Baby Step #7 – Build Wealth and Give

Give freely of your time; it is far more valuable than any amount of money.

We have finally reached the very last baby step. And if you personally have or will soon arrive at this step, congratulations! It takes an incredible amount of work and dedication to get here, and you deserve to sit back and enjoy this part of the ride.

Even if you’ve been investing 15% or more, have set aside enough to help your kids get through college debt free (we think they should pitch in; it’s good to have “skin in the game”), you still may not be in a position to give much more financially than you have been throughout the process, and that’s okay. While we think you should certainly give whatever you can, and hope that your ability to give financially continues to increase over time, there are so many other ways you can give that may have an even bigger impact on the lives of others.

Giving of your time is something that is absolutely the most precious gift of all. Each of us has a limited and unknown quantity of time on this Earth, and to give some of that precious commodity to others is the ultimate gift.

Take some time out of your busy day to find a place where you and you family can volunteer. The volunteering does not even need to be for a specific organization, although there are numerous charities who do amazing things to assist others. Instead, spend an hour or two picking up the rubbish off your street or around your neighborhood. Find a neighbor who could use a helping hand. Babysit for a mom who is struggling. Cook some food for an elderly person at your house of worship and go eat a meal with them. Head to an animal shelter and walk some dogs or pet some kittens. Go read to someone who can no longer see well enough to view the pages and would treasure your company. The list of possibilities is endless. Don’t think of giving as merely a monetary action; consider one that is even more valuable and precious. Your time.

Baby Step #6 – Pay Off the House Early

In our last post, we discussed baby step #5 and mentioned how steps 4, 5 and 6 are to be worked on simultaneously. And, that it is our humble opinion, steps 4 (investing 15%) and 6 should take precedent over saving for your children’s college (step #5).

Now, on to the debate that every single personal finance blog has touched on at least once; do you pay off your home early or invest more money? Which one will be better, financially speaking, in the long run. There are a ridiculous number of variables to consider: Do you plan on staying in your home long term? What is the interest rate of your mortgage? How much is your home worth? How much principal do you have remaining to pay off? What return do you expect on your investments? How soon do you plan to retire? What do you anticipate the rate of inflation will be? It’s enough to make you dizzy.

There are so many reasons to pay off your home early but, on the flip side, there are just as many reasons to not do so. Saying that, we are a firm believer that taking out a 30 year mortgage is never a good idea. Yes, we have always taken out a 30 year mortgage but we have also realized, after this 3rd time, that if you can’t afford a 15 year mortgage on the house, you really can’t afford it. Fifteen years goes by so very quickly, 30 years can feel like a life sentence of bill paying. Plus, you get better interest rates with a 15 year mortgage and, if you are able to send even more money to the bank to pay down the principal, it will knock even more time off your mortgage.

We have watched people perform long complicated math to figure out whether paying off the house or investing the extra money will yield the best results. No matter how detailed you look into every aspect of the formula, there is just no way to predict the future. We have no idea what interest rates will be doing, or how investments will performing in the future. When you plug those numbers into the formulae, whether based on historical averages, or plucking them out of thin air, they are just guesses when you get down to the brass tacks. Then, there are also job losses, the possibility of needing to move, or more serious things like family illnesses. When it comes right down to it, only you can decide what is best for your family, in your situation.

As for our family, since we don’t plan on staying in our current house long term (we’ll be debt free the moment we sell), and we are (I think we’ve said this a time or two) “late to the game” when it comes to retirement savings, we have taken a slightly different approach. We are working to save more than 20% of income and, therefore, not hammering the mortgage as hard as others might think we “should”. While we did start out with the “classic” approach, through discussion and prayer, we gained peace with letting our mortgage principal stay larger longer while we worked to secure a stronger footing for retirement.

Commentary on Step 5 – Saving for College

Here we are at baby step #5, saving for your children’s college.  As you likely know, Mr. Ramsey’s guidance is to work on steps 4, 5, and 6 at the same time.  He does keep this step more vague then the others due to the differences in family circumstances, from those who do not have children to those who have a boat load, creating a much bigger challenge in saving for college for the entire brood.

Most of what we’ve read, heard, and watched from Dave himself about this part of the journey implies it’s a non-negotiable step if you have children.  This is concerning, as everyone’s situation is different.  To be fair, Chris Hogan, one of the “Ramsey Personalities”, has shared on more than one occasion that one size does not fit all and, furthermore, making sure you can afford to retire should take priority.  Amen to that!

There are so many people out there who are struggling just to make ends meet.  They are dealing with unemployment, underemployment, illnesses, and so much more.  Once they FINALLY reach baby step #5, they may be well into middle age and need to save more than 15% of their income just to make sure they will retire with some semblance of dignity.  Not only are many playing catch-up on saving for retirement, they also need to pay off their home before they retire; steps 4 and 6 may take all the extra money they have, leaving them feeling guilty and defeated that they cannot provide their children with a paid for college education.

While we agree that saving to send kids to college is a great thing, it is the lowest priority of the three steps you work in unison (4, 5, & 6) and, quite frankly, it’s optional.  Your children have the rest of their lives to work and save.  No matter how old you are, as a parent, you have less time.  For those of us starting late in the game, with special circumstances, it just may not be in the cards.

Again, we aren’t trying to discourage people from saving for their children’s education.  Anything is better than nothing.  We opened a savings account for each of our children  when they are born; with each additional child, we were able to put in less and less.  Later, illnesses arrived, and putting money into those accounts was no longer possible.  Now that our kids are older — three of the four are working —  they have the accounts as a small foundation to build upon with their own savings.

We currently have one child in college, and he has chosen to live at home, work, and go to school at a local community college to complete his core classes.  This is working out well for him and has allowed him to save a tidy sum from his part time job; with careful planning, he should be able to avoid the college debt trap altogether.

If saving for your children’s college is something your family is able to do, there are several savings vehicles available which we will touch on that in a future post.

Until then,  make sure you put your financial future first.  Having a paid off house with sufficient retirement savings will be a benefit your children in the long run.

baby step # 4 – investing

Once you have reached this part of the Dave Ramsey plan you are now instructed to invest 15% of your household income into ROTH IRAs and pre-tax retirement. We will not get into the pros and cons of various types of investing in this post, but instead of focusing on the amount. So, this will be a short one.

Investing money is a very important step in winning with money. It is a necessity to save money for your future if you ever plan on retiring. On the flip side, none of us have any idea what life will throw at us and we may not be one of the lucky ones who actually get to choose when to stop working.

We personally believe that you should save and invest as much money as you possibly can when you are able. Fifteen percent is an awesome goal, but there are many families out there that no matter how hard they try, there is just not enough money to put towards investing. But, in no way should they be discouraged! Something, anything is better than nothing.

On the other side, I had read numerous blogs that tell of people investing and saving up to 70% or more of their monthly income. I have to admit I am happy for them, amazed and to be honest, a bit jealous. Had we done this when we were first married, our lives would look VERY different then it does now. Again, we had no idea what life would hand us and we also had no idea how to handle money. It took years and years for us to learn about Dave Ramsey and his baby steps. But coming to the game late and having extenuating circumstances, it makes our choices more limited.

So our advice is to the very best you can with what you have available to you.

How Much is Really Enough?

This week we continue our commentary with baby step 3, which is to save 3-6 months of expenses in a fully funded emergency fund. We absolutely agree that you should have a fully funded emergency fund. However, if you are already dealing with extenuating circumstances, or you are a one income family, we believe six months is really the minimum you should consider having in reserve before moving on to the next step; depending on your circumstances, a year may be more appropriate. Just think about how fast this summer has flown by; Memorial Day seems like it just happened, and yet we’re only a couple of weeks away from Labor Day… that span is just over 90 days, or three months. I can’t imagine how fast it would seem if we were in the midst of a financial crisis and were eating through our emergency reserves.

To reiterate, we’re not in disagreement as to the point of this step, or its order in the process. We just think that those of us who have more going on would be well advised to take a bit more time to build a bigger cushion before moving on to ensure we are able to weather our brand of storm.

As you are calculating how much money you need to live for your determined time span, be sure include the following:

  • all bills that you pay monthly, quarterly, or yearly (such a HOA fees, AAA and other memberships, etc.)
  • fuel and other regular travel expenses, such parking fees
  • food
  • medical expenses – this one is big for us – and includes therapies, medications, supplements, supplies, special foods
  • pet expenses
  • school fees
  • essential clothing needs

Regarding medical expenses, having a large family with every member having some chronic issue, it’s hard to remember a year that we didn’t meet our deductible — we did it in January once — and that is one thing we definitely took into consideration when calculating what “fully funded” would look like for us. We actually set up a separate sub-account at our bank and use it as a sinking fund to cover our annual deductible and then some when we have a big medical hit, such as an ER trip or an expensive diagnostic test. Once we’ve had to use it, part of our budgeted “payments”, regardless of what else we’re trying to do financially, is to get that account funded again before the end of the year so.

Each family is unique, and only you can decide what is best for your family, as we have for ours. Just be sure that you consider any special circumstances you may have before settling on the appropriate size for an emergency fund for your family, to ensure that it is sufficient. For us, it is the peace of mind knowing we’ll be able to pay our bills so we can fully focus on addressing whatever problem led you to dip into your fund in the first place.

Snowball Versus Avalanche

Recently, we shared our perspective on the first baby step. As you might have guessed, we aren’t in lockstep with Dave on Step 2 either. While we agree that, after having enough saved up for an emergency, tackling debt is the next logical step, we’re not rigid adherents to the debt snowball process. If you are reading this post, it’s probably safe to assume you have heard this term numerous times but, just to be sure, the process is to pay off your debts working from the smallest balance to the largest.

First things first. If you owe the government any money, you should strongly consider taking care of this first and as soon as possible. Owing the government is not something to be taken lightly as any government — be it federal, state or local — has the power to completely alter your life, and in some cases destroy it. Clearly, this is priority one. To be clear, it may not be necessary to get such liabilities paid in full immediately (i.e. you may be able to work out a payment plan), you definitely want to never miss a payment, especially if you’ve worked out a special plan.

The main focus of the debt snowball method seems to be getting quick wins to build psychological momentum and, thus, maintaining and even increasing motivation to stay the course. It makes good use of typical human reward responses to help you stay the course and ensure you hit the ultimate goal, which is to get rid of your debt. We certainly understand that, for many, the size of your debt, the number creditors you have, and other factors can make attacking your debt daunting, to say the least.

The debt snowball is a very good way to pay off debt because, first and foremost, it gives you a plan. As Dwight D. Eisenhower said, “In preparing for battle, I have always found that plans are useless but planning is indispensable”. When attacking your debt, you are most certainly entering battle, and one should never do so without a plan. As with many things in life, however, not all plans are equal; even though the snowball is good, it’s not necessarily the best for everyone.

Having made the decision to conquer your debt, it’s worth taking a few minutes for reflection to consider what approach best suits you. Whether you want to see your number of debts shrink more quickly (think snowball) or would prefer to maximize your savings and reduce your overall time to final payoff, as you would by paying off the highest interest debts first. We actually ended up doing a combination of the two. We knocked out a few smaller debts first and, having built some confidence in our commitment, switched to knocking out the highest interest debt first from the remaining accounts.

Now, you might think that working out all the differences between the various ways you can accelerate your debt payoff might involve a lot of complicated calculations you don’t want to do, and you’d be right. Fortunately, there are tools out there to help you work through the numbers. We found one that lets you compare payoff approaches. Just enter data about your debts, select a payoff order, then click calculate. You’ll not only see your savings vs. your current payment pattern, but how long it will take to pay off your debt using the selected method. To compare methods, just choose a different one and click “calculate” again.

Regardless of your plan, or your eventual path, paying off debt can be a very long road and may feel lonely at times; it’s okay to budget a little fun money each month so you can enjoy yourself some along the way.

As always, we’re interested to hear from you. Tell us about your journey and how you’re attacking your debt. Have you had to deviate from plan? Do you have any tips of your own to share?

Is Baby Step 1 Too Small?

Over the next seven weeks we are going to be delving into Dave Ramsey’s baby steps and how we tweaked them to work for us.  I realize this may ruffle a few feathers as there are many strict adherents to his financial peace protocol, and with good reason. Mr. Ramsey has designed a plan that works for many people, and it was a great starting point for us as we were completely clueless when it came to financial matters.

That said, there are many of us who do not fit into the “average American” bell curve; in fact, our circumstances place us on the fringe of the curve.  For our one-income family of six, with multiple chronic illnesses, $1,000 for a starter emergency fund is a complete joke.  It is certainly better than nothing, but $1,000 barely covers anything, even if you do have health insurance.

Case in point: I had a trip to the emergency room early this year that cost over $5,000.  Mr. Ramsey instructs people to call and negotiate the bill with medical establishments.  I have attempted this on numerous occasions and it has never worked.  I have been told that the bill would have to go to collections first, then they would “work with us.”  But having my credit tank over an unpaid medical bill is not something we are willing to do.  We know Dave calls them “debt love scores”, and we understand why, but having a good credit score can be very important, even when you aren’t shopping for more credit (more on that in an upcoming post).  While every one has offered monthly payment plans with 0% interest, which is far better than putting the bill on a credit card, none of the medical service providers with whom we have tried to negotiate has ever offered to simply reduce the bill.

Another area where we believe $1,000 falls short is with auto repairs.  When a vehicle is required for work, school, and appointments, it is not something you can let slide.  We drive older vehicles with no payments, and we have had few repairs that have been under $1,000 dollars.  A good set of tires can easily eat more than half of such a small fund.  According to Angie’s List, the average price of 4 new tires ranges from $525 – $725, which would leave little for other emergencies.

So, how much do we feel is enough for the initial emergency fund?  That is a great question, and it’s one we can’t answer for you, because it will vary based on individual circumstances.  If medical issues are part of your life, as they are for us, you should strongly consider saving enough to pay your deductible without adding to your debt load or blasting your credit rating by letting a bill go to collections.

Something else to consider; Dave Ramsey started in 1992.  Due to inflation, a thousand dollars from 1992 is worth about $1,825 in today’s dollars.  In our opinion, that’s closer to the amount most folks should target for their initial emergency fund.  Again, those with extenuating circumstances may consider more.

We do agree that most people can come up with $1,000 dollars rather quickly by selling stuff, saving money by changing habits (no more lattes, use coupons, stop eating out, etc.).  We certainly understand the desire to get the debt payoff ball rolling quickly to create momentum, which is critical when you are facing paying off a mountain of debt.  Even so, for those of us who have larger bills on a regular basis, having more in your emergency fund will help you keep heart and stay the course when those big shocks hit.

We’d like to hear from you.  What do you think is a good number to have saved for baby step #1?  What factors played into your number?

Who Knew 0 Was Such a beautiful number?

Calculator with coins
Give every penny a job!

In a previous post, I ranted about how all the money ran through our hands with nothing to really show for it.  Our lives finally began to change when we ran across Dave Ramsey, read his book, took a financial peace class, listened to his radio show, and started working the modified baby steps.

What helped us most from all that we learned was the zero-based budget.  It is so simple.  You take what you bring home each month, assign a job to every cent and stick to your budget.  It is amazing how, when you take the time tell your money what to do, it doesn’t  just disappear.  Gaining control over your money gives you confidence and control; when you want to win with money, control is a very important piece of the puzzle.

While most of you are likely familiar with the zero-based budget concept, I’ll give a simple example for those who aren’t.  Let’s say you bring home $1,000 dollars each month.  First, you make sure you take care of your 4 walls as Mr. Ramsey puts it.  Housing (rent or mortgage; you have to keep that roof over your head), necessary utilities (you want to keep the lights on and the water running), food, of course, and any necessary clothing (think Goodwill, not Gucci).    Once your bare necessities are covered, you would want to take any extra and retire debt or, if you have none, save or invest.  In other words, you’d start making investments in your financial liberty.

Rent: $600

Utilities: $100

Food: $250

Clothing: $50

Total:  $1,000

If your budget looks like this, you’ll need to figure out how to economize — which is often of limited impact — or increase your monthly income to either pay down debt or save for the future.

The biggest benefit we get from using a zero-based budget is accountability.  If it’s not in the budget, we either don’t buy it, or have a discussion and make a conscious decision to swap an item into the budget, meaning we have to remove or reduce spend on other plans we had made.  As you can guess, “is it in the budget?” is a favorite question in the Frugal Source household ;?)

As mentioned above, we didn’t follow the baby steps to a T.  There are several reasons for taking a different approach, and we will examine those reasons and the impact they had on our path very soon.

Would You Pick Up a Penny?

One person’s inconvenience is another person’s treasure…

I will pick up a penny off the ground and I am not too proud to admit it.

The other day, I was walking into our bank and I saw a penny on the ground. I asked my teenage daughter if she would like it, and she said, “It’s not worth picking up”. 

Well, I picked it up, and then saw more change on the ground near it.  In fact, there was a trail of change leading to a man, still in sight, walking away from the bank.  I called out to him to let him know that he was dropping change. He waved me off and said, “it’s okay, it’s not worth it.”  This was a young able-bodied male. Again, I told him he was dropping money, no big deal was his basic response. 

In my eyes, it was a big deal.  I bent over and followed the trail, picking up change and putting it in my purse. We then continued with our errands.  When I got home and counted the change, it totaled only $1.16. That’s  not much on its own, but it took me less than 30 seconds to pick it up. 

Was it worth it? Absolutely it was! 

I now have another $1.16 in our change bucket to put towards something bigger.

A Trip to the Discount Market

Yes, we stuffed all those cool things into that box!

On the same day that we ventured out to a bakery outlet we also made a stop at a discount market. Although it’s called a discount market, I think a better description for this place would be “salvage grocery store”. The store sells food that is past its “best by” date, or that has cosmetically damaged packaging. While many of you may be put off by the idea of buying food “seconds”, Mr. Frugal Source and I have been purchasing food in this manner for years from several different stores and we have never had any safety issues with any of the food we’ve purchased. We are careful what we buy, making sure the package is completely sealed, cans are not too dented and items are not too far out-of-date for our taste.

Like most discount and thrift stores, salvage groceries are hit or miss with regard to both selection and discount, but we have yet to go to this particular store without being able to fill our $30 dollar box to the brim. The way the store is set up is there are prices for each item or you can fill a box for set prices: $5.00, $10.00, $20.00 and $30.00. With our family of 6 we use a $30.00 box.

The rules are: fill your box to the top with anything in the store except produce and frozen foods. If you return your box you get a $1.00 discount. You also receive points for every each visit and once you hit 100 points you get $10.00 off your next purchase.

Here is what we purchased on our last trip for a total of $29.00:

  • Kraft Mac & Cheese assorted varieties 7.25 oz. – 4
  • Canned jalapeños 7 oz – 3
  • French’s crispy onions 6 oz – 4
  • Wild Harvest Organic Bars 7.9 oz – 3
  • Saltine crackers 4 oz – 2
  • Welch’s Fruit Snacks .5 oz – 1
  • KitKat Dark 1.5 oz – 6
  • Skittles Sweetheat 3.3 oz – 5
  • Combos – variety 1.8 oz – 4
  • Twix Dark 1.8 oz – 1
  • Refresh eye gel 30 .4 ml vials – 2
  • 9 Lives cat food 5.5 oz – 13
  • Stride gum 14 pieces – 2
  • Tic Tac 1 oz – 1
  • Altoids smalls .37 oz – 1
  • Hall cough drops 9 drops – 4
  • HubbaBubba gum 5 pieces – 1
  • Bubble Yum 5 pieces – 1
  • sugar free Breath Savers 1.27 oz – 1
  • La Croix 12 oz – 9
  • Diet Coke 12 oz – 2
  • canned refried beans 16 oz – 8
  • field peas & snaps 15 oz – 1
  • sardines 4.38 – 1
  • YES soup 11.1 oz – 1
  • Beefaroni 7.5 oz – 1
  • Bush’s Baked Beans 16 oz – 1
  • Campbell’s HomeStyle Soup 18.8 oz – 1
  • canned great northern beans 15.8 oz – 9
  • canned pinto beans 16 oz – 3
  • canned butter beans 16 oz – 2
  • natural sunscreen 4oz – 1
  • Quest Bars 2.12 oz – 2
  • Power Crunch 1.4 oz – 1
  • Mauer Bar 2.6 oz – 1
  • Epic Performance Bar 1.87 oz – 1
  • Quaker Sandwiches mini 5 – 1.23 oz in box
  • DVD – season 2 Sliders

Tips for your trip

Is That Really an Expiration Date?

While many people think of the date on a can of peas, a box of crackers, or a bag of chips as an expiration date, in most cases it is not. Most often, the date you see is the “best by” date, and usually represents the date by which the manufacturer suggests the contents be consumed to ensure optimum flavor and texture. Packaged foods are typically quite safe beyond the printed date. In our experience, the less durable the package, the less time you have after the best buy date before you start to notice changes in flavor. To be clear, we’ve never encountered anything gross tasting, but we have occasionally found things to be somewhat stale or seeming to have less flavor.

Something many don’t realize that properly stored canned goods can be safe years or even decades beyond the date on the can; in at least one case the contents of cans over 100 years old were found to be safe. Of course we’re not suggesting anyone ever try anything that old, just know that, with some knowledge and sufficient caution, it’s easy to make treasure out of what others might pass over.

If you want to try your hand at shopping discount or salvage groceries, realize that there is some trial and error involved in figuring out just how far past date you find the taste of nacho chips to be acceptable. In other words, YMMV. Also — and this is something we can’t stress enough — do your own research and be sure you are able to recognize the signs and understand the dangers of potentially compromised packages, especially when it comes to canned goods; always err on the side of caution.

Don’t Make a Special Trip

This is just sound general frugal advice; whenever possible, plan your visit to an outlet (or anywhere) as a stop on an outing, not as a single destination. This will tend to save not only gas, but time as well, as you will reduce the total miles you drive and time you spend doing so. Even if you only save a few miles each time you do this, over the course of a year, that can add up to several gallons of gas, not to mention the time you’ll save.

Be Aware of “Regular” Prices

As we often experience, not everything at an outlet or discount store is necessarily a bargain. In fact, every once in a while, nothing is. If you’re not prepared to compare the outlet’s prices with what you see every day in the store(s) you normally shop, you could end up paying more for the same stuff you normally buy, just in a different location.