Thursday, March 13, 2014

Financial Peace - Our Total Money Makeover (Part 2)

Thank you all so much for your kind words on my last post, Part 1 of Our Total Money Makeover! If you haven't read it yet, go here. Going through the course, Financial Peace University was such a great experience - I highly recommend it. There are courses offered all over the country if you would like to do it in a group (more accountability and motivation there!) or you can take a home study course. We took the home study course since we got to keep all the materials - DVDs, CDs etc. Here is a link to Dave's site when you can look for a local class if you are interested. If you don't want to invest in a class, you can always begin by reading one of his books - either Dave Ramsey's Complete Guide to Money or The Total Money Makeover. (Side note - Dave and his daughter Rachel have teamed to write a new book to help teach your kids about money: Smart Money Smart Kids - I am really excited for this one to be released!) I also had no problem finding his books at the library so check there first!

In Part 1, I listed the problems that DH and I identified as areas to work on which helped us get to work on the Seven Baby Steps. I'll explain them here and talk about our experience, and you can also find The Seven Baby Steps online here. If you'd like a nice printable for encouragement, I found this one on Pinterest. :)



Baby Step #1 - $1000 Emergency Fund
This is for those life events that you don’t plan or expect. The car breaks down and needs repair. The kitchen sink clogs and you need to get major repairs done. Heater/air conditioning, etc. You name it. Dave always says it’s not if - it’s when. It’s not if it rains. It IS going to rain. You need to be prepared when the emergencies do happen. This step took us about a month, maybe two. And yes, it does come before starting to pay down your debts in Step 2. You don't want to go further into debt because of an emergency.

We had MAJOR (in the thousands) car repairs for DH's car right before Christmas. The month before that we had a major clog in the kitchen sink. I can't even explain the relief at knowing we had the money. We didn't have to put it on a credit card. It was there, ready for those emergencies. (Don't get me wrong though... watching that kind of money fly into the car shop was still painful. :-P)

Baby Step #2 - Pay off all debt using the Debt Snowball
In this baby step you list all your debt, excluding the house. Credit cards, school loans, furniture or car loans, and so on. The smallest balance is where you begin. (Unless two debts are similar, in which case you pay the higher interest rate balance first, the interest rates are not considered.) The key in this step is changing your behavior. The idea is to get rid of debts as fast as you can and you can build momentum quickly by knocking off the first, then the second, and so on.

We had two credit cards - one for my laptop (that tempting 0% finance offer - ugh!), and another for furniture. This took about 2-3 additional months, if I remember correctly. We probably had about 6 months remaining on both, but they were both 0% interest, so whichever balance was smaller, we paid first. Sayonara, credit cards!!

Baby Step #3 - Three to Six months of expenses in Savings
By this step, the only debt you have remaining is a mortgage. Hopefully you have serious momentum now that you’ve knocked off those other debts! So, now the next thing to do is to build your true emergency fund of 3 to 6 months of expenses. If you have a job loss, you won’t be feeding your retirement income, you won’t be contributing to charities, you won’t be going out to fancy restaurants. You’ll be paying for food, your electricity and your mortgage payment - the essentials. Dave says that if you are a 2-income family, you can be okay with 3 months of expenses. With 1 income, plan on 6 months of expenses. (I teach, and work occasionally at our church, but since it’s not much, DH & I saved 6 months of expenses. Plus, I may not always do work outside the home as our family grows.) This is currently the step we are on now. We have a few more months left to go before this is fully funded. We re-evaluated how much we had in this account at the beginning of the year and decided to go back to this step to increase what we already had since we hope to increase our family this year.

Baby Step #4 - Invest 15% of household income into Roth IRAs and pre-tax retirement
While Dave suggests stopping investing while you are doing the debt snowball, we chose not to. (Mostly because we didn't have that much actual credit card debt to begin with.) I am so thankful for my parents and Grandma for encouraging me to get retirement funds started in my early 20's! 

Here is another great Dave example - Ben and Arthur (pdf) based on how early each of them began saving for retirement. Ah, the power of compound interest.

source

Baby Step #5 - College funding for Children
Dave has pointed out that often after you complete Baby Step 3, Steps 4, 5 and 6 happen at the same time. We are also working on Step 5. We opened a 529 College Savings plan for C a month or two after he was born. We ask for money for this fund from family for his Christmas and birthday gifts and contribute as well on those days, and occasionally throughout the year as well. (We will be able to contribute more frequently once we have our emergency fund in place again.)

Here is an article- Saving for College is Easier than You Think on Dave's site. This is a pretty powerful statement to consider:
  1. Start an Education Savings Account (ESA) or Education IRA NOW! This allows you to save $2,000 (after tax) per year, per child. Plus, this grows tax free! If you start when your child is born and save $2,000 a year for 18 years, you would only invest $36,000. However, at 12% growth, your child could have $126,000 for college!
Dave also encourages state schools for college education rather than traveling outside of the state. $126,000 should pretty well cover that! Again, the power of compound interest!!

Our thoughts and experience with college saving and student loans:
DH & I both feel very strongly about saving for college now, and encouraging C, and any future children to work and save money as well. (Again, I'm really looking forward to the book, Smart Money, Smart Kids!) 

I was very fortunate to earn my Bachelor's and Masters without any debt. I did go to a private Christian college in state but the tuition was the same as (and still is the same as) the main state universities. I had a very generous relative split his estate between me, my sisters and cousins for our college education. I was completely naive - I had no idea what a student loan was when I started college because this relative (and my parents too) had enough saved for me. The only sister to leave college with any debt (she was in a 6-year doctoral program) has since paid it off (close to $60,000 in just over two years, living at home. (WAY TO GO, R!) I am still so proud of her for this accomplishment! I also went back to school for my Masters degree, lived at home with my parents during that time, and refused to take out loans - I applied for a graduate assistantship and worked like crazy. Incidentally, I also had been accepted to this particular university for their undergraduate program, but chose not to attend because of the cost. 

DH attended a well-known big-ten university out of state. He was in ROTC however, so his undergrad was also covered. His 2 Masters degrees however... are now a main portion of our home equity line of credit. UGH. He continued to work full-time while going to school, but didn't pay anything until after he graduated, something he says he regrets. When they were "due" - we put them into the home equity line. Oops. If we had those fat interest amounts staring us in the face, we probably would have paid them off a heck of a lot faster!

Baby Step #6 - Pay Off Mortgage Early
Dave recommends having a downpayment of 100%. Yes, he does say this! But he does also say that if you have any debt, it can be a mortgage, and if you have a mortgage it should be a 15-year loan, not a 30-year loan. Once we're finished with Step 3, all our “extra” money will go toward this - any money I make from teaching or playing, any work bonuses, they all go toward paying down this debt. We are hoping to have a significant down payment when we eventually move from our townhouse. Since we also have the home equity line (student loans and the kitchen loan mentioned in Part 1), and it exceeds the amount where we would pay it off in Baby Step 2, Step 6 is where it gets paid off. 

Dave has callers on his radio show who have traveled to Tennessee to do their “debt free scream”. I LOVE hearing these callers and their stories - it is so motivating! I seriously cannot wait for that day!!! 

Baby Step #7 - Build Wealth and Give!
It is so important to plan and save for retirement- a great number of people live well into their 80s now and even 90s. DH's grandmother has been moved around in different care facilities because quite literally, she is running low on retirement money. Here's a scary figure... $6000. Per month. For assisted living care. (She's just getting to the point where she will need more care and she's in her mid-90s.) There was an article in a financial magazine that I read about a year ago where it mentioned people who are not only financially supporting their children but their parents as well because their parents don't have enough to last them through their retirement years. It's a lot to consider. Our financial advisor told us once that we'd never regret saving more!

Giving... we tithe per the biblical mandate -  we always look at our money as stewards. "Our" money is really God’s money and we are just managing it for Him. We have had many discussions during our marriage about the organizations we wish to support, and fortunately have always been on the same page. There's nothing like hearing about a need and knowing that God has blessed you so that you can meet it.  It really is better to give than to receive! 

One of the best stories I heard in this step was about a man who went out to eat on Thanksgiving. He pointed out that those working on Thanksgiving in a restaurant really need the money. He left a $500 tip and watched the waitress do a happy dance from the parking lot. Can you even imagine?? 

Since I think that's about enough for now (thank you if you made it this far!!) I'll continue Part 3 next week where I'll talk about budgeting. Ahhh.... the dreaded "B" word! :)

Please let me know if you have any questions in the comments section! What do you think about the Baby Steps?

6 comments:

  1. I love this! Baby Steps make it all seem much easier to manage. Thanks for sharing your personal experience. I know money talk can be taboo sometimes, but it's nice to hear exactly how you got through it. Looking forward to reading about the B-word next time around. :)

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  2. Love FPU. It was life changing for us to go through. So grateful for the advice and baby steps. It's amazing to have financial peace and not worry like we used to about money.

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  3. Looking forward to hearing more about budgeting! That is definitely my Waterloo right now!

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  4. My husband is a huge Ramsey fan! (me too) and maybe you can help clear up something we were wondering about re: the baby steps. We are almost debt free (one student loan left) but we're renting, and saving both for a house and an adoption (if we end up not adopting, we'll just consider that extra savings). Anyway, I don't currently give 15% to my pre-tax retirement savings, more like 5% (plus company match of 3%). We were talking about increasing it, but then thought maybe it would be better in the long run if we save more for a house so we can pay that off quicker. And of course adoption requires some serious cash! I get that the earlier you invest in retirement, the more you save in the long run. But on a tight budget, it's honestly hard to know what "bucket" you put your money in will be the best in the long run. If that makes sense...sorry to ramble, this has just been on my mind lately!

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  5. Thanks for writing about this. I was wondering the same thing as Ecce Fiat. Where/how does saving for adoption fit into your baby steps? Before or after paying off debt?

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  6. Thanks for laying it all out. When we paid off our credit cards we got rid of them all. It was a wonderful feeling.

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