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Saturday, October 25, 2008

Seven Steps to Get Out of Debt

I know it's a not very good time to talk about getting out of our debt. What with the inflation rising high, unsure of tomorrow economy stability and lots of other things.

However, I'd still like to share this information which I found at These steps were suggested by financial expert Dave Ramsey.

1-Save $1,000 Cash as a Starter Emergency Fund
Money magazine says that 78 percent of us will have a major negative event in a given 10-year period of time. Life happens, so be ready. Stop everything and focus. Twist and wring out the budget, work extra hours, sell something, or have a garage sale, but quickly get your $1,000.

2- Pay Off All Your Debt Using the Debt Snowball
List all your debts (except the house) in order of smallest payoff balance to largest. Then pay the minimum payment to stay current on all the debts except the smallest. Every dollar you can find from anywhere in your budget goes toward the smallest debt until it is paid. Once the smallest is paid, the payment from that debt is added to the next smallest debt. When debt number two is paid off, you attack three, and so on.

3-Finish the Emergency Fund
A fully funded emergency fund covers three to six months of expenses. When the big stuff happens, like the job layoff or the blown car engine, you can't depend on credit cards. If you use debt to cover emergencies, you have backtracked. A strong foundation in your financial house includes the big savings account, which will be used just for emergencies.

4- Invest 15 Percent of Your Income in Retirement
The rule is simple: Invest 15 percent of before-tax gross income annually toward retirement. Make the most of your 401K at work especially if your company matches. Invest in a diverse portfolio of mutual funds with a good track record. And put the rest of the 15 percent into a Roth IRA.
Note:In our case as Malaysians, this is the same as investing in our KWSP. However, the recent news about RM5 billion taken out of our KWSP as a loan to an unknown company called Valuecap is indeed very disturbing. Refer to

5- Save for College
When you save for your child's college tuition, you must make at least seven percent per year on your investment to keep up with inflation increases. I suggest funding college with an Educational Savings Account funded in a growth stock mutual fund. The ESA grows tax free when used for higher education.
Note: Again, the ESA is for Americans. My suggestion is we just need to do some research about the most profitable education fund available in Malaysia. Err.. definitely not the PTPTN.

6- Pay Off Your Home Mortgage

Put all of the intensity and financial power you put toward your debt snowball to pay your house off as quickly as possible. Imagine how good the grass will feel under your feet when it's paid for. Without a house payment you have control of your greatest wealth-building tool—your income.

7- Build Wealth

Here's the payoff. After all your hard work you have finally gained control of your most powerful wealth-building tool and it is yours to do with as you will. You have all this financial muscle, so now you should do something intentional with it. Have fun, invest and give.

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