Once you have completed Baby Step 1 (save $1,000 cash beginner emergency fund), you can move on to Baby Step 2. You may be asking yourself, “What is Baby Step 2?” If you are new to the debt free journey world, then you are probably seeing a lot of people/posts revolving around BS2. This refers to the Dave Ramsey Baby Steps. You can probably do a web search and locate tons of material / resources on the subject.
BS2 – List all of your debts from lowest to greatest (regardless of interest). Pay the minimum payments on the rest of the debts except for the 1st. Throw all extra cash (that is not tied up in the beginner emergency fund) at the 1st debt.
Reader: “Why do we list out from lowest to greatest? I have several credit cards with XX% APR. Why wouldn’t I attack those first?”
Author: We are changing a behavior. Your behavior is what got you into the mess you are in. It is not about math – if it were, you wouldn’t have any debt! The reason for listing out the debts from lowest to greatest has to do with your brain. We will work our way up to the larger debts. When you pay off the 1st small debt, it feels REALLY good. You are starting to make progress to becoming debt free. Plus, since you are on a tight, written budget, you will be able to move whatever payment you were making to that 1st debt onto the next debt while still making the minimums on everything else.
I have a lot of people ask me, “what about credit cards with frequent flyer miles?” My answer: IT IS NOT WORTH IT. Airlines know that you use your card for everyday purchases. So they get you hooked on spending $10k-20k on items you may not need in order to get a “free” flight to Hawaii (or other tropical location of your choosing). That’s why the miles are worth $.00000001. Besides, it takes FOREVER to get the right amount of miles in order to purchase your flight. One time, I needed to actually purchase some miles for a flight. I purchased the amount needed to get the “free” flight. When I went back to check the availability, the miles needed to purchase the flight went up!!! What a rip off!
When you start to build momentum on paying off your debts, you emotionally feel better too. The light at the end of the tunnel becomes clearer as you move past the muck and mire of the debt. It may be grueling for awhile, bit this is only temporary. Once you are debt free, you will never want to go back into debt. If you do wander back into debt after paying everything off, you bet your bottom dollar that it will get paid off in lightning speed.
Does this make sense? Can you see yourself putting together a plan of action to attack the debt like this? Would you do it differently? I want to know. Please reach out!
Madsen Financial Coaching 