I’ve Paid For This Twice Already…

Archive for the ‘personal choices’ Category

Over the past month or so, I’ve gone into detail about some of the specific choices of our debt reduction journey, and why we’ve decided to do the things that we do in the way that we do them. I’ve talked about saving for college, paying off a 0% credit card well before the 0% offer elapses, the $1000 emergency fund, and paying off debts in interest order vs size order. And yes, I still believe that the $1000 emergency fund was the right choice for us at the time we made it, even with the recent emergency-fund-draining car problems.

The next personal choice I’ll discuss might be one of the most polarizing, or it might not really make a difference to anyone - who knows. I carry my credit cards in my wallet. In fact, so does my spouse. I have taken them out on occasion and kept them in my drawer, usually when I’ve felt like I “should” because that is the prevailing wisdom when you’re getting out of debt, but I’ve always put them back. I have three basic reasons, one of which my spouse actually shares with me.

I’ll start of with the one I think is kind of the oddest, but yet it is a reason anyway. If I have them in my wallet - I feel like I have them under my control. They aren’t just randomly stashed somewhere, or destroyed and the numbers are just out there in the universe. I know where they are, and I know where to find them. This makes me feel less nervous about my identity being stolen. It may sound strange, but it is true. If the numbers were just out there and I had no tangible record of them, I feel like they are more vulnerable to being ripped off. Honestly, typing that out, it seems odd, but it is how I feel. My spouse had his identity stolen several years ago and I’m still not over it. However, this isn’t the reason my spouse carries his.

Second, honestly, I just don’t need to take them out to not use them. Different people have different ways they need to deal with things. For me, I was okay just deciding not to use them anymore. I was never really an “impulse” credit user. I always knew before I even started shopping if I was going to use credit or not. I just wasn’t a responsible user. And I did a whole lot more damage to myself with those credit card convenience checks than I ever did with the actual card.

Third, they serve their purpose as the “just in case” strategy. And I’m not talking about as an emergency fund - even when we decided to use credit in this recent emergency, we didn’t do it impulsively by whipping out one of our credit cards, it was a deliberate process that ended up not involving any of our existing cards. The “just in case” I mean is “just in case” our debit card stops working. This actually did happen, and we were fortunate enough to have it resolved before we would have had to use credit, but if it had happened when we were already on our trip instead of just starting on our trip, we might not have been so fortunate. At Gather Little By Little, glblguy talks about setting up a second bank account to serve this same purpose, and that might be something I choose instead in the future. At this moment, I’m still balancing keeping as little money as possible in my pocket and as much of it thrown at debt reduction as I can, and I think that the debit card not working is unlikely enough that I’d rather use my credit card as the backup plan. Oh and for those keeping score, this is the reason my spouse carries his.

In summary, I feel better knowing exactly where they are and honestly, I don’t think about them all that often. I think about the debt, but the cards themselves? I don’t give them much thought. So for me, being in my wallet doesn’t make their use more likely to happen. To each, indeed, their own.

This does not mean I think everyone should carry their credit cards. We all have our own spending triggers, and the key to navigating this is knowing what yours are and avoiding them. I can’t carry cash. I just spend it on randomness. I’d end up much further in debt if I just took all my money as cash and carried it around. I’d end up having to use credit to pay my bills and all would not go well. That’s the devil I have to eventually conquer.

Are you in debt? Do you carry your cards? Or have they gone through the shredder? Leave a comment and let me know!

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Yes, we’re in debt. We’re getting out of debt, but we’re nowhere near there yet. With one exception (our car loan), all of our debts have much higher interest than our savings accounts earn. And yet, I am still saving a modest amount of money each month in two special accounts. Those accounts are college savings funds for my kids, and unless some drastic circumstance happens, I will continue to faithfully contribute to each of them.

I know all the arguments by heart. I know that the interest I am earning is not as good as the interest I would save by paying down debt. I know that my kids can get loans for college (in fact, my spouse and I are living proof of that, years and years after our respective graduations…) and we can’t get a loan for retirement (we do save a bit for retirement too). I know that if I focus everything into debt reduction, I can make up for it later with larger contributions to their accounts.

I have two reasons why I keep putting money away for my kids college. One is that I am just enamored with compound interest. The whole idea of it, and making it work for me, is a lure I just cannot completely ignore. I can’t help but want to make that interest work as long as possible for me and my children.

The other reason is a much less tangible one and very much tied into the emotions of my spouse and me. Because I grew up in a lower-income household, where my parents were making barely enough to squeak by, even by financial aid standards, I qualified for need-based scholarships from the college of my choice. I was able to go to my first choice school simply because we were poor and I chose a small liberal arts college that has a large endowment and need-based funding for students. My spouse wasn’t quite as fortunate. His parents were in a higher income bracket than mine, but had a similar amount saved to go towards his education (read that as not too much). He didn’t qualify for near as much financial aid, and ended up going to a large state school instead of his first choice. Now was that a bad thing? No one can judge that and go back in time to see how it might have turned out if it was different. But what I do know is that over a decade later, this is still something that my spouse is not happy with. I know if all else was equal, if he could go back and go to his first choice school instead, he would. My children will have to make some hard choices in life, this I know. But as far as a college education, I want to as best we can, try to give them all the options that we possibly can.

Now, I am not sacrificing our entire future for the sake of our children’s. I save a very small amount per month each. Once we are out of debt I plan to up that significantly, but I will also be upping our retirement savings and by a bigger margin. I won’t be able to save every penny they will need for any school they choose, but I plan to try and do the best we can. It is important to me that my children consider the idea of going to college - and if *I* want them to do something so expensive, I feel I should contribute to that monetarily as well.

I do need to establish 529 accounts for both of the kids though vs the savings accounts I currently use. I have been procrastinating simply because the idea is new to me and it makes me nervous - I am a creature of habit and disrupting my routine and branching out makes me edgy. 2008 will be the year of the 529. This I decree. I need to harness better compound growth ASAP.

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Things have gotten a little out of order in my Personal Choices series, but that’s okay - the order I assigned them originally was random anyway. Today at the No Credit Needed Network site, my personal choice #4, Interest Order vs Balance Order and the Root of Motivation, is a guest post! NCN asked me to write a post about some aspect of my story to be featured on the network site and I was happy to oblige.

Never fear, Choice #3 will be right here on Monday - but until then, go read about choice #4 and if you are paying down debt or saving money (and aren’t we all doing one or the other or both?) consider joining the No Credit Needed Network.

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Last week I talked about how we came to the decision to have a $1000 emergency fund while concentrating on debt reduction. Another choice we’ve made that has caused some alternative opinions is the use of our 0% credit card offer and how we are paying it off.

We practice what might be termed the opposite of credit card arbitrage. Credit card arbitrage is taking a 0% credit card offer and putting the money into a high yield savings account, earning them interest for the period of the 0% offer, and then paying it off right before it is due. When we transferred our credit card debt to the card with a 0% for 12 months credit card offer (with no balance transfer fee), I could do a very similar thing if I chose to. Our minimum payment is very low (in fact, only 1.5% of our balance) and I could have put everything above that into an ING savings subaccount every month and let it earn interest until the 0% was set to expire (in September 2008). It would earn me a little bit of money which could go directly to debt reduction and help us get out of debt even a little bit faster.

Here is where my personal part of personal finance enters the picture. Just as some people pay down their debt by balance order (lowest balance to highest) instead of interest order (highest interest to lowest) for the psychological benefits of seeing debts completely eliminated, I need the psychological benefits of seeing our credit card balance go down. We’ve had the credit card debt hanging over our head for so long that I just need it to go. Away. Completely. And saving up the money in a savings account would be satisfying as well I think but not enough of a psychological boost to motivate my constant snowflaking. I am motivated each week to find some money to snowflake to my credit card and shoot the balance down even more, and I am not sure that would be replicated for me with a savings account method.

So we pay directly to the credit card. We’re on track to have the credit card debt eliminated completely in early 2008 and honestly, I cannot wait for the day I can say “We are credit card debt free.”

We are credit card debt free!

Has a nice ring to it, eh?

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Personal finance is, at its heart, personal. If it was just about numbers and figures and dollars and cents, there would be one plan that works for everyone and a whole lot of personal finance authors would be out of business. For every person, there is a unique set of circumstances, ideals, and beliefs that make them who they are, and a little bit different from everyone else. Over the next few weeks, I’ll be highlighting some of the personal choices that make me uniquely me and my family’s story uniquely ours. None of our choices are unique in and of themselves - but together they make up our own little slice of the personal finance world. For easy future access to the entire series, they each will be in the “Personal Choices” category.

The first is the $1000 emergency fund. There are those that advocate more, there are those who advocate less, and there are those who agree. Most of whom agree are followers of Dave Ramsey’s Baby Steps, which call for a $1000 emergency fund while getting out of debt. I actually have never read Ramsey directly, and settled on $1000 because that was the amount of my son’s college fund that we had basically been using as a “if we are completely desperate we’ll have to break into that” fund for the past several years. Which meant, for us and our situation right now, we felt a $1000 emergency fund would be generally sufficient. I’m happy to say that our $1000 emergency fund is completely separate from either child’s college fund now and is its own separate stand-alone account, that will someday form the seed money for our life emergency fund. And it has earned a whole ~$2 in interest.

With everything, there is risk. I can think of dozens of things off the top of my head that might happen and cost more than $1000. But for every thing I think of that would require more than our emergency fund, I can think of dozens of smaller things that the emergency fund is sufficient to cover. For us, there needs to be a balance between a safety net and reducing debt as quickly as possible. Reducing debt is also a sort of emergency fund builder, in that for every dollar our minimum payments are decreased, that is a dollar freed up in our budget that if we needed to tap into in an emergency, we could. So in essence, for us, we are building some emergency funds into our budget every single time we pay extra towards our credit card debt and reduce that minimum payment.

Why an emergency fund instead of using our credit card in an emergency? We do have available credit on all three of our credit cards, two of which have a zero balance. If we needed to, we could use our credit cards as an emergency fund. We haven’t yet, since establishing the $1000 cash emergency fund, had to tap into it (although a few times I was tempted to “just in case”) and that is one of the two main reasons I won’t rely on the credit cards as the primary emergency source. Our budget is tight. I am trying to maximize every single dollar and use as much as possible towards debt reduction. That means that a lot of the time, our checking account is running close to the edge. I don’t want to be tempted to use credit “just in case” I don’t have enough cash in checking to last until payday. If worst comes to worst, our emergency savings account is attached to our checking account and I can pull the money out of the savings into checking until payday just in case. I can’t do that as effectively and cleanly with a credit card.

The other reason we use cash as our emergency fund is for piece of mind and self reliance. We are relying on ourselves to get us out of any mess we happen into, and we have given ourselves the means to do so. No, it will not cover every conceivable emergency, but we are balancing our perceived risk with our perceived benefit of using money over $1000 to pay down debt aquickly as possible.

So, that is the place we are at now and why we chose to have a $1000 emergency fund at this point in our lives. Ask us a year from now, and the answer might be quite different. What is your emergency fund, what circumstances influenced your decision, and why have you chosen that amount? Leave a comment or write your own post and I’ll update this one with a link to your perspective. I look forward to hearing your input!

Other perspectives on the Emergency Fund: 

• Being Frugal:  How Much Emergency Fund Do You Need?
• Loonies and Sense:  Choosing An Emergency Fund
• This Wasn’t In the Plan:  The Story of Our Emergency Fund

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