Personal Update – Debt Free*

I’m late with an update on the progress of my personal finances for the third quarter, so I’ll just update you on what has happened up to now.

I’m proud to say that my wife and I made some pretty significant changes in our lives over the past year and it has paid off. Prioritizing goals helped us get rid of a massive amount of debt and allowed us the freedom to invest more toward our future. Here’s a run down of what has happened.

Debt Avalanche!

• Wife’s car: $5,610.32 paid in 2012. Status: Paid off.
• Wife’s student loan: $19,482.24 paid in 2012. Status: Paid off.
• Wife’s private student loan: $32,787.00 paid in 2012. Status: Paid off.
• Total debt paid off this year: $57,879.56

Forget the debt snowball, dive into a debt avalanche! As of this writing, we are debt free (*except for our mortgage). Our mortgage still represents a significant amount of debt that we owe, but we got rid of all of our extraneous debt.

How did we do it? Well, we held some extra savings aside until my wife gave birth to our beautiful daughter and returned to work after maternity leave. When we knew that she was healthy and we didn’t need to spend the savings to replace any loss of salary, we dumped it into student loan payments. Cutting back on home improvement projects and expenses also allowed us to put any leftovers from our paychecks into the loans. Our original plan was to pay it off in 3 years, but it just made more sense to pay it off now and get more serious about investing for retirement.

Mortgage

• Refinanced our mortgage from 4.85% to 3.75%.
• In the middle of another refinance to knock the rate down to 3.5%.

Since we live in an expensive part of California, our initial refinance a few months ago knocked off nearly $500 off our monthly payment and about $100k in interest payments over the course of the loan. The current refinance will knock another $100 off the monthly payment and about $30k in interest payments over the life of the loan. Now that we don’t have to make payments on any other loans, we plan on increasing payments to the mortgage beyond the minimum payment to decrease interest costs and time to payoff.

Savings

•  Increased the automatic withdrawal from our checking account on paydays to beef up our emergency savings fund.

Our goal for our emergency savings is not set in stone. We plan on keeping between 6-12 months of normal living expenses in cash savings and liquid investments, depending on our career outlook. While we are both employed full-time, it will probably be closer to the 6 month range. If I ever am able to pursue my business ventures full-time, it will move closer to the 12 month range.

Retirement Investing

• Moved my Roth IRA from Scottrade to Vanguard.
• Will move my wife’s Roth IRA from USAA to Vanguard in December.
• Maxed out our Roth IRA’s by contributing to a Traditional IRA and converting immediately into our existing Roth’s.
• Still only contributing 5% of our salary to our 401(k) and 457 plans until the end of the year.
• We will increase our contributions at the beginning of 2013 to max our our 401(k) and 457 plans. The contribution limit for a 401k or 457 plan in 2013 is $17,500.

I have recently spent time changing our retirement investment portfolio to reflect a passive index strategy using low-cost Vanguard funds. The difficult part was making a spreadsheet to allocate investments appropriately across all of our accounts. Since we can contribute more to our 401k and 457 plans, the holdings will reflect our core investments. Our Roth IRA’s will be used to fill the gaps in the portfolio and hold taxable assets like bonds and REITs.

Saving For College

• Opened a 529 College Savings Program at the Utah Educational Savings Plan.
• Invested $280 in cash gifts received for our daughters birth.
• Invested $1,000 as a birthday gift to our daughter.

Yes, I preach that there is no such thing as financial aid for retirement. In no way, unless I become ridiculously wealthy, will I pay for my child’s entire college education and expenses. Our retirement assets will still be the number one priority.

What’s Next?

We spent a lot of money this year servicing our debt, but we are now keeping more of our paycheck for ourselves – and it feels amazing. Here are some goals I have in mind for the future.

• Payoff mortgage in 20 years or less.
• Complete our emergency savings fund within the next 3 years.
• Max out our Roth IRA’s and 401k/457 accounts every year.
• Save money to buy a minivan, paying in full with cash.
• Quit my job!