its always good to have a backup plan

January 4th, 2008

It’s Always Good to Have a Backup Plan

When our debit card was rejected at the start of our trip to visit relatives last week, my spouse and I realized that we don’t really have a backup plan for something like that. And when my car completely died on Wednesday and we had no idea how expensive the repair bills would be (still no idea… hopefully find out today), we realized that we don’t have a concrete backup plan for an emergency that is potentially over $1000 either. However, because we have been focusing on improving our financial situation in the past months, in both cases we had options to consider and it was possible to create one on the fly.

In the case of the malfunctioning debit card, we knew we could use our debit card at our bank’s ATMs but not at any other places until the problem was fixed – and there was no timeframe on how long the problem would take to resolve, just “sometime that day”. So we had a few options. We brainstormed in the car the following ideas:

  • We could go to an ATM and take out more cash to cover all expenses for that day.
  • We could wait to buy gas, and when we needed to stop, hope the problem was resolved and if it was not, use the cash we had to buy gas.
  • If we went with the wait and see option, if it was not resolved by the next time we needed gas, we would have to use a credit card to cover expenses.

We didn’t really like the go get more cash option because we weren’t sure where an ATM for our bank was and we didn’t want to waste a lot of time getting off at every exit and checking around to see if we could find one. So we decided to go with the wait and see approach. We knew we had enough money to cover completely filling our gas tank once, plus tolls and food. Because we had transferred the balance on our Capital One card to a 0% offer on a Citicard, we had our Capital One card completely empty and could, if we really needed to, use it for gas and pay it electronically later that evening for the charges well before any interest would be assessed. It wasn’t our preferred plan, but it was definitely possible. And we were guessing that the debit card would work again before we had to use a credit card at all.

If the debit card might not work indefinitely, we would have looked for a branch of our bank or called our bank to get directions to the nearest branch. Using our credit card, even for just a short while and temporarily, was very low on the list of things I wanted to do. But we decided to run the risk because we were told that it would be a very short timeframe, and it did work out. By the time we needed to stop for gas the first time, our card worked again so we continued with our trip with no further incident on that front, and no credit card usage. We figured our bank (which is a large semi-national one) was being harassed by many many inconvenienced people and would solve the problem as fast as possible, and it turned out we were correct and it was resolved fairly quickly.

And then came the question of is a $1000 emergency fund sufficient. Well, I have never claimed that I thought it was completely sufficient, or that I planned on only having a $1000 emergency fund for the rest of our lives. But in the balance between paying down debt and protecting ourselves from more debt, we decided to have a $1000 emergency fund while we still had credit card debt. Once the credit card was paid off (and… that is so close I can actually feel it in my bones at this point), we were going to re-evaluate our emergency fund strategy and possibly change it while we are paying off our student loan. That time has come faster than we thought, and there will be more about our thinking on that next week. But for now – when you car dies, it seems serious, and you think it may be more than the $1000 emergency fund – what to do?

For us, we gathered up our financial statements and started brainstorming options. After transferring the remainder of the November extra paycheck into our checking account, we had approximately $550 available to start with. In our savings account, we had $1000, so we had $1550 available immediately (it only takes a minute to transfer the money from savings to checking) to deal with this problem. That would leave us incredibly tight until the 11th when my spouse gets paid, but it is doable.

But what if the repairs are more that $1550? Then we have to get creative. We have a number of ING subaccounts we can tap into. The first one we would hit is our “long term savings” account, which is slowly saving for things like a new furnace and water heater. That has $150 in it, and would be the first to go. Next is my spouse’s Playstation account. He has been saving his birthday money from the past year in this account and hoping to add it to this year’s birthday money and buy a Playstation 3. (Now before anyone attacks him over this, remember that he got a $1000 windfall and cheerfully put 90% of it towards debt and 10% of it into our kids college accounts, without saving a dime of it towards his Playstation. He doesn’t ask for much.) The Playstation fund has ~$150 in it (I was going to give him a $25 deposit for his Christmas present from me but haven’t yet because he wanted the credit card paid off first) and that would be next. So, we’ve raised our available total to $1850.

So the question is – if the repairs are significantly more than that, do we use a credit card, or hit the kids college accounts? And that’s where we are stuck. I do have some money in my “blog” account to cover taxes from my blog earnings, and I can tap into that as well although it would have to be replaced by tax time. But if the repairs are significantly more than the $1850 I’ve already outlined, something more is going to have to give.

So… credit card or borrow against the college accounts? Which is the lesser of two evils? I used to, back in the before the blog time, semi-regularly borrow against and pay back my son’s college account any time we had an emergency, and even though the money is technically “our” (my spouse and my) money that we put a college fund designation on in our heads, I hated how I felt about it and it stunk. Between the two kids, there is about $3000 available in the college funds. We’re still going back and forth about if we want to tap into that (with the first priority being replacing it) or use our empty Capital One card and prioritize paying off as much as possible before interest came due.

Hopefully we don’t have to decide between either of these options and the repairs are much less than the $1500 we can “comfortably” deal with. Not that a large amount of money like that will be at all comfortable, but it will just set back our plans, not semi-derail them.

And soon the emergency fund strategy will get an overhaul. Once we figure out if we still have an emergency fund, that is.

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20 Responses to “It’s Always Good to Have a Backup Plan”

  1. If I was in your position I would probably work out how much I would be able to pay back on the credit card before any interest was charged (i.e. the debt snowball minus all minimum payments), and make that my next source of money – and pay the balance off in full when due. Then I’d tap the college accounts. That probably saves you the most in interest.

    If it’s more than that – $5k to $6k I’m guessing -the cheapest thing to do would probably be to put it on a credit card and then pay that off by taking out a new loan/balance transfer. Sure that would suck, but having an enormous car repair bill would suck.

    My main caveat is that I don’t have any consumer debt issues, you’d need to take into account how much you were willing to spend to avoid falling into a debt trap again.

  2. Use the college fund if you have to. It’s an asset that you own.


  3. Hopefully, you won’t even need to spend over $1500. You could practically put a new engine your car for that much (depending on the car, of course). If it does go above that, I would use the credit card instead of pulling from a college account. More than likely the amount that you would go over isn’t going to be that much, and it would probably be fairly easy to make it up quickly without losing any interest in the college account.

  4. Well, in a Saturn, it costs $3500 to put in a new engine. How do I know? Because that’s what needs to be done, I just found out.

    And now I feel like I might throw up. We’re still discussing options about the car and about fixing it but… let’s say I’m not feeling good at the moment.

  5. This doesn’t really answer the query, but if I had a car problem that was going to cost over $1500 to repair, I would consider getting a new (to you) car unless everything else was in great condition.

  6. Hi Paid Twice. I have two pieces of advice:
    1. Breathe. Slowly. In and out.
    2. Have some perspective. $3500 is more than you planned for, but we have an amazing capacity to adapt. Roll with the punches and think “this too shall pass.” It can ALWAYS be worse.

    And for the more practical stuff – what’s the Saturn worth if you sold it? $3500 could get you a new car.

    Have you thought about splitting the diff? I’m not sure what the APR is on your Cap One account, but perhaps you can put half on there, and only take half from the college fund. Then you’ll have to readjust the plan for the next few months so that paying both these off takes priority.

    Good luck!

  7. Ah, breathing :)

    We’re still calling some places and seeing if this is the absolute best idea. But anyway. I’m formulating thoughts. heh.

    We still owe $3300 on the car. So we have to factor that in if we decide to get a new (to us) car instead of dealing with this one. We’ve tossed that idea around. But I don’t think it will win. That’d be a pile more debt to take on and I’m not sure I am prepared for that.

    A Saturn with a blown engine… no idea what its worth. Before the engine, blue book value was about $9000 but have no idea what that translates into in actual “worth”. Who is buying a car with a blown engine? I have no idea. heh.

  8. Anonymous Writer Says:

    January 4th, 2008 at 11:21 am

    You might want to consider seeing if any local high schools have an auto shop class. Sometimes they’ll take on a project, like putting in a new engine, for just the cost of parts. It’s the labor that’s terribly expensive but if you can be creative, you’ll be okay!

  9. Good luck – I just read this and feel really bad for you.

    I just found your blog today and like it a lot – keep your chin up! You motivate me, as well a many others I’m sure.

  10. Oh, Jaimie I’m so sorry to hear it’s the engine. Definitely call around though because in my experience, the dealership is the absolute most expensive place to have repairs made (I think I’m remembering right that is where it is). Hang in there, keep breathing. Darn Murphy!


  11. Oh, and I was going to comment on some of your other thoguhts. Would you feel as badly if you repaid the college accounts including the interest it would have earned? In other words, loan it to yourself so the kids don’t lose ground but you can utilize the asset. I also would definitely try to repay the two other accounts although I don’t know that I would worry about paying interest to those.


  12. Radical thought. Something to think about. Consider going with only one car. Look for a place that is close (as in walking distance) to grocery store and some basic necessities of life.

    Before you say, no, no. Ask yourself how much money are you pouring into that second car? Gas, oil, service, repairs, insurance, etc. Then ask how much would it cost to rent a car occasionally when you really do need that second car. Even if you rented a car every single weekend at $50/weekend x 52 = $2600/year. And you never have to worry about anything but gas. But I would be willing to bet that that you really don’t need the second car that much.

    Personally, I rather spend the money on my kids rather than the car mechanics’ kids.

  13. Someone did suggest it on one of these posts, maybe this one :)

    I did explain why for us that wasn’t feasible at this time, but I didn’t address the idea of renting a car every weekend… we don’t need two cars on the weekend. But we do during the week, judging by how often our garage is completely empty.

    To have only one car without making some extreme lifestyle changes that would also add an extra hour of driving Monday – Friday to our lives, we’d have to move. We don’t live in an area with adequate public transportation or grocery stores you can walk to (I refer to Kroger as being across the street but in actuality it is across the street and down a bit from our housing development and about 2 miles away). I did one of those walkability website things once and my address got almost the lowest score (meaning, worst) in how “walkable” where I live is.

    Moving is out of our realm of affordability at this moment. Not that I want to move but even if I did.

    I’d rather spend our money on two reasonable used cars instead of paying the car rental place kids’ allowances. :) And time is money, I save the time. I did rent a car once here…. a fuse in it blew and it had no lights whatsoever, and I had to wait two days to get another rental because they were busy. Not so fun.

    (And as I said before, I drove my Tracker, my very first car, for 14 years and 200,000 miles. The Saturn is only my second car ever, a 2001 that we bought in 2004, and I am in my mid-thirties. My spouse drives a ’96 Corolla which will pass 200,000 miles this year. We don’t buy expensive cars. I’ll just have to pick better next time. ;) )

    We do like our cars though. I’ll give you that. :)


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