How we paid off $55,500 in debt - 2 of 6

Step two of paying off our debt was to change our day to day habits such that we stopped adding to our debt. What does that mean??

First, we cut up all our credit cards. Dave Ramsey suggests switching from credit to using cash for all day to day purchases. We tried using cash for every day spending, but we found that cash was too difficult for us to track and instead switched to using our debit cards for all of our day to day purchases.

Second, we established our baby emergency fund of a $1000. The baby emergency fund is designed for those expenses, like a car repair, a medical bill, a home repair that used to land on our credit cards. Dave Ramsey recommends establishing a baby emergency fund before moving on to the debt snowball. And if you end up raiding the baby emergency fund, as we did a couple of times, you rebuild it before continuing with the debt snowball (more about the debt snowball in step 3).

I'm sure you are asking yourself, how do I save up $1000 for a baby emergency fund when I'm deep in debt and I'm living pay check to pay check . . .

• Pay yourself first. Include savings for your emergency fund as you would any other bill and put it at the top of your bill paying list.


• Found money. Use your tax refund, your stimulation check, bonus, birthday money, any 'windfall' money for your baby emergency fund.


• Clean house. Sell stuff - hold a yard sale, list items on eBay.com or craigslist.com. Down size - sell your car and buy a less expensive vehicle, sell the boat, camper, RV, etc.


• Up your income. Take on a part-time job and put your nights and weekends to work. Pick up extra income by baby-sitting or pet-sitting.


• Work your budget. Track your spending, every penny, for a couple of weeks and figure out where your money leaks are. Ask for receipts or carry a small notebook to track purchases. Are you spending $5-$10 a day on coffee or lunch? Plug up those money leaks and put that $50 a week into your emergency fund. Take a hard look at each and every regular bill (think cable, cell phone, internet, gym membership, cleaning service, lawn service, pet service, club dues, kids' activity fees, etc.) Anything that you can do yourself -- cleaning the house, cutting the lawn, walking the dog -- should be cut out all together. Consider also getting rid of the cell phones, cable T.V., etc. -- can't live without the cable, then reduce the number of channels and reduce the monthly bill.

What should you do with your emergency fund monies? Well, that is up to you - you need to figure out what works best for you. We kept part of our emergency fund in a regular savings account linked to our checking account with Wachovia. We kept the rest of our emergency fund in an ING high yield savings account. We earn more interest on the money in our ING account and its harder to access as it generally takes a day or two to transfer from ING back to Wachovia.

Are you interested in living a debt free life? Make it happen, move forward by establishing a baby emergency fund of $1000.

If you want to pay off your debt, stop incurring new debts. Cut up your credit cards or put them on ice (literally - freeze your cards in a block of ice).

Check back for steps 3 - 6 of how we paid off $55,500 in debt in 12 and a half months.
See step 1 of 6.