Saturday, November 5, 2011

Crunching the Numbers

When I posted my WWDRD? post, If I Were A Wealthy Girl commented, challenging me to figure out what my payoff/savings goal dates would be if I actually applied Dave's baby steps to the letter. Meaning no extra retirement until my E-fund is taken care of, paying my student debts first, etc. I realized I didn't know. So I thought I'd do some calculating.

One caveat: I have $3,000 of loan forgiveness coming my way at the end of this school year. So if I went gazelle intense, I could pay off my student loan before that, but obviously I don't want to. So, I need to leave enough that my regular payments go through and I still have $3,000 that I owe.

Plan 1: Dave's Way

I wouldn't put the money I have set aside into my Roth or 3 month E-fund, I'd apply that to my student loan. Then, because of my loan forgiveness I would switch to E-fun until the $3,000 posts. Whenever it posts, I'd pull the money out of my 3 month E-fund to pay the balance off.
Loan Payoff: Approximately June 2012
3 Month E-fund: March 2012
6 Month E-fund: August 2012
House Fund: January 2015

Pros: I am debt-free sooner in this plan. I also have my fully-funded E-fund by the end of the school year, in case I get laid off. This is definitely the fastest plan.
Cons: No Roth contribution for 2011, or for the first half of 2012. Wipes out savings over $1,000, so if a bigger emergency comes up, that's it.

Scenario 2: My Plan

Pay $300 extra toward student loan per month. Put tax return (up to $2,300) toward student loan. Save $400 per month, with $300 going toward E-fund and $100 going toward house fund. Put $420 per month toward my Roth, starting in January. Put current savings toward 2011 Roth to max that out as well.

Student Loan: Paid off October 2012 (just in time for my 30th birthday)
3 Month E-fund: October 2012
6 Month E-fund: June 2013
House: March 2016

Pros: I invest in my Roth starting this year, and it's funded fully for 2012 as well. I get to see something going on in my house down payment fund now rather than later.
Cons: WAY Later house fund (is that even correct?!). Later on pretty much everything.

Scenario 2: My plan modified...

I don't do the 2011 Roth Contribution. I split that money between my student loan and my E-fund. I still pay $300 per month toward my loan. I save my tax return for the beginning of a wedding fund. I save $400 per month in my E-fund, until loan is paid off. When that's done put $800 toward E-fund, and when that's funded switch the money to a house down payment.

Student Loan: August 2012
3 Month E-fund: May 2012
6 Month E-fund: November 2012
House Fund: October 2015

Pros: Still get to do Roth for 2012, get three month E-fund done by the end of this school year. House fund is earlier than my original plan. I have some savings now, and can use my tax returns as the need arises.
Cons: No Roth for 2011. Later house fund than Dave's plan, but sooner than my original.

I think I'm going to go with Scenario 3. It allows for meeting some goals faster and doesn't depend on my tax return to meet my debt payoff goal. Considering BF told me, "Just get me a small Christmas present and put the money towards a wedding" (!!!) I have a feeling I'll be needing a wedding fund sooner rather than later. I also want to get my Roth going for 2012, and this plan allows for that. But, I think I'm going to sleep on it before I move any money around.


  1. I like plan 3 as anything that funds the 6 month emergency plan the fastest is, in my opinion, the better. It is good to have a cushion. And planning for retirement is also a priority. Very good number crunching!

  2. I like Plan 3, too. I think that Dave's advice on not contributing to retirement until you have your debts paid is bogus. I don't think that Dave is good for building long term wealth. He preaches more on a short term basis. Sorry, just not a fan of his.

    You are doing a great job. Your student loan will be done in no time.

  3. Lol, just saw your comment and I laughed when I read If I Were a Wealthy Girl's post this morning! We are kinda similar, though, my frugal sister :)

    I'm also very back and forth about my goals for the upcoming year, and mostly for the same reasons that you are. It seems stupid to go all out on paying off my student loans when I have $5500 in forgiveness coming at the end of my 7th year. But frankly, I just don't know if ploughing so much money into cash savings is really my best bet either. Why not just put it into the Roth so that I can get some real growth?

    I just don't know...maybe I'll post about this soon....

  4. @TeacHer: I know, I can see how she might confuse us. Mostly because we're both awesome. When is your seventh year? If its not too far off, yeah I would just wait and then once the $5,500 comes through, get on paying the remainder off.

    The thing with cash savings is that it gives you options...a Roth is sort of stuck there until retirement or home ownership. Savings can be your New York fund, an emergency fund, a house fund, or anything else you need or want. But I change my mind a lot too, so I feel ya.

  5. I second the both awesome comment :)

    This is the beginning of my fifth year, so it's a couple years away. But if I keep making minimums until then, that $5500 will wipe it out. So I'm definitely not going to accelerate payments - it doesn't make sense.

    I'm starting to think I might just go with a small e-fund - like around $5,000. That would last me for 3 months if I got laid off if I was really careful; then I'll just invest the rest of my excess income in my Roth.

    This turned into a long response comment...sorry :/

  6. I love both of your (TeacHer Finance and Homewowner) blogs. I read them both all the time.

    There are so many personal finance experts out there (Dave Ramsey, Gail Voz Oxlade, Suze Orman, Michelle Singletary, Jean Chatzkey...and the list goes on) with different plans. Regardless of the plan people have to modify it to fit their situations (i.e. loan forgiveness for teachers).

    My arguement is not that the 7 baby steps are for everyone, but that everyone should run the numbers for any plan they choose if they were to follow it exactly as written. This serves as a great point of reference, when the desire/need to customize comes into play.

  7. As far as I know, you can get any contributions out of your Roth at any time. That is why putting money in the Roth is such a good idea - in an emergency, you can use your contributions without penalty. On the other hand, if you don't contribute to your Roth, the opportunity vanishes - you cannot put in money for past years. Good luck whatever you decide!