Baby Step 2 - Getting out of Debt (again)

In my last column I discussed step 2 of Dave Ramsey's Seven Baby Steps (see http://www.daveramsey.com/new/baby-steps/). The baby steps are as follows: (1) save $1000 to start an emergency fund, (2) pay off all debt using the debt snowball (besides your home), (3) 3 to 6 months of expenses in savings, (4) invest 15% of household income into RRSPs, (5) college funding for children, (6) pay off home early, and (7) build wealth and give.

I would like to continue discussing debt in answer to the question, "how is it possible to live without debt?" I would argue not only that it's possible to live without debt but that it's the best way to live (with the exception of a minimal home mortgage after a healthy down payment). I would even strongly recommend living without access to credit cards or lines of credit. Gasp! No credit cards?!

But what about emergencies?! That's what baby step 1 is for - $1000 to hold you over while you get rid of debt. Once you are rid of all your debt, work hard to complete baby step 3 by saving 3-6 months of expenses, which should be plenty for almost any emergency. Then you won't compound the emergency with years of payments on high-interest debt. Not having access to debt also forces you to be creative and resourceful with how you handle emergencies rather than simply handing over the plastic.

But how do I book hotels or buy stuff online?! Following the lead of US banks, more and more Canadian banks are offering Visa or Mastercard cards that are identical to a credit card except the funds are deducted directly from your checking account, like a debit card, rather than building a debt balance. I have the Global Mastercard from 1st Choice Savings, and I have never missed my credit card!

But I need to build my credit score! Why? So you can go into even more debt? Did you know that you can get a home mortgage without a credit score? If you have a good employment record and a history of paying rent, utilities, etc on time, you won't have trouble getting a mortgage. If a lender won't consider you because you don't have a credit score, take your business somewhere else.

As you can tell, I feel strongly about the pitfalls of debt, and it's not because I have always been smart about steering clear of debt. I have made my share of stupid decisions fueled by debt, and I never want to be caught in those traps again!

If you have any questions or comments, please email me!