Beating Broke

Personal Finance from the Broke Perspective

Why We’ve Decided Not to Throw Extra Money at Our Debt Now

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Going into debt is a bit like gaining weight.  It’s much easier to go into debt than to get out.  But, when you’ve finally decided you want to break the debt cycle and live debt free, it takes a lot of time and effort, much more effort than it took to go into debt.  Likewise, when you decide you want to be fit and healthy, you have to work much harder than you did to gain weight.  With either situation, when you decide you want to make a healthier change, you want it to happen.right.now!  That’s why so many people who want to be debt free decide to save only a $1,000 emergency fund and put the rest of their money on debt.  We’ve tried that before, but there are several reasons why we’ve decided not to throw extra money at our debt now.

Get Off the Debt Repayment Roller Coaster

Why We've Decided Not to Throw Our Extra Money at Debt Now
Photo by Matt Bowden on Unsplash

With COVID-19, we’re living in unstable times.  But honestly, even before the virus, a $1,000 emergency fund was never enough.  My husband and I have been in debt most of our lives.

When we were first married, we had student loan debt, car loan debt, and credit card debt from our time in college.  We followed financial gurus who said have a $1,000 emergency fund and put the rest of the money on debt.

Some months, we had phenomenal success and paid down a significant amount of our debt.  But other months, because we were living so close to the edge with only a $1,000 emergency fund, we’d have the unexpected happen such as a $2,500 car repair.  Our emergency fund would be wiped out, plus we’d go back into debt to finish paying for the unexpected.

Going back into debt a few thousand dollars when we were trying to pay down debt was depressing.  Plus, we’d have to pause our debt repayment and start back over to rebuild the emergency fund.

We paid off the credit cards eventually, but a few years ago, we went back into credit card debt when three things happened one summer—our HVAC system died, our house had mold and had to be remediated, and our child had a medical issue that wasn’t completely covered by insurance.

Since then, we’ve been working to build a more substantial emergency fund AND pay down debt.  No more debt repayment roller coaster for me.  This time I vowed when we paid down our debt, it would stay gone.  But for that to happen, we needed a bigger emergency fund.

The Economy Is Too Uncertain

Now that COVID-19 has hit, we’re not paying any extra on our debt.  We’re funneling all of our extra money to our emergency fund with the goal of hitting a 6-month emergency fund.

Why?

No one knows for sure what the economic impact of this virus will be.  I want to make sure my family has enough cushion to survive.  That means creating an ample emergency fund.

Prepare for Potential Job Loss

Why We've Decided Not to Throw Our Extra Money at Debt Now
Photo by Alexander Mils on Unsplash

We’ve been lucky that my husband hasn’t lost his job.  He’s in the higher education field, which is being hit especially hard by this pandemic.  He has to furlough for 39 days this upcoming year, which means we will essentially be losing two months of pay in the next 12 months.  However, we’re grateful that he still has a job.

But what will happen next year?

There is a very real possibility his job could be in jeopardy next year, depending on how badly this year goes.  We want to be prepared.  Sure, it would be nice if we could get our debt load down, but right now, we’re just focusing on piling cash in the bank.  We want an ample security net.

Much of the country is in the same predicament.  If you work for or own a small business, how long can the business hold out?  We’re already seeing some small businesses closing permanently, which means all of those employees will be looking for jobs.

I don’t want to advocate irresponsibility, but if you’ve lost your job and aren’t able to get a new one, you can always negotiate with your creditors or worst-case scenario, not pay your bills.  However, if you don’t have money in the bank, you’re left without resources.  Having a savings account in this situation always comes first.

Only Pay Down Debt After a 6 Month Emergency Fund Is Established

If you pause paying down your debt and only pay your minimum payments due, you can always change your plan later and pay more on your debts in a few months.  That’s one of the major reasons why we’ve decided not to throw extra money at our debt now.

We’re going to save, and save, and save.  If we, as a country, as a world, ride out this virus and it is no longer a threat, things can change.  Let’s say my husband and I do save a six-month emergency fund.  If, in another year or two, his job is stable, and the world is back to normal, we can change gears.  Maybe we take three months’ worth of our emergency fund and throw it on our debt to pay it off.  We can do that.

Final Thoughts

Though you may want to be debt free or carry a lower debt load, there are several good reasons to pause that goal.  The main reason why we’ve decided not to throw extra money at our debt now is because having money in the bank is priceless, especially in the age of a pandemic.

We can later decide to take some of that large emergency fund and put the money on our debt.  However, if we pay down our debt and stay with a $1,000 emergency fund, we’re extremely vulnerable financially to what may happen in the upcoming months.  We intend to protect ourselves as well as we can from economic instability by saving as much as we can.  There will be time later to aggressively pay down debt.  We don’t believe now is that time.

 

Are We Too Confident in the Stock Market?

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Experts are fond of telling us all about the historic returns of the stock market. But, does our belief in that make us overconfident in the stock market?

You’ll have a hard time finding someone who won’t tell you that the market performs quite admirably over time.  It may have it’s ups and downs, but it performs at a rate that touches on double digits for longer periods of time.  And, it’s hard to argue with the facts.  Take the market for any given 10 or so year period and you aren’t likely to find too many periods where it hasn’t returned a pretty nice rate.  Especially when you compare it to the rates of savings accounts and CDs over the same period.

But, there’s  shady side to all of that.  Our confidence in the ability of the stock market to return those kinds of numbers can sometimes cause us to over-invest our portfolios.  Every time the stock market drops significantly (or crashes altogether) we hear stories about the person who was near retirement and now has to work for another 10 years because he/she lost it all in the stock market drop.  Invariably, you hear one of the reporters utter something about whether the stock market is as safe as we all make it out to be.

Charging BullAnd the truth is, no.  It’s nowhere near as safe as some would make it out to be.  In fact, it’s down-right risky.  And the less diversification you have, the riskier it becomes.  Hold all your money, or a significant portion of your portfolio, in one stock and you’re just as likely to suffer a tragic loss than you are to retire rich.  Ignore the more conservative professionals who suggest that you should move more and more of your money away from stocks and into something like bonds as you age, and you have a much higher chance of suffering a tragic loss.

Our confidence isn’t entirely misplaced, however. The facts remain that the market does return a healthy rate over time. Alongside traditional investments, exploring alternative investment strategies can also add value to your portfolio. While stocks and bonds play a crucial role, diversifying into different financial instruments ensures a balanced approach to investing, mitigating risks associated with market volatility. As long as you can weather a few down trends, you’re likely to come out on top if you just hold on for the ride. The overconfidence comes when you keep your money in too high of a percentage of stocks as you near retirement age. By the time you are 10-15 years from retirement (about age 50-55) you should have moved at least 50% of your portfolio away from stocks and into bonds. Your investment adviser should be able to help you with that, or you should sign up with a stock advisor service (like the Motley Fool Stock Advisor, or Betterment).  When you’re 5 or so years from retirement, you should be closer to 90% in bonds and other safer investments.  Yes, these investments are less likely to have high returns, but they also are almost guaranteed to return something.  And, as the old saying goes, something is better than nothing.

The bottom line is this.  Be aware of the risk of the stock market and that you should begin playing it safer as you near retirement age and you should be ok.  Don’t get overconfident in the history of the stock market and it’s giant returns.  Most importantly, find an investment adviser that you can trust and, at the very least, get their advice on your portfolio and it’s allocations, and you should find yourself hitting retirement with most of the money you expected to be there.

Image Credit: Charging Bull by kdinuraj, on Flickr

This post originally appeared on Beating Broke on 10/25/2010, and has been refreshed.

Keeping Up With the Smiths

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Keeping up with the Joneses is bad.  We know that.  From a financial perspective, we spend a great deal of our time overcoming the green monster called envy in order to keep our lives in some semblance of financial order.  We know the Joneses down the street with their big, fancy new SUV.  We see them going on long family vacations.  And we know the guy that mows their lawn.  But, we also know that there’s a pretty high probability that they still owe a ton of money on that SUV.  That that family vacation likely was financed through a credit card.  Their entire financial life depends on them keeping their well-paying jobs.

Forget the Joneses

I’d like to talk about another family.  The Smiths.  You don’t know them.  We don’t talk about them like we do the Joneses.  Why don’t we?  Because, outwardly, their lives are nothing to be envious of.  They don’t own a big house on a double lot.  They don’t drive a brand new Escalade.  Their family vacations consist of weekend trips to state parks or trips to visit family a couple of counties over.  Outwardly, they may even seem a bit downtrodden.  They may seem (GASP!) a bit poor.

Sometimes they are.  Sometimes, they are truly victims of their circumstance, or their poor financial choices along the way.  But, for every one of those families, there’s at least two that aren’t poor.  They have well paying jobs.  They have money in the bank.  And they occasionally barbeque a steak on the cheap grill they have on their back deck.  It’s those Smiths I’d like to talk about.

It’s the Quiet Ones You Have to Watch Out For

Why don’t we know the Smiths?  Because we live in a society that is enamored of our celebrity.  We hang on every word that that famous athlete, or famous actress says.  We try and model our lives after theirs.  They live a glamorous life, full of flashing photography, red carpets, and any number of endorsement deals.

Keeping up with the Smiths

Who wouldn’t want to be like that?  Short of being famous, we decide that we’ll see how close we can get.  The bank doesn’t turn us down for that big house, big car, or vacation to the same beach that the celebrities hang out on.  Maybe we’ll even get to see one of them!

But, it’s the Smiths we should know.  We should know people who live their lives responsibly within their means.  We should know people who live for more than having our fellow neighbors think about how rich we are, and how rich our lives must be.  We should be the Smiths.  We should be the people who drive the reliable older car without the flashy rims and booming sound system.  We should be the people who live in the smaller house that we try and repair ourselves.

Society may push us towards that Joneses sort of lifestyle.  After all, what would become of some of the companies if we stopped trying to keep up with the Joneses and stopped buying all their luxury goods?  What would the news and tabloids cover if we weren’t constantly buying their rags in order to find out what sort of clothes the princes and princesses of some foreign country were wearing this spring?

Shiny Facades, Crumbling Foundations

All around us, there are Smiths.  We don’t notice them, and we rarely get to know them.  We’re surrounded by the Joneses, and the shiny facades of businesses and economies that are driven by their reckless spending.  But, under those shiny facades is a crumbling foundation.  The economy of the world is on shaky ground.  We saw just how shaky it really was in 2008.  When the housing market crashed, it very nearly brought the entire world economy with it.  Luckily, the economy was strong enough at the time to take a beating.  It wasn’t strong enough to bounce right back.  It’s been a long slog back to where we were.  We aren’t even back there yet.  There are still parts of the world that are hurting economically.

Imagine, for a moment, if we rebuilt that economy, not on the sands of bailouts and extended unemployment benefits, and instead built it on the bedrock of hard work and frugality that got us where we were in the first place.  Imagine if we had seen the folly of our loose spending ways and tightened our belts, stuck to our budgets, and started building an economy that doesn’t shake and quiver at the smallest rise in unemployment, or the slightest miss in an earnings report?

What if, instead of running around willy-nilly chasing the lifestyle of the Joneses, we were calmly working ourselves into the stable economy of the Smiths?  What if we all didn’t have wait for our next paycheck to buy gas because our last paycheck went to our mortgage and car payments?  What if we were able to fill a tank of gas from the cash in our bank account and know that we still had our emergency funds to help us along should a real emergency come along?

We can.  We can bring our spending in line with our earning.  We can sell the fancy car that we don’t need.  We can downsize our house to something that we can afford.  Sure, the dependable used car you buy might not have as much chrome as the fancy one.  It might not have the same heated seats.  And the house you downsize to might not have a walk-in closet, or a jacuzzi bath tub.  I’ll let you in on a little secret.  You don’t need them.  They’re luxuries.  You only think that it’s normal to have those things because the Joneses told you it was.

We should be keeping up with the Smiths.

We can be the Smiths.