Beating Broke

Personal Finance from the Broke Perspective

Sometimes Saving is Wrong

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Invariably, every few months, we get a wave of posts talking about “what would you do if you won $x,xxx,xxx?”  Or, what you would do with a smaller windfall.  And invariably, a majority of the people talk about how they would save the money.  And in some cases they are right.  But, most of the time, they are wrong.

Why are they wrong?  Because they’re looking at saving from the wrong direction.  I wouldn’t save a dime of it.  I would use every last cent of it to pay off debt.  And until I have no more debt, that’s what I would do every time.  Sure, maybe I’d by a few things that I needed, but the rest goes to debt.  Saving in a savings account doesn’t do you damn bit of good if you have debt.

If you have any debt at all, you really should think twice about having any savings at all except for an emergency fund.  Why?  Because, there is no savings account in the world that will guarantee you more interest than what you are paying on your debt.   If you pay off $100 of your credit card debt, you’ve just earned the 19% interest that you would have paid.  You “saved” more with that $100 than you would have in years if you had put it into a savings account.

Don’t fool yourself into thinking you need to have anything more than an emergency fund in the bank.  All the rest is just money that could be making you 19% interest instead of the paltry 1.30% that you’ll get at that high-yield online savings.  When you get rid of your debt, then is the time to start building your savings!

Some of you will likely ask “what about retirement savings?”  That’s a gray area.  There are some that would argue that if you don’t get that debt paid off, you’ll end up taking that money out early anyways.  Others would argue that due to the tax benefits of retirements accounts, and the magic of compound interest, you really should be putting money into your retirement too.  My current opinion is stuck somewhere in between.  I think that you should be putting a little into retirement, just so you have something going.  But, I also think that you should keep in minimal until your debt is gone and then ramp it up like gangbusters.

So, what would you do if you won $x,xxx?

Balanced Billing: Budget Helper

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In our house, we have a gas fueled furnace for heat and an electric fueled central air unit.  So, as you can likely deduce, our gas bill is much higher in the winter months and our electric bill is much higher in the summer months.  But, our bill hardly ever fluctuates.  Why is that?  We’ve got both bills set up on a little budget helper called balanced billing. It’s a lifesaver when it comes to doing a budget, and it offsets those peak months like the Money Beagle just had.

How does it Work?  It’s pretty simple really.  The gas/electric company takes our bills for the last year and adds them all up and then divides by 12.  That’s our bill for the month.  With the gas company, it adjusts each month, so we’ll see a variation of up to $10 or so dollars each month.  And with the electric company, they adjust once a year so we usually end up with a little bit higher bill (about $20) for one month to make up for any difference and then it’s back to where it was.  I highly recommend it.

How is Balanced Billing a budget helper?

Here’s a little anecdotal story to cement the need for such a program.  When I was still in college, I lived with 4 other guys in this awesome old house.  It didn’t have air, so it was warm in the summer.  In the winter, it had a gas fueled boiler that fed those old registers in each room.  The first winter we lived there, our typical gas bill up to that point had been about $200.  Not bad when you split it 5 ways.  Then we had a particularly cold November.  Our bill in December was over $650!  Obviously, it was a bit of a shock to us when our heating bill was more than the rent each month!  Luckily, we were all pretty good friends and a couple of the guys floated the rest of us some money to help pay for the bill.  But, imagine what would have happened if that had happened to a family that was living paycheck to paycheck?  Even if you aren’t living paycheck to paycheck, imagine what that would do to your budget!

And that, my dear readers, is why balanced billing can be such a wonderful budget helper.  If you’re interested, it usually just takes a quick phone call to the utility company to get it set up.

The Accounting Mistake that Almost Bankrupted Us

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Everybody makes mistakes.  It’s just how quickly you discover them and if you recover and learn from them that makes the difference.  Make a mistake and ignore it, and you’re likely headed for disaster.  Learn from the mistake, and avoid making it again, and you just might save yourself.

Recently, while catching up on our budgeting, we noticed a pretty large discrepancy in what the bank said we had (or didn’t have as the case may be), and what our budget said we had.  I’m used to some difference, but it’s not all that much normally.  This time, we’re talking about a very large difference.  Our budget said that we had nearly $2000 left over from the month of June.  Our bank?  Said we were nearly overdrawn.  Something was seriously not right.

And we had to figure out what.  I’m no accountant.  I don’t do math well (I took Trigonometry in college 5 times before I passed it.) and I am horrible at accounting math.  I’m a computer guy.  Computers are good at math, I leave it to them.  Unfortunately, as I was soon to learn, they are only as good as the data that you feed them.  And boy oh boy have I been feeding them some fun numbers.

Here’s what’s been happening, as best as I can figure.  As part of my payroll, I have child care flex taken out of my check.  Each month, about $400 is taken out of my check.  Each time I pay my daycare, I send in a form to HR and they reimburse the amount that I’ve taken out of my check.  So, at the end of the month, that $400 has been reimbursed back into my account.  Because of the way this works, I decided (when we started using the program) to not enter either transaction into my register or my budget.  My reasoning was solid.  A debit followed by a credit makes, essentially, a non-transaction.  Or so I thought.

Some of you may already see the problem.  Some may need this extra bit of information.  In determining the amount of income we budget for, we use the gross pay amount from my check.  Why is that important?  Well, let’s say, to keep the numbers easy to use, that I make $1000 a check.  I add $1000 to the income column on my budget.  From that $1000, my employer takes out $200 for the Child Care Reimbursement.  Now I have $800.  I then pay my daycare $200.  Now I have $600.  My employer reimburses the $200 to me.   I am back at $800.  That’s how the accounting should have been done.

Now, let’s take a look at why the way I was doing it was wrong.  I get paid $1000.  I put that in the income column of my budget.  I pay my daycare $200, but because that amount is reimbursed, I don’t enter it into the budget.  I also don’t enter the reimbursement or the initial withholding into my budget.  With no transactions, my budget still says that I have $1000 in income that I can spend.  When I really only have $800.

Of course, I’m using some simple round numbers, but you can see why that would be a problem.  Especially if it’s been building that way for at least the entirety of this year.  If I’ve been padding my budget-able income by $200 a check ($400 a month) for 7 months, that gives me $2800 in income showing that I don’t actually have.  And that is why my budget and my bank statement were so very far off.

Whoops.  Luckily, it didn’t cost us much to find the problem.  Unfortunately, we don’t have that much money just lying around.  Especially since we’ve been overspending by $400 a month.  So, we have to cut back as far as we can and watch our expenses until we can manage to bring that deficit back to $0.  Not any fun at all.  But, that’s the price you pay for a mistake.  At least we learned from it (enter all transactions, no matter whether they zero out or not), and will recover from it.  It’ll just make life a little bit harder for a while. But, if we hadn’t caught it, it could have bankrupted us.  It could have, essentially, cause our financial ruin.

The only thing that saved us is doing a budget and keeping track of our money.  Which is yet another reason that I advocate so strongly that you keep track of your money.  Even if it’s only going so far as balancing your account statements at the end of the month, you’ve got to know where your money is going.  It may save your financial life.

What mistakes have you made in your search for financial independence that set you back?  Or, maybe, that cause a bit of a windfall?