Zaphod for President

I intended to spend my day building a fence in the backyard, but was forced inside by a thunderstorm in the early afternoon. Perhaps it is for the best: after spending a few hours playing with Neo Office spreadsheets, I have begun drafting a “master plan” in regards to my personal finances.

After a few hours of serious thought, I came to the following conclusions:

• Even if I were to live exclusively on Romen Noodles, and dedicated every cent I earned towards debt, it would still take several years until I was debt-free. I am far more likely to succeed if I set realistic goals, and allow myself a somewhat decent standard of living.

• “Crash diets” don’t work, and therefore, I assume that “crash finances” are no better. Rather than go on a short-term “financial diet”, I must establish long-term habits that will result in good financial health.

• The greatest asset I have right now is time- time that will allow a Roth IRA to appreciate and mature.

• I feel fairly confident that the current income situation is stable, and will remain stable for the foreseeable future.

My master plan begins by opening a Roth IRA with $2,000 of found money, and ends will the repayment of my last debt. Along the way, I expect to pass through three distinct phases, each with a somewhat unique strategy.

Phase I

Goals:

• Eliminate all bad debt (credit cards, car)
• Save more than $15,000 in the emergency fund

Duration:

• 24 months (2 years)

The Plan:

• All constructive debt (mortgage and student loans) will be serviced with the minumim monthly payments.
• $380 will be saved in the emergency fund every month.
• $1,525 will be paid towards bad debt every month.
• I will open a Roth IRA with $2,000 before June 1, 2007.
• In the ten months remaining in the 2007 tax year, $200 will be added to the Roth, resulting in the $4,000 maximum annual contribution.
• Starting in April 2008, the monthly Roth contribution will jump to $333.33, which will ensure a fully-funded retirement.

The Result:

24 months from now:

• The emergency fund will be fully funded at over $15,000.
• I will be fully funded in my own Roth IRA retirement account.
• All credit card balances will be zero, and the car will be paid off.
• I will have paid a stupid tax of about $2,633- interest paid towards bad debt while repaying it.

Phase II

Goals:

• Reduce mortgage debt to 80% LTV (loan-to-value)

Duration:

• 33 months (about 3 years)

The Plan:

• As in Phase I, student loans will continue to be serviced with the minumim monthly payments.
• $380 will be reallocated from savings towards the monthly cost of a new car, with the remainder being used for pointless junk that makes life worth living.
• An additional $1,525 will be paid towards mortgage debt every month.
• I will continue to add $333.33 to the Roth IRA every month.

The Result:

56 months from now (about 4.5 years):

• My fiance will be enjoying a shiny new car.
• My mortgage debt will be approx. $200,000. Assuming a home value of $250,000 (ten thousand less than current market value), we will be financing 80% of our home.

Phase III

Goals:

• Eliminate student loan debt.
• Eliminate mortgage debt.
• Become 100% debt-free (aside from a rotating car loan)

Duration:

• 76 months (about 6.33 years)

The Plan:

• After achieving 80% LTV, and repaying all bad debts, we will refinance the remaining student loans (approx. $23k) into a 15-year mortgage. With a superior credit rating, and a 15-year term, I should be able to negotiate a far better interest rate. For my calculations, I used the 5.50% rate I found on Bankrate.com.
• An additional $1,525 will be paid towards mortgage debt every month.
• I will continue to add $333.33 to the Roth IRA every month.

The Result:

132 months from now (11 years):

• I will be 100% debt free.
• I will own my home outright.
• I will have contributed $44,000 to my Roth IRA, and enjoyed 11 years of tax-free gains.

As a 26-year-old, 11 years is about a half a lifetime as far as I am concerned. The idea of being 37 is bizzare. However, these existential issues must wait for another post- the numbers make sense.

Under my current financing (30 years fixed @ 7.37%), I am expected to suffer $411,741 in interest while paying off my house. Under the 11-year master plan, I will expect to pay about $126,000- a savings of more than $285,000.

Assuming a post-tax income of about $30,000, I am effectively “buying” 9.5 years of my life by repaying this debt early.

As a soon-to-be 27-year-old, that’s about 35% of my life we’re talking about.

I’ve said it before, I’ll say it again: debt is slavery. Just imagine it for a moment: nine-and-a-half years of waking up early, listening to insane clients, googling obscure error messages at 3am- all for the purpose of paying a banker I’ll never ever meet.

I don’t know about you, but I’d rather go the beach.

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