FIRE with a family
The choice to build wealth, not debt
December 2019 marked the start of our wealth building journey. What a time of year for anything to do with wealth. It’s usually a time of year for debt! At least it is for us.
With the jolly old man in the red jacket due to arrive at the end of the month (not to mention our son’s birthday right after), we were in the same boat as most. “What does everyone want?” and “Do you think the kids need new bikes?” or “Will dad appreciate more socks?”. These are the type of questions we ask each other. That was pretty much our routine in the run up to Christmas every year. Buy a lot of new stuff for everyone and throw it on the credit card. We’ll deal with the payments in the new year.
Hold on… Didn’t I just say our wealth building journey started in December? Yes. Yes I did. We still bought all the presents (except the bikes, it’s winter here. Hard to ride in 6 inches of snow.) and spent more than we probably should have. So what was different? This time we had a plan.
If you’ve read Our Story then you’ll know that I love a good spreadsheet. The wife is more of a pen and paper kinda gal. Like the, ‘have a calendar and write on it’ type. That’s not my style. If I can automate it or make it electronic, that’s the route I take. 100% of the time. Spreadsheets are great for all sorts of things and it was the perfect tool to capture our plan. But how in the world did we decide what should be in it?
Are any of you familiar with Dave Ramsey, and his book “Total Money Makeover”? I found it referenced by just about every personal finance YouTuber I’d watched. It came highly recommended as a “must read” for anybody looking to take control of the personal finances, so I thought this sounds like a perfect place to start. After a quick Google search, I soon found Dave was a very popular dude in the finance world. He even has his own radio show!
We downloaded Dave’s audiobook version of “Total Money Makeover” and committed to listening to a portion of it every time we hopped in the car, much to the dislike of the kids. The book is broken into chapters made for easy listening. Given where we live it’s nearly always a 30-minute (or longer) commute to get our destination, so we’d listen to a chapter or two at a time. To be perfectly honest, sometimes we’d go for a drive just to listen to more of the book. It’s safe to say we got through the book fairly quickly.
Dave’s teachings are based on The Baby Steps he outlines as essential to take control of your money and build your wealth. These principles are what we used to build our own plan. He speaks with passion and isn’t afraid to call a decision you’ve made “dumb”, but he applauds you for making the decision to start the wealth building journey. It’s like an uppercut followed by a kiss.
Now, back to the spreadsheet.
I opened excel and created a tab called “Plan”. That’s where I outlined each of the baby steps with a plan of how I think we could achieve them. I also placed a planned date for my best estimate as to when it seemed reasonable to achieve each step.
“That’s great, but you haven’t even told me what the steps are”, I hear you say? Well, if you didn’t want to click on the link to Dave’s site, I’ve placed a snapshot of our baby step plan below.
Image: The 6 Step Plan
Dave actually has a seventh step “Build wealth and give”, which we do plan on including on our journey, we just didn’t include it right now.
A brief explanation of the 6 steps, in my opinion:
1. Save enough to cover a minor emergency, such as your car breaking down or your fridge decides it’s had enough. This value may vary for some depending on what you class as minor. The intent is to have at least some cash so a little hiccup doesn’t throw you into more debt.
2. List all your debts from smallest to largest. The snowball method makes you attack the smallest debt on your list with all the spare cash you have. Once the smallest is wiped out, move onto the next one and continue this pattern until you’re only left with big debts like your mortgage. Personally, I took interest rates into account when prioritizing which debts to pay before others. For example, if you had a low interest loan of $2,000 at 3% APR or $5,000 of credit card debt at 20% APR, I’d choose to pay down the credit card first as you better rate of return.
3. Calculate how much it costs you to sustain life each month and save at least 3 times that amount. Things like housing, transport, food, education, insurance are all examples of items essential to your wellbeing. This isn’t a holiday fund. This stash of cash will be what saves you from creeping back into debt should the unfortunate happen – such as a job loss.
4. Take a look at your retirement account(s) and figure out how much of your paycheck you’re actually contributing. If it’s lower than 15% of your gross income, bump that baby up!
5. If you have kids and you want to provide them with solid tertiary education options, you should do this step. If not, move on.
6. When you’re at step 6, fire everything you have left at your home loan. Paying down your mortgage is a guaranteed rate of return. Personally, we haven’t decided if this is the route we’ll go. Instead we may choose to invest in the market long term for a higher return than our mortgage rate. I’ll go more into this in future posts.
So there you have it. That’s our plan! Pretty simple, right? Don’t worry if you find it a bit confusing at first, it definitely becomes easier over time.
Over the next few posts we will go into more detail on how we turned our plan into action and the tools we think are useful for the journey.
If you’re keen to start your FIRE journey or want to follow along on ours, let us know in the comments. We’re always up for a chat.
Blake & Allanah - FIRE with a Family