If you are debt free (or you plan to be debt free) then you know the freedom of not having monthly debt payments. But, your goal isn’t just to GET debt free, your goal is to STAY debt free. Here’s my plan for living a debt-free life:
(First, a word about retirement: I save for retirement in my 403b account. Personally, I try to balance my long-term savings for retirement with my desire to stay debt free and not borrow any money. Right now, I am putting 20% of my gross income into retirement. I also have an Emergency Fund of six months worth of expenses in my savings account.)
I determine how much money I need each month for living expenses. I place that specific amount in my checking account, and I create a monthly budget using that amount of money. All of the other money that I receive goes into my savings account. Here are some pretend figures: Suppose I made 100 dollars a month, and I needed 75 dollars a month to pay my normal expenses. I would put 75 dollars in my checking account, create my budget based on 75 dollars, and then put the other 25 dollars in my savings account.
On paper, I allocate my savings account according to my savings goals. Here’s how that works:
–I keep six months of expenses in my savings account at all times. (I refer to this amount of money as my Emergency Fund and it is to be used exclusively for real, major emergencies.)
–I prioritize my savings goal from “most important to least important”.
–Using this list, I allocate my savings. For me, college savings comes first, automobile savings comes second, furniture savings come third, and housing savings comes fourth.
–At the end of each month, I transfer money from my savings account into my various investment account. I invest in basic index funds.
–I do not try to save for everything all at once. Right now, my focus is on this year’s college savings. Every dollar that I can save is going to go into my daughter’s ESA.
–After I fully fund my daughter’s ESA for this year ($4000), I will turn my attention towards saving for a newer automobile. Once I finish saving for the automobile, I will turn my attention towards saving for furniture replacement, and then housing.
–For my automobile, furniture, and housing savings, I use a simple low-cost non-retirement account. Again, I invest in index funds (or index ETF’s). If I were concerned about volatility in the market, I would simply keep my money in my savings account which is earning close to 5%.
As you can see, all of my savings (except for the $4000 for college) will be readily available. On PAPER, I will be saving for different items, but in REALITY all of the money will be in “savings”. So, what happens if my dish washer breaks? Well, if I’ve been saving for a new automobile, I can simply “borrow” some money from my automobile account, buy a dish washer, and then “pay myself back”. The reality is, if you are going to live without borrowing money, you MUST save lots and lots of money in non-retirement accounts. The money must be accessible and you must be able to use it “penalty-free”.
One side-note: I am NOT an advocate of skimping on retirement savings. In fact, I think that saving for retirement with pre-tax dollars is an awesome idea! But, the reality is, if you wish to live without borrowing money, you have to fund your retirement AND save up for major purchases.
My ULTIMATE GOAL: I hope that I will one day have enough money (in non-retirement savings) to pay for my kids’ college, buy nice, used automobiles, replace items in our home, and buy a house. I also hope that I will have enough in my retirement savings to provide for my monthly expenses. (I am looking into the viability of using a Roth IRA to save for my home purchase. I’ll let you know if I decide to go this route. As of now, I’m using my standard investment account.)
–One last thing: At the end of the month, any money that is my checking account gets “swept” into my savings account and then “swept” into whichever account I’m funding that particular month!
Associated Posts and Resources:
Trying To Save 60% Of Gross Income
ING Direct Savings Account Referrals
10 thoughts on “How I Plan To STAY Out Of Debt”
One question about college savings….have you ever thought about not saving for your child’s college expenses? What will your personal return on investment be by paying for your child’s college? The money required for a degree is an investment in the child and should be paid for by the child. My parents paid for a portion of my college expenses and student loans were taken out under my name for the remainder. Knowing that loans (and interest) must be paid back for the time and classes I took was a huge motivation technique I used to finish in four years instead of “hanging out” in college and provided a goal for me to work towards paying off.
Just some things to think about.
Very good post. I like to see how others are planning on doing it. I’m pretty certain our plan will likely be very similar to what you have going right now. We’re saving up our 6 month EF right now adn then will make adjustments to the retirement accounts and establish other “savings” accounts.
Thanks for posting, I’m bookmarking this one to come back to later on. =]
I have thought about not paying for their college education. I personally do not have a college degree. The MAIN reason that I did not attend college was that I knew that I would have to pay for all of it, b/c my parents could not help me. So, I chose to go straight to work, instead of going to college. In hindsight, everything worked out just fine for me and I have a decent job with a decent salary. I want my children to have a “guilt-free” choice. They can attend college or not, and they’ll know exactly how much money they will have for college.
Just keep in mind that, as of 2007 financial aid guidelines, you would be expected to contribute 20% of savings and investments in the child’s name and only about 6.5% of savings and investments in the parent’s name.
I just stumbled this and love the site…
I personally feel that in the interest of caring for a child, you must do all that is necessary to help them get a start in life which is why I opened a 529 account for her three years ago when she was 2!
Also- an accountant friend of mine told me to NEVER finance a car, to ALWAYS pay cash upfront as it is a depreciating asset, if that means really nice used cars– so be it–
just my 2 cents-p
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