Thursday, June 18, 2009

Taking Control - Part 2 of 3

Talking earlier today I mentioned Dave Ramsey and the baby steps and how we vary but I didn't really go into detail so:

  1. 1,000 to start an emergency fund
  2. Pay off all debt using the debt snowball
  3. 3 to 6 months of expenses in savings
  4. Invest 15 percent of household income into Roth IRAs and pretax retirement
  5. College Funding for children
  6. Pay off home early
  7. Build wealth and give
Let me start by saying I really like Dave because he tells it like it is and isn't afraid to hurt someone's feelings or to give them a pat on the back. And I think his steps could be a great map for some people but I think we can better achieve what we want to achieve using a slight variation on some of the steps.

The BSquared version of the Baby Steps: (explanations afterwards)
  1. 1,000 as an emergency fund (have to first have a little to keep something little from throwing everything else out of kilter)
  2. Pay off all debts under $10,000 using the Debt Snowball, excepting those with a sub 3 APR (no debt is good debt but I think if your debt can be beat by inflation which is 4% over time then don't go crazy until further down the steps, with an exception I'll talk about at the end; I will also say that Dave's way takes the thinking and impulse control out of this with the no 3 APR exception which can be a good thing but for us we have proven over the past few years that we can handle the task of trusting the math and not abandoning the plan)
  3. Bump up the Emergency fund to $5,000 (this is big for us as we carry fairly high deductible insurance, lets assume a medical thing like I had last year then it takes $2k to the deductible, 5k here makes that keep everything from going crazy, also if have a bad car accident have to think 500 to get the car deductible another 500 for medical, if its not enough 2k for medical to kick in, its bad but it could be much worse w/o this safety net)
  4. Invest $10,000/year (or whatever is the Roth max) in retirement (for better or worse none of us are getting any younger and compounding interest does magical, magical things when applied to 30 or 35 years, start now or forever eat canned tuna fish instead of Sushi)
  5. Create savings of 3 to 6 months expenses (these numbers can seem kind of scary when you think about what is required BUT if you have paid off all debt except for sub 3's and the house it may not be as much as you think)
  6. Pay off debts over $10,000 using the Debt Snowball, excepting those with a sub 3 APR (this can get really discouraging, trust me, we know, the snowball rolls very slowly when trying to pay off $17k like with K's car but it happens and when it does it makes you feel really good; also I count a 2nd mortgage in here, 1st goes to the house, 2nd goes to not having enough cash at time of purchase IMO so it's just a loan debt)
  7. Increase the retirement savings to at least $15,000 a year, perhaps more if a good investment (thinking real estate) comes available
  8. Pay off home early (with this I assume your house isn't a sub 3, ours certianly isn't, but keeping a house payment for the tax implications just isn't smart, you don't rather keep a deduction than keeping all that money you are spending in interest on the house; run the number % of house payment going out not to principle v. what you are saving on taxes)
  9. Pay off any loans with a sub 3 APR (here is the magical place we are still 150k from (most of which is the house) but if you have paid the other stuff and put your retirement money in and built up 3 months of expenses you can certainly kill this and then you have all sorts of money to play with every month) - which takes us to #10
  10. Stuff as much into investments and retirement savings as possible to shoot for early retirement (plus remember, in theory social security will still be around in 2045 when I hope to retire and if it is (but I'm not counting on it) that is just gravy to the preplanning we have laid here)
I will say I did not mention anything about kids or college funding. This is for two reasons: 1. we don't have kids and don't plan on them in the near future so we control what we can best we can for now and if something happens down the line the 1-10 might get amended; and 2. In my family there is a tradition of parents not paying for college, my grandfather didn't pay for my dad, my dad didn't pay for me, and on some level I would like a kid of mine to have the satisfaction and self reliance that comes with making it on their own. Plus there is nothing wrong with junior college and state universities so it is afforable as long as you stay in state.

I almost forgot the exception I promised in #2 - The exception I include for paying off sub 3 APR stuff is if you anticipate a tough situation coming up or something where a cash infusion might be needed and you feel it best to clear a recuring debt (i.e. Car Loan at $350 a month) to make each month better if someone were to lose a job or something of the sort than I'm ok with forgetting the sub 3 APR thing because flexibility in tough times is worth its weight in gold (and piece of mind) regardless of the mathmatical equations regarding inflation beating the loan.

I will also give a shout out to a blog I read fairly religiously - Budgets are Sexy - some really good stuff there

AMENDED - I actually reordered the 5-9 a bit after reflection, basically I moved up 3 month Emergency plan and 15 K into retirement b/c those are smaller things you can do and still be accomplishing the bigger goals like paying off the house or all debts over 10k

1 comment:

J. Money said...

wow, that is awesome! big ass kudos for building this out and working on it :)