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Archive for March, 2009

Debt Reduction And The Emergency Fund

March 21st, 2009

NCN

From a recent email from “Rick” -

If you had to begin your debt reduction journey today, would you immediately begin to attack your debts or would you first take the time to build up my cash reserves?

This is a great question, and one I’ve been asked several times. First, for the sake of this article, I’ll refer to my cash reserves as my emergency fund. Second, I’ll simply share my thoughts on the subject, and leave the financial advice to a qualified professional.

If I Were In Debt Today…

I would create and begin to use a zero-based budget to manage our household finances.
I would list each of my creditors and develop a debt reduction strategy.
Before making any extra payments to my creditors, I would fund a small emergency fund, equal to $500 per person in our home. For our family, that would be $2500. (Four years ago, our youngest daughter had yet to be born, so our figure then was $2000.)

Just two weeks after we began our debt reduction journey, our son was hospitalized. It was during this time that my wife and I learned the value of the emergency fund. While insurance covered the cost of the hospitalization, there were a few associated expenses for which we were directly responsible. These were, obviously, unexpected expenses, so we used money from our emergency fund to pay for them. If we had not funded this small emergency fund, we would have been forced to use our credit cards, thus digging ourselves deeper into debt.

Please note, while we did stop making extra payments to our creditors, we continued to make minimum payments. It is crucial to make all minimum payments, in full, and on time, throughout the debt reduction process. If you are late with payments or you pay less than your minimums, you will be paying late fees and added interest. We hate fees.

There are several ways to calculate how much money one should have in an emergency fund, especially the beginning, smaller emergency fund. I arrived at the $500 per person amount by adding our automobile insurance per accident deductible to our family-wide health insurance deductible. I figured, optimistically or pessimistically, depending on your perspective, that we would have one health-related crisis and one automobile-related crisis during our debt reduction journey. In the end, we had two health-related inconveniences (neither really reached the level of a crisis) and nothing really went wrong with out automobiles. For our family, I calculated that a single crisis, whether it be health-related or automobile-related, would cost roughly $2000, so that’s the amount with which I went.

Throughout our debt reduction process, our small emergency fund balance fluctuated between $1000 and $2000. We had to tap into it on three different occasions, and while this slowed our debt reduction progress, just a bit, we also managed to avoid using our credit cards.

If I Had Just Paid Off My Debt Today…

I would celebrate!
I would continue to live on a budget.
I would redirect the money which had been going towards debt reduction and use it to build my permanent emergency fund.

As soon as I made my last debt reduction payment, I began to build my permanent emergency fund. To the $2000 already in the small emergency fund, I quickly added an additional $18,000. For my family, $20,000 represents roughly six months’ worth of expenses. This money is untouchable, and is to be used only in the case of extreme, actual, real, I-cannot-believe-this-is-happening, emergencies.

If you just spend some time in the archives, you will see that I refer to my emergency fund by another name: non-retirement savings. I do this, simply to differentiate this money from any money that is held inside a retirement account. Not to split hairs, but there is a slight difference between non-retirement savings and the emergency fund, in that the former can be used for any expense (budgeted or non-budgeted) and the latter is to be used specifically for emergencies.

Again, the $20,000 amount is specific to my family and our current situation. For some families, this number might be $10,000. For others, it might be $50,000. In fact, I actually have a poll open, asking readers the question – How Much Is 6 Months Worth Of Expenses? If you haven’t done so, click over and vote. As of today, more than 1100 votes have been cast, and the most popular amount is somewhere between $12,000 and $20,000.

To summarize -

Before and during debt reduction, I would maintain a small emergency fund, based on the size of my family.

After debt reduction, I would increase my emergency fund to six (or more) months’ worth of expenses, again tailored to my family size.

The debt that I am referring to in this article is non-mortgage debt.

Finally, if I had children with special needs or a family member with certain fixed medical expenses, I would consider a larger emergency fund, both during and after debt reduction.

These are my thoughts. What would you say to “Rick” about debt reduction and the emergency fund?

Posted in Debt Reduction, Emergency Fund

13 Comments »

The Kids’ Fun Fund – Our Alternative To Allowance

March 20th, 2009

NCN

Each summer, my wife an I take our kids to the beach for vacation. One of our kids’ favorite places to go, while on vacation, is the “fun park” where they can ride go-carts and play video games. I think they enjoy the “fun park” more than they do the pool!

A few months ago, in an effort to teach our kids a bit about money and responsibility, I created The Kids’ Fun Fund. Throughout the year, the kids are earning extra money, and they are planning to spend that money when we go on vacation. Here’s how The Kids’ Fund Fund works -

Instead of giving our kids an allowance, we reward our kids for doing chores around the house. Our daughter is 9, so she can help with folding clothes, taking care of the baby, cleaning her room, and straightening up the den. Our son, now 5, can make his bed, put away folded clothes, straighten up the bathroom, and pick up his toys.

Taking into consideration their differing ages, I created a list of 10 age appropriate chores for each of our kids. I then posted the list of those chores, along with how much Mommy and Daddy will pay upon completion of each of those chores, on a bulletin board near our refrigerator. (By the way, the bulletin board is a life-saver. It keeps papers off of the front of the refrigerator, and with a few pushpins, makes organization a snap.)

Each morning our kids go through their list of chores, and as they do them, they receive their “salaries” – usually a dime or a quarter per chore, depending on the chore’s complexity. My wife and I also have the flexibility to add bonus chores, something we do pretty often, especially if the house needs a quick clean up.

One cool thing about The Kids’ Fun Fund – all of the money goes into a single jar. It’s actually a square plastic container with a label that says “The Kids’ Fun Fun”. I made it from a jar of fancy peanuts. The kids have been earning money for several months, and neither one of them have commented on the “fairness” of putting all of the money into a single jar. In fact, from time to time, they’ll take all of the money out of the jar, count it, and determine what their “half” of the money is.

We have tried other systems for teaching them about money, but this one really seems to work. Clearly, our oldest is doing more work and could make much more money, but she seems very content to share whatever we give her with our son. And he loves nothing more than to dump the money onto the floor and organize the coins by type.

I’m not sure if this system will always work, but for right now, it’s a good way to teach them about work, how to share, the power of working together, and the joy of achieving a common goal. It’s going to be very interesting this summer at the beach. I really can’t wait to see if they spend all of their money at the “fun park”, or if they choose to save a bit for other adventures. Whatever they do, I’m sure there will be plenty of teachable moments along the way.

A couple of final thoughts – Our kids give a portion of what they earn to our local church. We believe it is important to teach them to be givers. Also, they save a portion, because we also believe it is important to save. Also, there are some chores that our kids are expected to do, for which they will not receive any financial reward. And, there are times when we just give them money, for no other reason than that we want to. We want them to learn that family members do for family members, not for gain, but out of love. Finally, I have found that the amount we give the kids is almost irrelevant to them. For now, they just really dig watching those shiny coins pile up.

Posted in Family, Tips

3 Comments »

Some Debt Reduction Celebrations

March 19th, 2009

NCN

It’s time to celebrate some debt reduction. Let’s go!

No Credit Needed Network member My Money Memoirs recently eliminated all credit card debt. Congratulations!

Another NCN Network member, Time4planB, reached a personal milestone and is at lowest debt level this decade. Great job!

My Money Minute recently paid off all consumer debt. My Money Minute shared this good news with me via Twitter. If you have a Twitter account, follow me and we can hang out!

It’s always inspiring to find folks who are reducing debt and changing their lives. To all of those mentioned above, and the thousands who are fighting the good fight, You Rock!

If you have had some recent debt reduction success, feel free to share it with us. Leave a comment and let us know about your progress.

Posted in Debt Reduction, Motivation, Noted

3 Comments »

How To Break The Credit Card Habit

March 19th, 2009

NCN

My wife and I have been living without credit cards for four years. For those who are ready to get out of debt, one of the first steps is to break the credit card habit. You can’t fill the hole in while at the same time digging it deeper! Here’s how we made the break -

We Balanced Our Checkbook -

This sets you up for success. If you are going to live without credit cards, you need to know, to the penny, just how much money you have. Grab your most recent bank statement, or go online and review your recent transactions, and balance your checkbook.

We Started To Live On A Budget -

You know how it works. You go to the store, you see something you want, you swipe your credit card, and ten seconds later, you have new debt. It’s just that simple. What would happen, if between want and swipe, you had to think about your budget? Trust me, that seven second pause, between wanting an item and using your credit card can save you so much money. Instead of want and swipe, there’s now want, plan, save, and then swipe – with a debit card!

We Simply Put Our Credit Cards In The Back Of Our Wallets -

We didn’t cut up our credit cards or freeze them in ice water. Instead, we just decided not to use them. Frankly, we don’t miss them, and once we made up our minds, done was done.

We Created A Simple System For Life Without Credit Cards -

I’ve written about our system before, so I will not go into the details here. Suffice to say, we have a system for managing our day-to-day finances, paying our bills, reserving a hotel, or renting a car. Click the link to read more.

We Learned To Manage Our Cash -

I’ve heard it a thousand times – “If I have cash in my pocket, I’ll just spend it.” That might be true, if you still have your credit card to fall back on. On the other hand, if you knew, and I mean knew, that the cash in your pocket was all that you had, I’ll bet that you could learn to manage it. We use the popular envelope system to manage our cash, but you can use any system that works for you. The point is, we are were trying to break a habit, a habit that had haunted our marriage for almost a decade. For us, going cold turkey and learning to manage our cash really worked.

I Stopped Thinking “I Deserve This”

I’ll leave my wife out of this one, because I’m the one who struggled with this. In the past, I could justify almost any purchase by saying to myself – “I deserve this…” It didn’t how much it cost, or how little we had, I could somehow rationalize the use of my credit card. In fact, I can distinctly remember thinking – “What’s a little interest? I work hard, I want it, so I’m going to get it…” When I think back to some of the silly things I purchased, and how I justified those purchases, I feel so ashamed. What was I thinking? Better yet, was I thinking? Now, instead of thinking – “I deserve this…” – I try to think – “Can I truly afford this…”

Breaking a habit can be very difficult, especially a socially accepted habit. Let’s face it, most people use credit cards. And, after you get out of debt, you might want to start using yours again. There’s nothing wrong, fundamentally, with credit card use. The problem is, use can turn into abuse very quickly. I choose to live without a credit card, even though I know, that at this point, I could use one responsibly. For me, I just don’t want to deal with the hassle of credit card payments. So, I’ll just continue to roll with my debit card and cash.

If you are struggling with a credit card habit, there is hope. Have a good long talk with yourself, embrace some of the changes mentioned above, and break the cycle!

Posted in Anti-Credit Articles, Credit

4 Comments »

Follow Through

March 18th, 2009

NCN

I really enjoy playing golf. I try to play once or twice a month, and if I had more time and money, I would play more. I am a pretty decent striker of the ball, but I do have one swing fault with which I constantly struggle. I find it hard to follow through and really finish my swing. The club, instead of finishing high and above my left shoulder will get stuck, and I’ll either block shots to the right or pull-hook them to the left. I’m always working to correct this swing fault.

Not only is it important to follow through when swinging a golf club, it’s also important to follow through when managing our personal finances. How many times have I set out, with good intentions, only to fail to actually implement those intentions? I’d rather have a B- plan coupled with A+ effort than an A+ plan coupled with D- effort.

I wrote several articles last week about setting goals. Today, I want us to think about follow through – actually taking those goals and making them our reality. As a rule, I’m a details person. I like to be thorough when tackling a challenge. There’s just one problem that I – and people like me – face. We get stuck. We work really, really hard to create our plans and organize our systems, but then we fail to follow through. Sure, it’s easy to pay off debt – on paper. It’s easy to save up for retirement – on paper. And it’s easy to plan for college – on paper. The real challenge, the real hard part, is doing the actual work.

For those of you who follow with follow through, here are some tips and tricks that I use to keep myself on track.

Simplify – I know it’s hard, but try to whittle down those forty seven goals and plans into one or two manageable tasks. Remember, perfection is the enemy of progress.

Rapid Organization – Take twenty minutes, right now, and get rid of the clutter on your desk, that pile of papers near the microwave, or that list of emails in your inbox. For those of us who struggle to complete tasks, it’s good to take fifteen or twenty minutes and just bull-rush through as many tasks as is possible.

Accountability – Find someone who can hold you accountable. I have several friends, and a world of blog readers, who hold me accountable. You need someone, at least one person, who can ask how your progress is going.

Rewards – Go ahead and reward yourself once you have accomplished a task. Promise yourself a nap, or a movie, or a round of golf, but only after you have completed the tasks that need to be completed.

List – This one really helps me. When I have several personal finance related matters to take care of, say filing taxes, balancing the checkbook, and filing documents, I’ll list them, putting them in order of priority. Just having this list, on hand, really helps me clear my mind a focus. For instance, a few years ago, I knew that my wife and I needed to write our wills. I kept putting this off, until one day I created a list of all the things that I needed to do. Create a will was at the top of my list. So, that day, I picked up the phone, called my lawyer, and scheduled an appointment. A few weeks later, our wills were complete, and I was able to mark that off of my list. It felt good to get something done.

Inspiration – For me, I get inspired by the success of others. That’s why I read several hundred blogs a month. If you are feeling down or depressed, because you’ve failed to follow through, go back to the original source of inspiration, and get fired up again! I love the do-over. Instead of wallowing in should-have, get inspired and move forward.

Posted in Goals

2 Comments »