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.


Dave Ramsey’s 7 Baby Steps

I was first introduced to Dave Ramsey in 2009, when I was still in college. My roommate at the time let me borrow her copy of The Total Money Makeover. Even though I had always been an avid saver and didn’t have any credit card debt, I wanted to learn more about money.

I didn’t retain a lot of the information I read at the time, but I remember agreeing with most of Dave’s principles. The book also helped me realize the importance of giving, which I had never thought much about before.

After reading that book, I didn’t think about Dave Ramsey or his 7 Baby Steps again until very recently.

At the end of the last year, my husband and I bought our third rental property. And when I finally filled out a net worth statement and realized just how much debt we had once we combined all three mortgages (plus a HELOC), it was a rude awakening to say the least.

Even though our net worth is still very much positive thanks to increasing home values, we don’t like having so much debt, or any debt, to be honest.

So shortly after we opened escrow, we started listening to The Dave Ramsey Show every day. Listening to all the Debt Free Screams has inspired us to finally take his 7 Baby Steps seriously and make a plan.

We are technically in Baby Step 2 because we have small car loan. But we should be able to jump to Baby Step 4 & 6 within the next 2 months (we’re skipping Baby Step 5 because don’t have kids yet) and here’s why:

Even though we have the cash to pay off the car, we are in the middle of a major home remodel for the new rental property we just bought. And since home remodels often come with expensive surprises (like suddenly all the pipes need to be replaced!), we want to have enough cash on hand to cover any of those surprises, rather than resort to borrowing more money.

Once the home remodel is compete, we should have enough cash remaining to pay off the car (Baby Step 2) and have a 3-6 month emergency fund in place (Baby Step 3).

My husband and I are currently saving about 10% of our gross income into our 401(k)s but as soon as the home remodel is done, we will bump it up to 15% (Baby Step 4). We will also be redoing our budget to make sure we can pay extra principle on our mortgages & HELOC to get out of debt faster (Baby Step 6).

Based off our current income and expenses, we are projected to be in Baby Step 6 for over 25 years (yikes!). But by reducing our expenses immediately and increasing our incomes over time, our goal is to get out of Baby Step 6 in 15 years or less. The average family takes 5-7 years to finished Baby Step 6 but since we have 3 rental properties, 15 years might be more realistic.

If all goes well, we should be financially independent the same time we pay off our last mortgage.

I know things won’t work out this way exactly because, you know, life happens. But that’s our plan and if we’re delayed by a few years, we would still be out of debt a heck of a lot sooner than if we had no plan at all.