Tuesday, August 29, 2006

Get More Out Of Your Paycheck - Escape Your Expenses

Over the past several weeks I have been separating out my expenses into two categories: escapable v.s. inescapable. The concept that I had in my brain in the beginning was rather abstract. But after reading the book "Rich Dad, Poor Dad", the concept became much clearer.

My thinking is simple: in life there are expenses. There is no way around it. You have to eat. You need to have someplace to live. These are two examples of expenses that you will be incurring no matter what your lifestyle is. And you will be paying for some things until you die. Taxes are another expense like this. It never occurred to me how often people overlook this one. But, like the adage advises us, there's no escaping death or taxes.

So this train of thought brings me to the question. If I have to eat, live somewhere, and pay taxes, What are the other kinds of expenses? The escapable ones! So, after a bit of thought, I was able to make a list of escapable expenses:

Credit Card
Student Loans
Car Loan

I think of these as escapable expenses because my goal is to eventually escape them. That is, pay off the obligation and not incur it again. How do I do that? There is a strategy for each one:

Credit Card - Pay it off and use cash for purchases
Student Loans - Pay it off
Car Loan - Pay it off and make good deals to have much smaller loans (and pay them off faster) each time until I build enough "roll-forward" equity and savings so as to afford a car outright.
Mortgage - Pay off additional principal/Get PMI removed to pay off mortgage

I've listed them in order of how we will tackle these. And obviously, some of them are easier than others. But my goal is to free up cashflow. If we succeed in paying off these debts - even with no additional income or raises - about 75% of the household's net monthly income is freed up. Just imagine what we could do with that money.

The key of course is to ensure that no additional consumer debt is taken.

But even if we do not accelerate any plans to pay off our debt, we will be completed with our mortgage by the time I am 55 just by sticking with our standard 30-year mortgage. That is a huge achievement; and it's likely to get paid off sooner.

1 comment:

Jane Dough said...

Escapable finances is an interesting way of thinking about it. I tend to think of them as fixed and flexible (my flexible would equal your escapable). Either way it is good to have a plan. Mine is to minimize my fixed as much as possible and eliminate as many flexible as possible.

Seems you are all set with the plan - now on to the execution!