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Your Budget is Worthless
When you realize that you’ve buried yourself in debt and decide to get out from under that terrible burden, the first thing you’ve got to do is build a budget because, without that, you’ve got no way to know how much money you have or need. After you’ve got a budget, you’ll start spending according to whatever it says. Hopefully, you’ll stay on budget, but what happens when an emergency does come up? What do you do when your car dies? When you suddenly find out your kids needs vision therapy? How do you manage when your job suddenly gets shipped off to East De Moines?
Your budget isn’t going to help you meet those expenses. Most people don’t have enough money in their bank account to make it all the way to the next payday, let alone enough to keep the lights on and food on the table. How can you possibly hope to deal with even the little things that come up?
You whip out your emergency fund.
The problem with a budget is that it does a poor job of accounting for the unexpected. That’s where an emergency fund comes in. An emergency fund is money that you have set aside in an available-but-not-too-accessible account. Its sole purpose is to give you a line of defense when life rears up and kicks you in the butt. Without an emergency fund, everything that comes unexpectedly is automatically an emergency. With an emergency fund, the things that come up are merely minor setbacks. Without an emergency fund, your budget is nothing but a good intention waiting to get shattered by the next thing that comes along. With an emergency fund, you are managing money. Without it, it’s managing you.
How much money do you need in an emergency fund?
Every “expert” has their own opinion on this. Dave Ramsey recommends $1000 to start. Suze Orman says 8 months. The average time spent looking for work after losing your job is 24.5 weeks(roughly 6 months), so I recommend 7 months of expenses. That’s enough to carry you through an average bout of unemployment and a little more, but that’s not a goal for your first steps toward financial perfection. To start with, get $1000 in a savings account. That’s enough to manage most run-of-the-mill emergencies, without unduly delaying the rest of your debt repayment and savings goals.
How do you build an emergency fund?
Let’s not kid ourselves, $1000 is a lot of money when can barely make it from one check to the next. Unfortunately, this vital first step can’t get ignored. If you really work at it, you should be able to come up with $1000 in a month or so. Here are some ideas on how to manage that:
- Cut. Drop every possible expense. If you drop cable, your cell phone, Netflix, and a weekly dinner out, you will already be saving $400 that month. You’d be almost halfway there.
- Sell. How much stuff do you have that you don’t need, want, or use? I’d be willing to be there’s more than you realize. Last spring, I had a garage sale that brought in about $1300. Everything we sold was just crap we don’t use any more. We sold candles and candle-holders, DVDs, books, clothes, toys, electronics, games, and anything else we could find. I spent a month going through every room in my house to find my inventory. Craigslist is a good way to sell just one or two things at a time.
- Work. Have you thought about delivering pizza or working weekends in a gas station? If you have some technical or writing ability, you could pick up some part time work on oDesk or eLance. Your opportunities are only limited by what you are willing to do.
Stop at a grand?
Dave Ramsey’s advice is to get your fund up to $1000 and then leave it alone until your debt is paid off. Screw that. I’ve got money going into my fund every month. It’s only $25 per month, but over the last two years, it has almost doubled my fund. Don’t dedicate so much money that you can’t meet your other goals, but don’t be afraid to keep some money flowing in .
Using the fund?
When can you pull the money out? That is entirely up to you. I have ju st two points to make about withdrawing from your emergency fund:
- Don’t keep the money in an easy-to-access account. If your fund is in the savings account that serves as your overdraft protection account, it’s too easy to spend it, and it will go away. I keep it in my INGDirect account. I don’t use the checking account for anything in person, so I don’t carry the card. If I want to spend that money, it will take 2-3 days to transfer into my main bank account.
- Never decide to spend the money on the spur of the moment. There are very few major financial decisions that can’t wait until morning to be answered. Sleep on it. If it’s still necessary tomorrow, you can spend it without guilt.
An emergency fund makes your life easier and your budget possible when the unexpectable happens. Don’t forget to fund yours.
How much money do you keep in your emergency fund? What would it take to get you to spend it?
What Happens When You Save
- Image via Wikipedia
I’m a debtor.
I’d like that to be otherwise, but I’m pretty close to the limit of what I can do to change that. Don’t get me wrong, it’s changing, but there is a limit to how many side projects I can take on at one time. So, I’m in debt and likely to stay that way for the next couple of years.
As part of my budget, I set up a few categories of items that are either necessities or “really wants” without being immediate expenses. For example, I’m setting aside some money each month for car repairs, even though my car isn’t currently broken. When it comes time to fix something, I hope to have the money available to fix it, without having to scramble or <spit> tap into my emergency fund.
All told, I have about a dozen of these categories set up, each as a separate INGDirect savings account. Twice a month, a few hundred dollars gets transferred over and divided among the savings goals. Most of these goals are short-term; they will be spent within the year, like the account for my property taxes. Some of them are open-ended, like my car repair fund. Some are open ended, but will eventually end, like the fund to finance my son’s braces. All of the accounts are slowly growing.
As I’ve watched the progress of my savings accounts, I’ve noticed something funny.
My confidence is up.
It may only be a few thousand dollars, but it’s more money than I have ever had saved. The vast majority of this money will be spent over the next few years, but having it there, now means that I have tomorrow covered. For the first time in my life, I’m not living paycheck to paycheck. No matter what happens, I know I can make ends meet for a couple of months. That fact alone has reduced my stress level more than I could have imagined.
Two years ago, I was sure I was going to file bankruptcy. Now, I’m looking at being just two years away from having all of my debt gone. I have faith that my future will be bright, and only getting brighter. If I can dig myself out of this hole once, I can do it again, no matter what happens.
This has brought a calm that I can’t easily explain. I don’t have to worry about where next week’s groceries are going to come from, or how we’re going to afford braces in a couple of years.
Having an emergency fund and some auxiliary funds has been entirely worth the work we’ve done for last two years. Have you noticed any changes as you pay off your debt and build savings?
The Things That Bring You Here
I’ve been walking though my analytics data. That is the Big Brother software I use to know everything about each one of my dear readers. It’s all part of my master plan to rule the world. Muwahaha!
Some of the results are interesting.
The single most-used search term to find this site is “slow carb diet“, which is great, because I really enjoyed writing that post. I’ve been slacking on the diet lately, but I’m still down more than 30 pounds. I’m currently ranked #3 in Google for this term. If I move up 2 more spots, I’ll outrank Tim Ferriss for his own product. If I aggregated all of the “slow carb” variations, this post probably accounts for more than half of my traffic from Google.
Many of you come here by searching for “how to have a perfect life“. I’ll do everything I can to help you achieve that, but it’s going to take work on your part. There are no shortcuts.
“Beat the Check” is another popular search term, but a very bad game to play. It’s almost impossible to win it, since the Check 21 Act of 2004.
It’s interesting that “trained husband” brings a few of you each month. My question: are you shopping, or exploring a new fetish? Don’t be shy.
I’m a bit amazed that “zombie wheels” is something people actually search for, but 140 people hit Google looking for that term every month, and a few of them make it over here.
“How to stretch a meal“, “things you should buy online“, and “unsecured loan advice” are some of the top personal finance terms bringing you all in, though “how to make a bunker” and its variation are popular, too.
“Hoe can you force your wife” is a bit disturbing. Most of the results are naturally for sex. I can’t help but hope that I’ve either really disappointed this visitor, or convinced him that force is a bad idea.
“How much did a pound of gold weigh in 1854?” is a search that makes me giggle. To the best of my knowledge, the troy scale has been used to weigh gold for a lot longer than that.
That was a fun little stroll through my statistics. Hopefully the fact that I used “fetish” and “sex” in a post will draw more crazy search terms.
How did you find me? Inquiring minds want to know, so please tell me in the comments.
5 Pain-Free Ways to Save Your Money
Everyone needs an emergency fund. More than that, you will eventually need retirement savings, a new car, a big-screen TV, or maybe just a new kidney. Whatever the reason, one day, have a comfortable savings account will make your life easier.
But, Jason, you say, it’s hard to save money! How can I start saving when I can’t make ends meet? I’ve got rent, 9 kids, and a DVD addiction that won’t quit. My mortgage is underwater, my Mercedes still has 8 years on the loan, and the Shoe-of-the-Month Club only carries Christian Louboutin’s. What can I do?
Well, I’ll reply, since I am Jason and you asked for me by name, you need to find a way to make it happen. I’d never recommend someone give up their diamond-studded kicks, but something’s gotta give. In the meantime, there are some ways you can save money without feeling the sting of delayed gratification.
1. Save your raise. When you get your next raise, pretend you didn’t. Set up an automatic transfer to stick that new 5% straight into a savings account. Don’t give yourself an opportunity to spend it.
2. Find it, hide it. When your Aunt Gertrude dies and leaves your her extensive collection of California Raisins figurines, sell them and save the money. If you find a $20 bill on the ground, throw it right into your savings account. When your 30th lottery ticket of the week gives you a $10 prize, save it! Don’t waste found money on luxuries. Use it to build your future.
3. Let it lapse. Do you have magazine subscriptions you never read? Or a gym membership you haven’t used since last winter? Panty-of-the-Month? Crack dealer who delivers? Stop paying them! Let those wasted services fall to the wayside and put the money to better use. I don’t mean flipping QVC products on eBay, either. Save the money.
4. Jar of 1s. Roughly once a week, I dig through my pockets and my money clip looking for one dollar bills. Any that I find go in a box to be forgotten. I use that box as walking-around money for our annual vacation, but it could easily get repurposed as a temporary holding tank for money I haven’t gotten to the bank, yet.
5. Round it up. Do you balance your checkbook? If you don’t, start. If you do, start doing it wrong. Round up all of your entries to the nearest dollar. $1.10 gets recorded as $2. $25.75 goes in as $26. If you use your checkbook or debit card 100 times a month, that’s going to be close to $75 saved with absolutely no effort. It even makes recording your spending easier.
There you have it, 5 easy ways to save money that won’t cause you a moment’s pain.
Do you have any tricks to help you save money?
Karate Guess So
“Walk on road, hm? Walk left side, safe. Walk right side, safe. Walk middle, sooner or later, [makes squish gesture] get squish just like grape. Here, karate, same thing. Either you karate do “yes”, or karate do “no”. You karate do “guess so”, [makes squish gesture] just like grape. Understand?” -Mr. Miyagi
It occurred to me that lately, I’ve changed my day-to-day cash flow plans a couple of times.
A year ago, I was running on a fairly strict cash-only plan.
A month ago, I was running on a strict budget, but doing it entirely out of my checking account.
Now, I’m loosening the budget reins, and moving all of my payments and day-to-day spending to a credit card, including a new balance that I can’t immediately pay off.
The thing is, changing plans too often scares me. Like the quote at the beginning of this post, I start worrying about being squished like a grape.
The simple fact is that any plan will work.
If you want to get out of debt, just pick a plan and run with it. If that means you follow Dave Ramsey and do the low-balance-first debt snowball, good for you. Do it. If you follow Suze Ormann and do a high-interest first repayment plan, great. Do it. If you follow Bach and pay based on a complicated DOLP formula to repay in the quickest manner, wonderful! Do it!
Just don’t switch plans every month. If you do that, you’ll lose momentum and motivation. Squish like grape! Just pick a plan and go. It really, truly does not matter which plan you are following as long as you are following through.
This applies to other parts of your life, too. For example, there are a thousand fad diets out there. Here’s a secret: they all work. Every single one of them, whether it’s Weight Watchers, slow carb, or the beer-only diet. The only thing that matters is that you stick to the diet. If you manage that, you will lose weight on any diet out there. Except for the jelly bean and lard diet. That one will make you extra soft.
Another secret: the productivity gurus are right. Every single one of them. David Allen, Stephen Covey, Steve Pavlina, and the rest. They all have the One True Secret to getting the most out of your day. Really. Pick a guru and go! But don’t try to Get Things Done in the morning and do 7 Habits at night. Changing systems, changing plans, changing your mind will make you sabotage yourself.
The real secret to accomplishing great things, whether it’s paying off $100,000 of debt, dropping 40 pounds in 3 months, or tripling your productivity is to do it. Just get started and, once you’ve started, don’t stop. If you keep going and stay consistent, you’ll accomplish more than anyone who hops from system to system every few weeks.
