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Dear Dave,
I’m trying to get out of debt and start handling my money better. Should lower the amount I’m contributing to my 401(k) so I can pay off my car and house faster?
Austin
Dear Austin,
I can tell you’re excited about the idea of getting out of debt. And that’s a good thing! But I don’t want you to get ahead of yourself when it comes to gaining control of your finances.
Here’s my Baby Steps plan. The first thing you should do is set aside a beginner emergency fund of $1,000. That’s Baby Step 1. Next comes Baby Step 2, which means paying off all your debt, except for your house. This would include your car. During this time, you should temporarily stop any kind of investing and retirement contributions, so you can attack your debt with a vengeance.
Once your mortgage is the only debt you have, it’s on to Baby Step 3. This means you start saving money to grow your beginner emergency fund into a fully-funded emergency fund of three to six months of expenses. After that, it’s on to Baby Step 4, which is investing 15 percent of your pre-tax income for retirement. In your case, that would mean re-starting contributions to your 401(k).
The rest of the plan goes like this. Baby Step 5 is putting money into your kids’ college funds, if you have kids. Baby Step 6 is focusing on paying off the house early, and then comes the real fun. Baby Step 7 is where you build wealth and give like crazy.
It may take a little time in some cases, but there are millions of people out there who will tell you this—following the Baby Steps works!
— Dave
