I’ve Paid For This Twice Already…

Archive for the ‘emergency fund’ Category

On Monday I wrote my treatise on why I find value in having an emergency fund even while still in debt. Mathematically, there is a sacrifice in interest earned on savings vs interest saved by using that to pay down debt, but I feel the benefits are more than financial. The responses to the post were mixed - some agreed, some lamented the idea of following irrational financial decisions with even more irrational decisions, and some brought up another benefit to the emergency fund that I hadn’t touched on in my post - teaching a spender the art of saving.

I started my life a saver, but learned to be a spender, and building an emergency fund really did help me to rediscover how to save. Even if the amount is not much, the act of putting money into a savings account just to save it, and not for a predetermined purpose, was a very new act for me. Even when I saved money, I always had something in mind for it while I was saving it. But the emergency fund isn’t pre-spent before it is saved - it is just-in-case money, and the act of saving it teaches me to save for the sake of saving.

Someone that’s in debt and struggling to get out may never have actually committed to saving before. Learning to save, and making a commitment to saving, is teaching a valuable skill that is best learned hands on. Paying down debt is obviously important, and I fully believe in doing everything you can to pay down your debt and escape the bondage that debt brings. But learning how to move forward and handle financial crises, big and small, without turning back to the allure of debt is important too. Having that feeling of being able to manage things without debt can, dare I say, make saving feel fun.

On a personal note, I obviously have an attachment and fondness for the cash emergency fund for a number of reasons, not the least of which is the fact that I’ve had to use mine several times. And yesterday afternoon, I received in the mail the explanation of benefits for my CT scan, and learned that as I expected, I will be paying about $1100 out of pocket for the procedure. That includes my $1000 deductible (we pay 30% of everything over $1000 up to $3000 a year), so I know my colonoscopy in June will be less expensive - or, at least, we’ll pay a much lower percentage of the charges out of pocket at least. We’ve already shifted to a half debt repayment/half savings plan for the forseeable future, and so have enough saved to cover the procedure. If the hospital takes as long to bill me as they did after my daughter was born, I won’t see an actual bill now that I have the explanation of benefits for a few weeks yet, and we have about $300 left in our healthcare Flexible Spending Account that we’ll also be pulling out to apply to this bill.

So things will be fine, and we will carry on. Without any emergency savings, my spouse’s student loan would be $1400 less right now, but we’d also be charging $1100 on a credit card. Debt begets debt.

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There are a number of different viewpoints on what an emergency fund is and what constitutes an emergency fund. While a cash emergency fund may be seen by many as the ideal, there are also arguments for emergency funds that consist of various lines of credit - from home equity to overdrafts to credit cards, and others I haven’t listed here.

An argument I hear quite often (and that makes sound mathematical sense) is that if you are in debt, having a cash emergency fund is costing you money, because typically you are earning less interest in your emergency fund than you are paying out to your debt. This is certainly mathematically true for me - my lowest interest debt is currently at 4% (with another at 7% and the last at 9%) while my ING Direct savings account earns somewhere in the neighborhood of 3% interest. Maybe a little higher or lower, I haven’t checked lately.

But from my perspective, this is again a place where personal finance is about both the personal and the finance. Adding additional debt, for me, would be very psychologically taxing. I personally don’t need the reward boost that the Ramsey plan gives from paying off debt in the order of small balances to large, but I do need that boost of watching my overall number go down, as well as the specific types of debt go down as well. This has come into focus a number of times for me over our debt reduction journey - most recenly with two large unplanned expenses. The first, a major car repair, caught me short and I had to finance $800 of the $3600 bill. Although I did not pay any interest on the financing and I paid it off within a month, it literally drove me mad increasing our overall debt, even for that short amount of time. I can’t imagine if we’d had to finance all $3600. I might still be upset. That experience caused me to make a few changes in how we accumulate our debt payoff money as well as our emergency fund, building in a lag time to help temporarily increase our emergency fund every month while still focusing on our debt reduction. So when the latest $3700 expense, the new furnace, occurred, we were better able to handle it without incurring more debt. And I can tell you, that gave me a lot of peace of mind.

So why have a cash emergency fund while you’re in debt? It depends on your personal in the realm of personal finance. Be honest with yourself - what would be the psychological ramifications for you of having to increase your debtload if (when) an emergency happened? If your answer is that it would completely throw you off track, a cash emergency fund may be the right compromise for you. If it wouldn’t cause you to miss a beat in your debt reduction focus, than a credit-based emergency fund may work in your favor. Whatever you decide, being true to who you are and not what works for someone else is the key to navigating this tricky road of debt reduction.

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The technicians are here as I type installing our new furnace.  They cleaned all my ducts this morning (that was a fun project for them, I’m sure) and now the furnace is being installed.  I just finished meeting with the president of the company, who is the person who came originally to the house to give me the estimate.  He sat down with me to go over everything, and he had a preprinted form-letter type checklist of things to touch base with me about, including the rebate our gas company is currently offering for this furnace, how to operate our new thermostat, and other issues like that.  Then I took out my checkbook to pay him, and as I wrote a check for $3700, he went to his preprinted generic checklist and the line item that said “Financing Paperwork Signed” he marked “N/A”.

This is a major moment in my life.

Honestly, it didn’t really sink in until that moment.  This is a major purchase we are making, that we hadn’t really quite planned to make so soon, and yet, we managed to swing it, without even touching our emergency fund.  We don’t need financing.  We just paid for it.  Of course, the timing of the furnace replacement was very fortuitous, with the economic stimulus rebate arriving, but even without that, we would have managed to pay for it (but the emergency fund would not have been untouched).

Times like this I realize even though we have a long way to go, we have really made a huge amount of progress in improving our financial present and future.  And we stimulated the local economy to boot. 

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I’ve spent a good portion of my adult life without anything I would call an emergency fund. Although I had saved some money in a retirement fund, I didn’t have anything to speak of in a savings account that I could easily access, and honestly, even though I thought I “should” I didn’t really think through why I should. Therefore, it wasn’t really a priority for me, and therefore, I never got around to it. And, if I *really* needed some money, I could just use a credit card, right? I wasn’t anywhere close to my limit of available credit, after all, even at the height of my indebtedness.

Well, of course, I changed that way of thinking, and stopped considering my available credit as money I had available to spend just in case. And once I started seriously budgeting, for the first time, I started to realize how often things come up that could be considered, to the unprepared, an emergency, and how often one might tap into credit if they don’t have anything saved to deal with life’s ups and downs. Besides the major expenses this past year of the car engine and the furnace, we’ve had the car’s ignition break, a problem with the alignment that caused the tires to wear unevenly and need replacing, our water meter froze and cracked, we had the spring in the garage door break, my parked unoccupied car got ran into in a parking lot… and those are just the things that spring directly to mind. Happily though, we’ve only, so far, had to raid the emergency fund once, and it has been replaced. But without an emergency fund, these were things I put on my credit cards. Thinking of it that way, it isn’t hard for me to figure out how we managed to slip into so much debt without even really noticing.

Life has a way of throwing you curveballs when you least expect them. As I hear all fall when watching my favorite sport - the best offense is a good defense. Hopefully we’re learning how to have a good defense. Only time will tell, but we’re at least on the right track. And we’re prepared for the furnace replacement on Thursday. Without the panic that accompanied the last time I spent more than $3000 on a single item, even. Progress not perfection, after all.

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I just wrote about my budget busters, just in time for something completely different to waltz right in and bust my budget wide open. It is related to one of the things I mentioned, the lack of experience budgeting - but it isn’t something I was thinking about when I wrote that post.

Argh! Well, now that that is out of my system, on to the explanation.

Wednesday night we had the blower in our furnace running to circulate some air throughout the house. When my spouse turned it off (at the thermostat) before bed, it didn’t turn off. Not being the technically savvy type, we hypothesized it was the thermostat going bad, and went to bed. Yesterday morning, I called our service company and they came out to check things out.

The technician came, and while he was troubleshooting the furnace, the fan turned itself off. Nice timing. The good news is that the technician says the thermostat is fine. The bad news is, he thinks the board in our furnace is going bad. What he said is that he thinks the relay that turns the fan on and off got stuck. The technician said he thought it would be okay until the fall, because it was the heat relay and not the cold relay. But the fan mysteriously came on again last night, so it probably isn’t okay. The only way to completely fix it is to replace the board, or replace the furnace.

The furnace is 22 years old. It has already outlasted its typical lifespan by 2 years and making a big investment of a new board in it would not be a smart long term move. Basically, this is a sign of things to come. A warning, if you will. Hey, I really wanted a more energy-efficient furnace, after all…

Coupled with the fact that I had a medical procedure on Tuesday that is sure to be expensive, we’ve decided to be proactive and shift the priority from debt repayment to saving for a short while until we get some things worked out. At this point, unless we find out the furnace needs to be replaced immediately, the debt snowball or $810.40 will continue to go towards debt repayment, plus a small bit so that we can make double payments to the spouse’s student loan (the debt snowball has $437.59 per month toward the student loan and we will up that to about $470) but all other snowflakes will be going into our savings account for a new furnace plus medical expenses. We’ll know more about the medical expense part after next week when I talk to my doctor about the results of the tests I had. But just the tests will cost money that we would rather save now versus take out of our emergency fund if we don’t have to.

This is all up for adjustment, and we may end up saving everything past the minimum debt payments if we need to of course, especially if the furnace continues to misbehave. It would be nice to continue the debt reduction in some fashion and continue to make the student loan double payments, but I am okay with not doing that if our finances warrant it. Dependent on the results of the tests I had, and our research into a new furnace, we may up the amount we need to save even more. But right now, we are guessing we’ll need about $5000 for the furnace and my tests. Once we put our economic stimulus check into savings, as well as my spouse’s additional paycheck in May (he is paid biweekly and May is a three paycheck month), plus what we have in savings already, we need to save about another $1000 to $1500. If we haven’t replaced the furnace by then, (and that number remains appropriate), we can shift back into significant debt overpayment and slay the student loan. We managed the huge car repair, we’ll manage this too. I knew things were sailing along too smoothly, and there were bound to be more bumps in the road. I was just hoping to get rid of the spouse’s student loan before we hit another one. So it turns out we may become consumers with the economic stimulus check after all, because it seems it will ultimately go towards a new furnace. The world has a funny idea of irony, that’s for sure.

Roll with the punches, I keep telling myself. This whole debt repayment thing is a huge game of adaptation. But, once more… Argh!

The technician who came for the furnace call checked my a/c unit as well and called the whole trip my yearly a/c service, so that was nice. At least I didn’t have to pay anything for that. However, the call I make this morning to have them come back… I assume I will have to pay for. But something better actually be completely diagnosed and fixed this time. Or something.

Argh!

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