Budget


Commitment made to be Debt Free – CHECK

Debt Freedom Plan – CHECK

Family on Board with Plan – CHECK

Workable Budget – CHECK

Bad Habits with Money Changed – CHECK

Preparation for Unexpected Expenses – CHECK

Patience for the time it takes to Pay off the Debt – FAIL

I see the light!  And I want to run towards it, out of this debt tunnel.  But for now, it’s just a waiting game.

The debt that seemed overwhelming in the beginning, has now progressed to an annoyance .  It’s the stain of our past poor financial choices.  The scarlet-letter “D” that sits there as we wait for the paycheck to put another chunk towards paying it down.  We get the paycheck, we pay the bills and then we wait, and wait, for the next paycheck to roll around.  And the cycle continues…

In the meantime we continue to do the right things, we stick to the budget and we forgo impulse buys.   What else is there to do when you’re saddled with debt?

Perhaps I’m being a tad overconfident but we just had a month where: one of our animals required a vet visit, there were three family birthdays (gifts), one christening (gift) and the TV Broke.   We made it through without resorting to credit card use, because we were prepared.

I feel invincible and impatient.  That scarlet “D” is still hanging around as a reminder of the past, but it is no longer representative of how we handle our money.

Our “reasons” for being in debt seem so pitiful now that I hesitate to even write them.  I can see, only in retrospect, they were the root of all our debt:

1)  We really didn’t care.

2)  We took the easy (irresponsible) way out of everything.

It was that simple. All of the excuses that go along with those “reasons” are just that, excuses.  So the “D“,  while annoying is rightfully deserved.

I take being debt free very seriously, but it is hard to keep solemnly caring about it.  We made financial mistakes, we rectified them, we are making slow and steady progress.  Wake me up when we get there.

Our dreams, like travel (paid for with cash), seem attainable.  I look forward to that time, while I begrudgingly wait patiently for that day to arrive.

To those just starting to get out of your money mess, it does get easier, in fact in gets downright BORING.  (But in a totally good way.)

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Would you ever gamble with your personal finances?

Is there room for informed risk with your family finances if you feel the cards are stacked in your favor?

I expect to get completely slammed for this but:

I’m thinking about gambling a little with our financial future…

While in debt do we need/should we have a LARGE emergency fund?

There is a delicate balance between saving money for emergencies and getting out debt.  It’s a race against the unknown.  You try pay off high interest debt as quickly as possible, all the while saving money for the inevitable little emergencies that are certain to pop up along the way.  Therein lies the catch-22.  The more debt you have, the more emergency savings you’ll need to keep up with your debt payments if a BIG emergency such a a job loss loss occurs.

Next month, barring any major/minor catastrophes, we will have $1500 in the emergency fund.  At that point, I’m not sure whether I want to keep adding to the fund our use the monthly amount I would put towards the emergency Fund and instead put it towards paying off high interest debt.

Is a $1500 emergency fund enough?

Why in our case I think may be:

My husband’s job will end at some point (the company has been ‘in liquidation’ for over 9 years) but senior management has assured him his position secure for at least another year, probably 2, maybe even 3.   They need him to keep working at his job TO MAKE his job obsolete – how’s that for another catch-22? When the company does finally close, he will receive an extremely generous severance package (including paid medical coverage).   Companies with similar dire financial  positions have implied they would love to have him when his company finally does go kaput.   (It seems he may never work for an actual viable company but someone has to clean up the mess of the imploded businesses these days.)

The experts recommend 3-6 months living expenses.  But saving this amount would prolong the debt and greatly increase the interest amounts we pay.  It would split our focus, and I feel the severance package and the $1500 in the bank is enough for the one year it will take to pay off the credit cards.

Is this plan too risky?

Possible Outcomes of my Gamble – Would you put your money on RED or BLACK?

GAMBLE ON RED:   $1500 Emergency Fund – earmarked emergency money now goes towards Debt

Worst Possible Outcome of betting on RED:

Over the course of the next year every appliance breaks down, someone gets so sick where we must meet the $500 deductible, a tree falls on the house.  We have used up the $1500 emergency fund.  If another emergency occurs we must resort to using a credit cards  because the emergency expenses have outweighed the fund balance.  This possibility exists , although I believe small, and we are right back where we started.

Probable Outcome of Betting on RED:

Next month the emergency fund has $1500.   We roll the money we are currently adding to the emergency fund amount  towards the high interest credit card debt.  Throughout the year, the house needs $500 in repairs.  An appliance kicks the bucket – $500.  One or two ER visits @ $75 each.  All covered by “$1500 emergency fund.”   In March 2011, the credit cards are paid off. At this point we have freed up a tremendous amount of discretionary income, and are no longer beholden to outrageous interest rates and can reassess “the plan”.

GAMBLE ON BLACK – keep adding towards emergency fund/diverting money from debt until at least 3 months income is saved.

This really isn’t a gamble.   It’s the safest possible choice.  I would assume most people would recommend this plan.  But it is also the most costly – both in money and time to be debt free.  (It would take us close to 10 months to save up 3 months income.)

I hate casinos, the few times I’ve been in one, I put a $20 bill in the nickel slots.  Cash it out and physically place a single nickel in an old-school one-armed bandit.  I milk that single $20 for as long as possible.    So it’s not like I’m some adrenalin freak who can’t function without taking risks.  But I’m leaning toward betting on RED. The risk feels calculated.   The odds seem to be in our favor…

Would you take this gamble?

Suburban Dollar was kind enough to host “The Carnival of Money Stories” this week.  Check out his “Final Four Edition” with some great reads, including one from me.

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While in college I took mathematics courses like  – “MATH 101 – Math for Life” and “STAT 200 – Statistics for Liberal Arts Majors”. My husband on the other hand, graduated from a top 5 business school with BS in Actuarial Science. I never even had heard of that major before we met.  Even today when people ask me what my husband does I say, “Don’t ask me. I’m just a girl [tee-hee tee-hee]!”

Of course I’m trying to be a funny guy, but much like that ill-fated barbie doll, math really isn’t my strong suit.  I always assumed because I had trouble with Chi-Square tests I was doomed when it came to investing, finances and budgeting.

But Personal Finance really isn’t about math. Because even with a math-nerd husband we still found ourselves not doing the right things when it came to money.

Personal Finance, at least in its beginner stages, is about commitment, sacrifice and self-control.

When we decided we didn’t want to live paycheck to paycheck any longer and wanted to get control (FULL control) of our finances.  I researched all kinds of Personal Finance advice, read the blogs, learned all the lingo. Worked out the budget, planned for our irregular expenses. Basically, I prepared for almost a full year for the commitment we were going to make to be debt free.

It had been working out great.  We’ve been sticking to “THE PLAN”.  We no longer use credit cards.  I actually cook almost all our meals.  We have a small but growing emergency fund that we continually add to.   We gave up the Y membership, soda, name-brand coffee…

I have been waiting on the inevitable though.

And so we come to our first true test in our quest to be debt free:

The family TV broke this week.  It’s dead and it’s un-fixable.

I applaud and am in awe of those families with kids who limit TV watching to 30 minutes a day or the like.  We are not that family.   While I don’t worry for a minute that the kids watch “too much TV”  – they don’t.   I do use the TV as a crutch when I need to get something important done and having an almost 2, 3 and 4 year old under my feet is too much.  After the kids go to bed, my husband and I are *gasp* also TV junkies.  I admit it.  We don’t spend our evenings reading each other Shakespeare, we often sit slack-jawed, immersed in our favorite mindless entertainment.

In much the same way the TV was is a “crutch” so were the credit cards.   In the past we would have run out and bought a new TV AND put it on our credit card.   We had a very serious conversation (I’m not joking) discussing what to do with this dilemma.   Things like, “Will we survive without  TV?” and “After investing 5 frustrating years, will we never find out what’s really going on on LOST?!”, were said.

In the end we decided to do the grown-up responsible thing, not raid the emergency fund, and save up to buy a new TV with CASH.

In the meantime, my husband has agreed to don a smoking jacket and get a pipe.  Me and the little children will gather at his feet nightly by the fireplace, our chins resting on his knee, looking up at him with our angelic faces while he reads Dickens (my favorite!) to us…

(Full Disclosure – We do have a dinky old 19″ TV we can drag out if the above fantasy doesn’t work out.)

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IRS – I take back all the nice things I recently said about you…YOU STINK!

Or it’s probably congress who stinks, I’m not sure who, but basically whoever is responsible for IRS Publication 15 (Circular E – Supplemental Wages) THEY stink.  This rule is going to cost us over $300 of our own hard-earned money.

The rule is regarding the tax treatment of bonus checks.  My husband receives a once a year bonus check in March.  According to the above rule,  this check is taxed at a mandatory 25%.

As I’ve stated before our effective tax rate is a ridiculous 1.26%.  I know, I don’t have a lot of room to complain with a tax rate like that, but we have deductible mortgage interest and property taxes, deductible student loan interest, crazy “city wage tax” and state taxes, three kids and are squarely middle class so it’s not like we are doing any creative accounting. ( I don’t even bother with our meager charity deductions because I feel I little guilty about this.)

I changed the w4 withholdings to 15 exemptions this year to no avail!  The paychecks don’t have a penny of Federal Taxes withheld and we will still get close to $3000 refunded.  The IRS will hold 23.74% of that bonus check in their coffers from March 2010 until we get it back in the form of a tax refund in MARCH of 2011.

In the meantime we will pay interest on credit cards with rates as high as 24.5%.  In the past I didn’t care, I loved that BIG REFUND.  But now that we are serious about no debt, and have a plan in place to get rid of it all, I’m a little miffed.  Each time I make a “Debt snowball” payment (or “debt avalanche” payment to be more precise)  I choke a little when I see how much of it goes to the interest and not the principal.   That chuck of our money we have to wait a year for would really speed up the process and save us money in interest or go to beefing up the emergency fund which would earn interest for us.

Do you think I can invoice the government for all the accumulated interest we will pay over this year?  I mean I don’t expect them to pay interest on tax refunds when most people who CHOOSE to CAN avoid them –  but what if  the IRS won’t ALLOW you avoid a refund?

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I recently posted about my ingenious “mini-escrows” (in my case bi-monthly budgeting for yearly expenses) and how they are the number one reason we haven’t (and hopefully won’t have to) resort back to credit card use.  If you are REALLY serious about getting out of debt, next to having $500 in the bank, I believe this method is THE most important way to get out of the credit-card-crutch cycle.

I’m not the only one.  I just found the other term used for this method is a “SINKING FUND”.  Everybody’s doing it!     These are some great posts about how other Personal Finance bloggers are using the same strategy:

Deliver Away DebtHow to Create Sinking Funds

Fiscal Geek Sinking Funds:  taking Budgeting to the Next Level

Frugal Dad: Sinking Fund Eases Strain of Annual Expenses

Call it a “Personal Escrow Account”, “mini-Escrows” or “Sinking Fund”, by any name you are prepared for the bills you know are coming!

Today our credit card debt alone totals over $11,000, but for the first time in a long time I fall asleep at night with hope rather than despair.   I’ve tried for over 2 years to get out debt but truth is we never made a dent in it.  It seems so obvious to me now why I’ve failed at getting our family debt.

One of the big reasons – I was unprepared and underfunded for the yearly bill/irregular bills when they came.   The fact that I never properly budgeted for the sewer bill or the car registration/inspection meant using credit cards or spending any “emergency savings” we had built up.   Basically back to square one.

Then I had an awesome idea that would revolutionize the personal finance world!    I would take all the irregular yearly bills, add them up, divide by 24 (my husband is paid bi-monthly) and make that part of my monthly budget.  I would call it our “Personal Escrow Account.”  GENIUS!

Of course this idea is old news.   In fact Charlotte, the subject of  an article at “Get Rich Slowly”, even calls her method a “Personal Escrow Account.”

While I won’t win any points for originality, this method has saved my budget and my sanity.  Breaking down big irregular bills into smaller semi-monthly payments not only makes me feel prepared but provides breathing room in the budget.

EXPENSES         YEARLY BILL         NEED TO SAVE per PAYCHECK

Sewer bill                        $204                                       $8.50

PreSchool                        $2430                                    $101.25

Cars(approx)                  $400                                      $16.70

Propane                            $1400                                    $58.35

These “mini-escrows”(I’m patenting that) have helped alleviate the pressure that would come any time a non-recurring bill would come due.  I round up the numbers to the nearest $5 and put them in designated ING accounts.  To build up the proper amounts I needed to borrow from the “Emergency Fund”.   I know, I know, YOU NEVER TOUCH the emergency fund but I would have had to either used the emergency fund to pay these bills or a credit card so what’s the difference?

I also add bi-monthly in sub ING accounts to the “Emergency Fund”, a “Christmas Fund” and a “Whatever Fund”.

When you NEED credit cards to pay bills you know you are in trouble.  That is where we were.  Hopefully, no more!  Over $11,000 in credit card debt is no joke, and while the amount we owe is still there I feel the crutch they provided may be gone.

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It’s snowing AGAIN right now and I have major winter fatigue!  Over 75 inches of snow this winter ALREADY in the Philly suburbs and it is only mid-February.  Visions of daffodils are dancing in my head.  I can’t wait to leave this winter behind and never see a another snowflake.  But when money is tight you really need to plan ahead.  Way ahead.

When living paycheck to paycheck any deviation in your bills can send you scrambling back to using credit cards.  For us, Christmas is one of those cases.  We don’t go crazy at Christmas buying gifts for our three kids and family members, but the cost is definitely greater than our monthly discretionary income at this point.   It would be the perfect set-up for a another failed attempt to get out of debt.

To avoid the squeeze I know is coming this December I decided to start a “Christmas Fund”.   My husband gets paid bi-monthly and we are putting $20 a paycheck away now –  so come Christmas we will not have to resort to credit cards to pay for it.

I’m putting this money in a sub-account at ING Direct .  I have enough faith in my budget for the first time ever that I know I will not need to raid this account.  But if you don’t trust yourself yet, many Credit Unions offer “Holiday Accounts” or “Christmas Club” accounts where they offer “bonus rates” with no penalties on withdrawals IF you don’t touch the money until November.   Even Kmart and Sears got in on the act last year with 3% BONUS rates on gift cards.

I’m hoping this plan will mean a less stressful holiday season.  The alternative is to pretend Christmas isn’t coming this year and AGAIN be faced credit card bills in January.

NOT "brought to you by Chase" this year!

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