calls ‘The Baby Steps’.

What Are The Baby Steps?

Often people get frustrated by all of the possibilities available to them. Information is great, yet information overload can be tragic. In order to help people process what is important, and what is just noise, Dave developed the following plan.

1. Build a Small Emergency Fund of $1,000

The first thing you should do is save $1,000 as fast as you can. Do whatever you have to do to put this money in the bank. Sell some old stuff on eBay or Craigslist. Get a second job bagging groceries at a grocery store. Create your own affiliate marketing empire online. Whatever it takes!

Once you save this money, keep it in the bank for true emergencies. Do not use it for a nice vacation. Do not go out and buy yourself a new set of golf clubs. Becoming debt free requires having this money set aside for true emergencies in the first step. If something does happen, you will not have to use your credit card to pay for it! You can use cash!

2. Start Your Debt Snowball

This is the step where most people begin to understand just how difficult it can be to get rid of debt. It takes a lot of effort, dedication and teamwork to power through this step. For some people, it may take two years to finally complete it. For others, it may only take a few months.

Here is the basic approach:

* Make a list of all our your debts from the smallest amount to the largest. List ALL of your debts, except for you house (this debt actually is accounted for later on).

* After all of your necessities are paid (food, shelter, transportation and clothing), pay the minimum amounts on all of your debts. As a side note, you should be current on all of your debts before you begin this step. In fact, I think you should be current on all of your debts before you complete your initial emergency fund.

* Any additional money that can be squeezed from your budget should be applied to your smallest debt. This is extra money, in addition to the minimum payments that you are already paying. Do not consider interest rates when determining which bill to pay extra on. Pay off your smallest debts first and ignore the mathematics involved.

* Once you have completely paid off the smallest debt, put all of the money you were paying on that debt on the next smallest debt.

* Repeat this process until you are debt free living, except for your mortgage.

3. Complete Your Emergency Fund

In step one, you saved $1,000 to cover minor emergencies while you begin to eliminate your debt. In baby step three, you will now complete your emergency fund. A fully funded emergency fund should cover between three to six months of expenses. This is your main security blanket.

How great would it feel to know that even if you lost your job, you would be OK while searching for a new one. Guys, a fully funded emergency fund is the best gift you can give to your wife. She will sleep so much more sounded at night when you have one.

4. Invest 15% of Your Income for Retirement

You have now finally reached the step where you start thinking about your retirement. You have no debt, except for maybe your mortgage, have a fully funded emergency fund and are well on your way to changing your family’s future.

Invest 15% of your gross income, not your take home. Do not cheat yourself out of potential growth. Additionally, if your company has some form of retirement match, do not include it in your calculations. Invest the full amount yourself and consider anything else just icing on the cake.

5. Save for College (if applicable)

According to Dave’s book, The Total Money Makeover, 68% of Americans have saved nothing for their child’s college education. This is a tragic oversight, which is putting thousands of students in debt before they even have a chance.

In this step, begin investing such plans ESA and 529s. If you do not know what these terms mean, simply type them into Google, and do a bit of research. New plans are being creating every day, so it may be best to talk to a qualified financial planner.

6. Pay Off The Mortgage

Who would have thought when you began this process, that you would actually be debt free (except for the mortgage), have a fully funded emergency fund, be saving for your retirement and be saving for your child’s college education? You have come a long way and you should congratulate yourself.

You are not, however, completely done yet. In baby step six, you will now start paying off your mortgage early. Treat this exactly like you treated your other debt in step two and figure out a way to pay more directly to the principle each month.

7. Build Wealth

This is the step most people only dream about. You are now debt free and can truly live free from any debt or burden, free from the stress of being able to pay your monthly bills and free to know that you will have something saved for your retirement.

In this step, build wealth and then…..give it away. Give some to family. Give some to churches, Support something you believe in. Create a lasting legacy for your family.

Conclusion
Being in debt is not the end. It does not have to be part of your life. Becoming debt free just requires the right plan.