Author Topic: First thing...first  (Read 5271 times)

Zx

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First thing...first
« on: May 14, 2015, 11:45:38 AM »
As a whisker-come-lately and a fan of Dave Ramsey, I'm curious as to how these two GooRoos match up from beginning to end.

Well, maybe more at the beginning, the stage my wife and I are in at the moment.               

To get up to date, since I last posted in this thread, I have put in my notice at the OR job and accepted a position in CA that pays about 130k, more than double the OR job. My wife has accelerated her game and is now raking in 700-800 per week, a drastic increase from the 1200 per month she was making when first I posted in these hallowed halls.

The LandMonster and Sentra still exist in our portfolio as basically debts on wheels, because though the LM is paid off it drinks gasoline like it's going out of style and we still have a loan on the Sentra.

The Sentra shows a blue book quote of 11700. We are asking 10900 but owe 10853 as of today. We are willing to go as low as 10500 to get rid of it. I showed the Sentra to a potential buyer yesterday and will show it today. We had one offer of 10000 cash, but that would mean putting in 853 of our own dollars to get rid of it...just a little too painful. I'm leaving in a week or 10 days and hope to get rid of it before then, so if nothing else comes along we might take that offer.

We plan to sell the LM when we have enough saved up to pay cash for its replacement, as I refuse to get another car loan at this juncture.

I know Dave Ramsey is more of a get out of debt guy, while MMM is a FIRE guy, but what about at first? Is saving up 6 months of wages FIRST the way to go? If that's true then I don't see how we could begin getting out of debt for 9 months or so. Perhaps saving up a few thousand would be the way to go first, as six months of wages for us would be about 50k now, which takes a while.

The next step, after putting away this emergency fund, would be to save for buying the LM's replacement, correct? After all, it is a ticking time bomb of repairs that sucks down gas at 8 mpg.

When this is done, start snowballing the 19k in CC debt, followed by an all out assault on the student loans. Then debt free. Then FIRE.

But I'm really curious as to the first goals and am asking for the Wisdom of the Mustaches.


MDM

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Re: First thing...first
« Reply #1 on: May 14, 2015, 11:55:44 AM »
Emergency funds are, by definition, for emergencies.

An emergency is, typically, something "unforeseen."

You have to estimate the likelihood of having an emergency large enough for you to need $X immediately, and compare that with the benefits gained from using $X to pay debt.

People will say "but you might have an emergency so you should plan as if you will have one."

People will also say "the likelihood is so low that you should take the sure thing and pay your debts."

A large factor could be the job security or lack thereof that you each have - what do you think yours is?

begood

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Re: First thing...first
« Reply #2 on: May 14, 2015, 12:07:22 PM »
I know Dave Ramsey is more of a get out of debt guy, while MMM is a FIRE guy, but what about at first? Is saving up 6 months of wages FIRST the way to go? If that's true then I don't see how we could begin getting out of debt for 9 months or so. Perhaps saving up a few thousand would be the way to go first, as six months of wages for us would be about 50k now, which takes a while.

An Emergency Fund isn't so many months of WAGES; it's so many months of EXPENSES. Those could be two very different numbers, depending on your cost-cutting measures, and that might mean you could move on to debt repayment more quickly than you might have anticipated.

Start with putting away 3-6 months of expenses in something safe and accessible - money market savings account, for example.

I'm not a Dave Ramsey person, but it seems to me that the most reasonable thing to do would be to knock out your highest interest credit card debt first - that's an automatic savings of __% per month.
« Last Edit: May 14, 2015, 12:09:05 PM by begood »

Zx

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Re: First thing...first
« Reply #3 on: May 14, 2015, 01:09:51 PM »
Emergency funds are, by definition, for emergencies.

An emergency is, typically, something "unforeseen."

You have to estimate the likelihood of having an emergency large enough for you to need $X immediately, and compare that with the benefits gained from using $X to pay debt.

People will say "but you might have an emergency so you should plan as if you will have one."

People will also say "the likelihood is so low that you should take the sure thing and pay your debts."

A large factor could be the job security or lack thereof that you each have - what do you think yours is?

The job I'm going to entails a high degree of job security, so I suppose I'll just aim for a 3000 dollar emergency fund or so and call it good.

prestache

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Re: First thing...first
« Reply #4 on: May 14, 2015, 02:23:34 PM »
Credit card debt generally has very high interest rates.  I would treat that as an emergency and pay it all off first.  Worst case scenario is that if an emergency strikes, you just draw on that line of credit (which will be freed up by paying off the card).

neil

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Re: First thing...first
« Reply #5 on: May 14, 2015, 02:55:13 PM »
Cash is needed for expenses.  The amount of it should be related to what you might need to spend and has nothing to do with your salary.  The common assumption that expenses are related to income is something you really need to break if you want to be on a path to FI.  Long term, it's ok to spend on wants.  But it is way too common to adjust spending on income and not really consider if the expenses are really necessary.

It is good to have enough liquid on the 1st of the month to cover that month.  Presumably you make enough to cover your expenses, but it simply not a good lifestyle to be waiting for the paycheck to cover expenses.  It also covers a bit of variation if you have some uneven spending.  I consider this step 1.  I grew up with parents living paycheck to paycheck and I never understood it.

After that, I would consider how I would deal with emergencies.  Obviously, it would be nice to be able to cover with cash, but consumer credit is a possibility for the short term.  If you already have consumer debt, you can get rid of that first before building up the cash fund.  If you really do have some emergency during this time, you can always go back to the credit card.  But it doesn't really make sense to grow a $10K emergency fund with a $20K CC bill accruing 20% interest or whatever it may be.  I'd rather get that CC back down to $10K and reduce my interest cost.  If some $2K emergency comes up that I really can not avoid, I can put it back on the CC if I really needed to.  The key here is really making sure your expenses are the minimum until you get the consumer debt to zero and build a proper emergency fund.  At that point then you shouldn't need consumer debt ever again.  (It doesn't hurt here to accumulate a bit more cash if that makes you feel comfortable, but remember every $100 you save is costing you about $1-2/month until the CC debt is gone.  Price of safety.)

Once CC is down to zero, whether or not you accelerate other debt payments before growing the e-fund becomes a call you need to make.  It is tough to give a hard rule on what your emergency fund needs to be and whether it is worth paying off a car loan or student debt (which is not revolving, unlike the CC example above - this money is gone) because it is not technically worth exchanging a 6% loan with 20% consumer debt because you didn't have emergency cash.  But it is also unreasonable to self-insure yourself for the worst case, because it is a lot to include things such as your insurance deductibles, broken vehicle, etc.  I am not certain if people really need money to cover things like rent and food when short term disability and unemployment insurance covers the main reasons why you have an unexpected drop in income.  As long as you are comfortable with your approach and in sync with your partner, it should be ok.
« Last Edit: May 14, 2015, 03:38:06 PM by neil »

okits

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Re: First thing...first
« Reply #6 on: May 14, 2015, 07:00:50 PM »
Credit card debt generally has very high interest rates.  I would treat that as an emergency and pay it all off first.  Worst case scenario is that if an emergency strikes, you just draw on that line of credit (which will be freed up by paying off the card).

+1

An emergency tomorrow is only a possibility.  But it is a certainty that tomorrow (and every day until you pay it off) your credit card debts are sucking interest charges out of you.  Get rid of your credit card debt right now, run them up again only in the case of a true emergency.

(And congrats to you and your wife on your improving situation!)

Tjat

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Re: First thing...first
« Reply #7 on: May 14, 2015, 07:46:15 PM »
Given your salaries, I'd suggest you follow MMM instead of Ramsey, who is targeted more towards the lower income and those lacking any self-control.

I'll assume two cars are needed, but do give some consideration to finding a place in CA close enough to work to bike. I feel having 3-6 months of cash for an "emergency fund" is a bit of a waste under normal circumstances and even more so when you have 19K credit card debt. A bit alarming, but fortunately your large increase in income should allow you to get this quickly under control.

Here's what I'd do:

1) Sell the LM for whatever you can get. Don't worry about saving for a 'replacement'. Instead analyze your expected annual miles driven and get something that you'll get a few years out of before it hits the red-zone of its expected lifetime miles. You should be able to do this for 5K. Sentra doesn't seem like a terrible car, why are you so eager to sell that?

2) Target a true emergency fund of 3,000. It sounds like you may already have this, but realize it doesn't necessary have to be in liquid cash. In the rare event of an emergency, it is okay to sell investments. Until you're truly debt free, I'd advise against the "springy" debt MMM philosophy.

3) Funnel any and all remaining income into the CC debt. Even without lifestyle changes, your wife is now pulling in 2400 a month that she previously wasn't. Can this all go to the CC debt?

3b) Do you have any current investments in taxable accounts? May be an opportunity to sell some and redirect towards the CC debt.

4) Now no CC debt, same strategy towards student loans.

4) Now debt free (xMortgage) you get to decide what to do with your newfound wealth. If you've managed to stave off lifestyle inflation, you will have a super large chunk of change to do with what you will. Depending on your risk tolerance, this may translate to paying off your house, or socking away in retirement accounts or Vanguard. 

Another Reader

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Re: First thing...first
« Reply #8 on: May 14, 2015, 07:59:37 PM »
Ramsey advocates saving a small emergency fund as step one.  The six months of expenses comes after the debt is all paid off except the mortgage IIRC.  He is oriented toward the low and middle income wage earner.  The idea is that any progress toward getting out of debt not be undone by a small problem such as a car repair.

In your shoes, I would figure out how I would handle a car repair, an emergency trip back to Oregon, or a co-pay for an emergency room visit.  IOW, the kinds of things you personally are likely to run into.  It might be a few thousand in the checking account, or you might be ok putting some of it back on the high interest rate card.  Whatever the cash cushion is that makes you comfortable in the short term, that's the goal.  Everything else goes to debt elimination.  Because that debt is your "hair on fire" emergency.

1967mama

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Re: First thing...first
« Reply #9 on: May 15, 2015, 12:00:36 AM »
This short explanation of Dave Ramsey's baby steps might be helpful, at least for your get-out-of-debt phase:

https://www.daveramsey.com/new/baby-steps/

I don't think Dave is geared toward low to middle wage earners ... he has plenty of folks doing their "debt free scream" who make six figures. Debt is debt...its just that with a higher income, you can get out of it faster.

BrickByBrick

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Re: First thing...first
« Reply #10 on: May 15, 2015, 05:12:37 AM »
It's already been mentioned above but to simply state it:

DR says to pull together $1000 first as a starter emergency fund before tackling your debt, so if your intention is to follow his way of getting out of debt you don't need to save the 3 - 6 months of expenses first.  If you feel you are more likely to run into an unexpected expense in the near future, save up more than that $1000.

After that you have the choice of the snowball method (DR's way) or the avalanche method (a more Mustachian way) of paying off debt.  (Side bar: I don't know if 'avalanche' is the correct term here, I've just heard it that way before)

The 3 - 6 month emergency fund comes after all non-mortgage debt has been paid off.

rmendpara

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Re: First thing...first
« Reply #11 on: May 16, 2015, 12:31:44 AM »
If it were me, I would get together a few thousand and stick it in a savings account. Definitely NOT 3-6 months of expenses while you are still paying down debts. Not that he is God's word on finances, but even dave ramsey suggests something like 1-2k in cash while you are paying off debts, and start increasing it as your debts come down to earth.

As far as the rest, I'm glad to see you are both working on things. I can only imagine you both are quite impulsive and quick to change on a whim. Many people can't do a 180-degree turn and be okay with it. Especially when it involves moving and uprooting their entire lives.

I applaud you for taking everything "MMM" to heart, but be careful not to go overboard. There is such a thing as burning out... and giving up... That's not good.

You are not in it for a short term savings bump. You are not trying to pay down a single mortgage. You have ~15 years to get out of horrible debt AND save up for retirement while living in some of the most expensive metros in the country. You likely will not retire a comfortable millionaire, but you can CERTAINLY have A LOT saved up come age 65 so you're not eating dog food for the rest of your days. Heck, maybe your health stays and you can continue to work at least a little bit until age 70, and then collect FULL SS income!!! Not that full SS is like a life of luxury, but it's a base level of sustenance plus whatever you have saved up to draw from.

CONGRATULATIONS! You took the first step. Don't get too eager and try and do everything overnight. You spent 25 years making sub-optimal decisions. It's going to take the next 10+ years (the WHOLE time) to right the ship and start making positive movement. You can and will get there, but take it step by step. A few things at a time.

Good luck to you both!