Light at the End of the (Debt) Tunnel

[BigMoneyJim]

I have been on fiscal autopilot for a while and haven't been hanging around here. I just thought I'd check in and share my progress.

Lowering my expenses and maximizing my debt reduction a couple of years ago has really paid off. I ran a little tight late last year, but so far I've pushed the payoff date back only a month. It may get pushed back one more month due to some more dental work, but I should be credit card debt free in June (or July) this year. After that I just have my car loan from a relative to pay off.

What's really shocking is to realize that huge monthly debt reduction payment will suddenly be freed up for other purposes. I know I'm going to save much of it and have some tentative numbers in mind but haven't planned a budget / savings plan yet. I don't want to do that too early because it feels like counting my chickens before they've hatched.

I better start getting in shape for my happy dance...

 

[Hiss]

Wow! I thought I was the only one who did the happy dance. When I do it my kids say I look like a penguin with my hands to the side and the bouncing back and forth. I was doing it many times during the Pats super victory Sunday night.

 

[Nords]

Turn on your own lights!

It's time to think about budget & savings!

Jim, you've been hatching eggs all along and now you can decide what to do with the chicks.

You sound like you already have a budget. Is it a budget that you can live on for the next few years/decades, until you retire early? If it's a livable frugal budget and not solitary-confinement sensory-deprivation hell, perhaps you can just stay on that budget and let the savings pile up that much faster. Or compromise by flinging a few more percent into the entertainment section and saving the rest.

Now is the time to figure out where you're going to put all the new savings--
Emergency fund (3-6 months' income?)
401(k)-- up to the employer's match
Roth IRA
Conventional IRA (especially if deductible)
House down payment?
Other tax-free or tax-deferred savings plans
Kid's college savings (if you feel you must subsidize the kid's education)
Taxable investments

And now is the time to find out what ETFs, stocks, bonds, or funds you'll want to buy... before all of that cash is burning a hole in your pocket.

 

[BigMoneyJim]

<-- My avatar from now through June 17 is a countdown until my CC debt is gone. (The computer updates it automatically.) Payday is June 15, and through online electronic bill pay the normal delay is 2 days. So sometime on June 17, 2004 my CC debt vanishes.

After that I'll redirect all the debt reduction money to my relative and pay off the car by the second half of August .

I'll give my mom $1200 in September. She isn't expecting it, but I feel I owe it to her for a past favor.

After my mom's $1200 I will be 100% debt free!

By the way, it was tempting several times to take a penaltied withdrawal from my 401(k) / IRA to pay it off. 5 years ago when I decided to rid myself of the debt I had enough in my nest egg to pay it off and cover the taxes/penalties. Three reasons kept me from doing it:

• The taxes and penalties were prohibitively steep
• I couldn't "catch up" or recover the tax-deferred savings because of yearly contribution limits (opportunity loss)
• If I took this quick'n'easy way out, how could I be sure I could maintain a budget to not rack up the debt again? I did this before with a consolidation loan; I had credit card debt built up before it was paid off.

I gotta say it's a terrific feeling to have the debt almost gone and have already proven to myself that I can hold a budget that allows for debt reduction--which after the debt is gone becomes savings.

It's time to think about budget & savings!

Here are my immediate post-debt plans for after-tax money:

• Roughly split the freed income between 401(k) and my savings account
• Build up $5000 emergency fund

Short-term plans (up to a year):

• Open a Vanguard MM fund account for savings instead of keeping it in my CU savings
• Build up the emergency fund in the Vanguard account

Medium term plans (roughly 5 year outlook):

• Ideally target 18 months emergency fund since 18 months is the average IT professional's unemployment length
• Target maybe $10,000 for car replacement fund
• Target $40,000-$50,000 earmarked for house down payment and closing costs

The tax-deferred money will continue its current mix of Vanguard indexed stock and bond funds.

The above plan figures are rough guestimates at this time. For example I'm not going to have a $50,000 down payment in 5 years while maintaining all my other numbers. I expect my cash fund will be flexible for the forseeable future, and if I'm forced to buy a car or decide to buy a house I'll forfeit a few months of emergency reserve.

18 months may be a bit too much emergency reserve, anyway, since I'm now on an expense budget that can be maintained by a much lower-wage position at the cost of stopping savings contributions. Plus if I'm making much less money I won't be buying a $10,000 car with cash or buying a house.

I have a lot of budgeting and analysis to do, but I haven't been in the mood for it yet. (I can do math well, but I never enjoyed it.)

One thing that occurred to me while typing this post is that I don't have a medium-term investment vehicle in mind. I have long-term vehicles and cash reserve vehicles that I'm happy with, but I don't offhand know where I would put money that doesn't need to act as a reserve and won't be spent for 3-6 years. 100% bond funds?

You sound like you already have a budget. Is it a budget that you can live on for the next few years/decades, until you retire early? If it's a livable frugal budget and not solitary-confinement sensory-deprivation hell, perhaps you can just stay on that budget and let the savings pile up that much faster. Or compromise by flinging a few more percent into the entertainment section and saving the rest.

My plan was in fact your last suggestion of throwing some more to entertainment and saving the rest. The budget is livable but needs a little more fun and a couple of trips a year.

I had planned on just pulling vacations out of cash reserves, but now that I think about it I might be better off budgeting a separate vacation savings account to cap my expenditures or at least track them better. I don't have the interest or dedication to track expenses carefuly, but it's maintainable for me to budget a block of money and determine how far over or under the block I go; in this case the vacation account would be the audit device.

 

[BigMoneyJim]

The biggest question for me in this transition is how to balance tax-deferred accounts with after-tax accounts. The conventional wisdom is to max the 401(k) and IRA's and then after-tax. (By the way, my company match is small and even now I'm getting the max match.) But even with as much as I'm saving the 401(k) can take a majority of my saved income, but I want/need to build an emergency fund and budget for a car and house down payment. For now I've decided to split the money between the 401(k) and after-tax savings at least until I have a decent emergency fund.

I'm noticing that everything I have in mind for the after-tax accounts I plan to have in MM funds. Perhaps that's correct, and until I have my 18 months' expenses, $10k car and $50k down payment I don't need longer term vehicles in after-tax accounts.

I mention cars a couple of times above. I'm not itching to buy a car, it's just that I realize mine will wear out eventually. Also, I'm not convinced I'll buy a house anytime soon, and I may not ever, but I want a down payment ready just in case. I'm not sure quite what to do with that money besides a MM fund or maybe a bond fund, though.

I'm obviously partial to Vanguard fund investing. I may open up to other investments in the future, but I understand what my money is doing and that's the most important thing.

 

[Skylark]

I use the following budget categories for expenses over and above my monthly budget items. Each of these categories has a dedicated savings account which gets a monthly "payment" from my income.

Strategic: Savings for planned larger expenses such as major home repairs, non-emergency health care expenses, vacations, car purchase, or other large expenses.

Annual: Regular, planned expenses that come up once or twice a year, such as property taxes, insurance and condo fees.

Emergency: Unexpected expenses that you have no choice about that you cannot afford from your monthly budget.

By using these categories you can get a handle on expenses over and above your normal monthly expenses.

I make a spreadsheet list for strategic and annual expenses. We look at the lists every once and a while and reevaluate as our priorities change. When you work your monthly budget you then balance your need/desire for strategic and annual expenses with your need/desire for monthly expenses.

The whole idea behind this is to maintain savings to pay for non-monthly expenses rather than using credit cards or consumer debt.

I knocked off another credit card debt this month!!!!!!!!!!!!!!!!!!!!!!!

Now I am redirecting that monthly amount to the next victim, woohoo!

I'm hoping that in August I will be credit card and consumer debt free. Hopefully no big emergencies will happen between now and then.

Then I will have to try to build the emergency fund before an emergency happens. I will need to buy another car eventually and a roof repair is in our future, but I will delay as long as possible on this stuff.

I am maxing the 457 (401k) plan and saving $200/month in a Scottrade account as well, so I'm already saving a good amount. But I would like to be more aggressive to reach FIRE more quickly. Barring no financial emergencies, by the end of the year I should be out of cc debt, with an emergency savings cushion, making extra payments on my mortgage, plus putting away $1500 to $2000 a month in 457 and taxable investments.

Thats the goal, as long as we can avoid any bad or impulse spending decisions and emergencies we should get this savings plan on automatic pilot soon.

Do you have any idea if it is better to have a Vanguard account or a Scottrade account? When I get enough cash together I intend to buy a Vanguard fund. I can do that with Scottrade too, though there is an initial fee. Future payments are no charge.

 

[Whakamole]

Ideally target 18 months emergency fund since 18 months is the average IT professional's unemployment length

Just out of curiousity... where did you get this number?

 

[BigMoneyJim]

Just out of curiousity... where did you get this number?

I suppose I should have qualified that. I heard that from a couple of other guys, and one guy I know spent 18 months between IT jobs and I spent 18 months between decent IT jobs, so actually it's a rather anecdotal number.

Now that I think about it more, wiith my budget and soon-to-be zero debt I can temporarily take a lower-pay/non-IT job if necessary and/or cut back on eating and entertainment expenses, so 18 months of current expenses may be unnecessarily high and take away from other investment goals. What killed me last jobless spell was the debt. (And a little stupidity, but nevermind that.)

 

[Whakamole]

I suppose I should have qualified that. I heard that from a couple of other guys, and one guy I know spent 18 months between IT jobs and I spent 18 months between decent IT jobs, so actually it's a rather anecdotal number.

Now that I think about it more, wiith my budget and soon-to-be zero debt I can temporarily take a lower-pay/non-IT job if necessary and/or cut back on eating and entertainment expenses, so 18 months of current expenses may be unnecessarily high and take away from other investment goals. What killed me last jobless spell was the debt. (And a little stupidity, but nevermind that.)

Ah, OK. I was a bit scared there as I am in IT. I've been pretty lucky between jobs and contracts, but I haven't been in debt during those periods.

My philosophy has always been to try and keep working, I've taken odd computer jobs that didn't seem like a great fit at the time, but ended up serving me well in the long run. As Jon Lovitz once said, "HEY! A job's a job!"

 

[BigMoneyJim]

My philosophy has always been to try and keep working, I've taken odd computer jobs that didn't seem like a great fit at the time, but ended up serving me well in the long run. As Jon Lovitz once said, "HEY! A job's a job!"

Part of my stupidity during my jobless streak was a large ego. I thought I was hot stuff, IT-wise. I had 6-years experience and an MCSE. I wanted no less than $55k/year and to work within 20 miles of where I lived. (The most I had previsouly made was a little over $40k/year.) It took a few months for my cash and ego to wear down. I finally wound up selling office supplice at the local supply for a couple of months to stop racking up the debt after the cash ran out--and by then I was happy to have that job. After that I found a low-pay IT job for a couple of months before moving 1000 miles to get my career back on track.

My timing also stunk since I was job hunting after the internet bubble burst, but the job ego lesson is burned into memory. The other edge of the sword is that I may cling to a job more than necessary after the ego beating I took last time I was job hunting. As an example I had a buyout opportunity a few months ago but didn't take it. If I was confident I could've found a good secure job I would've taken the buyout.

 

[John Galt]

I never spent a minute worrying about unemployment
or job loss, and I was unemployed plenty of times
in my working life. I recall once when I was between
jobs, a banker friend said "You look pretty relaxed for someone who is unemployed." I replied, "Unemployment doesn't scare me a bit, but working at a job I dislike.............now that scares the hell out of me!"

John Galt

 

[Cut-Throat]

I never spent a minute worrying about unemployment
or job loss, and I was unemployed plenty of times
in my working life.

I never did either, John Galt. But I am suspecting that times are different here in the U.S. than they have been for the last 30 years.

I see this outsourcing of jobs from the U.S. as a real leveler with the rest of the World. The U.S. has enjoyed a much higher standard of living than the rest of the World. I see the U.S. standard coming down and the rest of the World increasing slightly. Cheap labor is where it's at today. India, China has plenty of it and the Big U.S. Corporations are going to cash in.

If I were to give a kid advice today on what career path to follow, I think I'd be speechless. I'm glad I'm done working for wages. - It just looks pretty grim to me

 

[Bob_Smith]

I agree Cut-throat, but don't you think the fact that there will be fewer workers competing for jobs in the US will minimize the impact on our kids? I'm telling my daughters to get jobs that cannot be sent overseas (teaching, health, law, etc.).

 

[John Galt]

Yeah Cut-Throat, and BTW, shouldn't you be packing?

John Galt

 

[Cut-Throat]

Yeah Cut-Throat, and BTW, shouldn't you be packing?

I pack in between posts. I've got this down to a science. The warm weather fishing trips are easy to pack for.

No waders, warm clothes etc. - Just fishing gear, shorts, tee-shirts and Gin Gimlet ingredients

 

[Whakamole]

If I were to give a kid advice today on what career path to follow, I think I'd be speechless. I'm glad I'm done working for wages. - It just looks pretty grim to me

Yeah... if it can't be sent overseas, they'll just import cheap labor to do it.

On the other hand... the reason those countries are hiring is because of US demand. We are the consumer of the world. At some point either the world will have to start consuming too, with all sorts of implications, or the US either won't afford it or protectionism will return in force.

Hard to know what is going to happen, so I continue to save as much as I can.

 

[BigMoneyJim]

I am suddenly reminded of a conversation I had when I was 18 or 19 with a truck driver in his 50's/60's (gray haired is really old when you're under 20). I was a naive young boy who had been with the freight company less than a year, and this guy was ex-military and had been around the block a few times. This was late 80's/early 90's and I recall a big deal being made of the Japanese buying all this American real estate. I brought up the subject with him, and he said he doesn't worry about it because if the Japanese bought all the real estate and then we needed it we could just bomb them and take it.

I still don't really agree with that plan of action, but in a way he has a point. As long as the U.S. has power, the wealth will probably stay here.

I won't dare try to debate the pros and cons of that outlook, but it's an interesing thought to consider. And if the U.S. loses all that power, then our Vanguards and Schwabbs and E-Trades and TIPS may not be our top concern.

Now I feel young and naive again.