Cash out of Debt: Three Steps to Financial Freedom

by | Aug. 10, 2009


Save. Another four-letter word and one that too many of us avoid. Save for emergencies. Buy food storage. Save for missions. Pay the home off early. Save for retirement. Save for college expenses. Chances are that by trying to do them all, you will do none of them. That would make you normal. It will also make you broke.
Three Simple Steps
During our first twenty years of marriage, my wife and I handled money the way most people did--we borrowed. We weren't spendthrifts; we paid our tithing and lived frugally on a single income. But every year we ended up a little more in debt than the year before.
Fast forward twenty-three months, and our consumer debt went from $26,000 to $0. What changed was not knowledge, it was behavior. We followed these three simple steps:
1. Pay a full tithe and generous offerings.
2. Save a beginner's $1,000 emergency fund.
3. Pay off all consumer debt, one debt at a time beginning with the smallest.
In order for this plan to work, we also had to change three behaviors:
1. We cut up our credit cards.
2. We started using a cash envelope system
3. Together, we planned a monthly zero-based budget to tell our money what to do, each and every month.
Now the only debt we have is our mortgage. Great, you can be happy for me, but what does that do for you? Not much. But if you decide to follow these three steps and change these three behaviors, I predict that in eighteen months to three years, you too will be debt free except for your mortgage.
Step 1: Pay a full tithe and generous offerings
As a rule, many of us could do better with charitable contributions beyond tithing and fast offerings. Maureen Smith from Bountiful, Utah, who was still in debt, had been saving her music lesson money to replace a ten-year-old living room carpet worn thin by six busy children. In December 2005 her bishop was asking for donations to help needy families with Christmas. She gave him $600 - so much for plans for a new carpet. Around this same time, a local restaurant burned to the ground, and the law firm next door was required by their insurance company to pull out their three-month-old carpet, even though it was not damaged. To Maureen's surprise, the carpet was dropped off in her garage and is now in her home.
Step 2: Save a beginner's $1,000 emergency fund
If you set up a $1,000 beginner's emergency fund, two things will happen--you will be more careful in spending your hard-earned cash, and emergencies will happen with less frequency. Most people can set up this emergency fund in a few weeks or months. Sell something, take a temporary job, make minimum debt payments and throw that money into this fund.
Step 3: Pay off all consumer debt, one debt at a time beginning with the smallest.
With the first two steps taken care of, focus turns to paying off all consumer debt. Make minimum payments on everything but the smallest debt and use all your financial resources to pay it off as quickly as possible. As each debt is paid off, the amount you have to attack the next debt grows like a snowball. With focus, planning, dedication, and discipline you should be debt free except for your home in around two years.
Consumer advocate and personal finance author Dave Ramsey likes to say, "Personal finance is eighty percent behavior and only twenty percent head knowledge." If you can implement the following three behaviors, you will be able to easily follow the three steps above.
New Behavior 1: Cut up your credit cards
Professor Elizabeth Warren of Harvard Law School is known for her bold statement that credit card companies use the same marketing tactics as drug dealers. The average household has at least four credit cards, and fifteen percent have at least ten. The average user with a credit card balance owes around $9,000, and just like a drug addict, they had no intention of getting into this position. The average non-user owes nothing. There is no reason why a family can't make do with one credit card or none at all. You can use a debit card in place of most any type of credit card purchase.
New Behavior 2: Use a cash envelope system
Studies have shown that people who buy things with a credit card will spend thirty percent or more than by using cash. Your money will last a lot longer if you set up a cash envelope system for food, entertainment, clothing, and any other area where it is easy to overspend. Decide how much you are going to spend in each of these areas on payday and put the cash in separate envelopes. This money needs to last until you refill the envelopes again with the next paycheck.
Mandy and Steve Baker of Burley, Idaho, have used this system for a number of years. They have found that sometimes they have had to juggle money between envelopes, but they don't overspend. As a result, they have paid off nearly $10,000 of consumer debt and are now building up their emergency savings fund to equal three to six months of expenses.
New Behavior 3: Plan a monthly zero-based budget to tell your money what to do each and every month
Tyrell Arnold of Vanderhoof, British Columbia, was $30,000 in debt, and his wife BreAnn was expecting their first child. They held monthly budget meetings to plan what their money would do each month. They sold an expensive truck and made other adjustments that allowed them to pay off all their debts in four months. No debts mean they are getting a head start on saving for their children's education.
Joe Loughmiller of Fairmont, Minnesota, started holding a monthly budget meeting with his wife, and in twenty-eight months paid off more than $40,000 of debt. This monthly budgeting kept them on track with their goals. It was hard the first few months as they learned and honestly confronted their spending patterns, but they soon got the hang of it, as the results show.
The key is to use this budget for at least three months. Each month you will do better.
You now can choose to be normal and broke or change your behavior by following these simple steps to financial freedom. Since being debt free is more compatible with gospel principles, I hope to see you join the thousands of members that have already found this financial peace.

Don Milne lives in Bountiful, Utah. He directs a Zions Bank program (, which has partnered with businesses and churches in Utah and Idaho to teach classes on getting out of debt. More than 6,000 people have participated.
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