So it is not generally recommended that a blog specifically focus on the blogger. Especially a blog that is just getting started. You don’t want to hear about me, and I get that. But I do want to talk about our current financial plan, not necessarily because it is about me and my family, but mostly because it aligns with a lot of the recommendations I give to others regarding personal finance. Before I get into this, I also want to mention that I realize not everyone has the financial room to contribute a lot of money toward debt, or a lot of money toward retirement, or both. There will be future topics that can address boosting income, or spending less. But this article is not about frugality or increasing income, it is much more about just having a plan.
Putting the Plan Together
Our Goals
We would not have a plan without first setting out some goals. While we have long term goals around our childrens college savings and our retirement, the short term goals are the focus for this topic. The short term goals are part of the longer term plan, but the 1-2 year goals really indicate what we need to be doing today.
Two primary factors have led to creation of these goals:
- Birth of our premature son – demonstrating the need for an emergency fund and more stability in our finances
- Upcoming reduction in income – my wife will be reducing her work within the next two years
So here we have a past event that encouraged us to take action. But we also have a future event that we control. Because it is our choice to reduce income in this case, we have set some predefined targets that we must hit before my wife can reduce work. This gives us real incentive to work together and hit the goals. Our two financial goals for the short term are 1) reduce our debt to the point where our home value is greater than our remaining debt, and 2) establish an emergency fund of at least 4 months expenses. When we started the plan last May, we had two 401(k) loans, a home equity loan, a student loan, and a mortgage. And we had no sizable emergency fund.
Bringing our debt down below the current value of our home is advantageous because we could then sell the house and be completely debt free. With the housing market down, we do have to work harder than we expected when we started the plan! Nevertheless it is still our target. Establishing the emergency fund is key to providing the stability we craved after the birth of our son.
Crafting the Plan
Our first decision to make was which loans to pay off and in what order. After some thought about each loan the decision was not all that difficult. The type of loan, the size of the loan, and the interest rate were all factors. Here is how we broke it down:
- 401(k) Loans – Generally speaking 401(k) loans are recommended against, which I will cover in a future topic. The only factor for making these loans the top priority was to have more freedom to change jobs (or withstand a layoff) without having to repay the loan immediately or owe interest and a penalty.
- Home Equity Loan – This became our second priority because of the relatively high 8.85% interest rate.
- Student Loan – Our interest rate on this loan is a very fortunate 1.75%. If it were 2 or more percentage points higher, I would be inclined to include it in this debt repayment plan. This became our lowest priority and would only be paid off in a medium to long term plan.
- Mortgage – The interest rate for the mortgage is 5.75%, and it is our largest debt balance. This is our third debt priority, but would have to be addressed after retirement savings and various other needs and wants in our medium to long term plans.
Our intention was to attack this debt with extreme focus. So while we have not followed Dave Ramsey’s Baby Steps exactly, the steps we have taken are not far removed from his approach.
Started a Budget and Reduced Spending
Where we had no formal budget before, we began to track our spending. We tracked our spending for the first month before establishing any budget. We identified areas to cut and began implementing those changes. The key point here is that we communicated what each of our priorities were within the budget, including some available money for non-essentials such as entertainment, eating out, and so on. Instead of eliminating all of the non-essentials, we put together a budget that reduced the number of smaller non-essential items like eating out. Where we really created room in the budget though was by eliminating and putting off the big non-essentials like out of state vacations, recurring monthly expenses, and cosmetic home improvements. Our income situation allowed for this, though if we had more debt or less income we would have had to focus on all discretionary expenses.
Created an Emergency Fund
Getting the budget completed allowed us then to put together a small emergency fund. As quickly as possible we put in place $2000 for this emergency fund. We chose $2000 because while our expenses we under more control, they were still high enough that an expensive emergency could derail our plan. We keep this money in our ING Savings account in order to be able to access it quickly if an emergency required it.
We Threw Money at the Debt Constantly
All “extra” money we had went directly to the debt. Well almost 
With the 401(k) loans we had to pay them off in full, so we had to save the money first. This gave us extra perceived cushion on our emergency fund as well, but it requires much discipline to avoid dipping into the money that is saved to pay off debt. All of our excess money went to paying off debt. By the end of 2008 we had our two 401(k) loans paid off. This had a fortunate side effect as well, at least for one of the loans. With the crash in the stock market, if we had all of the money from the loan still in our 401(k), we would have lost much of it in the crash. But instead it was like having a cash investment. We paid one loan off before the crash, so we lost around 40% of it in the downturn. But the other loan was repaid after the crash, coincidentally a great time to be buying into the stock market. This of course was luck, and I would not suggest trying to plan it this way.
Aside from the budget and reduced spending, we also made some other temporary changes:
- Reduced 401(k) contributions – we reduced our 401(k) contributions to just enough to get the company match. If this plan were going to take more than two years, or if we were going to just incur more debt after we paid these debts off, then this would be a bad move. All the money that previously went to 401(k) contributions now goes to the debt.
- Any extra income or money such as bonuses, income tax refunds, and reimbursements from Child Care Dependent Care account and our Health Savings Account goes directly to the debt.
Our Current Progress
These changes enabled us to pay off our two 401(k) loans by the end of last year, and cut our home equity loan debt in half. At this rate, we should be able to meet our goal of having less total debt than the value of our home by February of next year. Then within about 6 months of completing that goal, we should have our emergency fund established. So a plan that originally took us through mid 2011 is on track to be accomplished by mid 2010. We are thrilled about the progress, especially given the current economic conditions. What we have found is that this focused intensity has enabled us to meet these goals much earlier than we imagined. It does not always work out that way for everyone, but my hope is that this provides some motivation for others.
Next Steps
Once we meet our target around mid 2010, our focus will shift slightly to medium range plans. A major item for that time frame will include saving to buy our next cars. Our current cars will reach 10 years old around 2013 and we want to be prepared to buy our next cars without incurring new debt. Once we have saved the money, if the cars are still running fine we will wait to buy them though. We own our current cars and are in no rush to replace them — we want them to last as long as possible.
Also during this timeframe we will re-establish fully funding our retirement accounts. We will plan a vacation. And my wife will be able to scale back her work. So with that, I will provide more information on our progress and our medium to long term plans in future posts!
