Medicated Money

Monday, April 03, 2006

The Debt Re-Payment - Revolution

The second part of our re-evaluation of our debt repayment plan was to determine which plan was the best for us. We first determined a list of conditions to help us make the decision:
  • We do not want to live so frugal that we resent it
  • We would like to be debt free as soon as possible
  • We want to be able to retire in our fifties
  • We are willing to compromise being in debt in order to achieve other life experiences

With these guidelines, we re-aligned the table to be debt free in the shortest amount of time to the longest amount of time. The rearrangement looked like this:

As you can see, Debt Monster is correct in believing that for us to be completely debt free, we should follow Dave Ramsey's advice and stop our 403(b), use all of our emergency fund except $1000, and start pinching pennies. If we did that, we would be debt free in August of 2007. 16 months of hardship, but in the end, debt free. However, in looking at our conditions in doing, this represents only 1 of the 4. To be honest, we know we could not do this. Some things you can do, some things you can't. This is one we just don't think we can do. We know that we would probably kill ourselves if not each other if we were consistently worried about where we spent money. Due to this, we eliminated the 4 plans representing 'penny pinching!'

Our next focus was on whether we should stop the 403(b) plan. The plan does 2 things for us. The first, the obvious, is that we are able to save for retirement. In comparing plans with the 403(b) vs non-403(b) plans, the average time of debt free is anywhere from 17 months to 22 months (again, the penny pinching plan option has been removed). In that time period, money invested would be from $42,500 to $55,000. If we retire when we are 59yrs/old, that money would be worth $741,600 to $959,717 at 10% annual return. The second factor with the 403(b) is that it lowers our taxes from total taxes of incomes from 20% to 17%. It also should allow us to be eligible for the Roth IRA. Factoring in the Roth IRA for 2 years, the $16,000 invested would yield us $279,190 of after-tax money. With these factors, we decided to continue the 403(b).

The third item we focused on was the emergency fund. This emergency fund is important because of 2 factors. For one, we have very good jobs, however, we are living in the Southwest and would entertain a move back to the Northeast if the opportunity presented itself and seem worthwhile. We are currently not planning any move, but the emergency fund represents the ability to move even if we go a month without a paycheck. Second, we are strong believers in the importance of a emergency fund. Also, the difference in our calculations, for the remaining plans, is equal to one month payoff difference. Due to this, we are going to keep it.

The last area we focused on (with the remaining plans: current plan vs moderate living, 403(b) & emergency fund plan) was truly how much can we put to our debt per month. When we first figured $3,500, we decided that this amount represented a consistent amount that we could reach every month. With this, an extra $700/month would be available for savings, life events, and our enjoyment. As you can see, there is a statistical difference between paying $3,500 or $4,250/month, in that being debt free 5 months earlier. In seeing this, we decided to try to increase our debt repayment per month closer to $4,250.

As you can see, we definitely analyzed many different plans and determined that in the end, we could and should increase our debt repayment plan a month. Thanks to Debt Monster for her comments to help stimulate our thinking. After completing this exercise, the main thing we realized is that it is easy to determine how much you should pay towards debt, however, it really comes down to what you feel comfortable doing and what you can live with to make it possible.

2 Comments:

  • I'm glad to see that you decided to continue contributing to your retirement account. I tend to cringe when I hear about people skipping out on that, in order to pay down their debt faster. They tend to not look at the future value of the money, and not take into account the fact that they can't go back in time to add that contribution later.

    Good luck with the plan.

    By Blogger HoustonHedonist, at 11:41 PM, April 03, 2006  

  • Thanks for reading.

    After the number crunching, it was too hard to stop the 403(b) and kick that money towards debt. We would rather be in debt longer (especially at 3.625%) than give up those years of contributing.

    By Blogger Medicated Money, at 12:15 PM, April 04, 2006  

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