Taking Baby Steps & Rolling the Debt Snowball

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
$1000
1/25/08
1/25/08
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
  • Maggie Visa
$600
9/1/07
9/1/07
Made two $300 payments to clear the balance, then retired card to safe.
  • Discover (Leftover wedding expenses)
$862
1/10/08
1/12/08
Paid balance in full in January 2008; card still actively used for gasoline ONLY. Balance paid in full each month going forward.
  • Chris Visa
$1000
1/15/08
1/15/08
Paid balance in full in January 2008. Card retired to safe.
  • Amex (travel, Ikea couches…)
$1944
1/21/08
1/20/08
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.
  • HELOC (new A/C in 6/07)
$4200
1/23/08
1/23/08
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.
  • Maggie Car Loan
$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.
  • Chris Student Loan
$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!
  • 2nd Mortgage
$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*

* 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.

5 thoughts on “Taking Baby Steps & Rolling the Debt Snowball

  1. This is an AWESOME plan Maggie! Hubby and I have been implementing the baby steps since 2007 a we should be out of debt in 2 years.

    Great job!

    ~ Vilma

  2. Good job with the plan – I’ve decided the hubby and I need to do something similar and take control of our finances before they control us!

    Surprisingly, we have a very similar starting point as you guys wrt income and basic expenses amounts – mort. utiliites, etc. – we just have a bunch of debt looming over our heads. Sometimes when you make a decent salary, it’s easy to forget about the debts because it’s no problem to make the payments. Seeing your 17 year vs. 2yrs 2mos. plans was a sobering thing!

    :em26:

    I’m going to head out to Chapters this weekend and see if I can find the book you mentioned – I could use some refreshers on budgeting annd the basics. (should also probably start blog to avoid hijacking others comment pages!)

    ps – have you made any kitty clothes yet? I hope you post some pictures!

  3. Great job with the debt snowball plan!

    And yes, you can start contributing to a 529 college savings plan before you have children — you or your husband would be the beneficiary initially, but then you can transfer it to your child.

    Here’s the link to the one in FL, but keep in mind that you’re not limited to your state’s plan (I believe you can invest in any state’s plan): http://www.florida529plans.com/savings/index.html

    I’ve been reading your blog for a while now, but this is my first comment — thanks for all the great posts!

  4. Dave’s plan is awesome! Hubby and I have been following it since Oct 2007 and we have paid off $12k already. Not sure if you were aware that you can subscribe to Dave’s podcasts in iTunes for free (you can get 1 hour of his daily 3 hour show at no charge – you can also listen to him live on his website free from 1-4pm EST). He is a lot of fun to listen to!

  5. You are definitely on the right track. I am always intrigued to find folks who are serious about getting out of debt. Even though we were debt free prior to using Ramsey’s methods we did learn a lot from Financial Freedom University. Good work – KEEP IT UP!

    PS. Nice website!

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