This is what our financial navigational system would have sounded like when we started our journey back in early 2016. After looking at our finances, we knew that first thing was first. “Get out of debt!” Although in our minds we didn’t have “bad” debt, we had to tackle the debt we had. Here’s what it looked like:
At the start of the year, we were already on track to paying off a student loan and a car note. Enter, Dave Ramsey. My co-worker loan me her copy of the Total Money Makeover. Although I don’t agree with everything he teaches, he teaches some really good, basic principles. We were already putting money into our savings account yet still accruing interest on our outstanding loans. Even though the interest rates were low, under 3%, there was absolutely no reason to pay the financial institutions any more money than we had too.
We continued to contribute to our retirement plans but stopped putting money in our savings account. After cutting our dining and entertainment budgets, we were able to be debt free… well almost.
One huge debt that is not listed, is our mortgage. We made changes in that are too. In April 2016, we refinanced our mortgage to decrease our interest rate by 1%. This removed the PMI, private mortgage insurance, from our monthly payment. Because our monthly payment was reduced, we decided to shave a few years from the payment schedule and went from a 30-year mortgage to a 20-year loan. If you look at the debt box above you can see that we made a huge dent in our debts in the month of April. No mortgage payment due to the refinance + a fifth Friday in the month of April gave us an extra paycheck = DEBT PAYDOWN!
One of the principles I disagree with Dave Ramsey about is, stopping all contributions to savings and investments in every situation. In our case, we only needed to defer savings for five months to be debt free. Our savings interest rate was less than 1%. We didn’t lose money by not saving for those five months. We had the cash to pay off the debt in one lump sum, it made me feel more comfortable leaving our savings account untouched. We didn’t make any withdrawals or deposits in those months. Make sure you consider all outcomes and alternatives, especially if you have a large debt.
For example, if you have a debt that will take 10 years to pay off while not saving any money for retirement, I would do the math. Consider the following:
If your employer is matching your contributions by 5%, at the very least, consider putting enough to receive the employer match. More often than not, this makes better financial sense in the long term.
It’s so important to drastically reduce, preferably eliminate, all debt before you start thinking about investing. As for us, we’ve paid off over $8,000 in debt, now only 120 months to go on the FIRE road.