Beating Broke

How We Save for Financial Emergencies

May 22, 2023 By MelissaB Leave a Comment

A financial emergency, large or small, can happen at any time. Maybe you have a $2000 car repair that you hadn’t expected. Or, worse, you get laid off. You should save for financial emergencies to prepare for life’s unexpected expenses. We’ve been working on bulking up our savings for the last few years. Here’s how we’re doing.

Utilize Sinking Funds

Our first step was to create a budget that realistically represented our expenses. So, we save $138 every paycheck for home improvements. Then, we save another $138 for home maintenance. That gives us $3588 yearly for home improvements and $3588 for home maintenance. Honestly, that’s likely not enough, but it’s the best we can do for now.

We also set aside $92 per paycheck for car repairs/maintenance, giving ourselves $2,400 annually for this category. So, if we have a car repair, we pay for it from this sinking fund.

The sinking funds allow us to pay for expenses without dipping into our emergency fund.

Budget a Month in Advance

Next, we worked on budgeting a month in advance. As we earned money above what we had budgeted, we started applying it to next month’s expenses. We now have enough money to cover an entire month of costs. So, when we get paid in May, I don’t use the money in May. Instead, I use it to fund June’s expenses. Now that we’ve accomplished this goal, I’m working on budgeting two months ahead. (This might take me another year to complete.)

Have an Emergency Fund

Beyond sinking funds and budgeting in advance, we also have a separate emergency fund. I want to get this up to at least $10,000, but right now, it’s sitting at $3,500. We will use this if we have a significant home or car repair that exceeds our sinking fund. We could also use it if one of us lost our job.

Consider Credit Cards

We don’t have credit card debt, and we’d like to avoid having any in the future. However, we could use our credit cards if we had a significant emergency, such as a personal injury or a long-term unemployment situation. We have tens of thousands available, though we’d only use them as a last resort.

Additional Safeguards

We have additional safeguards in place for financial emergencies.

My husband and I both work, so it’s unlikely we would lose our jobs simultaneously. Therefore, we should always have some income stream.
Second, my husband has short-term and long-term disability insurance since he’s the primary breadwinner.
Third, we have life insurance in place for both of us.

Final Thoughts

Our strategy to save for financial emergencies is an ongoing one. We will continue to save, focusing now on budgeting two months in advance rather than one month. We will also work to grow our emergency fund. Finally, when either of us gets a raise, we will use some of the increase in funds to increase our sinking funds, so we will have to rely less on our emergency fund.

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Why I Prefer to Pay with a Credit Card

May 8, 2023 By MelissaB Leave a Comment

I’ve been interested in personal finance, budgeting, and money management for at least 25 years. During that time, I have repeatedly seen the advice to pay cash to best manage your money. Proponents argue that paying cash limits spending and makes you feel pain, so you won’t want to spend as freely. However, I prefer to pay with a credit card. I’ve tried paying with cash, and I find it a hassle.

Why I Prefer to Pay with a Credit Card

There are several reasons why I prefer to pay with a credit card.

Keep Track of Spending

When I pay with a credit card, I can keep track of my spending. Whenever I pay with cash, I forget what I bought and have no record unless I got a receipt and saved that. With my credit card, I can go to the credit card statement and see what I spent where.

Convenience

Paying with a credit card is more convenient. When I experimented with using cash, two things often happened. First, I would forget my cash, get to the store, and realize I had no money. I’d have to drive back home to get my cash. Second, if I went to a gas station, I didn’t feel comfortable leaving my young children in the car alone while I paid. I would have to get them out of the car to pay the cashier in the store. What a pain! Swiping a credit card at the pump was easier and safer.

Accumulate Rewards

I always use credit cards that have rewards programs. We pay them off at least every month, sometimes weekly. Because we use the cards responsibly, we aren’t stuck paying interest fees.

When we lived in Arizona, I used the credit card rewards to pay for our trips back home to Michigan. I would save rewards for a year or two until we had enough money to finance our trip. Now, my husband and I have moved closer to family, so we are using the rewards to plan international travel.

Extended Warranties

Many credit cards offer extended warranties. For instance, we recently bought a laptop and a new dryer. We charged both purchases on our American Express card because American Express offers extended warranties, saving us money from purchasing additional protection.

Rental Car Insurance

Another perk of paying with a credit card is that some cards offer car insurance for rental cars. Rental car insurance can run several hundred dollars, so this is a considerable saving. However, ensure you know what card offers this service and use that car to pay for your rental.

Protected from Theft

If you carry cash and lose your money or it’s stolen, you’re out of luck. That money is gone. However, if you use a credit card and someone fraudulently charges something, the credit card company will erase that charge. You are not responsible. That alone is an excellent reason to pay with credit cards rather than cash.

Maintains Credit Score

A sound credit card is essential for low car loans and mortgage interest rates. In addition, a good credit score can save you money on your car insurance and help you rent an apartment.

When you use a credit card regularly and pay it off, you help build or maintain your credit score. Cash cannot do that.

Two Drawbacks to Paying with a Credit Card

Of course, there are two drawbacks to using a credit card for most of your spending.

Credit Cards Get Stolen

I have never had it physically stolen in the more than 25 years I’ve used credit cards. However, I have had people make, or try to make, fraudulent charges at least four times. Each time, the credit card company caught the fraud, often before the purchase went through. However, the company then had to cancel my card and issue a new one, which was inconvenient. I could not use my credit card for a few days while waiting for the new one, and I had to change all my autopayments that used that particular credit card. Even worse, if I forgot to change all of them, some companies billed me a $20 missed payment charge since the credit card was no longer valid.

More recently, I had a scammer steal my credit card rewards points, but the credit card company refunded them for me when I noticed.

You May Overspend

If you are not disciplined and lack a budget system, you may overspend when using credit cards. When I was in my 20s, a friend said she thought of credit cards as “free money.” Unfortunately, many think this way and mindlessly spend more when using credit cards instead of cash.

How I Handle Credit Cards in the Budget

To avoid overspending, I use my credit card only for purchases I had already budgeted for. For instance, we use You Need a Budget (YNAB), and I have a separate category for dining out. So if I only have $20 in the dining out fund, and the family wants to go out to eat, we don’t at that time because there’s not enough money in the dining out category. So, by utilizing my budget in this way, I can avoid overspending on my credit card.

Likewise, this year we needed to buy a new dryer. When ours stopped working last week, I charged it with no qualms because I had enough money in my home maintenance fund to cover the purchase.

Final Thoughts

Choosing to pay cash or use a credit card is a personal decision. I prefer to pay with a credit card because it helps me monitor my spending easier than using cash. Because I combine my credit card usage with my budgeting, I rarely overspend on my credit card. In addition, we pay off our credit card each month (or earlier), so we do not have to pay interest fees. If you currently have a credit card balance, paying with cash until your credit card is paid off may make more sense.

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The Shock of an Escrow Shortage for First-Time Homebuyers

April 17, 2023 By MelissaB Leave a Comment

When my husband and I bought our first house nine years ago, our budget was stretched to meet the monthly payment, which included escrow. One year later, I experienced the shock of an escrow shortage. I couldn’t believe I was getting a bill telling me I had to pay an additional $600 or increase my mortgage payment by $50 a month. Unfortunately, I’ve learned I’m not alone; many first-time homebuyers do not realize their mortgage payments will likely increase yearly.

What Is Escrow?

When you buy a home, you also likely have an escrow account. The bank collects money—in addition to your principal and mortgage payment—to set aside to pay your home insurance and property taxes. You don’t need to pay for these items yourself when they come due. Instead, the bank uses your escrow funds to pay them.

What Is an Escrow Shortage?

Nearly every year, your property taxes and home insurance increase. When this happens, your escrow account will need more money to make the payment. The bank will pay on your behalf, but you’ll have to cover the shortfall with either one lump sum payment or splitting the shortage into 12 equal payments and increasing your monthly mortgage payment by that amount.

How We Handled the Shortage

After our first year of home ownership, I was shocked to see the escrow shortage bill. Our money was tight, and I didn’t want my monthly payment to increase. However, I didn’t have the money for a one-time payment, so I opted to increase my monthly payment. I hated paying more each month but didn’t have an alternative.

The second year, I was better prepared for an increase. I had enough money set aside to make a one-time payment because the last thing I wanted was to increase my monthly mortgage payment for another year.

After six years in our home, we could refinance and drop our private mortgage insurance (PMI). Then, I could choose to pay my own house insurance and property tax payments rather than using an escrow account, which I did. Because I did that, my monthly mortgage payment was guaranteed to stay the same throughout the life of the loan. I prefer to set aside the money and serve as my escrow. Then, the money I set aside can earn interest while it accrues before the payment is due.

Final Thoughts

Not everyone who has the option to pay their property taxes and house insurance on their own choose to do so. Some people like the convenience of having the bank make those payments through escrow. After all, you never have to worry about missing a payment if you utilize escrow.

However, if you are a first-time homebuyer, ensure you know how escrow works to avoid the shock of escrow shortage. Then, if you’re prepared, you can have money set aside to make the one-time additional payment rather than increasing your monthly mortgage payment.

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