PTFO: Planning to Meet Your Goals
In my last PTFO post, I talked about calculating my net worth and coming up with a preliminary budget that included my wife’s income. I didn’t include our budget in the last post, but I’ve decided to do it here for completeness sake. The bare-bones version of our monthly budget looked something like this:
Estimating that our net income would be around $18,000 a month, I figured that we would have about $13,000 left after accounting for our monthly budgeted expenses. Knowing this, I was able to come up with a plan for my previously mentioned goals.
To refresh your memory, my goals discussed in the previous post were to pay off my credit card debt in two months, save up an emergency fund within six months, and to pay off my student loans in five years. Based on my initial budget, I adjusted my plan for the credit card debt and decided to pay it off in full at once. For my student loans, I owed about $300,000 at an annual interest rate of roughly 6%. Using available online calculators, I figured out that I would need to make monthly payments of about $5,800 to meet my goal of paying off the loan in five years. Just as an FYI, the minimum payment would be about $2,200 a month over a 20-year repayment plan.
In calculating our emergency fund, I went with the amount that would cover our minimal living expenses for six months. To come up with this amount, I adjusted our monthly budget to just cover fixed expenses, gas and food. I cut out the $1,000 in the “other” category, which is essentially discretionary spending. I also cut out the $400 monthly payment to our maid, as this is not really a “necessity”. After doing this, the adjusted monthly expenses would come out to about $3,600. I added the minimum monthly payment that I would have to make on my student loans, but I excluded the credit card debt, as that would be paid off in one month. I came up with about $5,800 per month, which I rounded up to $6,000. So my estimated emergency fund value would be at least $36,000 ($6,000 x 6 months). I rounded up and set my target to $40,000. My wife and I already had a combined savings of $10,000, so we had to save an additional $30,000 over the next six months in order to reach my goal.
Using these numbers, my plan looked something like this:
Month 1: Months 2 through 6:
$5,000 credit card $7,000 loans
$6,000 loans $6,000 emergency
In reality, my plan went off without a hitch. After six month, I had paid off my credit card debt and fully funded our emergency fund. What’s more, I now had an extra $6,000 a month in cash flow that I could now use for other financial goals, which I’ll talk about more in the next post.
Thanks for reading!