March 6, 2011

Baby Step 2, Phase 1: Complete!

Our debt snowball has rolled all the way down the hill! Baby step 2 in Dave Ramsey's plan is to pay off all debt except your mortgage. Since we don't currently have a mortgage, we've modified Dave's plan a bit. After putting $1,000 in our emergency fund, we paid off all debt except student loans for Nathan's graduate school. Over the past eight months, all of my take-home pay and then some has gone towards paying off debt. While we can't officially say that we're debt free, it's still a nice feeling to not have any credit card payments, car payments, or any other debts.

Putting our final payment in the mail

How We Did It
For the most part, we avoided lifestyle inflation after Nathan started a better paying job. When he first called to tell me the news, I was so excited about how much money we would have that I went to Panera for a $12 lunch that day. But I haven't done that since then. Our way of living hasn't really changed all that much. We live in the same apartment, drive the same cars, and wear pretty much the same clothes. We've made a few splurges, but we budgeted for them. I'm a tightwad by nature, and I've managed to reign in Nathan a little.

The Next Step
Over the next three months, we'll be putting the same amount of money we have been using to pay off debt into our emergency fund. Since it will take us quite a while to pay off the graduate school loans, we didn't want to pay off those with the same intensity without having an emergency fund of 3 to 6 months' expenses (Baby Step 3). Our emergency fund is in a special type of bank account. Unlike our standard savings account, from which I can transfer funds with just a few mouse clicks, we must actually visit a branch or call the 800 number to withdraw money from our emergency fund. We also have a Health Savings Account that we can use for any medical expenses, but we want to have 3 to 6 months' expenses saved in addition to the money in our HSA.

After Our First Anniversary
Starting in July, assuming all goes well, we want to start setting aside money for two purposes: paying off the student loans and saving up a 20-25% down payment for a house. It's hard to say how long this will take - our income could go up or down, we could have another mouth to feed - but we'll still be paying off student loans a lot faster than most people, and we're in no hurry to buy a house when Nathan has only been at his job for 7 months. I'm just thrilled that we've already made it this far on our road to financial peace.

For those of you who have gone through Financial Peace University or are familiar with Dave's teachings, have you followed his steps in order or switched things around a bit?


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