Freedom - Part 3

In the last post we discussed the first three baby steps. These are foundational in obtaining financial freedom. In this post we will cover baby steps 4 - 7. To review, the baby steps are listed below.

1. Baby Emergency Fund of $1,000
2. Debt Snowball
3. Fully Funded Emergency Fund (FFEF)
4. 15% of gross income into retirement
5. Kid’s college
6. Pay off the House
7. Build Wealth

Picture this with me. You have spent the last 18-24 months (or longer) putting every single dollar you could scrounge towards debt, and saving for your FFEF. Since you’ve gotten to this point I have no doubt you were super intense. It’s as if you’ve been riding in a speeding car with the windows down. The road and trees flying by so fast you can’t make anything out. You’ve had one thing on your mind and that was to kick debt to the curb, and arrive with enough buffer money to last in the event of some unexpected situation. Congratulations. You’ve made it. Now it’s time to slow down a bit, and become a little more strategic with your money.

Can you see yourself reaching this point? I can. I know you can do it. I can testify it’s one of the most satisfying feelings you’ll ever experience. What’s next? Glad you asked. Let’s move on.

When you free up your income by paying off everything except the house, you have accomplished what many see as unattainable. You should now have what’s known as cash surplus. You’ll have money left over at the end of your month instead of the other way around. The TMMO (Total Money Makeover) suggests you now begin thinking of the future by adding 15% of your gross income towards retirement.

Baby Step 4 - Retirement

There are a few different types of retirement investments Dave suggests. Since the goal of this post is purely informational, and meant to explain what Dave teaches, I will not attempt to argue whether he is right or wrong. First, if your employer offers a matching 401(k) plan you should contribute up to the amount that is matched. If your company offers a 3% matching plan, then you should contribute 3% of your check. Free money is always a good thing.

The next recommended investment type is an IRA, or Individual Retirement Account. You have two types to choose from. There is the traditional IRA, and the Roth IRA. There is nearly a limitless supply of information on these types of retirement choices. I will not attempt to go over them here.

Since we’re in our thirties, my wife and I contribute to a Roth IRA, one for her and one for me. As of this writing we can contribute $5,000 each per year. Although we pay taxes on the money we put into a Roth IRA, we do not pay taxes on the amount that grows once it’s in the IRA Account. When it’s time to pull money from the Roth, we will not pay taxes on what is taken out. Dave suggests mutual funds inside your IRA that fall into four categories.

• Growth (25%)
• Growth & Income (25%)
• Aggressive Growth (25%)
• International (25%)

The risk level in funds runs from safe (growth) to risky (aggressive growth), and then takes advantage of an array of international companies. The funds should be at least 10 years old (or somewhere close to this), and should have a 10% return (or more) over that time. These funds exist, but you must look at the record over the LIFE of the fund not over the short term. Other things to consider would be if the fund is a no load, what the expense ratio is, and the turnover rate of the funds. Again, you’ll need to do your own research, and understand your investment choices. If you need help with this go to http://www.daveramsey.com and click on ELP (Endorsed Local Provider).

Baby Step 5 - Kid’s College

Step 5 is devoted to setting aside money for college. College is expensive, and getting more so every year. A 2008 study from the National Center for Education Statistics discovered that 50% of all college graduates have an average of $10,000 to pay back in loans. I’ve known people personally to have MUCH more than this. It’s important to our children’s financial freedom to make sure they do not start off life with debt. It’s not always completely avoidable, but it can be drastically reduced based on many factors, and good choices. I also hope to encourage my kids to work through school and help with the cost of their education.

Dave recommends using the Educational Savings Account (ESA) to build college savings. It works much like a Roth IRA in that you get to choose the funds, and the money is not taxed when it’s properly used. There is plenty of information on the Internet to help you understand the details of an ESA. Google is your friend.

Baby Step 6 - Pay off the House

Up to this point I can speak from experience. This step is still in the works for us, although we currently have a relatively low mortgage balance. Up until Baby Step 4 (Fully Funded Emergency Fund), you have a clear idea of exactly how to know when the step is complete. Save $1000. Pay off everything but the house. Save three to six months of expenses. Put 15% towards retirement. Then, in step 5, you aren’t given a percentage or an amount. You are simply told to ‘save for college’.

Exactly how you choose to implement the previous steps will help determine how much surplus you have to apply to Step 6, pay off the house. Dave suggests any money left over after steps 1-5 should go towards paying down the mortgage.

I’m going to chase a rabbit real quick. Come along with me. I’m the type of person who likes things to be as close to black and white as possible. Tell me what to do, and I’ll do it (within reason). Many people get confused after the FFEF is complete. At what point can we begin to save for vacation, new furniture, special dinners, new toys, etc? This is unofficially called baby step 3b. If you want to save up $2,000 to go on a vacation, the only thing you’ll need to make sure of is that you are completely done with baby step 3. I have stopped 4-6 in order to save for something on 3b (temporarily), and then rolled back into 4-6. I think this is okay, but you need to decide this for yourself. As long as you’re not adding debt back to your life, I feel like this approach is okay. You obviously don’t want to make a 6 month habit of it, but if you need a few pay periods, or a few months to hit a short term savings goal, then it should be fine to either cut back, or stop the other steps. Others may disagree, and this point isn’t really spelled out by Dave. Let’s exit the rabbit trail, shall we.

Baby Step 7 - Build Wealth

Once you’ve completed the monumental task of paying off your mortgage, then your income is truly freed to the point of building some serious wealth. Dave also recommends to give some of it away. Yes, you heard me. Give some of your surplus to a great cause. If you don’t focus on others, it’s possible that you’ll get constipated on your own possessions. Giving lifts your spirit in addition to helping someone else. I highly recommend it.

Conclusion

So, there you have it. This is the essence of The Total Money Makeover. Follow them and I promise you’ll have peace in your life. Spend a relatively short time eliminating debt from your life and you’ll never be sorry you did. As Dave often says, live like no one else so later you can live like no one else.

BlogPress

Okay, so I just downloaded and installed Blogpress for iPhone/iPad. I want to see how useful it'll be. This is only a test.


This is how you put a picture in the post. That was really simple. Let's add another.

Freedom - Part 2

I enjoy a good brainstorming session. The process of writing out all kinds of wacky ideas that may or may not ever come to completion is liberating to me. There’s something about a hand full of markers and a dry erase board that gets my mind flowing with all kinds of potential. Maybe it’s the smell of the dry erase markers, but I digress.

However, there comes a time when you have to get your head out of the clouds (or that other place), and start pinning down exactly how to tackle a specific task, or complete a project. I’m pretty sure I suffer from a bit of ADD, or other type of newfangled focusing disorder. I find it difficult to get through some projects. After the honeymoon of brainstorming is over, you really have to decide what step comes next, and then get about the business of doing it. That’s what makes The Total Money Makeover (hereby referred to as TMMO) so appealing.

I mentioned in the first post of this series that I was attracted to the practical nature of the TMMO plan. Basically, it’s comprised of seven, easy to understand steps. Notice I said the steps were easy to understand, not easy to follow. Understanding is the knowledge of what to do, and following the steps is the behavior. 20% understanding, 80% behavior. The seven steps are as follows:

1. Baby Emergency Fund of $1,000
2. Debt Snowball
3. Fully Funded Emergency Fund (FFEF)
4. 15% of gross income into retirement
5. Kid’s college
6. Pay off the House
7. Build Wealth

These steps are very practical, and easy to understand. I’ll lay out each of these steps beginning with the first three in this post, and move on to steps 4 through 7 in another post.

Before the Baby Steps

First and foremost, you have to change your view of debt. Debt is bad. Say that with me. Debt. Is. Bad. No, say it out loud. DEBT IS BAD! There you go. Once you’ve developed a hatred for debt, you must make a decision to never, ever, ever, go into debt again, for any reason. EVER. This step is crucial to the success of this plan. (Note: Mortgages are permitted under certain guidelines. More on that in a later post.)

Are you currently contributing to a retirement plan? 401(k)? IRA or Roth? If so, you’ll need to stop this before you begin. You read that correctly. Stop contributing to retirement while working the first three baby steps. You’ll get your chance to contribute to retirement beginning with step 4. Oh, you have a matching plan? Doesn’t matter. Stop it anyway. You need to get serious about using every single dollar you have towards digging out of this hole you’re in. Think about it. You’re going to be debt free in 18-24 months. In the grand scheme of things, that amount of time will not matter much. Trust me on this.

The Baby Emergency Fund of $1,000 - Why We Do This

Save $1,000 as fast as you can and put it in the bank. Don’t put it under your bed, or in your nightstand. Put it in the bank. This is for emergencies ONLY. This isn’t money for eating out, or other leisure activities. Emergencies. Got it? Here’s why. If you’ve ever been a home owner, you’ll appreciate, and understand the logic behind the baby emergency fund.

• The hot water heater goes out.
• A pipe under the kitchen sink bursts.
• A window is broken.

These are only a few examples of the fun times had by home owners. Let’s move on to cars.

• Transmission acts up
• Flat Tire
• Starter goes out
• Water pump bites the dust

I could go on. The idea is this: if any one of these things were to happen, with $1,000 in the bank, you could pay for it without having to go further into debt. You’ve made a commitment to yourself (and your spouse if you have one) to NOT add to your existing debt. Baby step one is the net below the trapeze artist. It’s the fire extinguisher in the kitchen. It’s the safety harness around the high-rise window washer. It’s the....you get the point. It may take some folks a while to complete this step. For others, it’s already done. Once you complete your baby emergency fund, you’ll move onto the next step. Don’t skip this very important step in the plan.

The Debt Snowball - Overview

Most people spend the majority of their time right here. Having been through this step, I’ll have to say, it was the funnest, but also took the most discipline. Here’s how you get started.

Take out a pen and paper. List ALL of your consumer debt, including car loans, credit cards, student loans, and personal loans. If you owe money to someone or some business, list it. Don’t list your mortgage, rent, and or re-occurring monthly bills such as your electric bill, cell phone, gas bill, and the like.

This may go against what you’ve heard in the past, but I want you to list the debts smallest to largest. Put the debt with the smallest balance at the top. Write the next smallest debt under the smallest, and so on until you’re done. Total it up at the bottom, and make sure you’re sitting down. It may shock you.

What about interest rates? Ah, glad you asked. Does it make sense to pay off the higher interest rate cards first? Well, mathematically, it might. We’re not concerned with math right now. If we were concerned with math, logic, and what makes sense, we wouldn’t be in this mess in the first place, now would we?

You’ll be paying off debt smallest to largest regardless of interest rates. The plan is to be completely out of debt, except for your mortgage, in two years or less. That may seem like an eternity, but if you’re serious about this, you can make it happen. Over two years, interest rates will have very little impact on your overall plan. There are always exceptions, but don’t be quick to assume your case is one of them.

The Budget

I’ve had several people physically flinch at the sound of the this word: budget. Tension rises. Images of walls actually moving in from all four sides spring to the front on their mind. If you feel this way, hang with me through the next few paragraphs.

I prefer to be in control of my surroundings as much as possible, don’t you? Stephen Covey (7 Habits of Highly Effective People) writes about having a ‘circle of influence’ and ‘circle of concern’. There are lots of things going on around us, and we have varying degrees of potential impact upon them. Some things we may be concerned about, but have very little way of changing, such as nuclear war, or the national debt. These things fall in the circle of concern. However, which restaurant you eat at on Sunday afternoon, or where you choose to be employed is very much within your circle of influence. The more time we spend in our circle of influence, the more in control we’ll be, and the more we will impact the world around us for the better.

Deciding to do a budget is a proactive measure that will have a significant impact on your personal finances, and is well within your ‘circle of influence’. Someone once said budgeting is telling your money where to go (proactive) instead of wondering where it went (reactive). A budget puts you in charge of every dollar. If you (and your spouse) decide to spend $200 a month on clothes, and this works out with the rest of your plan, then by golly that’s what you can do, but not a cent over. The hard part about deciding on a budget is deciding on the budget. It’s a clean slate, basically. You pay for food, utilities, shelter, and transportation. Then you pay the cable bill, doctor bills, credit card bills. First you decide, and then you follow the plan, adjusting it as you go, ONLY when all effected parties agree. Go to daveramsey.com and click on budgeting under the Tools section for more detailed information.

Still not convinced? Do you like challenges? Prove me wrong. Spend three months seriously working a budget, and see if you don’t feel more in control. More clear headed. It won’t be easy, but I guarantee you’ll see positive results. Be patient. It’s not easy.

Fully Funded Emergency Fund

Baby step three is where you build your fully funded emergency fund. At one point in life I did not think it was necessary, or even possible to do this. How big does your FFEF need to be? A commonly accepted guideline is three to six months of household expenses. At this point in the game, the only debt you’ll have left is your mortgage. You’ve plowed through all consumer debt, personal loans, cars, and student loans. In addition to your mortgage, you would include groceries, utilities, insurance, child care and transportation costs. By this point in the program, you should have a very good idea what is required per month.

So, which is it? Do I save three months or six months worth of expenses? The answer is yes. You do what makes sense to you, and what you’re comfortable with. Remember to consider the many risks that exist, such as an impact to your income due to job loss or injury. You are more likely to be disabled before you’re 65 than you are to die. You must determine your risk tolerance level. How much you put in is totally up to you and your spouse. Women tend to prefer a heftier emergency fund that men, and that’s okay. Both sides have a vote.

Much like your baby emergency fund, the FFEF is for emergencies only! This is not savings towards a new car, xbox, hunting rifle, shoes, or anything else you might want. EMERGENCIES!!

This has been a very lengthy post. I hope you have actually made it his far. These steps are the foundation of the TMMO, and some of the most rewarding because it’s the early stages of your road to financial freedom, and excitement abounds. I hope you will begin to make these changes right away. Check back later for steps 4-7.

Freedom

Take a trip with me back to the first quarter of 2008. We were in the middle of small home remodel, and Cary was due to give birth at the end of March with our second child. We financed the remodel as a second mortgage using the house as collateral. Payments wouldn’t be a problem based on our recent change from a one income to a two income household. In addition to the mortgage, we had two car notes, and a relatively small amount of credit card debt.

I would run up our credit card paying hospital bills, and an occasional indulgent purchase here and there, but wasn’t serious about paying it off in any particular time frame. We never used the credit card for daily expenses such as groceries or gas. Overall, it wasn’t a ton of money, but added up it came to around $32,000, minus the first and second mortgage. Wait, that is a lot of money when you say it out loud. THIRTY-TWO THOUSAND DOLLARS. But wait, a lot of that is car debt. We’ll always have a car payment, so that doesn’t really count, right? Uh, yeah, you owe it, and believe it or not, having a car payment is a choice.

We were never late on payments, and had “extra” money each month to spend on what we wanted. We regularly contributed money to our 401(k)’s, and even had a few thousand dollars in savings. We are also tithers, so 10% faithfully went to the church. Our financial situation, in comparison to others, wasn’t bad at all. We were pretty much normal, if not a bit above average.

Then, [cue dramatic music -- dum, dum, dummmmm] I ran across this guy by the name of Dave Ramsey. I didn’t actually run into Dave Ramsey, but I did find his book somewhere, probably in that dreaded store that starts with a dubya.

I quickly consumed the book, and began to realize this was the first piece of financial material that gave practical, step-by-step advice on how to handle money. I’m a slow study, so I need some hand-holding. I’m also a very detailed person, so I was pleasantly surprised to find “The Total Money Makeover” breaks down this giant elephant into small manageable, bite-sized, pieces. That’s how you eat an elephant, you know. One bite at a time.

We were doing many of the things Dave suggests, but not with focused intensity. We were tackling to many things at once. We would pay off a credit card, while contributing to retirement, while making car payments, while cash-flowing certain things, while putting debt back on the credit cards, while talking about the need for a college fund for the kids. You get the picture. We never felt like we were making any progress because we had not positioned the magnifying glass in the right spot. I loved burning leaves as a kid with a magnifying glass. This program is much like that. You have to be ‘gazelle intense’, and focus everything you have on one thing at a time until you get out of debt. Then, you can slow down and do other things. But, if you’re in paying-off-debt mode, don’t even think about anything else. More on that later.

Having the experience of being on both sides of this equation, I can tell you it was worth every sacrifice to get to where we are today. The biggest wealth building tool we have is our income. If our income is being taken up by car payments, a house we can’t afford, or the latest tech gadget (hey, I’m a tech junkie), then we will never build wealth, or have financial freedom.

Let me warn you. This program is not easy. This is not a get-rich-quick scheme. This program is built on basic, common sense principles. Dave says personal finance is 20% knowledge, and 80% behavior, and I can attest to that. If you’ve ever tried to change your behavior, you know how hard this will be. You will be required to change. Depending on your situation, it may take years to complete, but don’t get discouraged right away. You can do it. I believe in you. The average person/couple who decides once and for all to get out of debt spends 18 months paying off everything but the house. That’s the average. For some it will be more. For others, it will be less. But, it works, and it’s worth it.

In my next post in this series I’ll explain the basics of The Total Money Makeover, and the challenges we had with each step.

A Long Overdue Reunion

Two young men joined the Navy in 1969 with hopes of seeing the world and getting out of their respective little towns. Richard Evans of Norphlet met Glen Allen aboard the USS Coral Sea (CVA-43) while both of them were on air conditioning detail. The two men quickly became close friends through various activities on and off ship. Together they graduated from pollywogs to shellbacks when they “crossed the line” and sailed across the equator en-route to Australia. The bonds forged on the Gulf of Tonkin and throughout the South China Sea would prove to last a very long time.

Both Richard and Glen were discharged from the Navy in the early 1970s and returned to civilian life. As many friends do, they continued to write one another and occasionally talk on the phone, but eventually the more than 2,300 miles of geographical separation ended their close friendship.

Richard went on to marry Terri Beaty in April of 1975. The young couple soon had a son of their own to add to their family of four. Terri had two sons from a previous marriage, James and Chad. Richard, remembering his great friend Glen Allen, decided to give his first biological son his best friend's name, Chance Glen Evans.

With the Internet boom in the late 1990s, the world seemingly shrank. Story after story aired on popular television programs of long lost family members and friends finding one another by using this new wonderful technology.

In 2002, Glen decided to post his contact information to the Korean War Project website in hopes that some day his old friend would find it. After posting, he waited eagerly to see if by some chance the Internet would prove to be useful in locating his buddy. Days, weeks, months, and then years passed. Nothing. There's one thing about the Internet. It has patience and hope when we lose ours.

For Richard, the Internet was a great tool for reading about things that were special to him, his time in the Navy. It allowed him to take many trips down memory lane. Reminiscing about old times, Richard wondered what happened to Glen. He wondered if Glen had thought about him over the years. In 2006, Richard happened upon the Korean War Project website, and upon something surprising. He discovered a post nearly fours years old from his close friend from the Navy. A youthful excitement rushed over Richard as he quickly jotted down Glen’s phone number and address.

Over the next several days, Richard called the number listed, but never got an answer. Not knowing if he was even calling the right number, he began looking for other people in the vicinity with the last name of Allen. He called half a dozen Allens but landed no solid leads. A little discouraged, he left a message on someone's answering machine, and went about his daily activities.

In a far corner of the country, another story was playing out. Richard's message was left with a close friend of Glen's sister, who passed the word on to Glen. When Glen received the unexpected news that his buddy was trying to contact him, he was overwhelmed with enthusiasm.

In the Fall of 2006, Glen made contact with Richard. It was the first time the two had spoken in many years! Persistence, patience, and modern technology had paid off. For the next two years, they would spend hours on the phone catching up and e-mailing pictures of their families back and forth.

In July of 2008, they decided it was time to make plans for a face-to-face reunion. The meeting was set for Colorado Springs, Colorado, and would take place in July of 2009. As part of a long-haul motorcycle ride, Glen would travel from Washington, and Richard and Terri from Arkansas. The distance is roughly halfway.
On July 29, 2009, Richard Evans and Glen Allen met for the first time in almost 40 years on the streets of Colorado Springs. It was an emotion-packed moment that brought tears of joy to all who witnessed it, even to the two former Navy men. They spent the next few days catching up on old times, looking at pictures, and getting to know each other again. Richard and Glen continue to e-mail, text message, and talk on the phone regularly. They have vowed to stay in touch, and are already looking forward to visiting one another again soon.

What's Been Going On?

I've finally sold the Element, and have two different vehicles in its place.  I picked up two ponies; one old one, and, well, two old ones, actually.  The first pony is a 1991 Mustang GT.  I had a 1993 GT in the late 90's that I absolutely loved.  I parted ways with her in 2000, and have never really been the same since.  A part of me has been missing, so I had to fill the void.

1993 Mustang GT

1991 Mustang GT

The second pony, and love at first site, is a 1977 Ford Bronco.  My introduction to the Ford Bronco (I) was through a good friend who restores them.  We spoke a few times in the past about me getting one, but never really sealed the deal until recently.  I absolutely LOVE this piece of equipment.  I don't really know why, but I do.  Maybe it's the nostalgia.  Maybe it's the rugged engineering.  Whatever it is....I like it.  

1977 Ford Bronco

Like any other project, it's a work in progress.  This beauty is a daily driver though.  It drives very well for a vehicle of this age.  It's equipped with all the niceties you can get on a 32 year old automobile; power steering, power brakes, and an automatic transmission being pushed by a 302 V8 engine.  Recent upgrades before I got it were freshly covered seats, new exhaust, front to back, new tires, paint, and some engine work.

Since I've had it, it's had stock painted bumpers installed, a James Duff hitch, painted dash, new marker & tail lenses, and a few other things.  Future upgrades/updates will include a new headliner, dynamat, wheels, chrome bumpers, and an assortment of other chrome trimmings.  Last but not least, it'll have a vintage air AC unit installed so I can continue to drive it in the summer.  This thing generates some serious heat!

My Mustang will be driven less than the Bronco in order to keep the mileage down.  Did I mention the 1991 Mustang has 37,000 original miles?  I would like to keep that as low as possible for a while to come.  We'll see, though.  Anyway, that's what's been occupying most of my time lately, along with family stuff (Cary rolling her eyes at this point).  I have an ongoing flickr set if you're interested in following along with the progress of the Bronco.  

FOR SALE - 2006 Honda Element

FOR SALE - 2006 Honda Element
!!SOLD!!

I spent quite a while making the decision to purchase this vehicle during 2005 and 2006, and have not regretted it one bit.  I've driven it since November 2006, and it has been a pleasure.  The versatility of the Element is one of it's strong points.  I've picked up materials from Home Depot for weekend projects, grocery shopped, and taken trips as far as Birmingham AL.  Regardless of the task, the Element has foot the bill perfectly.  With gas mileage at 24mpg in town, and 28-29mpg on the highway the Element is easy on the pocket book at the pump.

I've met many people in the near 3 years of owning this vehicle who have never actually seen one up close.  Almost every person walks away from it with a different perspective.  At first, they may have been a little critical, but with a closer look, they can see the head and leg room in both the front and rear, feel the comfort of the bucket seats, and envision the usefulness of the roomy inside for whatever they may require.  I'm 6' tall, and when sitting in the back seat, I can not touch the back of the front seats, and have several inches above my head.  The amount of room in an Element is very near an allusion.  So, if you're in the market for a really clean used vehicle that holds its value with the best of them, and you're a little skeptical, give me a call and come see it in person.  I think you'll be surprised at what you find.  Or, if you're already sold on the idea of owning an Element, shoot me an e-mail or drop me a line and we'll talk.

Out of 319 reviews on KBB, average drivers just like me have given the Honda Element 4.7 out of 5 stars!  That is impressive!  So, why would I part ways with something I just spent two paragraphs praising?  Well, I've been bitten by the bug.  THAT is a whole different blog post!

Details Below:

• 31500 Miles
  
• SUPER CLEAN
  
• 1 Owner
  
• Non-Smoker
  
• Honda Ruggedized Floor Mats
  
• CD Player / XM Receiver / AUX input / Premium Sound with sub
  
• Keyless Entry
  
• Cold A/C
  
• Power Windows, Mirrors, Locks
  
• Tinted Glass
  
• Automatic Trans
  
• Cruise
  
• Tilt
  
• 4 wheel anti-lock disc brakes
  

...and more...

Lots of Pictures can be found here .

NADA Retail is $16,950

ASking $15,499 OBO

Call 870.310.6682 if you are interested