The first speed bump of 2013 hit me like a truck last week. Every financial analyst at the company I work for was pulled into a room (about 60 including the managers) for a conference call. Without getting into too much detail, we were told that the company had identified a lot of work being done in some areas as “non value-adding” and they were going to eliminate that work. Over the next week they were going to identify which areas were going to be overstaffed as a result of the change and unfortunately, some job eliminations would be announced.
Before I go any further, I was relatively confident that this reorganization wouldn’t impact me. Still, nobody was specifically excluded from this process and as a result it’s impossible not to worry. The thought that my group was going to be under a magnifying glass (just like all the others) over the next week was enough alone to cause concern. As expected, I was not impacted by this reorganization. Further, since this was not a cost-cutting move but rather a move to eliminate unnecessary work that our customers should not have to pay for, I have no reason to be concerned for my job in the immediate future… so don’t worry about me 🙂
All the same, stressful times like this do have some value. It was a cold smack in the face that forced me to sit back and think about whether or not I’m heading in the right direction so that if I did find myself jobless, I would be as prepared as I possibly could be. I sat down with my wife many times over the last week figuring this out.
Ultimately, we decided that we need to be much more diligent in becoming debt-free. When things are going smoothly in life, I think it’s easy to become complacent and make assumptions such as “I pay the monthly student loan payments, so they’ll be paid off eventually. No big deal.” Suddenly, that $500 per month becomes a routine part of your budget that you don’t question or concern yourself with. We had been driving older vehicles until recently, so we purchased new ones. Similar to the student loans, the idea had been to pay the car payments for five years and they’d be paid off at that point.
As far as saving money, we have been doing a fine job at that. The existing plan was to build up our savings balance to a very large amount before having children, and before having our second child we would sell our condo and move into a house, putting 30% or more into a down-payment. It’s not a bad plan, and the fun thing about personal finance is that it’s really all about what you’re most comfortable with. After last week, we’re no longer comfortable with that plan.
New Plan : Pay Off the Debt
Instead of building an exorbitant amount of savings, our new plan is to tackle our debt. While we have zero credit card debt, we do have two auto loans and plenty of student loans. We’re going to hold onto a reasonable level of “emergency cash,” which I’ll define now as the amount of money it would take to survive six months at our current budget if either me or my wife were out of work and had zero income. All new excess will be used to tackle our debt in a modification of Dave Ramsey’s “Debt Snowball” approach.
Debt Snowball – My Way versus Ramsey
I’m an enormous fan of Dave Ramsey. I’ve read his books and I understand his philosophy well. He advocates something which he calls the Debt Snowball, which consists of tackling (“with a vengeance,” as Ramsey famously says) your debt with every excess dollar you have. You start with your smallest debt, such as a $500 credit card balance, and once you’ve paid it off you work your way up to the next smallest balance. With each balance you pay off, you free up a little more money to tackle the larger balances with.
My debt situation is a little unique in the sense that my wife and I have no credit card debt. We have various disbursements of student loans for small amounts that all have small monthly payments associated with them. As you pay off each disbursement, your total monthly student loan bill drops by a small amount. Other than student loans, we only have our condo and our auto loans.
I could tackle all the small disbursements of student loans as the Debt Snowball suggests, but since those are 15 to 25-year loans, the payoff in terms of dropping my monthly expenses is small. One of my student loans is a $3,500 disbursement that currently costs $50 per month, for example. Alternatively, I could attack my car loan and pay it off by March of this year and free up nearly $400 per month. Then if I diverted all our excess to Ashley’s car, we could pay her’s off in about a year and free up an additional $500 per month. Then, my math tells me that we’d be armed with enough monthly excess to knock out both of our student loan balances in total in a little over a year from then. All in all, I think we could be completely debt-free except our home in about three years. That would take twice as long if we started with our student loans.
Saving Cash versus Paying Down Debt
As I said before, personal finance is really all about making smart decisions that fall within your comfort zone. When I was driving a 12-year old car and my home’s HVAC system was 30 years old, I valued having a large balance in my savings account because I had a lot of risk for cash emergencies. Those situations have changed in the last few years and I just never really re-calibrated my strategy to compensate for it. Today, I value creating as much excess monthly household income as possible, and a great way to do that is by paying down debt.
Don’t get me wrong, once this process is over I will certainly be diverting my excess household income into rebuilding my savings and my brokerage accounts, but at this stage in my life and my current frame of mind, my values have changed and I’m comfortable with a standard 6-month emergency fund and attacking my debt with the remaining excess.
At the end of the day, this is just a different strategy toward the same end result. Personal finance is kind of like chess. While there are multiple ways to get a checkmate, it’s important to make sure you are strategically placing your pieces.