Debt Snowball Plan

Yesterday I announced we're going XSTREAM with our plan to pay off debt. Until the debt is gone, we're going to be as tactically creative as possible and maneuver our way to debt freedom with, as Ramsey likes to say, gazelle intensity. I am just not messing around anymore.

The overall strategy is called The Debt Snowball:

• List all debts in ascending order from smallest balance to largest. This is the method's most distinctive feature, in that the order is determined by amount owed, not the rate of interest charged. However, if two debts are very close in amount owed, then the debt with the higher interest rate would be moved above in the list.
• Commit to pay the minimum payment on every debt.
• Determine how much extra can be applied towards the smallest debt.
• Pay the minimum payment plus the extra amount towards that smallest debt until it is paid off.
• Then, add the old minimum payment from the first debt to the extra amount, and apply the new sum to the second smallest debt.
• Repeat until all debts are paid in full.

In theory, by the time the final debts are reached, the extra amount paid toward the larger debts will grow quickly, similar to a snowball rolling downhill gathering more snow (thus the name).

I figure, in order to really speed away from our debt, the are prerequisites which we have all ready implemented: 1) Quit borrowing money, 2) Save the $1,000 for immediate cash reserves, 3) Create a zero based budget and following it monthly.

Here's our situation. But first, do you think I am nuts for sharing all this with you and the world on the internet? I figure, it's all public information anyways if bankruptcy ever happened. it makes it easier for you to feel free and hold me accountable at any given moment (you probably could have fun with that). So here's the shameful truth:

• $17,100 of consumer debt (i.e. credit cards, medical bills, etc.)
  
• $25,900 on a home equity loan.
  
• The debt snowball plan then is going after $43,000 total debt.
• The minimum payment is $840. Ouch!, that's insane but it's true. One of the best things about going through FPU is that reality wakes you up.
  

Our first leap toward gazelle intensity:

• Apply $485 extra each month from family budget. This makes the total monthly contribution to the plan to be $1,325.
• All gifts and other blessings in the way of unexpected cash inflow will go directly to the plan.

This plan will get us to debt freedom in Dec 2010. Yesterday I got this crazy idea that we'll increase the intensity and strive to be debt free a whole year earlier - this will really stretch us but force us to be insanely (and hopefully brilliantly) creative. It will be fun! For example:

1. I am strongly considering taking on another job. I would like to do something for the next 6-8 months. What's holding me back is the lost time with my family. I am not ready to leap into this one yet but I am dreaming about it.
2. Keep selling things.
   
3. Raise money. This is the one thing I think is completely insane. Ask people to chip in, to give me money to help me pay off my family's personal debt? Did you notice the little red widget on the top of the right side bar of this blog? I set an objective of $15,000 by Dec 31, 2008. Let's see what happens. This amount would take an entire year off the plan I described earlier. I do plan to "earn it" in sense. I am going to do the best I can to provide meaningful information on this blog. I am going to increase the intensity of the value of this blog. Yes, it's insane. I won't be constantly pleading for money. I am not even really asking for money right now. This is only a small part of my plan and it's an experiment.

I have to run. I sold something on Craigslist yesterday and I need to get it ready for the guy coming at 10:30. Another $400 to the plan!!!

FPU: xSTREAM tactics

I went crazy selling stuff to raise money for our immediate cash reserve fund of $1,000. That got me so pumped up that now I am going xSTREAM. I'm attacking our family debt with whatever it takes. I'll be posting more soon about my xSTREAM tactics and laying out my whole debt snowball plan.

As a preview, the whole plan begins with a challenge from my wife and a friend to be creative and pay off all our debt before December 2010. I am setting a goal. I want to see if we can do it a whole year earlier.

FPU: The Baby Steps

The Baby Steps:

1. 1,000 to start and emergency fund
2. Pay off all debt except the house utilizing the debt snowball strategy.
3. Three to six months of expenses in savings
4. Invest 15 percent of household income into Roth IRAs and pre-tax retirement
5. College funding for children
6. Pay off home early
7. Build wealth and give!

My family is working on Step 2. We'll be there for a while, at least until mid year 2010.

FPU 7: Insurance

Boring. Insurance. Is. Not unless you are an insurance yoda I suppose.

Ramsey's style made this necessary session bearable enough for me to take the topic more seriously than I have in sometime. Insurance planning is not as fun as going gang busters after a short term goal but insurance is a key component of a total financial plan.

The presentation from Ramsey was consistent and he ended it with a very compelling real life story of a man and his family and the benefits of being adequately insured. However, I did not like the message Ramsey sent about a certain type of life insurance - in the later half of this post I give my reasons why.

This session covered the basics of what type of coverage is needed in a standard financial plan. From the right type of Homeowners/Auto and Life to Disability Income. He also discussed what types of insurance that should be avoided (i.e. Credit Life, Accidental Life.)

I walked away thinking about how I am going to deal with major exposure to the risk of loss of income if I ever become disabled and not able to work. I remember this stat from the time in my life when I used to sell insurance and investments - 1 in 3 people will be disabled and unable to work at one point or another in their life time. Ramsey mentioned the stat in this session too. Think about it. It is staggering. I remember too when I used to sell disability insurance that it was one of the easiest sales when the prospect really got it. When they really understood the risk. I also remember the battle of convincing people that the high premiums are worth it. Even today, I sit fully exposed to the risk of loss due to disability because I feel I can not afford the premiums. Why do I (and others) think the risk is not personal relevant? I always used to tell people..."The chance of becoming disabled is 100% when it happens to you." The high premiums are the deciding factor, however.

Most employers offer a form of short term and long term disability insurance (D.I.) and most employees purchase it through payroll deduction. Dave didn't stress this point all that much but most DI employee benefits are woefully inadequate. I won't get into all the reasons but in summary there are just too many restrictions on the terms of actual payouts. Some kind of supplemental DI is needed to cover risk not meet by employer DI plan offerings. Back to where I am currently. Fully exposed. I will look into obtaining my own personal DI insurance but I already know premiums will be too high. I will at least look around and get some quotes.

Phew! This post is already too long and I haven't even got to what I really wanted to write about. So here goes it.

The single gripe I have about this session on insurance is Dave's handling of any type of permanent "cash value" life insurance (aka Whole Life, Universal Life, or Variable Universal Life.) Dave attacks this topic with more passion that I've seen so far in FPU. Dave clearly hates permanent life insurance. I understand the hatred. If you look at how this type of insurance has been erroneously marketed and sold as an investment and then you actually run the numbers and compare the the strategy of "buying term insurance and investing the difference", buying whole life as an investment is as blindly foolish as a lumberjack sawing on a branch he's standing on, but in the space between he and the tree. From that perspective, I get Dave's passion.

It's ironic though because two sessions ago Dave confessed his strange fascination with the excellent marketing of banks and credit card companies. In that session Dave attacked the marketing methods but in this session on insurance he attacked the product and the companies (and, to some extent, the agents who sell whole life insurance.) Yes, permanent life insurance as an investment is a bad, bad, bad idea. Permanent life insurance as an insurance idea is really not even close to being as bad as Dave shouts about it. The major problem with permanent life insurance is how it is marketed and sold.

Marketing methods aside, and as with any other financial product on the market, there are many reasons why term insurance is better for most people than permanent insurance. But I totally disagree with one of the reasons presented in this case against permanent insurance - that when you die the insurance company keeps your cash value and only gives your beneficiaries the death benefit. I disagree because the reason falls short of a complete technical understanding the workings of permanent insurance. Also, the unsaid implication points to thievery on behalf of the insurance companies. I know Dave is much wiser than this. Dave is a financial expert and phenomenal servant teacher. I can't figure out why he would stop short and say something to the effect that the insurance company takes your cash value and leaves your family short.

Very simply, the reason permanent life insurance contains a cash value account is because the insurance is really a declining term type coverage. As the cash value builds, the true insurance coverage actually goes down while the total payout at death stays the same. As the cash builds the risk is transfered away from the insurance company and back to the policy holder. At death, the cash value is actually part of the total death benefit. For example, on a policy that pays $100,000 at death, at first there is no cash value and so the total insurance is $100,000. Fast forward to a point when there is $3,000 in cash value. At death the $100,000 is still paid but it consists of $97,000 of true insurance from the insurance company and $3,000 of cash value. You see? The insurance company is not stealing the cash value. This simple understanding of permanent cash value insurance douses the balls of fire launched by so many haters. With all that said, permanent insurance has its place in the marketing place, not as an investment tool, but in cases where its more likely needed such as complex estate planning and executive pension planning (only two examples.)

By the way, I own term insurance because I get a higher death benefit for a cheaper premium and I am not investing the difference because I am using the difference to pay off debt.

FPU Update: Immediate Emergency Fund Fully Funded

I did not think it was possible. For some, the amount is a drop in the bucket. For my family, no way. At first I laughed off the call to raise $1,000 for the sole purpose of a short term immediate cash emergency fund. I believed eventually we'd get there, over the next six months. I budgeted a certain amount each paycheck and thought "If we don't have an emergency, we'll get there."

We started on Feb 2 and now yesterday, Feb 24, we crossed over $1,000. Twenty two days. I sold some stuff on ebay and craigslist. Matter of fact, we have some extra cash and will pay off two medical bills that we've been paying on for the last two years.

FPU: Still Enrolled, Sessions 5 and 6

I am still enrolled in FPU - no danger of dropping out. I just have not had enough time recently to post quality thoughts on my experience.

The last two sessions have been extremely informative centering on Dave's ideas about the credit industry and big business marketing in general. Ramsey does a great job at laying out the big picture in these two areas. I, like Ramsey, am amazed at the excellence of effective marketing. Yet, I must remember that no marketing can ever be good enough to persuade me to give up financial freedom and - in the end, the marketing my be great, but I always make the final decision to give someone else the money that has been entrusted to me. The big idea for me in Dave's message is: THINK! Pat, think before you throw your money away. Think about what you really want when you're considering a large purchase. Think about what you really want from any financial transaction, and what you expect to really receive. Most foolish money decisions are because there exists more complex problems in the heart about what really matters in life. The item purchased will not deliver on whatever promise is proposed via the excellent marketing.

Status Update on What I've Done Since Entering FPU

1. Started saving $1,000 as an immediate emergency fund on Feb 2nd. Ramsey suggests to get this amount as fast as possible. I thought I heard him say in 1-2 months. My family lives hand to mouth pretty much every month. The most I think my wife and I have accumulated in the last few years at any given time has been around $500, and then of course an emergency would hit (or at least what we considered an emergency.)
   
2. Fully implemented a very workable budget. Got the numbers out of my head, shared them with my wife and agreed together to work them over the next few months.
3. Pulled an annual credit report.
4. Started researching other ways to increase household income.
5. Evaluated current debt snowball plan. We'll have all unsecured debt paid off at the end of 2009. I am working on rolling the second mortgage into this plan and the end date will be extended to 2010.
6. Sold some stuff on ebay - added another $340 to the emergency fund. The emergency fund is now at $840.
7. Have a plan to add more money to emergency over the next paycheck. We'll be at $1,000 on March 1st. WOW! I really didn't think we'd be able to save $1,000 in one month in our situation.
   

I've also been listening daily to Ramsey's radio show. I am telling you, Dave Ramsey is good!!! He gives solid unbiased advice and cuts to the chase. He tells it like it is and keeps people focused on the future, moving forward and making changes. I've said before Ramsey teaches common financial principles. However, after listening to him for a few weeks, I understand his appeal, he knows how to motivate. He is really a servant teacher.

FPU Sesson 4: Debt Snowball

Slamming a sugar free rock star "energy" drink sixty minutes beforehand helped but this was the best session so far. The message: You're in too much debt, get out now! I did not anticipate having such a positive reaction, to this class. My "I already know that" cynical attitude is being redeemed into something much more hope-filled. Ya'know, after this session I am ready to say I am a Dave Ramsey fan. I even listened to his radio show the day after. I am not ready to become an evangelist yet though. Or am I?

As expected this session was 90% motivation and 10% practical skills training. I think Dave Ramsey likes delivering this session the most as well. It is clear he is driven to inspire people to get mad (really mad) at their personal debt and get rid of it as soon as possible. His passion was supported by statistic after statistic while he talked a little over 45 minutes through popular myths about debt, such as "I'll always have a car payment.", "A home equity line is a good cash reserve," and "We'll switch to a fixed rate in two years before this Adjustable Rate Mortgage increases." Ramsey walks through a dozen or so myths and I recognized that I've been trapped by at least nine of them at one time (a few more than once).

People tend to forget the simple reality that debt is a product. Lending companies are the best marketeers in existence on planet earth today. We forget how good...no...purely excellent they are at what they do, selling money. I loved it when Ramsey pointed out that debt is one of the only products that people get down on their knees and beg to get approved for. Why is it the attitude is such that people plead with banks to get (just) approved to buy a product that the banks themselves are making billions off of? Amazing when you really think about it! Unbelievable power!

I also liked the forget-about-the-past-it-is-what-it-is graceful attitude that Ramsey seemed to display without saying much about it. His focus in this session was to motivate people to act now to become debt free. With all his myth busting he could have wasted time personalizing his debt-is-bad message by flavoring it with ideas like "Shame on you. You are in debt because of your very stupid decision.", or "You're an idiot because you decided to become a slave to someone by letting them help you buy that overpriced car. Can't you see what a dump thing you have done." Ramsey actually does like the words stupid and idiot as evidenced by his extreme use of them. It could have just been me but I was not bothered by it as much in this session. I really appreciated the matter of fact (and in your face) plea by Ramsey - yes you have debt, get out of it now, here's a great plan, it will take hard work and time, and it is possible, you will someday be debt free.

Ramsey communicates the reason to get debt free is for the sake of the personal freedom itself. I agree but I think it is a bit shortsighted. There is a much bigger reason to get debt free. However, I am going to have to break this post up into two parts as I have run out of blogging time this morning. Perhaps you'll feel free to hold me accountable to posting again on the deeper motivations for becoming debt free.

The Altar of Cynicism

I've posted numerous times on my hearts stickiness to cynicism. Ever since that one day when someone got in my face and called me a cynical S.O.B. I took it seriously and decided to get to the bottom of it.

What have I discovered? This fantastic article: The Altar of Cynicism clearly points to the central issue.

I define my cynicism as: discovering, in the end, that all of life is meaningless without God and willfully choosing to live as if it is true. Another way to look at it is that cynicism is a perseverating choice not to love and apply by faith the remedy - The real Gospel of Jesus Christ - to all of life.

The following quote displays the remedy:

In our bitterness and resentment we go to the temple of cynicism. But there is a gospel for cynics. There is a gospel that says to us, “Of course, all of these will fail you. Of course, they are unfaithful and untrustworthy, and so are you.” So, in the words of Solomon, let’s hear “the conclusion of the matter.”

Don’t give up; there is one more temple. It is the temple that welcomes the unfaithful and untrustworthy. Above the door are words of grace: “Come, everyone who thirsts, come to the waters; and he who has no money, come, buy and eat! Come, buy wine and milk without money and without price. Why do you spend your money for that which is not bread, and your labor for that which does not satisfy?” (Isa. 55:1–2).

The cynic comes to this temple and finally finds One who will not betray him and who will never fail him.

Cynicism is day-to-day faithlessness in the true and living God. Yet, cynicism is faith in my own made up unfaithful god. Cynicism says "Of course there is something deeply wrong with everything in this world. Of course. It also says "I MUST DO SOMETHING ABOUT IT!!!"

The gospel says "You can't. It's been done. Rest."