Our Baby Step Update – Baby Steps 2 & 3 Complete!

Back in February, I mentioned how we would be done with Baby Step 3 by April. Turns out, I was about 3 months off.

The remodel cost more and took longer than anticipated – of course. And we didn’t secure tenants until mid-June, which means we had to cover all the overhead costs (mortgage, property tax, insurance, HOA) for a total of 7 months!

Once we got the first month’s check and security deposit from our tenants, the first thing we did was pay off my husband’s car loan. Baby Step 2 complete!

The rest of the money went to our emergency fund. Dave (and every other financial professional in the industry) says your emergency fund should be 3-6 months worth of expenses. We’re planning to save only 3 month’s worth for two reasons:

  1. We have HELOC that has an interest rate of prime + .25 percent. The prime rate is set by the Fed and it’s currently 4.25%, which means our interest rate on the HELOC is currently 4.5%. Since interest rates are likely to continue going up, we want to pay down the HELOC as fast as possible.
  2. My husband and I have pretty stable jobs that are salary based. Since the timing and amount of income we receive is fairly predictable, having extra cushion in our emergency fund takes second priority over paying down the HELOC.

We thought it would take us a few months to build up our emergency fund but now that I have my term life insurance in place, I decided to cash out a whole life insurance policy that my mom purchased for me when I was four. [Parents, please DO NOT buy life insurance for your young children. Life insurance is meant for replacing income that would be lost if something happened to the person insured and as far as I know, four year olds aren’t bringing home the bacon. And if you’re going to buy life insurance, please stay away from permanent policies (variable, universal and especially whole life)!] By cashing out my whole life insurance policy and applying the accumulated savings to our emergency fund, Baby Step 3 is now complete!

Now we’ll be tackling Baby Step 4 & 6. (We’re skipping Baby Step 5 because we don’t have any kids yet!)

Baby Step 4 is saving 15 percent of your gross income into your retirement account. We won’t be saving the full 15 percent because we still want to pay down that HELOC as soon as possible. But that could take a couple of years and I don’t want us to miss out completely on all that compounding interest in the meantime.

Once the HELOC is paid off, saving the full 15 percent into retirement accounts will then take priority over paying extra principal on our three mortgages, which is Baby Step 6.