Thursday, August 26, 2010

Financial Peace

Jim and I attended Dave Ramsey's Financial Peace University (FPU) at our local church in February 2009.  I dragged Jim along, telling him I would spend my Christmas money on this class (it was discounted through our church, so it cost me $100.)  This covered the book, workbook, CDs of the class videos to listen to, and being able to attend 13 classes and watch the videos at church.  We took Alex, who attended youth group, and Trinity & Clara, who were some of the oldest girls in the nursery to church with us each and every Sunday night.  After just a class or two, Jim was enjoying himself and learning, as much as I was.

History and Lies
My idea of a budget was printing out where our money went.  Jim had just finished going back to school, where we racked up student loans to pay for school, and lived on the GI Bill and a tiny bit of income I made doing part-time preschool teaching and house cleaning.  When Jim got re-hired at Dell, we moved to Colorado.  This was the fall of 2008.  We had to purchase furniture, a TV (it had to be HD of course), and splurged on cable for the first time in our married life together (15 years at the time).  We also purchased a newer Suburban that was a bit more reliable.  A year earlier we sold our first home in TX, so we had a bit of cash on hand for the Suburban, and hopefully a down payment on a house once we determined where we'd live.  We didn't want to spend our actual cash, and the furniture and electronic stores had this great "no interest for one year financing" plan going on.  Of course we thought that was a great deal, and since we had cash in the bank, we knew we'd have that paid off the month before it was due.

Jim's student loan was only $11,000 and we only had to pay $120 per month.  This wasn't real debt, I told myself.  Neither was the great finance plans we had for the furniture and TV, since we had the cash in the bank.  It wasn't real debt to live off credit cards each month if I made the full payment each month.

LIES, it was all lies.  I tricked myself into believing these lies.  I had debt.  About $20,000 worth of debt.  I realized the error of my thinking during this class.  I realized how much money and worry I could have saved had I paid cash for these things.  Jim's student loan was decreasing by $65-75 per month.  I was giving the government $45-55 per month as a thank you for letting us borrow their money.  (That's how I explain paying interest to my little ones.)

Zero Budget and Budget Meetings
The first month of FPU, we learned how to make a "zero budget".  This means we have to allocate every dollar that comes in before we let it go out.  This was hard, especially at first, since so much had to go to pay the credit card from the previous month.  Eventually we moved to only using cash.  Dave Ramsey told the "nerd" - that's me, to create the budget.  I also had to present the budget and shut up while Jim looked at it. The "free-spirit" - that's Jim had to join me at the "budget meeting" each time we got paid.  His job was to change something in the budget.  The first meeting, Jim said, there's no money for tires.  I'll need $900 for Suburban tires in a year.  I calmly asked where I should get this money from, since that equated to a $75 deficit.  He blurted, "take it out of gifts."  Eventually we figured out how to still have Christmas paid for, money set aside for tires and other auto problems and still have money to pour into our debt snowball (step 2).

Baby Step 1: Baby Emergency Fund
Sell a vehicle, have a garage sale, unload everything you can on Craigslist, get a second job, whatever!  You need $1000 in the bank to pay for any minor emergencies that come up.  We had money in the bank, but wanted to keep some for a partial down payment on our home.  We finally sold the old, broken down Suburban.  It needed a new radiator, and each replacement resulted in a new minor broken plastic piece.  Jim got it all fixed up and running and we had a little over $2000 in the bank for an emergency fund.

Baby Step 2:  Debt Snowball
Throw everything you have at your debt.  Dave says ignore the percent interest on all debt for now.  He taught us to pay off our smallest debt first.  I paid every credit card, and put them all away.  I transferred all of my automatic payments from credit to debit.  We accomplished paying off our furniture in April, the TV in June, then in December we finished the last payment of Jim's student loan.  Every time I wrote the final check, I told Jim and we high-fived.  It was an amazing feeling.  If I had tried to tackle the student loan first, it would have shrunk, until the payments were due for our furniture and TV, which then would become the priority with all that back interest, and I would have been frustrated with not making anything go away until the end of the year.  When we paid the first debt, we got to throw that much extra at the second one, then when it was paid off we poured all of that on top of the payment on the next loan.  This becomes like a snowball effect, the amount you're paying on each loan grows as you pay off a smaller one.  You accomplish more, faster and with more determination.  We were like a "gazelle" running from the debt "cheetah" as Dave showed on a video one night.  We had gazelle-like intensity.  We paid off our debt on Christmas Eve.  It was like a present to ourselves.  We announced in on Facebook, told everyone we spoke to and were so excited!  We have a chunky mortgage on our home, but other than that WE'RE DEBT FREE!!!!!

Baby Step 3:  Fully Funded Emergency Fund
This is the step we're currently on, and will be on for about 2 years.  This is collecting an emergency fund that will carry us through 3-6 months of no income.  If Jim were to lose his job or if someone gets horribly ill, we'll have enough money to pay for all necessities.  This includes mortgage, gas for car, electricity, gas, water, 1 cell phone, and $1000 for medical coverage (hopefully we'll get it much cheaper).  We'll immediately cut the cable, other phones (cell and home probably), internet, spend no money on extra clothes or splurge on other fun things.  Jim and I have analyzed the budget together and have calculated the amount we'll need to save to be safe through hardships.  I've got a couple months worth of food stored up at all times (I stock up when I've got coupons that correspond with sales) and shop at a farmers' market for fresh produce, which I'm canning when it's a super great price.  This should also result in less food money being spent and we'll be ok for a while.  We currently have 1 1/2 months of emergency money, and Jim and I will take any job we can get to get by if something catastrophic happens.  We'll probably ask Alex to do the same.  We will use NO credit cards (in fact, we cancelled almost every one we had.)  Soon, we'll be getting rid of the very last one.  I'd like to have Baby Step 3 fully funded first.  I spent a couple hours cancelling every credit card months ago.  I shredded them and had Jim cancel a few more.  It was scary and freeing at the same time.  I'll be checking my credit report again (I do it 3 times per year free) and I'll see if I missed anything.  Each time we get a report we find something we forgot or didn't remember ever getting (nope - no one hijacked our accounts or stole our identity.)

Once this step is done, I look forward to working on the next steps.

Baby Step 4:  15% into retirement (pre-tax IRAs and Roth IRAs)
We are putting in the amount that Dell matches into the pre-tax IRA, but no extras at this time.  I'm looking forward to hunting down some great mutual funds that will be slow-growing stable investments.  Dave says to look for a 25 year track record of at least 10-12% returns.  There are a few good, quality companies that have good returns even in this bad economy.  Now's a great time to buy, since things are cheap!

Baby Step 5:  College Funding
Since we've got one child who will be college age in 2 years, we probably won't be helping out much in this area.  This is why it's even more crucial to teach him how to manage his money now, and encourage him to save.  We will be helping him by paying for half of his car.  He must pay his half in cash, as will we.  We're encouraging him to do his best in school and work while in college to make sure he doesn't go in debt.  Hopefully he'll chose to go to college and not incur any student loans or other debt to do it.  The girls will be encouraged to do the same, and hopefully at the time they enter college, we'll have a little saved for him.

Baby Step 6:  Pay off your home early
This and retirement funding are the steps I most look forward to.  I want to stop paying "thank you's to the bank" for letting me borrow their money!

Baby Step 7:  Build wealth and give!
Jim and I trust the Lord with our finances, and therefore have regularly tithed our 10% to our local church for years.  We also have a couple people/organizations that we donate to.  All of the money we earn is God's money.  Everything we own is His.  I'm recognizing this by giving.  Since giving regularly, we've never needed anything.  God has provided during all of our hardships.  He is good.

Learn More
Dave Ramsey is on facebook and you can also check out his website  You can also check out some of his books at the library or buy them.  He's an amazing and fun teacher.  If you have the opportunity to go to FPU, do it.  You will learn how to save money by paying cash, learn to communicate better with your spouse about money and budgets.  You'll have less stress, fear and debt.  I am pretty sure the first FPU class is free, and most locations for classes offer a preview class.  Find a class near you.  You won't regret it.  You'll spend less on this class than you will learn to save.  I've cut my grocery budget about $200/month with tips from fellow classmates.  I saved hundreds on a new HE washer/dryer Jim found on Craigslist because it had a scratch/dent on the back corner, and a couple hundred more by asking for a cash discount.  I've also saved at Target, TJ Maxx and other places by asking for a cash discount.  We have more fun now that there's a specific envelope for "entertainment."  We specifically budget for it.  I won't get angry when Jim gets a new movie, Jim and I go out on date days or date nights now and can do it because we have budgeted for it.  I enjoy myself more, and have more money saved than ever in our lives (except right after we sold our house in Texas).  Thank you Dave Ramsey.  Thank you to my class leader.  Thank you to my classmates.  Thank you to Jim, my partner, my best friend, my husband for coming with me to the class and being open to change how we spend money.  Thank you most of all, God, for teaching me to be wise with the money you let us use!

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