Zaphod for President

The last time I wrote about my personal finances, I included three goals. To reiterate:

• Become 100% debt-free.
• Save $15,000 (3-months expenses) in an emergency fund.
• Create and fund a Roth IRA to the maximum allowed annual contribution.

I would like to add a fourth goal to this list:

• Fix up my dump of a house.

The purpose of this post is to prioritize these goals, and begin to form a solid plan of action.

Debt

How much debt are we talking about? The grand total, including mortgage and student loans, is $334,963.50. Holy smokes, that’s a lot of scratch. In fact, when I look at the total for too long, my head starts spinning and I start to feel sick. Let’s break it down:

Constructive Debt
Constructive debt includes all debts incurred in hopes of long-term gains. Ironically, this is sometimes referred to as “good debt”, and includes the mortgage and student loans.

Mortgage:	$273.928
Zap’s Student Loans:	$19,023.09
Mrs. T’s Student Loans:	$8,744.96
Total:	$301,696.05 (90.07%)

Why is this “constructive” debt? The classical thinking is this:

1. A college graduate earns more than someone without a college degree. In other words, if I can earn $10,000 more per year with a degree, I will “profit” from a $20,000 investment in college after only two years.
2. Once I pay down my mortgage, I will own equity in the value of my home. When I am old and bitter I can sell it, and take the current cash value. Assuming my home appreciates along with the CPI, this should also provide a solid hedge against inflation. For example, if my house appreciates at 5% per year after bottoming out at $200,000, it would be priced at about $800,000 when the time comes to sell it. However, that $800,000 will be worth a lot less 30 years from now, as inflation will continue to eat away at the buying power of those U.S. dollars. The $600,000 “profit” may not actually provide any greater buying power than $200,000 today, but at the very least I should be able to preserve something.

Of course, there are plenty of unemployed and underemployed college graduates, and plenty of houses that depreciate in value over the long-term. In other words, even “constructive” debt is an albatross around my neck as far as I’m concerned.

Dumbass Debt
Dumbass debt includes all of the money I owe on things that will be worthless sometime in the next decade. For example, VISA, AMEX and the car loan are all dumbass debts; none of the things purchased with this money will be worth anything in 2017. In truth, there is some equity here (I could sell the car, and a few DVDs and books on eBay), but these are not “investments” of any kind.

VISA:	$10,000
AMEX:	$16,257.57
Car:	$7,009.89
Total:	$33,267.46 (9.93%)

Debt Strategy
Luckily, I am not a total bone-head:

• I have haggled all “dumbass debts” to a 7.99% APR.
• All “constructive debts” are even cheaper than that.
• I have $9 in “good debt” for every $1 of “bad debt”, so things could be a lot worse.

Of course, things could also be a lot better. At 7.99%, my $33,267.46 of “dumbass debt” will cost $2,658.07 per year to maintain. Assuming 7.99% for the entire $334,963.50 of total debts, my total annual costs jump to $26,763.58. In other words, I would need a full-time job earning $12.86 per hour just to tread water- and that’s entirely avoiding the issue of Uncle Sam’s cut (the Income Tax, which is another scam altogether).

Slavery has certainly evolved in the past 150 years, but make no mistake: this is slavery. Worse still, it is self-elected slavery, born out of impatience. Let me say it again: I am paying a Stupid Tax of over $20,000 per year. I am a fool. I am a sucker. If you fall for the scam of credit, you are doomed to be a fool, doomed to be a sucker, doomed to pay a Stupid Tax like me.

Until now, I have not prepared a specific strategy for paying this down. Instead, we have payed all the bills, put aside a few hundred into savings, and then divided the rest, almost randomly, among all of these other debts.

I have seen quite a few strategies in regards to paying off debt. Some of these include:

• Pay the most expensive (highest APR) debt first, and work your way back to cheaper debt.
• Pay the smallest balance first, and then the second-smallest, and so-on until you have conquered even the largest debt.
• Put aside a monthly “debt payment” and divide it equally among all debts.

Simply stated: becoming 100% debt-free is going to be a bit trickier than I first thought.

Emergency Fund

Our “emergency fund” is currently a third of the way to our goal amount of $15,000. I would like to save another $10,000 in this account, and I would like to do it quickly. How much should we be saving per month?

• At $100 per month, we will reach our goal in 100 months, 8.3 years
• At $250 per month, we will reach our goal in 40 months, 3.3 years
• At $500 per month, we will reach our goal in 20 months, 1.7 years
• At $1,000 per month, we will reach our goal in 10 months

Which is more important: funding the emergency fund, or paying off high-interest debt?

Consider this: the money in the emergency fund is growing at 4.5%, so we are paying a 3.49% APR premium by deferring debt payments in favor of savings.

Roth IRA

Does the Roth IRA come before or after funding the emergency fund?

Does that happen before or after I have repaid the debts? Which debts? All debts? Dumbass debts?

I haven’t decided on anything, but I wanted to put my Roth IRA to work in a few index funds. I think I can make about 15% per year. Being somewhat young (I will turn 27 at the end of June), I think I can afford a bit of risk in order to make this happen.

Assuming this 15% annual return is attainable, I am losing 7.01% per year by repaying my high-interest debts instead of simply tossing everything into Index funds. In practice, I can only invest $4,000 via a tax-free Roth IRA- after that, capital gains taxes will become an issue and reduce the net profit.

Assuming I contributed my annual cap of $4,000 in 12 equal installments, I need to save $333.34 per month. I also “owe myself” payments for Jan, Feb, Mar, Apr and May (5 x $333.34 = $1,666.67). Was it stupid of me to pay so much towards the VISA balance last month?

Home Sweet Home

From an engineering perspective, I live in a cement bunker with a 40-year history of surviving hurricanes. This is an important factor to me, and was one of the main reasons we decided to buy used as opposed to going the builder route. Sadly, from a design point of view, my house is a dump. From the pepto-bismo-colored exterior walls, to the tiny toilets, to the ancient kitchen appliances, it is more museum than home.

Long-term, we intend to completely rehab this place. That includes (among countless other things) a new kitchen and two new bathrooms. Using “off the top of my head” numbers, I expect it will require a full $100,000 to turn this place into our dream home. I expect it will take a few years before everything is finished.

So far I have gone out of my way to focus on the frugal projects first. For example; clearing the overgrown jungle that surrounds us, replacing drywall, painting, and other jobs that can be completed in a few days for a few hundred bucks. As every handyman will attest, there is no shortage of tools and supplies one might purchase for these endeavors, however, I have been very good about this if I do say so myself. For example, I only bought myself three power tools, a leaf blower, drill and a reciprocal saw, and I have done everything else the “old fashioned” way, with “old fashioned” non-electric tools. Lucky for me, the house came with an old gas-powered lawnmower which, after some new oil and some basic tightening, works just fine.

Last month, we allocated $5,200 to replacing the windows in each of our three bedrooms. This is, by an enormous margin, the most expensive home improvement we have planned to date. We are paying cash, and have vowed not to use our credit for anything but a life-or-death emergency. Even still, it is a significant expense.

Was this foolish?

Here is my thinking:

• Our current windows are 40 years old, single pane glass. They are junk.
• Our new windows will be double-pane, hurricane-proof glass, designed to withstand a direct impact at 140+ mph
• Hurricane season is coming.
• All of our other windows (except for 4) are protected by external hurricane shutters. The remaining windows are located in the bathrooms, kitchen and living room, and are protected by virtue of their locations.
• I would rather work at McDonalds until I am 90 years old than watch my soon-to-wife get injured in any preventable way.

Foolish or not, we have signed the contract, and have committed to the project. However, I offer the decision for your criticism. In my head, this was a necessity, not a luxury. Am I being irrational?

We are currently considering a few other projects. All of the quoted prices are high-estimates.

• Replace our external air conditioner and the cement platform that goes underneath it - $5,000. Our current air conditioner is functional, but only barely. It hasn’t been used since last October. Current average daily temperature is 85*F. Seasonal high average is 95*F, starting in June, lasting through September.
• Complete replacement fence in the backyard- $1,000. This I can do myself (I have already built one section) but I need materials from Home Depot / Lowes.
• Replace/repair irrigation system- $200. This I can do myself, I just need some PVC pipes, sprinkler heads, and my trusty shovel.
• Replace fridge, kitchen outlet - $300. We have already replaced the original fridge with a gift from a neighbor, but now the “new” fridge is on the fritz too. I think the outlet may be defective, but I am not sure. The fridge gets power, but refuses to get cold, despite the settings used, which is exactly the same problem we had with the last one.
• Backyard landscaping- $1,234,302. My soon-to-be wife and I both love big, luscious palm trees, not to mention the hundreds of other varieties of exotic tropical plants that thrive down here, but they can get expensive quickly. I also need to re-sod sections of the lawn after replacing the irrigation system.

This is by no means a complete list, but you should be able to get a rough idea of what I’d like to accomplish this summer. The question I keep facing is this: luxury or necessity? New landscaping can wait, but what about A/C? How much time and money should we allocate to home improvement? What percentage of income is appropriate, keeping in mind our other financial goals?

Found Money

We are currently enjoying a streak of good luck, and expect to receive an extra $5,000 sometime in the next few weeks. This money includes some outstanding paychecks, and an incredibly generous gift from Mrs. T’s parents. We already spent our tax refunds on the new windows and high interest debts, so this is $5,000 of “found money” as far as we are concerned.

What should we do with it?

I think the most rational decision is to divide this money according to the four goals outlined above. Now for the tricky part: how much should we put towards each goal?

I’m off to do some more reading, and to crunch a few numbers. Any constructive input you can offer will be appreciated.

Hungry for more?

• Finance
• Goals