It’s been often said that personal finance is personal. I wholeheartedly agree. The gurus give advice. Sometimes that advice conflicts! One financial expert may say never pay off your mortgage, while another will tell you to pay it off as quickly as you can. Ultimately, each person has to decide for him or herself how best to approach personal finance. As we all have different risk tolerance and various goals, it’s very hard to find one advice that will apply to all. That being said, I’ve decided to give you a glimpse as to how I am managing my finances. Specifically, I will take a look at how my financial plan stacks up against Dave Ramsey and his first 3 baby steps. Let’s dive in for an honest look at my financial ladder so far.
1. Establish a Starter Emergency Fund
A typical advice you will hear is to build a starter emergency fund. Dave Ramsey is a fan of this and he suggests in the first of his baby steps to build a starter emergency fund of $1000. Other gurus might have a higher amount, but I agree with Dave Ramsey on this approach.
At the time of this writing, my starter emergency fund is sitting at approximately $1038.
This starter emergency fund is held at a separate bank account. I don’t have a debit card to this account, but I can certainly transfer the funds if needed to one of my more regular bank accounts. Now that I’ve established my starter emergency fund of $1000, I may increase it to $2500, but that won’t be the priority. I do contribute about $50 – $100 per month.
Finally, I will say that if my car broke down, or if I had some other emergency that cost me more than $1000, I would be able to come up with the cash. I would simply take money from other accounts to cover the cost. But, for purposes of this post, I’ve met the requirement of having a starter emergency fund of $1000.
2. Payoff All Debt Except The House
Depending on who you listen to will depend on how this next step is phrased. Dave Ramsey recommends you payoff ALL your debts except the mortgage. Moreover, he recommends using the debt snowball method to do so. That is, he recommends you payoff the smallest debt first regardless of the interest rate.
Others suggest that you pay off only bad debt, and yet others still recommend paying off high-interest rate debt.
For what its worth, I only have one debt at the moment, that most would agree I should payoff asap. That is, I have a credit card with a balance of about $8000!!! Coincidentally, I recently crossed the $10,000 milestone in my dividend portfolio. Arguably, I should just cash that out to payoff the debt, but that’s not going to happen!
Regardless of which guru I listen to, I’m sure that they all would suggest that my credit card debt is bad debt and I should get rid of it as soon as possible – especially since the interest rate is at least 16%. So, that is what I intend to do.
My initial plan was to sell some of my bitcoins to payoff my credit card debt. For what it’s worth, I’ve decided not to do that either. To paraphrase Dave Ramsey, I didn’t wander into debt and I can’t wander out of it. So, I will definitely make this a priority. However, I choose not to do so to the exclusion of my other investment goals – a notion that Dave Ramsey definitely disagrees with.
A. What About My Other Real Estate
This one is tough. Dave Ramsey suggests I pay these off too (with the exception of the house I am living in). But, my other real estate are rental properties and the tenants are paying down the mortgage.
Rightly or wrongly, I’ve decided that I won’t be paying down these mortgages before I invest. I will say though that I am doing somewhat of a snowball method on paying down my rentals. So, I am targeting one rental, and when that’s paid off, I will target the others. But, I will still continue to invest in the stock market as well as pursue other investments while this is going on.
The point is that while I agree with some things Dave Ramsey says, I don’t necessary agree with or follow all of his advice.
3. Save 3-6 Months of Expenses in a Fully Funded Emergency Fund
For years, I’ve ignored this advice! My rationale was that I have a stable job and if an emergency happens, I can always rely on my credit cards. I’ve since had a change of heart. Who knows, maybe I just don’t like the idea of paying 16% interest on a $8,000 debt!
At present, I own 3 rental properties, include one property that I currently live in (I have roommates). In an ideal world, I will have at least 3-6 months of mortgage expenses (mortgage, taxes, insurance). Of course, there are other expenses to keep in mind, including maintenance, vacancy, utilities, etc. But, having 3-6 months of basic mortgage expenses covered would give me some peace of mind!
Each property is paid from a separate bank account. The rental income is also deposited into separate bank accounts (although not necessarily the same one that pays the mortgage). This crazy arrangement may change, especially as I acquire more properties. But I’m able to manage the chaos now. Let’s take a look at the three properties.
A. Property-A
Property-A is a long-term rental. The rent covers the mortgage and it’s being managed by a property manager. At present, I don’t have enough money to cover one month mortgage payment (which is about $1100). Once I rearrange my bank accounts, I hope to focus on building this up.
B. Property-B
Property-B is my the house I live in, and it is a long-term rental. I have roommates and their rent covers the mortgage and half the utilities. I am happy to report that as of April 1, 2022, I will have at least one month of basic mortgage payments in a separate account designated for this property.
Eventually, I will build it up to 3 months, and also have enough there to cover maintenance and additional expenses.
There is no property manager in place for this property because I am currently living in it. If and when I move out, I will likely have a property manager to take care of the house.
C. Property-C
Property-C is the beach condo and it focuses on the short-term rental market. Because I am relatively new to this market, I am not touching the money that the condo is making.
With a beach condo, there are seasons, and this summer is the busy season. However, once the summer ends, I still need to pay my mortgage and HOA fees during the off-season regardless of whether or not anyone books the condo. So, the goal is to make enough in the busy season so that the funds will cover the expenses during the off-season. I also hope to make a profit as well.
As of right now, I have enough expected income to last through to August. I need to earn enough income to get me through to March 2023! Arguably I’m behind, but it is still relatively early.
I say expected income because although the property is booked, and I know precisely the amount of income I will be receiving from the bookings, anything can happen to the bookings. So, the guest could cancel, or even if the guest shows up, the unit could be in a bad shape and cause the guest to complain or leave early thereby cause a refund. So, I really can’t count on the income until after the guest leaves, but the expected income is a useful metric to let me know how the property is doing.
Conclusion
There you have. I’ve followed some of Dave Ramsey’s advice on the first 3 of his baby steps, but not all. Although I am focusing on many goals at once, I anticipate that the next year will be about me re-creating a sound financial foundation to suceed.
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