DH and I enjoy a fabulous meal (paid with gift card given by DD1) to celebrate the completion of Part 1 and the launch of Part 2 of our journey out of debt.
- DH = Dear Husband
- DD1 = Dear First Daughter
- DD2 = Dear Second Daughter
A quick recap of Part 1: “Baby steps” #1 & #2
If you’ve been following this blog for any amount of time, you know that DH and I started our journey out of debt after reading Dave Ramsey’s The Total Money Makeover. Just so you know, I don’t get paid to say that, and I don’t agree with every opinion Ramsey has; he’s far more right wing than I am. The simple truth is that his book worked its magic for us in a powerful way, and for that he has won my respect and gratitude.
Ramsey calls his 7 steps towards financial freedom “baby steps”. For us, Step #1 wasn’t really a step at all.
#1 – Save $1,000 as a mini-emergency fund.
We already had that amount of money on hand, so no problem. When it came to Step #2, however, there was nothing “baby” about it.
#2 – Pay off all debt but the house.
We had $21,000 in consumer debt, and $81,000 in business debt for a grand total of $102,000 non-mortgage debt. It took us exactly 3 years and 2 weeks to pay it off. I still have to pinch myself on that one. We paid it off!
What are the next steps?
Here are the remaining steps according to Ramsey’s plan:
#3 – Save up an emergency fund to cover 3-6 months in expenses in case of a loss of income.
#4 – Increase your investment in retirement to 15% of your gross household income.
#5 – If you have children, save up for their post-secondary education.
#6 – Pay off your mortgage early.
#7 – Build wealth and give generously.
Where do we stand?
Are we prone to a loss of income?
“It’s really hard for Canadians to save up an emergency fund,” said a friend of ours not too long ago. The number one motivation for Americans to save an emergency fund is to cover unexpected medical expenses. For Canadians, health care is largely free (if you don’t count our higher taxes). Furthermore, in my case, if sickness or injury prevented me from doing my job, I would have built-in access to long-term disability insurance.
The one thing that could put a stop to my income is union action – and as it happens, that remains an ongoing possibility. Then there’s the fact that DH’s business is entirely vulnerable. Bad health would mean zero income for him. New expense on the horizon: We are going to invest in disability insurance for him, something we’ve perhaps foolishly put off until the business debt was paid off. We used to have an “It won’t happen to us,” attitude, but not anymore. 6 years of DH’s under/unemployment brought us levels of financial stress that we never want to see again. We know that “it” can happen to us – just like “it” can happen to anyone. We’re going to save an emergency fund.
How is our retirement looking?
Before his career crisis in the early millennium, DH invested regularly for his retirement, taking advantage of his employer’s match program. But for well over a decade, he hasn’t invested a cent. We aren’t too stressed about our retirement though, because I have a great pension plan. I went to Mr. Money Mustache’s Forum a few months ago to seek advice for our retirement investments, given our situation. Many people responded, and I remember one guy saying something like, “If you’re a Canadian teacher, you’ve got it made. $50,000 per year in your retirement – is that right? Any Mustachian can easily live on that.” (A Mustachian – or “badass” – is someone who subscribes to MMM’s extreme frugality and quest for early financial independence.)
I understand that it wouldn’t be wise for us to rely completely upon my pension plan, but it does give us a fabulous foundation for retirement. DH plans to start adding to his retirement investments to the tune of 15% of his gross income once the emergency fund is in place.
What about our children’s post-secondary education?
We started to invest in RESPs (Registered Education Savings Plan) for our three daughters when they were young. It ends up being enough to cover about half of their undergraduate university expenses if they live at home. Each daughter covers the remaining expenses with income from part-time jobs and any scholarships, grants, or bursaries that she can get. DD1 graduated 2 years ago debt-frree. In the case of DD2, who is about half way through her undergraduate degree (debt-free so far), there’s a new expense on the horizon – a big one – but I’ll save that for later. For now, I’ll just say that our basic investment in our children’s education has already been taken care of for our two eldest, and it’s ongoing for our youngest who is still in high school.
And our mortgage?
I find it interesting when people say that they’re debt-free even when they have a mortgage. A mortgage is definitely a debt, but it’s one of those “good debts” – and most of us don’t feel any urgency about it. I do. Maybe it’s a stage-of-life thing. If DH and I were in our 30s, we might be more comfortable with the $128,000 we still have owing on our house, thinking “It will get paid off eventually . . . ” I hit 50 two years ago, and “eventually . . .” doesn’t do it for me anymore. I know a few superstars who paid off their mortgages in their 30s, and if I could go back in time, I like to think I’d be one of them. But since we can only go forward in time, we’re aiming for June of 2019. Not a superstar achievement, but it would still put us in the minority. 59% of Canadians retire while still in debt. We plan not to.
Building wealth and giving?
For me, the gold standard for giving is 10% of gross income, and we haven’t done that since the plunge in DH’s income over a decade ago. Even though our income is once again very healthy, we’ve been focused on debt-reduction, and our giving has been low. We have increased it since paying off the last of the business debt, but it still falls far short of the amount I feel right about. I can only hope that as we continue to build wealth we will also increase our giving.
Here we go!
So there it is: our game plan for Part 2. We only paid off all non-mortgage debt a few weeks ago, but already we’re noticing a strange abundance. When DH and I prepare our budget each month, we have to go through it two or three times, cutting here and there to get it to balance. But when we prepared July’s budget, we had to go over it again for a different reason. We were left with a surplus after our first draft. That has NEVER happened before. A hint of things to come? I don’t know. This stage is new for us, and we’ll take it as it comes. Here we go!
Do you consider your mortgage to be a debt? Do you find it difficult to balance savings with debt-repayment? Are you able to give as much as you’d like to? Your comments are welcome.
OK, this is added for Kay’s benefit. (See her comment below.)
These are called “Sliders”: Baked Baguette/Crab Meat/Buttered Lobster/Confit of Duck/Beef Strips/
Believe it or not, this plate was an appetizer. And we each ordered it! Then I had lamb and DH had fillet mignon. SO full!