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Now that the car loan is gone, I have an additional $556 to work with in my budget. I don't want to let this extra money get wasted and/or spent frivolously so I put the pen to paper and re-evaluated my financial plan. I know how I want my finances to look and I'm setting a plan in action to accomplish the desired results. My new plan consists of a fully funding my Emergency Fund, Flexible Savings Account and continuing to reduce debt.

Emergency Fund. I've determined that if there were a situation where I had absolutely no income coming in, I could live on $2500 a month in bare bones expenses. This includes the mortgages on my primary home and rental property, food, utilities gas. I've also included money for health insurance premiums that I'd be paying out of pocket. I've calculated that I would be comfortable having at least 8 months of expenses available to keep me afloat. $2500/a month for 8 months comes to a nice round figure of $20,000. As of this post, I am roughly $2000 off. If I pay my former car payment to my savings account, I should be at my $20k goal in about 4 months. It should be even sooner considering I will get an extra paycheck in July and my stimulus check should be coming at the end of June.

Flexible Savings Account. I would like to keep a minimum of $2000 in my Flexible Savings Account. This account is used for any unplanned expenses or when Murphy decides to visit. My flexible savings account now stands at about $1400. Once the Emergency Fund is fully funded, I'll throw a couple payments into the flexible savings account to boost the balance of that account.

Debt Reduction. The original plan was to eliminate my student loan once the credit card debt and car loan were paid off. I've since decided to go another route. My second mortgage interest rate is 8% and my student loan interest rate is less than 6%. With the falling home prices, it is more important than ever to reduce my loan balance as quickly as possible in case there is a situation that comes up that forces me to need to sell my home quickly. There is a position at my job that I am possibly considering. If I were to take the job, I would need to relocate.

It feels good to have a plan in place for my finances. As they say, "If you fail to plan, plan to fail. " I've made significant improvements in my finances and I surely wouldn't want to go back to my financial life of 2-3 years ago.

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  1. dominiking // June 9, 2008 at 8:36 AM  
    This comment has been removed by the author.
  2. dominiking // June 9, 2008 at 8:50 AM  

    There must be great relief in paying off your car balance! If I keep on track mine will be gone in 10 months since I will be making double payments starting this month.
    I definitely agree with you on paying off the second mortgage before paying the student loans because of the current real estate market and the accompanying credit crunch. Keep on building solid financial goals and sticking to them!

  3. Anonymous // June 9, 2008 at 1:19 PM  

    With a 20K emergency fund you should be able to cover any selling expenses and decrease in your home's value. This is assuming you don't live in Detroit, California, Florida, Phenoix, or Las Vegas. I would put the extra money towards whichever balance is lower. This helps build up momentum and keeps you focused. However, if you sleep better at night with more equity in your home, that is probably the better choice. Also note, student loan interest may not be a tax deduction depending on your income.

  4. Anonymous // June 9, 2008 at 10:23 PM  

    A thought on the second mortgage-why don't you refinance it? 8% is pretty high, at least for the moment. Seems like you could refinance and save yourself a chunk of money (and still pre-pay on it if you want, you'd just be denting the principal even faster!).

  5. Debbie // June 11, 2008 at 9:15 AM  

    So glad you got rid of the car loan! And good point about including health insurance when planning your emergency fund--I hadn't considered that.

    I, too, decided to pay down my second mortgage instead of my student loan. I like the way you think!