If ever there were a time to batten down our financial hatches, don our life vests and check the life boat for leaks, this is it; I can almost hear the gale force winds howling when I listen to Maria Bartiromo giving us the horror tale of the stock market in the evening. This is only made more scary by Suze Orman advising us how to deal with our incredibly shrinking assets in the morning.

But we all know what the best first step should be.

Michael Sitarzewski in How we got out of debt: from $50k to $0 in less than a year talks about his own moment of illumination when he realized he was looking at “a $23k personal loan, $24k in two cars, and a few thousand on credit cards ($50k for for the math deficient). He had heard Dave Ramsey on the radio, was impressed, so he and his wife turned to Dave’s book The Total Money Makeover for help.

“The plan? Live on less than you make (a lot less if you can), and use the rest to pay off debt.

So we formulated a plan based on Dave Ramsey’s “Baby Steps.”

1. The $1,000 Emergency Fund - we put ours in a savings account that was tied to the checking account as overdraft protection. That helped us get over using the credit cards as a buffer. We found that we never had an expense so large that we needed more than $1,000.

2. Pay off all debt using the Debt Snowball – pay off the debts, smallest to largest, using the payment from the last one on the next. Eventually, everything is paid off and the fun starts. Interest isn’t relevant in the conversation because the excitement and the feeling of progress by paying off debts is extremely valuable. Don’t get out the calculator, it doesn’t matter. Pay them off, smallest to largest, and you’ll see how fun getting out of debt can be.

We started with the smallest card, then the other. Closing credit cards is fun. In the meantime I made the incredibly difficult decision to rid myself of my car and the $800/mo it was costing us. Man I loved that car, but $580 for the payment, another $100 for insurance, and $120 or so in gas per month? Didn’t love that. My car took two months to sell, but once it did we were able to apply that money to the other car (it was next in line).

With the second car paid off ($300/mo), my car sold ($800/mo), and the credit cards gone ($180/mo), the personal loan was up next. The friend that loaned us the money was getting a little impatient with us given how much debt we were paying off, but he was pretty excited to see the progress come so quickly when it was his turn. We were paying that debt off quickly. Very quickly.

It is said that once you start doing smart things with money, money finds you. Whether or not I believe that in a metaphysical sense is a matter of debate, we did see a nice tax return (the largest in years) and had an investment pay decently that spring. We didn’t get raises during that period, and still haven’t, but the investment keeps making returns and by getting out of debt, we’ve found a lot more money in our salaries.

We wrote the last check on September 18, 2007 – we were debt free in less than a year.

3. 3 to 6 months of expenses in savings - we chose a high interest savings account… and decided on 3 months of expenses because two of us were working. By extension, that means 6 months as long as we don’t both lose our jobs. We’ve completed this step. Reaching this goal while debt free was relatively painless – we were already trained by the budget.

4. Invest 15% of household income into Roth IRAs and pre-tax retirement. In 2007 – for the first time ever – we fully funded our IRAs. We snuck it in just under the wire, but we did it.

For the long run, look at  5 through 7: College funding; Pay off your house early – Build wealth and GIVE! “

This advice is good for normal times but in today’s hazardous financial climate, with worse times looming, it will pay extra dividends to start the belt tightening and budget crunching, injecting more discipline in our spending and, generally, getting our financial house in order. When the good times return, this should accelerate our savings and one day we could be receiving interest instead of paying it out monthly.

Video: Suze Orman’s Guide To Tough Financial Times

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