Take 'baby steps' to financial success

Flipping the radio dial as he drove one day, Allen Johnson stopped at the voice of a radical -- a get-out-of-debt radical.

Johnson listened as financial writer Dave Ramsey espoused practices that could all but get a man stoned in an American shopping mall.

Ramsey is a consumerism blasphemer, saying if you can't pay cash for something then you can't afford it.

His mantra: "Live your wage."

It's advice many Americans don't follow -- particularly during tough economic times.

As of February, the Federal Reserve reported the total revolving consumer credit debt in the United States at nearly $950 billion. The Fed also reported a 2 percent consumer credit increase for July, much of it credit-card debt.

"The Fed's stats are alarming," said Bruce McClary, a certified financial specialist and spokesman with the nonprofit ClearPoint Financial Solutions (formerly Consumer Credit Counseling Services), which has 35 offices nationwide. "People are continuing to charge as usual."

Not all people. When Johnson, who drives for UPS, got home that night he told his wife, Meredith, about what he had heard. At the time, about three years ago, they had a 30-year mortgage on their 2,100-square-foot home in Somerville, Tenn., had just had their first child and indulged in a buying spree that included a home computer, a video recorder, an SUV and a truck.

But then Meredith bought one of Ramsey's books, "Money Makeover."

"It was like one of those cartoon things," Allen said as he held their second child, a 3-month-old daughter, in their living room, and raised his hand over his head. "The light bulb goes on."

Meredith, 37, is on maternity leave from her management job at AT&T. But before taking her leave, she passed Ramsey's book to one of her employees: 23-year-old Marcus Washington.

He and his wife, Ashley, just celebrated their one-year anniversary. She graduated from the University of Memphis with a degree in social work and is a secretary for United Way of the Mid-South. Marcus is in his senior year at the U of M, and Meredith proudly points out that he already has paid off much of his student loan.

"We both had been through a lot financially before we got together," Ashley said. "When I was with my parents, I'd spend my whole check. My parents were my safety net."

Marcus says they used to spend money on "frivolous, unnecessary things."

Although they are still paying off two cars, they should be done in a year or so. They're saving to buy a house, but "we want to wait till we get 20 percent to put down," he said.

The Washingtons also have decided to delay starting their family.

"We think it's more responsible to wait," said Marcus.

Fortunately, when the Johnsons bought a $25,000 in-ground gunite pool, they also refinanced their house and went to a 15-year mortgage. But challenges remained.

So, they devoted themselves fully to Ramsey's "seven baby steps" (see below), and maybe the most important step is what Ramsey calls the "debt snowball."

Under this concept, you pay off the smallest debt first and work your way toward the largest debt (typically, your house note).

McClary, however, says the "debt snowball" theory is not appropriate for every season.

"We treat every situation as unique," McClary said. "There are times when the snowball works. There are other situations where there are other factors that have to be addressed first, and other situations where it might not work at all."

It has worked for the Johnsons, who say they have paid down $200,000 in debt over the last five years. They are now counting down to the day they pay off their mortgage: May 17, 2009.

They no longer have credit cards and Meredith continues to clip coupons, recently sold their son's baby clothes on eBay, and twice repaired their old sofa before replacing it and paying cash for a new sofa.

"Knowing our conversations with our grandparents, this is how it used to be," Meredith said. "You didn't go out and try to create a life based on credit."

Baby Steps to "financial peace":

-- Put back $1,000 to start an emergency fund.

-- Pay off all debt, using the "debt snowball" concept: paying off the smallest debt first and working your way up to your largest debt.

-- Keep three to six months' worth of expenses in your savings.

-- Invest 15 percent of household income into Roth IRAs and pre-tax retirement.

-- Divert some money to college funding for your children.

-- Pay off your home early.

-- Build wealth and give! Invest in mutual funds and real estate.

Source: daveramsey.com

(E-mail Don Wade at dwade(at)commercialappeal.com)