Last year I started off well by learning a lot of new strategies, beginning to save more and optimizing travel to the maximum extent possible. Unfortunately, the foundation I was building upon was not factoring in tax withholding properly (for 1099s) so we were hit with a big tax bill for last year and restructuring needed for this year (so we wouldn’t run into that same mistake again). Suddenly we went from having a healthy emergency and no consumer debt to no emergency fund and credit card debt. This pretty much re-triggered my old debt trauma, and I threw in the towel for monthly tracking of my budget. But if there is anything I learned from this past year is when life throws you curve balls, that doesn’t mean you should throw in the towel, it just means you need to pivot. I’m going back to the starting line but better equipped this time. Here is my slow starter approach for:
1) Re-establishing my baseline
2) Rebuilding my emergency fund
3) Paying my newly acquired debt
My baseline – I needed to find enough cashflow to pay to start funding the other two goals. To start, my wife and I had to go through our budget and cut out some things we felt were not essential for the upcoming year. One thing we slashed was our travel budget. After our massive travel indulgence last year (with the help of travel rewards), we are fully content not to travel this year so we will only go somewhere if needed for work or family. We also cut a few subscriptions we weren’t using and stopped a couple of carryout dining days that we had incorporated into our routine. We also had to cut back on the extra principal payments we were putting on our mortgage. This gave us enough cashflow to start working on compounding snowball.
Emergency fund – our first goal is to have 3 months of expenses saved up. While we don’t have a fixed timeline for this, our estimation is that it will take 12-18 months. This will take longer because we are now maxing out our retirement savings and using a payroll system with payroll tax instead of sending quarterly estimates. If we do get any tax refund or windfall throughout the year, they will get thrown into the emergency fund replenishment bucket.
Debt payoff – I had to use a combination of credit cards and my 401k loans to pay taxes and retro max out my wife’s newly established 401k before the end of last year. I was fortunate enough to have just enough funds from my taxable investment account to pay off the credit cards, but my shares were locked up from being able to be sold for the next 24 months (but that is a story for another day). The next best option was to do a balance transfer for 0% the remaining credit card balance for 14 months. I am currently allocating money every paycheck to fund my covered call project. In the past I would have halted that for the next 14 months to pay off the credit card balance before the promotional period expires. But my new love of compounding outweighs my old fear of having a balance so for the next 14 months I will continue paying that extra principal into my taxable investments so that a year from now I will ideally have the remaining payoff amount along with some extra to throw into the emergency fund.
While the year is starting off slow, this Pivot will help keep some momentum going while getting back on track.
