Modern-day slavery is alive and well today. You might ask, “But wasn’t emancipation achieved in our nation over one hundred years ago?” We are not talking about the evils of slavery in the historic sense of the word, yet much of our culture is still enslaved. We are enslaved to the obvious addictions: drugs and alcohol, social media and entertainment, pornography and much more. But one area of enslavement that few people talk about, but to which many are in bondage, is debt. One of our goals at Redemptology is to free people from their bondage to the slavery of debt.
In the US today the average student loan debt is $38,390. The average mortgage debt is $202,284 and the average consumer credit card debt per household is $16,061. For many people, this debt will enslave them for much of their life. But there is a way out. With hard work and creativity, anyone can find freedom from the bondage to debt.
One of the simplest, most straight forward and effective programs for victory over debt and financial freedom was created by Dave Ramsey called Financial Peace University. This program has had a profound impact on many people. We highly recommend this resource.
Dave and his team have boiled down the essentials of Financial Peace University into 7 steps to financial freedom and stability. We would like to share with you a slightly modified version that we believe will provide both financial freedom along with an additional legacy that you can pass down to the next generation.
Baby Step 1: Save $1,000 for your quick emergency fund.
The first step to financial freedom is to aggressively save $1,000 cash for life’s unexpected emergencies. The goal is to get out of debt so that when a true emergency comes up, you want to have the cash in hand, instead of putting it on a credit card. This first step helps to break the cycle of debt caused by unexpected circumstances. Would you like ideas on how to make some extra money on the side to save up your $1,000 emergency fund? Check out this list of side job ideas.
Baby Step 2: Pay off all debt (except for the house) using the debt snowball.
Next, make a list of all debts that you have. They may include a car loan, credit cards, student loans, medical debt. List them in order from smallest debt to largest.
A. Begin by paying off the smallest debt aggressively while also paying the required minimum payments on all other debts.
B. Once the smallest debt has been paid off, add the amount that had been going to the smallest debt, to pay down the next debt on your list. This will begin the snowball effect which will pay down each debt more quickly until all debts are paid off.
C. Dave Ramsey also encourages getting rid of credit cards and moving to a cash system to keep better track of expenses.
Note: if you have medical debt, please read How to negotiate down medical debt.
Baby Step 3: Save 3-6 months of expenses in a fully-funded emergency fund.
When all debt is paid off, continue to put the money that had been spent paying down debt into a 3-6 month emergency fund. This will be important to have in the case of job loss to provide for your family while a new job is found. How do you determine 3-6 months of expenses? Track all of your expenses for the month including housing costs, food, education, transportation, etc.
Baby Step 4: Invest 15% of your household income in retirement.
Budget at least 15% of your income to saving for retirement. Consider a 401(k) if your employer has matching funds and a Roth IRA. Saving doesn’t have to be hard. It helps if you can make it automatic. Check out these resources: How to make saving automatic and acorns.com.
Baby Step 5: Pay off your home early.
Paying off your mortgage is the final step in becoming financially free from debt. By paying down your mortgage quickly you will also save tens or even hundreds of thousands of dollars of interest that would have gone to a bank. For more information, check out these resources: How to Pay Off Your Mortgage FAST, daveramsey.com/mortgage-payoff-calculator, amortization-calc.com/mortgage-calculator/
Baby Step 6: Build wealth and give.
Although the last step listed, giving joyfully should be part of the entire process. Believers should give to the church, not out of compulsion but out of gratitude for what God has done (2 Corinthians 9:7). We should make it a practice to give first to the Lord, knowing that it is the Lord who blesses us with everything. Consider making a plan and commitment to give to the Lord, through the local church. When you’ve been freed from the slavery of debt in your life you can also look for ways to bless those in need. Looking for needs and meeting those needs is one of the greatest joys that we can experience. For more information about the joy of giving, check out Randy Alcorn’s book The Treasure Principle.*
2 Bonus Steps to Leave a Legacy for Your Children
One day, your children will leave your home to begin their own life journey. The first way to prepare your children for life is to teach them financial literacy. A second way to leave a legacy and bless your children is to help them avoid the two greatest areas of debt that most people encounter, sending them into adulthood debt-free. The next two baby steps will help them avoid education debt and mortgage debt.
Baby Step 7: Save for your children’s college fund.
Saving for your child’s college education can be done through a 529 college savings plan or ESA (Educational Savings Account). We also recommend considering using this college hack to spend $5,000 or less for college or check out Scholly, which matches students with scholarships and grants for college.
But before definitely deciding to invest the time and money into college, it is a good idea to determine if the cost of college is worth it according to each child’s vocational goals.
Baby Step 8: Save for your children’s first house.
If you were able to help them get into their first home without a mortgage, they would be given a huge head-start in life. One potential way to help them do this is to purchase a house for them while they are young and rent it for 15-20 years while the rent is paying for the mortgage. If done strategically, the house could be completely paid off by the time they would be leaving the home on their own. A second strategy would be to build or purchase a tiny home for them that they could live mortgage-free so that they can save to pay cash for their second home. See this post for Gifting Your Children a Mortgage-Free Life.
6 Steps to be Financially Fit + 2 Steps to Leave a Legacy
