In Part 3 of my story, I shared how I made my already disastrous life even worse by trying my hand at the Music Business and going deeply into debt. I had made a total mess of my financial life for sure, and I didn’t know where to start in my quest to climb out of debt and get my financial house in order. I was working as hard as I could, but needed a systematic plan to address my debts or I knew I would continue living paycheck-to-paycheck. That’s when I hit my local book store and found two books that would change my life: The Total Money Makeover by Dave Ramsey and The Automatic Millionaire, by David Bach.
Even 15 years later, I am still recommending these books and giving them as graduation gifts. Dave Ramsey’s company is based out of Nashville, Tennessee and he has a wildly popular nationally syndicated radio program, The Dave Ramsey Show. I highly recommend that you check it out. In his book, The Total Money Makeover and his educational course, Financial Peace University, Dave teaches the “Seven Baby Steps” to get out of debt and build wealth. The basics of the Plan are as follows:
Step 1: Save $1,000
Step 2: Pay off all of your unsecured consumer debt, attacking each debt in the order of smallest to greatest, thereby creating a “debt snow ball”
Step 3: Build up a 3-6 month emergency fund
Step 4: Invest 15% in retirement accounts (401k, Roth IRA, Traditional IRA)
Step 5: Save for your kid’s college
Step 6: Pay off your home
Step 7: Build wealth and give
Each “baby step” has additional details beyond the scope of this post, but I’ll be discussing them more in the future!
David Bach’s book, The Automatic Millionaire, was equally formative in the early stages of my financial recovery. The book challenges you to conquer many of the same goals as Dave Ramsey’s “baby steps”, but it is the method of budgeting that distinguishes the two books. While Dave Ramsey emphasizes a detailed written budget where “every dollar has a name”, David Bach focuses on “paying yourself first” and skipping the written budget. To implement his plan, David Bach recommends that you set up a series of payroll deductions and automatic drafts from your bank account to fund all of your savings goals. After you have “paid yourself first”, Bach says you can simply spend what’s left. My wife describes David Bach’s plan as “self-inflicted poverty”. In fact, Mrs. BK2FI regularly complains that we aren’t broke … I’ve just made it feel that way because of all of my automatic savings!
After reading these two books in 2002, I was ready to conquer the world, climb out of debt, and make up for all of my financial mistakes. There was only one problem — I ran out of money right when I was eager to get started! But there was hope. I knew that I had my first big Christmas bonus coming in a matter of weeks if I could just bridge the gap. With no available credit and no cash, I approached the turning point of my financial life. I called a really good friend who agreed to meet me in a grocery store parking lot and loan me $100 to make it through to my upcoming bonus. It felt really bad to borrow that money. It’s hard to describe the feeling. It was a mixture of failure, embarrassment, and determination. Sitting in that parking lot on a cold Saturday night, I made a promise to myself that I would never allow myself to be that broke again. And I have kept that promise.
That was my moment of truth. We all have them. I’d love to hear about yours!
In future posts, I’ll share the nuts and bolts of how I combined the “7 Baby Steps” and the “Pay Yourself First” teachings of Dave Ramsey and David Bach to conquer my debt problem…