Monthly Archives: September 2007

Day 22 of 33 Days And 33 Ways To Save Money And Reduce Debt: The Emergency Fund

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Day 22: The Emergency Fund

A brief history of my Emergency Fund –

Before I decided to get out of debt, I did not have an emergency fund. I lived “paycheck-to-paycheck” and if things got “tight” at the end of the month, I would whip out the old credit card and “solve that month’s money problem”. Of course, all that I was doing was pushing one month’s problem into the next month, and so on and so on.

When I finally decided to get my financial house in order, the first thing I did was establish a mini-emergency fund. I sold things on eBay, I had a yard sale, and I started living on a strict budget. Very quickly, I was able to put $1000 into my savings account. (Click here and here to read about times when I had to dip into my emergency fund.)

After getting out of debt, my next goal was to build up a big-time emergency fund. I wanted enough money in my fund so that if my wife or I lost our job, our family would be taken care of and neither of us would have to rush out and take a job that we didn’t enjoy. After some consideration, I settled on the nice round amount of $20,000. I spent the next several months piling up cash and putting it into savings. I never really considered interest rates. My goal was to a have a readily available cash supply, set aside for a true emergency.

Now that I am maxing out my retirement contributions and education savings account contributions, my emergency fund is just “sitting” in my savings account, earning interest. I don’t really worry about how much interest it makes, because this money is not to be used for investing or spending. Nope. The money in my emergency fund is for – you guessed it – emergencies!

I also have a small amount of cash in non-retirement, long-term savings. I have divided this amount between a standard brokerage account and my online savings account. Each year, after I max-out my retirement and education savings contributions, I will then pile up as much cash as I can in my brokerage account and my savings account. This money will be used for future “major purchases” – cars, furniture, etc. My super-long-term goal is to buy a house – with cash!

Leave a comment about the security of having “an emergency fund”.

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Day 23 of 33 Days And 33 Ways To Save Money And Reduce Debt: Illustrated Debt Snowball

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Made popular by Dave Ramsey, the Debt Snowball allows for rapid debt reduction.

I used the Debt Snowball and managed to pay off $11,500 in 10 months.

Here’s a quick overview of how the Debt Snowball works:

  1. List all debts – either from lowest balance to highest balance OR highest interest rate to lowest interest rate – and make minimum payments to all accounts.
  2. Make an extra payment to the first account on your list.
  3. After paying off the first account, take the combined amount (minimum payment and extra payment) which had been going to the first account, and apply it to the second account.
  4. Repeat until all of your accounts have been paid off in full.

The following charts illustrate the power of the Debt Snowball.

Note: I have listed accounts ‘lowest balance to highest balance’ – but you might choose to list them ‘highest rate to lowest rate’. Pick the method that suits your personality.

Chart 1: The Setup

  • Accounts have been listed by their balances – lowest to highest
  • Monthly Interest is an approximation – annual rate divided by 12
  • Extra payment amount is $300
  • M – Month

Chart 2: After Six Months

  • Account #1 has been paid off
  • (Blue Arrow) Amount not needed for Account #1 is added to Extra Payment
  • (Red Arrow) New Extra Payment amount = Account #1 Minimum + Original Extra Payment

Chart 3: After 10 Months

  • Accounts #1 and #2 have been paid off.
  • (Blue Arrow) Amount not needed for Account #2 is added to Extra Payment
  • (Red Arrow) New Extra Payment Amount = Account #1 Minimum + Account #2 Minimum + Original Extra Payment

Chart 4: After 14 Months

  • Accounts #1, #2, and #3 have been paid off.
  • (Blue Arrow) Amount not needed for Account #3 is added to Extra Payment
  • (Red Arrow) New Extra Payment Amount = Account #1 Minimum + Account #2 Minimum + Account #3 Minimum + Original Extra Payment

Chart 5: Complete Chart

As you can see, by focusing on one account at a time and then ‘snowballing’ your payments, debt reduction occurs rapidly. In effect, instead of four separate ‘debts’, all accounts are treated like one ‘big debt’.

Leave a comment if you’ve used the Debt Snowball method to get out of debt.

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Day 21 of 33 Days And 33 Ways To Save Money And Reduce Debt: Focus

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Day 21: Focus

I believe in ‘goal creation’.  Over the past three years, I’ve created three personal finance goals.  I started this blog because I wanted to get out of debt.  After getting out of debt, I decided to build emergency fund.  Now I’m working to save 60% of my income in retirement and education savings.  So, what’s the ‘secret’?

Focus.

I create a goal and then I break that goal down into manageable micro-goals – and then I spend my days focusing on those micro-goals.

When I wanted to get out of debt, I put every extra dollar towards paying off the account with the lowest remaining balance.  Instead of splitting extra payments between various accounts, I focused on one account, and I bulldogged my way from account to account.

When I was saving for my emergency fund, I didn’t worry about “the goal” – I focused on my “micro-goals”.  If I wanted to save $20,000 in 8 months, that meant I had to save $2500 a month – which is $83 a day -and that means that everyday, every week, every month, I had to be ‘focused’ on finding ways to increase my income and decrease spending.  I had to make plans and execute.

Trust me, I know hundreds of people who have decided to ‘get out of debt’.  I only know a handful of people who have been successful in doing so.  After a month or so, it’s very, very easy to get discouraged and quit.  During my debt reduction process, I had to dip into my emergency fund THREE times – and I missed my goal date by more than FOUR months.  But, I remained focused.  I refused to give up or give in.  I made a decision to get out of debt – and I got out of debt.

It might take you five months to get out of debt, or five years, of twenty-five years.  But, I can absolutely assure you, no matter how long it takes, it is absolutely worth it.

Pep talk over!

If you have a goal you would like to share with the world, consider joining the No Credit Needed Network.

If you have written a post about ‘goal creation’, contact me and I’ll be happy to link to your post.

Leave a comment about the power of ‘goal creation’.

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Food For Thought – Articles From My Blogroll – Paying Debt, New Cars, ADHD, ETFs

Here are my favorite posts from the past week.

From the Money Blog Network:

Mighty Bargain Hunter (with a post after my own heart) suggests that you add a windfall to your debt snowball.  Yes!

AllFinancialMatters has issues with “Americans For Fairness In Lending”.

Blueprint For Financial Prosperity offers up a very unique bargaining technique – play pretend!

Consumerism Commentary suggests that when buying a rental property, it pays to stay close to home.

Five Cent Nickel has information about Vanguard’s Voyager Services.

Free Money Finance has 5 reasons for why ETFs are better than Mutual Funds.  (I’m an ETF-guy, myself.)

Get Rich Slowly deals with that ‘new car itch’.  (My wife and I are thinking about a ‘newer-car’.)

From My Blogroll:

Blogging Away Debt manages to combine Quicken and joke telling – contest time!

Clever Dude is paying off debt at a very rapid pace.  Great job!

Adult ADD has an interesting post about ADHD and money issues.

Generation X Finance asks, “Do You Have A Will?“.

Lazy Man And Money has ideas for a lazy portfolio.

Money Smart Life writes about television, the time we spend in front of it, and what else we could be doing.

Money, Matter, and More Musings has an EXCELLENT personal finance checklist – poll.  (Why didn’t I write this post?  Great job, MMM!)

The Digerati Life scares me to death with a post about inflation. :)

The Sun’s Financial Diary compares 4-Week T-Bills and online savings accounts.

My Two Dollars is having a contest – leave a comment and you could find a Warren Buffett book in your mailbox.

My Money Blog (a daily ‘must-read’ for me) writes about passive income.

From the Carnivals and Festivals:

Money, Matter, and More Musings hosted this week’s Carnival of Personal Finance.

Mr. Credit Card hosted this week’s Carnival of Debt Reduction.

No Credit Needed (that’s me) hosted the Festival of Frugality.

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