Saturday, April 21, 2012

Saving the Moola: financial planning

There are lots of ways to save money, but saving money, whether by couponing, shopping at thrift stores, being a one-car family, etc., doesn't really do or mean anything unless you have a plan. You have to tell your money where to go instead of wonder where it went - Dave Ramsey talks about this frequently on his radio show.

Ya'll know Jason and I are both fans of Suze Orman and Dave Ramsey. Jason is also currently reading Jim Sammon's Financial Freedom book and watching the accompanying DVDs. There are other financial gurus out there as well, we're sure.

Whether you choose to follow one of their plans or not, you need a plan. Jason and I actually don't follow Suze's plan or Dave's plan. We've taken what we feel is best for ourselves from their plans and created our own plan.

Here's the short versions of their plans:
  • Suze advises that you have an 8-month emergency fund and build that while paying down debt.
  • Dave has baby steps. Baby step 1 is a $1,000 emergency fund. Baby step 2 is pay off all debt except a mortgage. Baby step 3 is build a 3- to 6-month emergency fund. Check out his book, The Total Money Makeover, for all the steps. 
  • Suze advises that you max out your ROTH IRA each year.
  • Dave says to commit 15% of your bring-home pay to retirement.
Right now, we have an emergency fund bigger than $1,000 but smaller than eight months of expenses. We wanted something bigger than $1,000 because we are driving a very old car who really could die at any time. We wanted to be able to buy something right away if our car does die (praying constantly to God that our car lasts a long, long time!).

Our right-now emergency fund is done. I have two student loans, and that's all the debt we have. We're currently paying the smallest one as fast as we can. Dave says to pay off the smallest loans first, regardless of interest, to get your momentum going. Suze says to pay off the loan with the highest interest rate first. We chose the smallest just to get it out of the way, then we could focus all our attention on the big loan.

While we're paying down our debt, we're not really living on rice and beans, beans and rice, as Dave recommends. We are taking a vacation this year, and we do set aside money each month for entertainment, clothing and crafts. We're making sacrifices, but we're not sacrificing everything. We don't want to get burned out, and we thought if we preserved some fun, it would motivate us enough to keep going.

Once our debt is paid off, we're going to build our 8-month emergency fund. Dave just recommends 3 to 6 months, but we figure the more we have in there in case of an emergency, the better.

After that, we plan to save to buy a condo/house in cash. If our car should officially die before we buy real estate (and our car likely will die before then), we will use our emergency fund to pay for a new-to-us car in cash. Our goal is to purchase a condo/home in 2020 or before, as we both fully believe that in the mid '20s and beyond, the real estate market will recover. We don't think it's going anywhere really until then, so we're in no rush to buy.

We likely are going to buy a condo rather than a house - this is what I personally want, but Jason is still split on whether he wants a house or a condo. And really, this kind of just depends on what we can afford in cash. I think a condo is more likely and more sensible for us, but if we have the funds to buy a house and we find a house that fits what we want, we could buy a house. We'll just have to see!

Once we have a new-to-us car and a new home, we'll make sure our 8-month emergency fund is still in place. Since we'll use cash from the emergency fund for a new-to-us car, we'll have to replenish it.

After that, we're going to max out our ROTH IRA each year until we retire. The nitty gritty details of our plan tends to change often, but the big picture we just outlined doesn't really change.

Again, the point of this is not necessarily that we follow a specific plan, point by point, but that we have a plan and we have goals and dreams we're striving for. It's more exciting to have one car and reap the benefits of that if we know why we're doing it. Are we doing it because we're broke? No. Are we doing it to buy a new TV? No (because that wouldn't motivate us). We're doing this to be debt free, we're doing this to get a newer car, we're doing this to buy a house, etc.

Whatever your financial plan is, be on the same page with your spouse/partner. If you're single, share your goals with others. Make yourself be accountable to your dreams. We're not shy about sharing our plans. We love to tell others of the joy we're finding in living simply and meeting goals!

Share with us! Are you on a financial plan? What goals are you striving for?


september said...

On the paying cash for a home thing, have you factored in the financial implications for leaving the money invested based on the interest rate you're able to get? We're in our mid-thirties and owned our home free and clear, but when we were investing into a business we were crunching numbers with our planner and realized that we were better off taking a 150K mortgage (which in terms of equity we were comfortable with, as it's less than half the appraised value of the home) at a 4.25% interest rate; even if we decided five years from now that we just didn't want any debt at all, we would still be better off, as even using a conservative investment model we should bring in at least 6% on that money.

Jess and Jason said...

Hi there, great comment! There are a few reasons why we are not planning to have a mortgage and are planning to buy our future home in cash. 1 - In our humble opinion, debt is dumb. It's the principle of the matter. If we own our home in cash, there's no monthly payment to pay. If we lost our jobs, we wouldn't have to worry about losing our home. 2 - Getting a 6% interest rate is great until it's not - meaning, if the market tanks, your 6% could now be 0%.

I would advise that to get a more full answer to those questions, either read Dave Ramsey's Total Money Makeover book or listen to his radio show, as he advises callers on this exact issue often.

If you're comfortable with debt, that's great for you, but it's not something we aspire to have. We also live as biblically as we can and God says to owe no man anything but love.

Thank you for reading!