Financial Snapshot IV

The Bottom Line: We have officially paid off 2 of our 3 debt accounts and are superbly ahead of schedule in our quest to become debt free. What follows are the details, for those who are interested.

The Strategy
Dave Ramsey's strategy is to first accumulate an emergency fund (he suggests $1000) and from there you are supposed to use every surplus dollar to pay off your debt. In other words, unless you have no more consumer debt, your savings should not climb above that $1000 mark. The idea is that, as long as you have enough to cover short-term emergencies, in the long run your dollars are better served by eliminating your debt. It is not until your debt is totally eliminated that you should begin to increase your savings beyond your given emergency fund mark.

For us, our emergency fund should probably be substantially higher than $1000 due to our inflated cost of living and the ownership of 2 rental properties. As I mentioned in the last snapshot, owning 2 rentals and a primary residence means that for any given month we can be on the hook for $3700 of mortgage payments if our tenants were to disappear... And once you tack on an additional $3K+ for cost of living (we're working on lowering that number)... it is no wonder that we were reluctant to deplete our savings in order to pay off debt. In short, the rewards of paying off the debt did not seem to outweigh the risks of living check-to-check.

The Big Payoff
But with all of that said, at some point during the month we got tired of looking at our balances and just said what the heck. The most troublesome of our two tenants has paid rent on-time a whopping two months in a row (ha)... and the newer, more reliable tenant has sent postmarked checks for the remainder of the year. And so we took that little bit of peace of mind and ran with it.

As it turns out, May was an ideal month for us to get bold with our debt reduction. Our monthly zero-budget is based on us receiving 2 monthly paychecks apiece. This works out perfectly for me as I'm a semi-monthly (24 checks a year) state employee. However, as a biweekly payee V gets 26 checks per year, which leaves us with 2 months per year that she gets a 3rd paycheck. So BINGO... For the month of May we received an "extra paycheck". We spent most of it on new clothes, camera equipment, and that new bedroom set we've been eyeing for a year now. Psyche! (Y'all know better). Of course we threw the whole thing at our debt. And on top of that, we got our Economic Stimulus Payment this month, and so that was another $1500 that we were able to funnel directly to our debt (please tell me you didn't spend your whole rebate check!!)... Long story short, we took those two checks, plus a chunk of our savings, squeezed our monthly budget for any more change that would fall out, and paid off two of our debt accounts. So Student Loan 1 AND the Credit Card Debt (or what we called the Stupid Tax) are both officially GONE. From March 2006 to date, we have gone from a debt total of  $29,695.10 down to a total of $10,925.81! [insert jump for joy here].

Here is the corresponding snapshot:







So where do we go from here?
Here's where we deviate from Ramsey's plan yet again. As to not stay financially exposed too long, the plan is to start accumulating our emergency fund again. Of course a big part of that is continuing our efforts to sell our primary residence. If that happens then we'll be in a position to reduce our cost-of-living significantly, and increase our mobility (which opens up more options like moving to an area with lower costs of living,  either of us switching jobs, or V staying home for baby #2). It would also give us an easy out towards paying off Student Loan 2. In the event that we don't sell the house, it may be a while before the final student loan account is paid in full (the current target is July 2011, but I expect that to change). At 3.25% interest, this will cost us about $700 in interest over 3 years, which we think is worth the trade off.

But who knows what tomorrow will bring.