Balance Your Borked Budget

You’ve got a budget worked out to the penny.  You know every dollar that comes in and every dime that you spend.    All of your bills are getting paid on time.  Then, one day, it all comes crashing down. Your budget is no longer even a reasonable approximation of your cash flow.  You’ve got no idea what’s coming in or going out.   Bills are piling up and fees are digging you deeper in debt.

What happened?  More importantly, how do you get back on track?

The first thing you need to do is identify the problem. What, exactly, went wrong?  Did you lose your job or need a surprise botox injection?  Your car died or your kid developed a hockey habit?  Sports car or shoe sale?  Whatever the cause, if you can’t identify it, you can’t deal with it.  Some of the possible problems may be things that can get clubbed and buried in the backyard, while other things may be expenses that won’t be going away.    If it’s a one-time expense, you can simply refocus your debt repayment to take it into account.  If it’s an ongoing expense, you will need to adjust your other expenses, possibly in a drastic manner, to make ends meet.  You can’t know which way to go without knowing what caused the problem.

Next, commit to to making it right. Don’t leave it at a mere commitment.  Actually commit and actually do it right. Future-you is counting on you to fix the problem before he gets screwed.   This is important.  Without firm–and real–commitment, nothing else will matter.  At best, you will be treading water.  At worst, you will drown yourself in unanticipated bills.

Cut everything extra.   Every expense–whether it’s your mortgage or your maid–is a rock in your pocket, one hundred miles from shore.  How much can you carry and stay afloat?  This isn’t the time to keep paying something because you enjoy it.  If it isn’t absolutely necessary, it’s got to go.  Cut your internet, cancel Netflix, learn to shut off the lights when you aren’t using them.   Is the early termination fee less than 6 months of your cable bill, your satellite bill?  Cancel it.    You can always sign up again later.  This is the time to be ruthless.

Is there a way to bring in some extra cash?  Can you pick up a second job, or land a freelancing gig?  If you’ve suddenly found yourself unemployed, can you spend some time on being a Mechanical Turk?  Sell all of the things you don’t use anymore, or, more likely, never should have bought in the first place?  Do you have a spare kidney?

Remember, this is a drastic situation calling for drastic measures.  Your future is depending on you.  Don’t make him come back and kick your butt.

Update:  This post has been included in the Carnival of Personal Finance.

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New Debt

music therapy

Image by emanuela franchini via Flickr

For the first time in 2 years(almost to the day), I am acquiring new debt that I can’t afford to pay off immediately.  On a credit card.

Last Thursday, my son entered vision therapy.  He has what is commonly known as a “lazy eye”, but is more properly called a “wandering eye”.  His eyes don’t always lock on to whatever he is looking at.  Instead, one of his eyes will (occasionally, but not always) drift to the side and shut off.  His brain doesn’t interpret the signals from that eye.

We had two sessions of tests to diagnose the specific problems: $350.

We will have 28 weekly sessions of therapy @ $140 per session:  $3920

There is an equipment fee: $85

That’s a total of $4355 over the next 7 months.

Insurance covers some of it, but the therapist is out-of-network, so it’s “pay first, get reimbursed later from the insurance company”.  If we pay up front, we get 1 session free, bringing the price to $4215, minus insurance.

I have a health savings account that I have been trying to max out to cover this, to make my payments all pre-tax.  I haven’t been able to get enough in there, yet.  In fact, since I don’t have my kids on my insurance, my maximum HSA contribution is $3050.

Since finding out that vision therapy was going to be necessary, I have managed to save $1000 in cash, and about $1500 in my HSA.   That’s $2500 of a $4215 bill, leaving $1715 that I still need to be able to cover.

Here is my plan:

We’re charging the entire $4215 at 11.9% interest on a card with a 2% travel rewards program.  This will give me $84.30 worth of travel rewards good for reimbursing any travel expenses.

I will immediately pay off $1000 from cash savings.

I will also immediately file for an insurance reimbursement, which will cover 80% – $500, or $2972 minus a bit.   Our insurance got a waiver on the pseudo-wonderful healthcare fraud act on the grounds that the plan sucks so bad that it would cost too much to comply with the law.  No joke.  I’m expecting about a $2500 reimbursement, and I have no idea how long that takes.

In 6 weeks, when I have maxed out my HSA contributions for the year, I will file for an HSA reimbursement for about $2500, leaving about $500 to cover some medical costs for the rest of the year.   Vision therapy doesn’t count against my deductible, since my kids are on my wife’s insurance plan.

Starting in June, my debt snowball will no longer be going to max out my HSA and will instead go straight to this card, to finish paying it off as quickly as possible.   That’s $750 per month.

Any money from any side work will also go towards this bill, but I don’t budget for that, because it isn’t reliable money.

The projected results:

$3215 on the credit card for 6 weeks @ 11.9% = $50 in interest payments.

After the HSA reimbursement, there will be $715 left to pay, which will be paid off in June for another $10 in interest.

When we get the insurance reimbursement, we’ll replenish the medical bill account, to start getting ready for the kid’s braces next year.  We’ll drop $1500 into that account and use the remaining $1000 as a debt snowball payment.

We’ll end up paying $60 in interest to save $140 in therapy costs, so it’s good math, but I hate the idea of racking up another credit card bill.   I could drop the interest costs a bit by raiding my emergency fund, but that still wouldn’t cover it all, and it would leave me with very little left for an actual emergency.  I could raid the emergency fund for half of its value($700), and reduce the initial interest paid to $25 and the total interest paid to about $40, then use the $1000 leftover from the insurance reimbursement to replace my emergency fund.

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