Tag: Budgeting

If you haven’t heard of the snowball method to pay debt, it is one strategy that can really help you further your financial success.
How does it work? It’s pretty simple. You determine what debt you would like to pay off, such as a credit cards, student loan or even mortgage; the general recommendation is to choose the smallest amount of debt with the higher interest rate; most likely credit cards. After paying one debt, and eliminating that liability you will repurpose that payment and dump it on the next bucket of debt.

To illustrate, I would use my own case. We first chose to pay off our credit cards by making not only the minimum monthly payments but also paying additional cash towards the principal we owe. Once we paid the credit cards, instead of saying, “look! Now we have extra cash to spend,” we pretended the money was not there and kept a tight budget. We looked again at our budget and chose what debt was next. In our case the student loan was next, with a balance of 22K at a 6.5% rate. We used the regular monthly payment of $238 we were obliged to, plus the cash we had freed up from the credit cards debt. Our final number was $716. Now, instead of continuing paying $238 to the student loan debt, we were paying a total of $716; $478 extra towards the principal every month.
Was it easy? Well, some months were better than others. Some months were a real squeeze. But we stuck to the plan.
One of the strategies we used to help us out a bit paying off the student loan was using a home equity line of credit. By doing so, we reduced the interest rate from 6.5% to 4.5%. This gave us an estimated saving of $416 yearly if we committed to pay the debt within two years.
However, if we didn’t pay this debt and continued on the minimum payment track we would have stayed on that same track until 2028; that was the loan’s maturity date and it also included accruing $1430 of interest payment yearly (22K x 6.5%)!
Instead, we saved 8 years of burden saving us $11,440($1430 x 8 years) of interest payment! This is nuts! Now I can expect that number to eventually come on my side of the ledger as years go by.

Next target

Now we are aiming to pay our rental’s mortgage off. That is what I envisioned as part of our blueprint to reach FI. This one is not going to be an easy goal and will require some perseverance to endure 4 years of sticking to a plan. By doing this, we will increase our yearly income by 35K.
17K from gross rental income, 8.5K from cash that we have freed up from debt( Student loan and credit cards), plus approximately 10K that we get yearly in our tax return.
In 2024, we are thinking about getting one or two more rentals, in the same area we have the current rental. We feel like we could comfortably manage one or two more properties as the first rental will be completely paid off.
In 2024 I will have only four more years left before I reach my goal of retiring in the summer of 2029. In this mix, of buying real estate we also would like to buy a small house in Michigan. This may be the place where we think we would like to retire once the kids are done with high school. That’s a bit ahead of the game and will remain a thought for a while, so more on that in future posts.

Silent Weapon

Something that I highly recommend and has helped us tremendously as well is technology. I like using regular Excel spreadsheets or even Google Sheets to keep track of our budget. But I also like using Personal Capital and Mint.

With Personal Capital I can really look closely to all my accounts, budget, and even take a quick snapshot of our Net Worth.
Mint, on the other hand is what I use on my phone for just a quick look of bank accounts and ongoing expenses on a daily basis.

However, the ONE silent weapon that we use all the time is automatic money transfers through our bank. We look into the budget, set up a goal and schedule these transfers as a one time event or re-occurring events. By doing so, all you need is to figure out your strategy, setting it in motion and forget about it.

In our case, we sat down to determine the amount we needed to pay toward the student loan in order to meet the pay-off date we desired and we were done. At times we just made sure we were still on track and simply kept on going.
If you are in the same situation of trying to pay off debt, start with your budget. That is really a financial GPS. Determine what is the maximum extra payment you can make and schedule that payment to be made as soon as you get paid. Don’t wait for the month’s left overs in your account to figure it out; that’s a recipe for disaster. Pay yourself first. Figure out how many payments will be required for you to reach your goal and stick to it. Ask yourself what will be your next goal? Pay more debt or invest? Likewise, is there anything you could do to increase your income? Maybe a side hustle or cutting off some unnecessary expenses like cable?

Conclusion

Financial literacy is a must for everybody. I wish I would have taken a more active approach in my early years and set some financial goals as my younger self. However, I am amazed at how much progress you can make financially by just paying attention to your expenses, determining your priorities and setting financial goals every year. It’s never too late; never too early.
You don’t have to be on a beans and rice diet to achieve financial goals. I still have an amazing life with my four kids and wife. I have become just more intentional with my money.

I would love to hear about your financial goals for this year 2020 or any achievement (Big or small) you feel proud of on your FI journey.