Emergency Fund Archives — Beating Broke

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

May 11, 2020 By MelissaB 1 Comment

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

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.

5 Benefits and Drawbacks of Keeping a Change Jar

November 28, 2019 By MelissaB 1 Comment

Do you keep a change jar? My mom keeps all of her change and has been saving it for the last two years for a vacation. She is not alone as many people hoard their change as a way to save money, especially if they feel they’d otherwise be unable to. However, just as many (or more) argue that keeping change is a waste of time and space. Both sides have valid points; I find there are 5 benefits and drawbacks of keeping a change jar.

Benefits to Keeping a Change Jar

There are benefits to keeping a change jar, which is why so many people do so, even in this age of prevalent credit card usage.

Save for Something Special

5 Benefits and Drawbacks of Keeping a Change Jar — Photo by Deanna Ritchie on Unsplash

Have you ever seen the big five-gallon jugs that people use to collect their change? One man saved for 10 years, and when he cashed it in, he had over $3,000, which he used for a trip to Europe. Would he have saved that money without keeping his change? He says no. If you don’t have the discipline to save, keeping your change is a good, mindless way to save.

Cash Emergency Fund

Another woman saves her change for a rainy day. She and her husband had an expensive car repair that they hadn’t planned for, and they robbed all of their budget categories to pay in cash for the expense. That left her with no grocery money for her family of four for the month, so she raided her change jar. She had $224 in there, which she used to feed her family. It was still a tight month, but she didn’t go into debt, and her family didn’t go hungry.

Drawbacks to Keeping a Change Jar

Unfortunately, there are risks and expenses with saving this way.

Could Earn Interest

One of the major drawbacks to keeping all of your change in a jar for years is that you miss out on the interest you could be receiving. Take the man who had $3,000 in change. He could have invested his money as he saved and been earning interest. He would have made more money than he did just leaving it in his closet.

May Lose It All

An even bigger drawback is that you have the potential to lose all of the change. A friend of mine had about $120 in change she’d been saving, and, unfortunately, her house was robbed. All of that money was gone. Even if your house isn’t broken into, you could lose the money if you have a fire. Even teens have been known to dig into their parents’ change jar for a little extra money.

You May Pay a Fee

A select few banks still offer coin counting machines for free, but many won’t take coin rolls. If you have to rely on CoinStar, you’ll pay an 11.9% fee, so if you turn in $300 in change, you’ll pay $36 in processing fees. If you need to pay a fee this high, is it still worthwhile to save your change?

Saving change has been a fun way to save money, but as these 5 benefits and drawbacks of keeping a change jar demonstrate, it’s becoming increasingly costly. If you can have enough self-discipline to save the money on your own in a bank or invest it, that is the better way to save.

Do you save your change? What benefits and drawbacks do you see?

Should You Create Sinking Funds Before You’re Debt Free?

October 21, 2019 By MelissaB Leave a Comment

You have debt. A lot of debt. And now you want to pay it off, IMMEDIATELY! You’re fired up. You’ve read financial blogs, read debt payoff gurus books, and you’re setting up your budget. Should you create sinking funds before your debt free or put all of your money toward debt repayment?

What Are Sinking Funds?

If you’re new to budgeting, sinking funds are money you put aside for irregular expenses you know will come up during the year. Let’s say you spend $1,000 each Christmas, so you decide, in January, to set aside $83 a month in your Christmas sinking fund. When December rolls around, you have all of the money you need to pay for your Christmas gifts debt free.

Create Sinking Funds Before You Pay Off Debt? — Photo by Eugene Zhyvchik on Unsplash

The Argument Against Sinking Funds

Some argue that you shouldn’t set up sinking funds until you’re debt free. What is the point of putting $83 aside for Christmas when you’re paying 15% interest on your credit card? That $83 each month would be better served if you applied it to your credit card and reduced the balance and therefore the amount you’re paying in interest. You’ll get out of debt more quickly this way.

The Flaw With This Kind of Thinking

There is one major flaw with this kind of thinking. What will you do when you need to actually pay one of these irregular expenses?

I live in Arizona, and six months of the year, my air conditioner runs night and day. During those months, my electric bill ranges from $225 to $275, depending on how warm it is outside. Then there are about two months a year in flux when the electric is $125 to $175, and, in the winter, for four months, my electric settles down to $80 a month.

My budget can’t handle such big fluctuations in our electric bill, so every month, I set aside $150 for electric. When summer comes, I have a large sinking fund to help me pay for those hot months when the electric bill will be much higher than $150.

If I didn’t have a sinking fund, how would I pay for the high electric bill in July?

A Happy Compromise

I encourage everyone to set up sinking funds, even if you do have lots of debt. Part of getting out of debt (and staying out of debt) is changing your attitude toward money. What’s the use of putting all of your money on your debt if you have a $1,500 car repair, no money set aside, and you have to charge it and go further back in debt again? That’s not a budget roller coaster I want to be on.

But there is a compromise; if you have extra in the sinking fund after the event is over, apply that money to debt. For instance, let’s go back to the sinking fund of $1,000 at Christmas. Let’s say you’re conservative, shop the deals, and only end up spending $750 on Christmas presents. Great! Take that leftover $250 and apply it to debt. Then, in January start saving for the sinking fund again.

If you’re paying down debt, make sure to create and fund sinking funds. You won’t be sorry, and you’ll be changing your attitude toward money so when you get out of debt, you stay out of debt.

Do you create and fund sinking funds each month? If not, how do you handle it when large, unplanned or irregular expenses come up?