On this day

So Facebook’s “On This Day” feature reminded me a couple days ago that I posted this back in October 2009:2009 Dave Ramsey

It’s almost humorous to me now, six years later, to read that. And I want to discuss what a mind shift has taken place in me since then. I spend much more time being intentional about purchases and our overall financial plan, and I feel less anxious about our bigger financial goals.

When we got married, we had budgeted enough to know that we could afford our apartment and living expenses, but hadn’t figured out what to do about debt, savings, retirement, etc. I was 27, and my husband was 26 when we got married in 2008, and I think we were pretty typical in that we’d discussed some financial stuff before marriage and in our first year of being married, but not other things. We both had mounting student loans, since we got married while we were both in school (him completing a second bachelor’s degree, me completing my master’s degree). Even before graduating in May 2009, I felt the pressure to get a good job in order to start paying my student loan debt. My husband’s debts weren’t nearly as large, but 2009 was rough for him in other ways, and he needed a new direction in life, and so we both began new jobs within a couple months of each other. We had no credit card debt and two older vehicles that we owned outright.

But when Steve’s aunt mentioned Dave Ramsey to us in the summer of 2009, we were both intrigued. I got one of his books at the library when we got home, and must have been reading through it and thinking about in October. My first student loan payment came due in November 2009, and I had just started my new job on October 6. If you’ve been reading along with me, or have read the archives, you already know how things turned out. We now have a positive net worth, no debt, and still no mortgage (at least while my husband is graduate school).

The major change is that I feel that I know a heck of a lot more about money and am much more financially savvy now. Dave Ramsey was a great first step, and the snowball method of eliminating debt worked exactly as it does, with people, on average, paying off their debts in around four years. But I’ve done a lot of other reading (and listening to podcasts like Planet Money), and feel confident in most of the financial decision-making situations in which I find myself. For example, open enrollment for health insurance is just around the corner, but I’ve already got a spreadsheet set up and next year’s spending plan laid out, so I can simply plug in some numbers to see what’s best financially for us. There’s no more big question marks looming in our financial picture. Of course, anything can happen, but there’s more security in having a plan and a backup plan than having no plan at all.


Debt #2 is gone

At the end of September, we were able to pay off the second to the last student loan. I think the beginning total was something like $9k. I’ll just go ahead and overshare with actual rough totals:

Debt #1 – $6k, paid off in August 2010
Debt #2 – $9k, paid off in September 2011
Debt #3 – $38k, to be paid off in 2013

It doesn’t seem all that long ago that I wrote that we’d paid off Debt #1, and it really wasn’t. How did we pay off $15k in less than 2 years? And how will we pay off $32k by 2014? By being very lucky with our jobs and living well below our means. We’re fairly average according to Dave Ramsey, with being able to get through the Debt Snowball in three years–$53k in three years doesn’t sound too shabby.

I recently heard that students shouldn’t borrow more than they will make in their first year working. After I thought, “that’s impossible,” I realized that this holds true for both my spouse and I. He made more than $15k his first year after he finished with school, and I made more than $38k. And, with not changing our lifestyles from being students to part of the full-time workforce, quickly paying off the debt and saving over $25k in interest payments has been marvelous.

Need new energy

I have to admit that I am growing bored with the debt snowball. I listened to some Dave Ramsey this evening to see if it would inspire me, but it just didn’t. I think paying off the next debt in the snowball just seems less exciting that paying off that first one. Sure, it will be nice when we’re down to just one last debt on the list, but I guess I feel like I am losing momentum.

One nice thing that happened last month in the snowball was getting to the point where the vast majority of the payment on debt #2 went toward principal. There is almost nothing going toward interest on that one anymore. Sadly, loan #3’s payment is over $200 and less than half of it goes toward the principal. If I think about that, it does start annoy me, which makes me want to kick it to the curb that much more.

I envision that some day in the not-too-distant future–when we are DEBT FREE!!– we will look back at this time and remember how it felt like such an uphill battle, a sisyphean task. But, it will be worth it, oh so worth it. In Dave’s words, “Live like no one else so you can live like no one else.”

New Year’s Resolutions

I have to be honest and say I didn’t make a single new year’s resolution. The thing is, I already exercise regularly (and love it! So weird!) and have some pretty big goals in life (which I track at 43things), and on top of that, we have our financial plan which is a constant project. I literally look at our spreadsheets every day; it helps remind me what we’re working towards.

Every time I get an e-mail from the likes of J.Crew or Zappos, I think, “I could get those shoes/that dress/those jeans, but then what would our budget look like? How many months would that set us back?” That sounds kind of depressing, but it’s actually energizing. Resisting buying something supposedly small, like under $50, really adds up when you think that I probably have that urge almost every day. Even if I only spent $20 extra a few times a week, I’d be spending about $250 on… nothing much. I have plenty of clothes, I don’t need much other than the basics, and my idea of fun is reading.

We started the debt snowball in September 2009 after my husband’s aunt recommended his books to us at a family reunion. It’s only been 16 months, but we’ve accomplished so much. Honestly, when we stop to think about it, we’re really proud of what we’ve done. We’ll both turn 30 in 2011, and I’m pretty pleased with where we are. The plan is to pay off about $20K in debt this year, which sounds just insane on our modest incomes, but I know we can do it, one month at a time. As Bob would say, “Baby steps, baby steps…”

Getting on the same page… how?

One of the toughest and most rewarding aspects of marriage and finance is being on the same page, meaning having the same goals and agreeing on a plan to work toward them. This is not my area of expertise at all. I am very independent-minded and, even though I’m not an only child, have trouble sharing what I consider ‘my stuff.’ That all changes with marriage.

When we first got married, we kept our separate checking accounts. Neither of us had much money, and we’d just split bills or take turns with bills depending on who had more in their account. It was a roommate financial style that worked for us at that time. Later, as we obtained better-paying jobs and the ability to save money, it seemed a combined account might work better, so I added my husband to my main checking account. Later, he added me to his main account, and all of our savings accounts are shared.

Yes, merging accounts takes trust, and it also takes communication. One person can’t spend $1,000 on a new television while the other spends $500 on a new wardrobe when there’s only $2,000 in the account and bills need to be paid.

We’re still working on this aspect of our finances. Since we aren’t living paycheck-to-paycheck we have some flexibility with our checking account balance. However, in reading Dave Ramsey’s “More Than Enough,” I am learning that working even more closely on financial goals is important and will result in an even more blissfully happy marriage.

One obvious goal is tackling debt. Another is saving for a down payment on a home, and yet another is a comfortable retirement. But what about those goals that seem more like wishes than actual goals–things like endowing a scholarship or spending a summer in Japan? Someone who lives in our apartment really wants to own a convertible someday (not naming names to protect the innocent), and another person would love to open a cool café & coffee shop in the local college neighborhood. How can we make those dreams a reality?

Planning, planning, and–you guessed it–more planning. It doesn’t sound fun but when you think of the end product, it can be the most fun around.

Why interest sucks

If Dave Ramsey’s proposed concept of paying off debt (any and all debt–no debt is ‘good,’ even student loans, even mortgages!) isn’t a familiar one, I’ll use some of my own real world examples to demonstrate why I am waging an all out war on debt (my student loan). These are actual real life numbers, so if you’re afraid of what this means, then you know my fear!

Now, I’ve already admitted I borrowed a bit more than I should have in order to get through graduate school, but I’ve also got a better job than I thought I would have at this point, so I’m going to be kicking this loan–hard–very soon.

My loan information:

Principal balance: $31,784.72
Interest rate: 6.625%
Monthly payment: $241.45
Repayment term (months): 235
Interest paid: $24,997.22
Total amount repaid: $56,738.02

Okay, maybe that doesn’t look scary, or maybe you aren’t used to looking at straight numbers, so let me put that into regular English. I borrowed $31,000+ to pay for school. My interest rate is 6.625% (keep in mind, some mortgages are going for around 5% or less these days) and the repayment term they’ve given me is 235 months. In real terms, this is nearly 20 years to repay this loan–20 YEARS! You’d think that’s great, right? I can take my time, only pay $241 a month, and that it’s… but wait. What’s this ‘interest paid’ category? Take a closer look. That’s right, if I take 20 years to pay off this $31,000 debt, I’ll pay AN ADDITIONAL $24,997 in interest. That means I’ll pay $56,738 for my $31,784 education. Yikes!

Seeing those numbers makes me angry. This is good, because this anger and frustration is what propels me to do something about it. This debt happens to be Debt #3 in our ‘snowball,’ so it’s going to be last in our series of debts.

Debt #1 in our snowball is already paid off, and right now, we are focused on paying off Debt #2. Right now, Debt #2 is getting paid each month, plus the amount we were paying toward Debt #1, and whatever other money we can throw at it. We are putting a very minimal amount into savings each month, because our debt interest is much higher than the interest we’d earn on money in a savings account. We are putting a substantial amount to our student loans each month. And then what? Then I’ll have an additional $24,000 in my pocket 20 years from now…

Saving, or, pay yourself first

One thing that it seems few Americans do is put aside some money each month for a rainy day, or what Dave Ramsey would call “an emergency fund.” It’s hard to do when living paycheck to paycheck. The first step is probably the toughest, which is to live on less than a full month’s pay. A monthly spending plan can help with this immensely.

Once you see everything, I mean absolutely everything, laid out like that, you can see where you can cut back. Or, you can see that you need a part-time job to be able to save that emergency fund. Dave Ramsey recommends pizza delivery, but I also know people who write book reviews or do secret shopping in order to make a few extra bucks a month.

All our saving is done with ING savings accounts labeled for their various needs (like when we were saving for a new vehicle, we had “New Car” and “Emergency Fund” accounts). ING makes it easy to set up recurring deposits, and since there’s a delay when transferring money back to a checking account, it makes you think twice about spending money that isn’t immediately available.

Interest rates on traditional savings accounts right now are poor, but taking that money out of an account where it’s easy to spend and moving it to an account where it’s more difficult to spend sets up a psychological barrier to blowing all our hard-earned money. Also, since I still get to see that money via our Mint.com account, I get to enjoy seeing one category (regular spending) be in the positive instead of the negative (student loans).

High-yield savings accounts or money market accounts are another option for a better rate of return, as are CDs (though CD rates are also low right now). The high-yield accounts usually have a minimum deposit, like $5K, so right now, that’s not an option for us while we aggressively–and I mean, really aggressively–pay off debt.

But here’s where I disagree with Dave Ramsey a bit. He says to take all your savings (if you’ve got any beyond $1,000) and throw that toward debt. I’m not comfortable only having a $1K emergency fund, especially with higher medical insurance deductibles and the likelihood of us moving within the next year (damage deposit and paying rent on two places in one month in order to move slowly is a big ouch!). I think the amount in the emergency fund should be comfortable for the individual family; for most, I’d guess that’s going to be 3 months income/expenses, which could be over $10K for some families, and less than $3K for others.

What do you think? Do you have an emergency fund? Do you feel, like Dave Ramsey does, that having a fund wards off Murphy?

No vacations but staycations

I was looking at my accrued PTO (paid time off) today, and realized I’ll be banking quite a lot this summer and fall. And yet, we don’t have any vacation plans other than staying with my parents in their rental cabin for our annual family resort vacation up north on a lake in Minnesota. I was hoping to take a short vacation, possibly to Wisconsin, this summer, but I think we’re going to wait on that trip (to see Madison and Taliesin) for when more of our debt is paid off.

We’re really going to be taking Dave Ramsey’s vacation advice to heart. By really sticking to our Debt Snowball, I think we’ll be enjoying lovely, debt-free vacations in the years to come.

Retirement planning, or, aren’t you too young for that?

I think it’s funny when people comment that I’m too young to be thinking about retirement. Well, I’m probably too young to be fantasizing about moving to Spain and living out my days near the ocean, but I’m not too young to be putting aside some money each month to fund whatever my retirement fantasy becomes as I get older.

At this point, my husband and I only use pre-tax accounts for retirement savings. We each have an IRA (mine’s a Roth, his is a traditional) and have pre-tax savings through our employers. My husband’s IRA is a managed account through his credit union financial advisor, while mine is through Fidelity.com where I chose a mutual fund in which to put my IRA dollars.

We have our reasons for choosing what we did. I am much more savvy about investing and interested in the process, so I’m comfortable choosing my fund and sticking with it in good times and bad (mostly bad lately… oh well). My husband doesn’t like to think about his finances as much, so he’s more comfortable working with a professional and taking his advice.

I mentioned the 401(k), 457(b), etc. accounts in my previous post about budgeting. The really nice thing about those accounts is that we never even see the money. Instead of seeing the money go into the checking account, and then having to set it aside, it’s taken out of our checks before it even hits the checking account. It’s automatic saving, and we’re actually putting the recommended 15% of our income toward retirement savings already, even though it’s not until Baby Step 4 that Dave Ramsey gets us to retirement savings. This is because we know the value of starting earlier rather than later. Check out the impact of time PDF in this blog entry for a demonstration of the power of time.

Playing around with a calculator like this one can give you a vague idea of how much to be saving. I really like the planning tools that Fidelity.com offers, but those are only available if you have a Fidelity account. Even saving a little is better than saving nothing!

Budgeting (a.k.a. spending plan)

Living on a budget is probably one of the most boring sounding things in the universe. But it can actually be fun, and, ironically, rather freeing. Instead of fearing the bills coming in throughout the month, we can enjoy knowing that we have enough to cover the bills and have some money for fun things, too. Instead of calling it a “budget,” I like to call it a monthly spending plan (a la Dave Ramsey). Basically, this means allocating all your money toward a category before it’s even deposited into the bank, including money toward savings. Something like this:

This is just a sample [note: not my real income or budget]. I liked trying out Dave Ramsey’s Gazelle Budget Lite calculator to see approximately how much we should be spending in each category; I love a good financial calculator like this one. Amounts will vary based on income and general cost of living based on location, but it’s helpful to see when a number is either far lower than a recommended percentage, or far higher.

Also, categories will vary depending on the household. This spending plan is based on a 2-income family with no children or pets, and no car payments. Medical insurance and other costs are not factored in since all of those needs are covered with pre-tax dollars (like an HRA, HSA, or FSA) taken out of the paycheck before it’s even deposited. Retirement savings is also not included, since those are also taken pre-tax (401k, 457b, etc.). A larger than average amount is allocated for new clothing, based on two young professionals building a needed wardrobe. Using a spreadsheet to play around with numbers to see what’s comfortable works well; sharing a Google Doc with the plan makes it easy for either spouse to check and adjust.

One thing we’re trying is to use cash on those things that are not necessities: eating out, clothes, and entertainment. Once the cash is gone, the spending in that category is done for the month. Will report on how well this works for us!