My avatar from now through June 17 is a countdown until my CC debt is gone. (The computer updates it automatically.) Payday is June 15, and through online electronic bill pay the normal delay is 2 days. So sometime on June 17, 2004 my CC debt vanishes.

After that I'll redirect all the debt reduction money to my relative and pay off the car by the second half of August .

I'll give my mom $1200 in September. She isn't expecting it, but I feel I owe it to her for a past favor.

After my mom's $1200 I will be 100% debt free!

By the way, it was tempting several times to take a penaltied withdrawal from my 401(k) / IRA to pay it off. 5 years ago when I decided to rid myself of the debt I had enough in my nest egg to pay it off and cover the taxes/penalties. Three reasons kept me from doing it:

  • The taxes and penalties were prohibitively steep
  • I couldn't "catch up" or recover the tax-deferred savings because of yearly contribution limits (opportunity loss)
  • If I took this quick'n'easy way out, how could I be sure I could maintain a budget to not rack up the debt again? I did this before with a consolidation loan; I had credit card debt built up before it was paid off.

I gotta say it's a terrific feeling to have the debt almost gone and have already proven to myself that I can hold a budget that allows for debt reduction--which after the debt is gone becomes savings.

Here are my immediate post-debt plans for after-tax money:
  • Roughly split the freed income between 401(k) and my savings account
  • Build up $5000 emergency fund

Short-term plans (up to a year):

  • Open a MM fund account for savings instead of keeping it in my CU savings
  • Build up the emergency fund in the account

Medium term plans (roughly 5 year outlook):

  • Ideally target 18 months emergency fund since 18 months is the average IT professional's unemployment length
  • Target maybe $10,000 for car replacement fund
  • Target $40,000-$50,000 earmarked for house down payment and closing costs

The tax-deferred money will continue its current mix of indexed stock and bond funds.

The above plan figures are rough guestimates at this time. For example I'm not going to have a $50,000 down payment in 5 years while maintaining all my other numbers. I expect my cash fund will be flexible for the forseeable future, and if I'm forced to buy a car or decide to buy a house I'll forfeit a few months of emergency reserve.

18 months may be a bit too much emergency reserve, anyway, since I'm now on an expense budget that can be maintained by a much lower-wage position at the cost of stopping savings contributions. Plus if I'm making much less money I won't be buying a $10,000 car with cash or buying a house.

I have a lot of budgeting and analysis to do, but I haven't been in the mood for it yet. (I can do math well, but I never enjoyed it.)

One thing that occurred to me while typing this post is that I don't have a medium-term investment vehicle in mind. I have long-term vehicles and cash reserve vehicles that I'm happy with, but I don't offhand know where I would put money that doesn't need to act as a reserve and won't be spent for 3-6 years. 100% bond funds?

My budget plan is similar to what Nords suggested: throwing some more to entertainment and saving the rest. The budget is livable but needs a little more fun and a couple of trips a year.

I had planned on just pulling vacations out of cash reserves, but now that I think about it I might be better off budgeting a separate vacation savings account to cap my expenditures or at least track them better. I don't have the interest or dedication to track expenses carefully, but it's maintainable for me to budget a block of money and determine how far over or under the block I go; in this case the vacation account would be the audit device.

The biggest question for me in this transition is how to balance tax-deferred accounts with after-tax accounts. The conventional wisdom is to max the 401(k) and IRA's and then after-tax. (By the way, my company match is small and even now I'm getting the max match.) But even with as much as I'm saving the 401(k) can take a majority of my saved income, but I want/need to build an emergency fund and budget for a car and house down payment. For now I've decided to split the money between the 401(k) and after-tax savings at least until I have a decent emergency fund.

I'm noticing that everything I have in mind for the after-tax accounts I plan to have in MM funds. Perhaps that's correct, and until I have my 18 months' expenses, $10k car and $50k down payment I don't need longer term vehicles in after-tax accounts.

I mention cars a couple of times above. I'm not itching to buy a car, it's just that I realize mine will wear out eventually. Also, I'm not convinced I'll buy a house anytime soon, and I may not ever, but I want a down payment ready just in case. I'm not sure quite what to do with that money besides a MM fund or maybe a bond fund, though.

I'm obviously partial to fund investing. I may open up to other investments in the future, but I understand what my money is doing and that's the most important thing.

This post is a December 18, 2011 republication of my March 21, 2004 post at Early Retirement Forum.