Beating Broke

Personal Finance from the Broke Perspective

Are Your Personal Finance Skills Holding You Back?

By 3 Comments

One of the reasons that I started this site was because it forces me to learn new personal finance skills.  Sometimes, the tree is sitting there in the forest and you need someone to point it out and make it stick out from the forest.  The more skills that you learn in any given subject, the closer you are to what could be considered an expert on that subject.  There are a few subjects that I consider myself to be an expert, but personal finance is not one of them.  But, I am trying.

It occurs to me, however, that in our journey to become experts at personal finance (even if it’s just our own finances) we can sometimes hold ourselves back.  We can sometimes become so focused on the topic and that one slice of our lives that we forget that there are other parts of our lives that must also be taken care of.  For many, personal finance is a deeply religious topic.  As a Christian, there are many places in the Bible that specifically mention money and the manner in which we should handle it.  In fact, you might notice the tag line here at Beating Broke as being a quote from the Bible.  But, nowhere in the Bible does it say that I must be perfect in the handling of my money before I should begin to work on any other aspects of my life.

If we focus too long on any one aspect, many of the other aspects can quickly fall behind.  Baker, from Man vs. Debt, recently called himself a hypocrite.  Why?  Because he’s been a crusader for paying off debt and doing so unrelentingly.  He has preached a very die-hard approach to debt retirement that is based in the teachings of Dave Ramsey.  But, Baker and his family have put their debt repayment on hold while they travel and experience foreign living and working.

If you only glance at the situation, you can’t help but agree with Baker’s assessment of himself.  And in a some ways, he is a hypocrite.  However, he also is not entirely a hypocrite.  He and his wife planned for this trip.  They budgeted for it and saved for it.  Yes, they put some of their goals on hold, but they did so to take advantage of an opportunity that may have never reappeared for them.  If he and his wife had passed up on this opportunity, they would have been kicking themselves for it for the rest of their life.  They’d be debt free, but at what cost.

It is a lifetime opportunity.  If they had to choose between debt repayment and a trip to Disneyland, I would say that they would be stupid to not skip it.  After all, Disneyland isn’t likely to go away anytime soon and they’d be able to visit at a later date.  Yes, you have to maintain your vigilance and do whatever you can to meet your goals.  But you also have to live your life.  If your goals are holding you back from living your life, then you really should rethink your goals, because they may be causing more harm than good.

Baker is a very skillful personal finance person.  He’s been writing about the subject for quite a while now.  He and his wife have made great strides towards their goal of being debt free.  But, Baker didn’t let his personal finance skills hold him back.  He didn’t let them keep him from living passionately. And he didn’t let them keep him from taking advantage of a once in a lifetime opportunity.  He and his family will have a wonderful story to tell and experiences that you just can’t buy.  If that makes him a hypocrite, then so be it.  I don’t think it does.  After all, if he hadn’t been walking the walk, he wouldn’t have had the ability to take advantage of the opportunity.  If anything, he’s an example of why you need to stick to your guns.  If you do, you will be able to take advantage of opportunity instead of having to let it pass you by.

How Much Should Your Emergency Fund Be?

By 6 Comments

If you’re smart, and you are since you’re reading Beating Broke, you’ve got an emergency fund.  But just how much do you have in your emergency fund?  And how much should you have in that fund?

Ramseyan thought:  Start with a goal of $1000 and then after your bills are paid off, move it up to cover at least 6 months of expenses.  This is the current plan that my wife and I are using.  We built up our intitial fund of $1000 and have been letting it sit in our e-trade savings.  It’s just under $1050 at the moment and growing at about $2-$3 a month.  Nothing big, but much more than we ever had before.

Some will say that Ramsey is a little off on this thinking.  Many people, my wife and I included, couldn’t even make it a month on $1000.  Those same people would suggest that you build up a 1 month expenses emergency fund at the minimum.  They may be right.

The key here, is that we’re discussing personal finances.  It’s personal.  When my wife and I decided to take the reins and take control of our personal finances, we didn’t have an emergency fund at all.  We had just completed reading Dave Ramsey’s Total Money Makeover, so we followed (are following) his baby steps plan to get ourselves out of the hole.  We’re Beating Broke. (Do you like how I slipped that in there? 😉 )

The Beating Broke thought: Because we’re talking about personal finances, it’s important for you to gauge your risk and build an emergency fund that is appropriate.  Certain things will raise the risk of an emergency.  If you’re driving an old car, for instance, the risk of a breakdown is higher than if you were driving a newer car.  If you’re health is a little worse than average, the risk of you having a medical emergency could also be higher.

The higher your emergency risk, the larger your emergency fund should be.  I suggest starting with at least $1000.  It’s a good number, and for many, it’s more than what you already have.  If you can continue to grow that emergency fund without derailing your excess debt payoffs, do so.  Continue to build it until it is at least 3 months expenses.  In the end, shoot for a constant emergency fund of at least 6 months expenses.  Try to keep it to no more than 12 months though.

Why no more than 12 months?  Because you’re likely keeping it in a high-yield savings.  The 3-4% that they are currently paying is good, but you can do better elsewhere.  If you’ve already got 12 months of expenses in the bank, you can take any excesses and do much better through investments that will get you a higher return.  Presumably anyways.  History would say so, and it usually doesn’t lie.

Most importantly, you must have an emergency fund.  If you don’t then this whole article is pointless.  It will give you a peace of mind that you’ve been missing and make it easier to pay off your debt.

As usual, the advice here is merely that of a lowly personal finance blogger and not that of a financial professional.  Before making any big money moves, you should consult a professional.

Debt Avalanche? Correct?

By 15 Comments

There are many theories as to how best to pay off your credit card debt.  One, the Debt Snowball, was popularized by Dave Ramsey and has many followers.  In it, a borrower pays off the lowest balance rate card first and then “snowballs” the payment from that card onto the next lowest balance until they are all paid off.  One of the benefits of doing it this way is that you get a “quick win” when you pay off the first card.  And because you are “snowballing” the payments onto the next card, as the balances go up, so does the payment and your first “quick win” turns into another. Then another.

Flexo at Consumerism Commentary seems to think that that isn’t the best way to do it.  According to him, the method that he calls the “debt avalanche” is the “correct” way to pay off debt.  In this method, you arrange your debts in order of highest interest rate first to lowest interest rate last.  As you pay off your debts, you are saving more money on interest and paying the grand total off in a faster length of time because of it.  In his words:

By choosing the Debt Avalanche method, you will pay off your total debt faster, you will pay less interest, and you are mathematically efficient.

And he’s right.  Mathematically.  And if we are all robots, it will work for each and every one of us.  What he fails to do is take into account the human factor.  Let me make an example for us.

[Read more…]