As most of you know, my husband and I have been following the steps in Dave Ramsey’s Total Money Makeover (TMM) book since the start of the year. Actually, we inadvertently got started last September with a more limited plan to aggressively pay off the $4200 we put on our HELOC in June when our A/C had to be replaced, but I was introduced to both Dominguez and Robin’s Your Money or Your Life and Ramsey’s book not long after that and started planning our TMM almost immediately when I realized how much of our combined income was going toward payments on debt…and how long it would take to be debt-free except for our primary mortgage if we only paid what was required in our banks’ coupon books. (Seventeen years, in case you were interested, because we took out a 20-year piggyback mortgage at 6.75% in 2005 when we bought our house. The next longest payment cycle would be Chris’s student loans, which have somewhere in the neighborhood of 55 monthly payments remaining.)
I also ran some projections as to how much we would have left over each month from our take home pay for savings, retirement, investments, and fun money if we only had to pay for a $1200 mortgage payment, $400 in utilities, and $200 for food.
It was pretty staggering–somewhere in the neighborhood of $4000 EACH MONTH.
I’d always thought that we were doing pretty well considering that we were bringing in around $90-$100k/year in combined gross income in the relatively cheap central Florida area and weren’t into expensive hobbies or ostentatious displays of wealth in our home, cars, or clothing. Both of us contributed between 12%-20% of our incomes into our 401(k)s and Roth IRA accounts like the cynical, Social Security-doubting Gen-X’ers that we are. We always had enough to cover our living expenses, a reasonable amount of shared entertainment, and one or two trips to visit family each year, but we didn’t have any non-retirement savings at all for emergencies (see above note about having to borrow $4200 against our house to pay for a new air conditioner…) and no concrete plan for how to save up the money for a kitchen renovation and the delayed Mediterranean honeymoon cruise we’d still like to take at some point. We should have been able to save a LOT more than we did, but we had become so complacent with our finances and so accustomed to monthly debt payments that we never took a look at the overall big picture.
Curious about how long it would actually take us to clear everything but the primary mortgage if we followed Ramsey’s Baby Steps to Financial Freedom and suspended retirement contributions for a year or two, I took a look at our average take home pay, fixed expenses, and debt obligations and calculated that we could easily pay off everything except the primary mortgage in 26 months starting in January 2008.
Two years, two months versus seventeen years!
And this was possible even taking into account continued 4% minimum contributions to our 401(k) accounts to receive our company matches and monthly allowances for some entertainment, one or two dinners out, and regular contributions to an irregular expenses fund to cover things like holiday and birthday presents, family visits, and car insurance. I felt both chagrined and elated; chagrined that we would have blithely gone on paying the minimums on our car, student, and home loans forever, and elated that a bit of time spent budgeting and planning could put us in a great place financially within 2 years if we just stopped settling for “good enough” and really aimed for “ass-kicking awesome.”
(We’d also like to have one or two Brilliant, Scholarship-Winning, Stunningly Attractive Half-Asian Offspring before I turn 37 and the chances of a high-risk pregnancy start to increase dramatically, so knocking the monthly expenses down by half before I have to take a break from my career to spawn would be nothing short of genius.)
So here I present to you our current progress toward financial nirvana. Completed line items will have a strikethrough and a completion date. Notes/plans for each item will be in the Actions column, and each TMM Baby Step is shown in boldface font.
| Baby Step |
Amount
|
Target
|
Complete
|
Actions
|
| 1. $1000 to start emergency fund |
|
|
|
Contributed a combination of wedding gift money, personal savings, and bonus commissions to a shared savings account earning 3.75% APY |
| 2. Pay off all debt (except the home) using a Debt Snowball |
$49612
|
2/1/10
|
||
|
|
|
|
Made two $300 payments to clear the balance, then retired card to safe. |
|
|
|
|
Paid balance in full in January 2008; card still actively used for gasoline ONLY. Balance paid in full each month going forward. |
|
|
|
|
Paid balance in full in January 2008. Card retired to safe. |
|
|
|
|
Paid statement balance in full in January 2008. Card still actively used for recurring utility bills, but will be paid in full each month going forward. |
|
|
|
|
Chris and I both cut off federal income tax withholding from 9/07 – 12/07 after calculating that we were both overpaying. The excess money in our paychecks was used to make aggressive $1000 payments on the HELOC every month. |
|
$3490
|
6/1/08
|
Pay $2000 from 2007 tax refund on 3/10/08. Paying $353/month for 4 more payments until car is paid off 6/1/08. I already made a large extra payment of $1500 on the car. | |
|
$12000
|
7/1/08
|
Combined payments of $1470-$2020/month until the loan is paid off around 7/2008; under the original loan terms and payments of only $220/month, it would be another 5 years before we would be clear! | |
|
$25516
|
2/1/10
|
Putting this one on hold until after the $10,000 emergency savings account and 2008 Roth IRAs are fully funded. Regular minimum payments of $205 through 3/2009, then payments of $2006 until 2/2010 | |
| 3. 3 to 6 months of expenses in savings |
$10000
|
11/1/08
|
4 deposits of $2320/month | |
| 4. Invest 15% of household income into Roth IRAs and pre-tax retirement accounts |
15%
of gross income |
3/1/09 (ongoing)
|
Fully retroactively fund both household Roth IRAs for 2008 at $5000/each from 12/08-3/09. Reinstate monthly Roth IRA contributions for 2009 @ $555/month for 2009. Increase 401(k) contribution to 5% (currently at 4%). Regular monthly Roth contributions of $466.66 starting 1/2010. | |
| 5. College funding for children |
TBD
|
…Er…No kids yet. Need to see if an education savings account can be started without actual offspring. | ||
| 6. Pay off home early |
$135880
|
3/1/16
|
Research refinance into 15 year fixed rate mortgage and/or set up extra principal only payments of $1400/month to pay off home within 6 years. | |
| 7. Build wealth by investing |
TBD
|
And if we decide to stay in the same house for the long run and pay it off early by making an extra monthly payment from just half of the freed up cash after we finish our Debt Snowball in February 2010, we could conceivably own our home outright within 5-6 years. Wow.
| Payment Options |
Start
Date |
Loan
Balance |
Total
Interest Paid |
Payoff
Date |
| Original 30-year Fixed Rate Mortgage |
12/1/05
|
$144000
|
$166806
|
12/1/35
|
| Accelerated Payments (+$1400/month) starting 3/2010 |
3/1/10
|
$135880
|
$61141
|
3/1/16
|
|
Savings
|
$105665
in interest savings and 19 years, 9 months of time* |
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* Calculators used: Bankrate’s Mortgage Calculator to get the figures for the original mortgage terms and an amortization table, and Debt-Proof Living’s Mortgage Payoff Goal Calculator.
