August 5, 2013

So now what? {An update on our Financial Peace Trek}

It's been awhile since I wrote about our financial goals. Since we just significantly lowered our income, and since Nathan and I are going to be two of the co-leaders for a session of Dave Ramsey's Financial Peace University starting next month, I decided it was time to take a look at how we're doing with our trek to financial peace. We've made lots of progress, but we still have a long way to go.

To review Dave Ramsey's baby steps and the progress we've made so far, step one is to put $1,000 in the bank. That one was pretty easy for us with two incomes; we've never had less than $1,000 during our marriage. Step two is to pay off all debt except your mortgage, but we deviated from Dave's plan a bit. We have no mortgage and had quite a bit of debt in the form of graduate school loans, so we decided to pay off all debt except the grad school loans. We called this Baby Step 2, Phase 1, and we completed it early in 2011. Then we moved on to step 3, which is building an emergency fund of 3-6 months' expenses. This baby step kind of bugs me. Three months and six months is a big difference. How do you know when you've completed it? We just decided on a nice round number, and after saving that amount about two years ago, we began paying off the grad school loans.

Originally we thought about setting aside money for a down payment on a house at the same time we were paying off the loans, but we decided it made more sense to pour all our extra funds into getting rid of the debt as quickly as possible to avoid paying more in interest. We've questioned this decision from time to time as we watched the real estate market, but ultimately, we can't predict the future, and we're okay with renting.

Our goal for 2012 was to pay off half the grad school loans. I never did write a post on how I did with my 12 to Tackle in 2012, but I can say that we successfully met our financial goal. I called this our "Big Hairy Audacious Goal" because I really didn't think we could pull it off. Well, we did! The initial goal for 2013 was to be completely debt free with a 3-6 months' emergency fund. However, we could only do that by putting 100% of my income (and then some) towards paying off debt. Without my income, this isn't just an audacious goal, it's a nearly impossible one.

So now what?

Well, we are still putting as much as possible towards becoming debt free. I say "as much as possible," but within reason; we want to be able to enjoy life. As of now, seven months into 2013, we have paid off around 75% of the grad school loans. Our only remaining debt is two subsidized federal government loans. Can we be debt free by the end of the year? Probably. The question is, do we want to be? By the end of the year, the amount of debt we have will most likely be less than the amount in our emergency fund, so if we wanted to, we could use the money from our emergency fund to pay off our debt (assuming we have no serious emergencies). The financial adviser we met with doesn't think we should do it. He told us, "Dave Ramsey says once you have your emergency fund, you don't touch it." True, but Dave also says to pay off all debt before worrying about building your larger emergency fund. So, we're not sure what we'll do when we reach that "break even" point, but for now we're just continuing to work towards reaching that point by the end of the year.

How's your trek to financial peace? Which do you think is more important: having lots of savings, or being completely debt free?


  1. Would say savings. Savings is earning more. The market earns ~8% annual on average and recently much better than that (21% YTD for my best performing fund). My loans cost a government guaranteed 3.5%. That means even with a 15% long term gains tax I'm earning 14.8% on my savings vice the cost of maintaining that debt and the debt is tax deductible. Now current performance will not always be maintained but the money is there to pay back my debt in the future if the market sours. And if I develop a long term illness I can defer paying the loan and utilize my savings. You can't re-loan the money at those rates if a problem arises. And I still keep a 3 month emergency fund in a cash equivalent (I keep a low number because with the military my income and employment is very very stable).

    1. For the most part I don't believe in stable employment anymore, which is why I like having the emergency fund, but yeah, I guess you're in pretty good shape!


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