Almost at the finish line for TMM baby step 2: debt snowball. Actually, we could have been there on July 19th, but, the laptop hubby has been wanting for so long went on sale for the 4th of July week. We saved $100 by buying it now and pushing the fridge payoff out one more paycheck (Aug 2). Which I think is fine given it's no interest for 3 more months and definitely will be paid off on the 2nd. We chose snail speed shipping though to save on that part, so it will still be another week or so before he gets it, but I'm sure he will be very happy when it finally arrives!

We are starting to look into what the next financial steps are. Dave Ramsey says baby step 3 should be saving a 3-6 month emergency fund (building on the $1000 one from baby step 1). That would be about $18,000 for us and would take quite some time. And in the meantime, we would still not be taking advantage of the 3% 401K matching hubby's company offers (not to mention just plain starting to save for retirement period, even though we're both entering our late 30's.) Additionally, our '99 SUV is probably not going to last much longer and certainly will be an emergency when it dies. And we want our next car purchase to be a slightly used, reliable family vehicle with low miles that we can count on driving for at least 8-10 years.

So, we're thinking of taking a middle of the road approach. I've opened a money market account with Ally bank and transferred our $1000 emergency fund there. As soon as the fridge is done we are going to work on building that up to $5000 as fast as possible. After that, we have some home maintenance issues we have been putting off forever that we need to take care of. Getting all of that accomplished is going to push us well into the end of Oct.

But once we're there, we are going to start putting 6% of hubby's paychecks into the company 401K (the maximum matching amount). And come open enrollment in Nov we are also going to up our HSA/FSA medical contributions to the max for the coming year. That's going to take quite a dent out of our monthly income, but with all the debt we've now paid off (as well as the decrease in taxable income from the 401K/HSA/FSA), we should still be able to raise our entertainment budget from what it has been these past 9 months, and still work towards saving for a new vehicle.

We originally wanted to save for it completely before purchasing, which would have taken about a year, but our daughter really needs a car for the college internship she wants to do next summer. Assuming the SUV is still running then, we'd like to pass it off to her by next May so she can do that. That said, we should be 80% of the way there by May with hubby's bonus, so it shouldn't be too bad to take out a small loan at that point and pay it off in 4-6 months.

At that point, I will be starting school again (just a few classes at a community college to begin with) so there will be some tuition to take care of. But we will also need to start kicking up our savings as well. I'm looking into a Roth IRA for that, and Ally bank seems like a good place to help us with it. Given that you can withdraw contributions without penalty if needed, I feel like this could double with retirement and most of our remaining 3-6 month emergency fund. Short of job loss, I doubt we will ever need more than the $5K we will already have set aside in the money market (which I will keep separate). And $18K seems like too much money to just have sitting in a low interest account, when it will likely never be used, while we make no progress on retirement. Dave Ramsey would not approve, and I'm still looking into the details, but right now that's the plan.

This may be simply an exercise in idealistic dreaming, but I want to paint for you (or maybe mostly just me) a picture of how I see this new financial plan unfolding for us in the coming years. Cause I have big, unrealized but hopefully not unrealistic, dreams. In Dave Ramsey's book, he tells you that it takes most people about seven years to reach Baby Step 7: Build Wealth. Longer still to get to the Pinnacle Point where your money finally starts working harder than you have to. Certainly, that is the long term goal. And the short term goal is the credit card/car payment debt payoff I've already outlined. But it'd be nice to have a picture of our mid-term plan as well. Especially given that I don't think we will be following the Baby Steps precisely.

So, one year out, give or take a few months, and hopefully our small debts (non-mortgage/student loan) will be paid off. At that point we will hopefully be more used to getting by with a lot less monthly discretionary income. Maybe we can at least add enough back in to be able to go on monthly date nights again though. But I don't want to get too slack because we still have a lot or work to do. Baby Step 3 is to Finish the Emergency Fund, which he defines as 3-6 mos. worth of expenses. For us, that would roughly be $15K-$30K.

Projecting out both raises and expenses, once we get our small debts paid off, I think we could save roughly $25K/yr. So, that should take us 7-14 mos. depending on how much cushion we want. My thought is that we should save as much as possible, setting aside the minimum $15K to touch only for emergencies, but then factor in the fact that our family SUV will be 15 years old (already has 223K miles) by then. I am fine with driving it until it dies, but its pretty much a given that that is going to be before too much longer (please, please, please not this year!). I am also fine with not getting a new car when it does die. But I would prefer to get something gently used with at least a few more bells and whistles than our current one has. I think we could probably get something 5-6 years old for between $15-$20K.

That's not the only big ticket item we need to save for though. In a few more years, the boys will be ready to start school and I will be more than ready to jump back on the career train. But that is probably going to require a bit of retraining on my part, and I am not willing to take out any more student loans. (Above and beyond the $105K I already put my foot down on of course). So, if I want to go back, which I very much do right now, we will need to save for that too. I am conservatively estimating about $20K for that right now, plus after school daycare (maybe $5K? Though that will be more of an on-going expense), but given the rising cost of education these days, who knows?

The point of all this speculating is to point out that with these extra purchases, the time it takes up to save about $30K for an emergency fund is going to be more like 2-3/4 to 3 years rather than 14 mos. That's a long time. And who knows how many set backs there might be in the meantime. At some point, hubby's car will need to be replaced as well, though it is 5 years newer than the SUV at least. But I guess I'm okay with it as long as we get to Baby Step 4: Retirement Investing, by the time I re-graduate, which I am predicting will be in 5-6 years. If we get to that step before I graduate, then I guess we will start putting at least the company matching amount into hubby's 401K. Actually, if we don't get to that step before 40, we probably should do a lot more than that, and I kind of doubt we will. Once I do graduate and start working again though, we are going to kick step 4's butt.

And then we get to Baby Step 5: College Funding for the kids. Except we're going to re-package that one as college payoff for the adults. By then my daughter will be done with college (or darn well better be at least). Until we get fabulously wealthy, I have done the best I can for her by insisting that she go to a school where she would graduate with a maximum of $40K in debt. Still a lot I know, but less than half as much than me, and within the amount considered reasonable by the income to debt calculators. She hated me for it at the time, but now seems mostly happy.

I am hoping that with a new masters degree I will be able to make at least $50K, although about half of that will probably have to go towards retirement, and the rest will get taxed. But lets just say that after stocking up our emergency fund, we have about $25K/yr extra from hubby's income and $25K/yr from mine. So $50K/yr extra after I start working to do with what we will. (OMG, is that really possible?) What to do with all that cash?? Pay off my damn student loans!! If we stick to the plan, that should take us only two more years. At that point, we can look into some minimal investing for the boys' college (and maybe some back pay for my daughter). But they are going to be expected to chip in as well because we are heading off to...

...Baby Step 6: Pay Off the Mortgage! Honestly, not quite sure what's going to happen when we get to this step because you see, before we focus on paying off the mortgage, we'd like to focus instead of getting the house we'd really like to have. The exciting thing is, once the student loan is paid off, we could afford about $600 more per month for a mortgage without changing anything else. Assuming the market continues to improve, we should also have a fair amount of equity at this point, having lived here for about 11 years. I am not sure yet whether we would rather buy or remodel. It will probably depend a lot on the location of our jobs at that point. There are some things I really like about both this home and this area, but our home was built in the 1960's and it really needs some updating. I think it would take between $175K-$200K to get it to where we want it, and only about 60% of that could be recouped in re-sale value. Whether or not that's worth it will depend largely on what we could get for the same value given the housing market at the time.

I also really like Dave Ramsey's idea of taking out only a 15 year mortgage and keeping your mortgage payment to less than 25% of your take home pay. Whether we decide to buy or remodel, I do very much want to keep those rules in mind. After all our hard work, I certainly do not want to end up house poor. It will be hard to feel like we can't afford just about whatever we want once we've taken care of all that other debt. And I do love big, pretty homes. Nonetheless, regardless of what we choose to do, at that point it should be a maximum of 15 years until we are entirely debt free, and if we continue with the $50K/yr rule, I think we could take that down to 6 years.

Which means this is more like a 14 year than a 7 years plan for us, but by the time we enter our 50's, it is very possible we will have no debt remaining (maybe we'll bump up the boys college fund at that point) and hopefully by the time we hit our 60's we will have reached that fabled Pinnacle Point which will leave us set for a long, happy retirement. Its certainly not a get rich quick scheme. which makes it seem somewhat more believable. Though it will certainly require a lot of dedication and sacrifice. But it seems like by the time the boys graduate from high school, we will finally have both the time AND money to do all sorts of things.

So that's the big picture. And now back to Baby Step 2.