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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When you finally make a plan to get out of debt it is easy to succumb to irrational exuberance and put yourself right back where you started. 

This is my third attempt in two years to pay off our debt and this time I think I have it right.

Failure #1 –  A Sloppy Budget:

I never fully took control of expenses.  I basically just added up the bills and thought “OK – I’m done – There is my budget”.  But I underestimated costs of necessary reoccurring expenses.  For example – I’d budget $200 grocery shopping and spend $200 on groceries.  That’s all well and good but we’d run out of milk, bread or whatever and my budget never accounted for those in-between trips.   I also did not get rid of obvious money-suckers (IE premium cable).  Nor did I take the time to call my creditors/insurance companies/cable co. and request interest rate/premium reductions.

FIX – Why I hope the budget will not fail now:

I took a lot of time and many weeks carefully combing through the bank statements to find the true amount we really spend so we have an accurate picture for the budget.   I feel confident I’m not just blindly coming up with budget categories and sticking some number, any number in there. We cut a lot of unnecessary expenses.  We called every place we get a bill from and tried to get the payments or interest rates lowered.  And in MOST cases it worked, lower expenses = more money.

Failure #2 – Tried to do Too much too fast.

When the credit card bills rolled in I’d throw an $100-$200 at the payment.  I was so excited to be making a dent in amount we owe!  But days before payday when we ran out money (because of my sloppy budget) we would have to put diapers or a doctor visit or birthday gift (or all of the above) on the credit card.  We would be back to square one and sometimes in a even worse situation.

FIX  – Slow and Steady.

I am resigned to fact that it did not take a couple weeks to get in debt and it will be a marathon not a sprint to get out.  With careful and realistic planning being debt-free will happen.  Just not overnight.  If there is extra left over in the checking when payday comes THEN we can put that towards the cards.

Failure #3  – Not Expecting the Unexpected.

With no buffer in the budget or small emergency fund, unplanned expenses would HAVE to be put on a credit card.  These small setbacks were so deflating that this when I would often give up on the get-out-of-debt plan.

FIX – “Broken Window Fund”

Now that the budget is realistic and I am committed (but not irrationally over-eager to pay off the credit cards) we set up a small fund for all the little setbacks that happen in real life.

Plan Weaknesses – The “Emergency Fund”

It’s going to take a long time for us to save up the recommended 3-6 month living expenses most people say it smart.   I just have to cross my fingers here and hope for the best.   I put away what we can put away.  It’s the best we can do right now.  I think saving 1 month is worthy goal for now and if the “new plan” pans out I can revisit this later.

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