The other day, when I was able to share with everyone that our debt was under $21,000, it felt so good. I felt like we were making some progress again.
For quite a while there, it seemed like I was sending oodles of money towards our credit cards. I felt like I was showing the debt beast a thing or two and then I even started wondering if we could pay off our debt way before our goal date. Life was good.
Things stalled a bit when I decided that we should have a rainy day savings of $2,500. We were no longer was sending $500 payments toward our cards. Instead, for a while there we was paying the minimum payment and that was it. To put it into words, I felt like we were treading water again when it came to our debt. I knew that having some money in savings was a good thing, but it did hamper our debt reduction progress.
Then our income took a hit…we owed for 2006 taxes…we owed for a mistake in our 2005 taxes. BAM…BAM…BAM. Talk about trying to keep it together. I’ve never been one that could handle a whole bunch of setbacks at once with grace.
But I did this time.
Sure, I did break down and had a good cry. I was upset and I had to get it out of my system. The biggest difference was that we had a little over $2,000 in our savings at that point. We paid our 2006 taxes with that. We paid our state 2005 taxes in full with that and sent a partial payment to the IRS (the other portion of the IRS debt we are going into a payment plan for). Our savings account did dwindle down, but we were able to do something we have never been able to do before…we were able to handle some of these financial set-backs with cash.
No filling out a credit card cash advance check. No putting the groceries on our credit cards because we needed the cash in our checking account for other things. None of that this time around.
It felt pretty darn good.
It’s funny because for the longest time I have been against saving up money in an emergency fund. I wanted to attack the debt so hard and to take away funds to put in a savings account was crazy to me. Heck, if there was an emergency I could always rely on my credit cards…right?
As time passed, I started thinking more about it. Thanks to the lure of a $20 bonus at Virtual Bank, I made the plunge and saved $100. In January, our health insurance bill made me decide to at least save $350 in our rainy day fund. Then, in February I suddenly decided it was time to save more money in there and set a goal of $2,500.
I’m not sure what prompted me to suddenly decide it was time to beef up our savings. But I can say that I am very thankful things worked out the way they did.
I think most of you know it’s not my style to tell you what you need to do because everyone’s situation is different. For us, though, I believe having that emergency fund saved me from really losing it and getting too discouraged.
Next step? Time to get our savings account replenished 😉
I understand you feeling of wanting to get you debt gone, but I find setting money aside to be really motivating. The thing is just paying debt off isn’t good enough, you have to develop frugal habits at the same time or you run the risk of falling back into old habits.
Here’s how I do it.
I take the same amount out each week as I have for years and see how much I can save of it. As I mentioned in my email by using a shopping list amonst other ideas I’ve cut my shopping budget in half rather than spending that money else where as I might have done before it now gets set aside in a jar. All of sudden instead of complaining how hard it is to keep our spending under control I’m motivated to see how much I can cut each week. As the savings grow so does my motivation.
I expect by the end of the month to have 3-4 hundreds euros set aside. Best part is I don’t feel like I’m scrimping and scraping by for a change I’m really enjoying not spending money.
There is a second and very important reason for saving rather than just debt reduction. It gets you in the habit of having money in the bank. Of saving of paying for things cash. Once you are debt free you run the risk of slipping back into old habits again if all you’ve done is debt reduction. The reason is that while you haven’t been running up debts you haven’t been developing the habit of setting money aside each month. It’s very easy to fall back into the temptation of spending again now that your free.
But if you’ve been saving at the same time as you are paying debt off as your payments you are ingraining new habits which will make it harder to slip back into old ways once you are debt free.
I have been debt free several times only to fall back into old habits, that’s why I keep telling my wife it’s not about paying debts off but living frugally. Getting debt free will happen naturally
Or as I like to say a dollar (euro) saved is less time spent working OT!
I get a bonus from my job every year and in the past that lump sum of money would come and leave quickly. This year I utilized the bonus and restarted my savings account. It’s nice having a grand just sitting there in the event I was to need it for an unplanned event.
When growing up I always saw the credit card as the emergency fund to pay for stuff when the income ran out. Living below income seems like a wild idea that so many people simply don’t do. Tackling that debt seems to never happen because there is never enough money. The money is there but the management is not.
I’ve followed your blog for a few months now and you have made a lot of progress on paying down your debt. Good luck to you on getting your savings back up for those rainy days.
This is so great to see! The great part is that you have changed your relationship with your money, and your life will never be the same.
As you found out, the emergency fund is quite important. It helps you cover the unexpected bills, so that you can keep moving full steam ahead.
With the changed behavior patterns you are exhibiting it won’t be long before that debt is gone!
I have made a similar journey, so the can feel the excitement along with you.
-The Happy Rock
What you say is so true. My husband and I have just gone through something similar. Without any warning, my husband lost his job, and if we hadn’t had money in savings, we would have been sunk for sure. It would have been nice to have used the money to pay off our student loans, but had we done that, we would be living on credit cards now.
I just found your blog recently. Way to go on your financial progress!
Congratulations on keeping it together in a time when most people would have lost it.
I applaud the notion of having a rainy day fund, but I would urge you to rethink this decision. The rainy day fund is costing you a lot of money – specifically, the difference in interest between VirtualBank and your credit card balances.
You do always have the option of borrowing to cover emergencies. Let that be your rainy day fund for now. Post-debt, your first $2,500 of savings can be the new rainy day fund.
David – Coming from a guy just getting out of debt, I can tell you that the rainy day fund is really necessary. Borrowing to cover emergencies is a step backwards, and worse yet, it’s an emotional blow – kind of like a drunk hitting the bottle again. Granted, you might save some cash by borrowing, but the cash you save is coming out of your own emotional well being. And also, it’s makes you feel self reliant to use your own resources in order to tackle problems. Just my interest free two cents 🙂
I’d have to disagree with David. The way I see?
The interest paid on 4 credit cards: average 5.69%
The interest earned on one emergency fund: 4.5%
The interest in having peace of mind in knowing you won’t have to bring out the credit cards in case of emergency: priceless.
Peace of mind is everything to me. And you have to do what brings you to that.
I can’t begin to quantify the amount of stress, tears and frustration our $1,000 emergency fund has saved us from in the past 18 months. It’s the greatest thing we did when we began our debt payoff plan. When we get hit with an unexpected emergency expense (plane tickets to attend my grandfather’s funeral; a $400 emergency vet bill; the heater that went out a couple days before Christmas; bathroom repairs due to a hidden toilet leak, to name a few), I feel so secure knowing we can dust ourselves off and get on with life, mostly without missing a beat.
In reply to David, borrowing money to cover these emergencies would be totally counterproductive to the mentality of paying off debt, not to mention inefficient. Again, save yourself the stress.
I really don’t have a bright knowledge on most financial things. I do know that I have never liked to OWE any one any thing. AT ALL.
It stands to reason though, that if you borrow money it was because you didn’t have any or enough. If you can put some away while you are paying off the money you owe, you more than likely will not have to borrow again.
A savings is a good idea. No matter how small, just start one. It doesn’t even have to be in a traditional savings account at a bank (although you are missing out on an interest rate if you have enough in savings.)
Mine is about $200.00 right now. My husband just went back to work a month ago, and we are catching up on being off work for almost 6 months. Yeah, 200 isn’t much, but that is 200 that will not be put on a credit card or borrowed in an emergency.
This path is well-trodden, and you’ve just experienced a couple of those “I can’t explain it you have to experience it” kind of things.
I think everyone goes through the same process. First, they decide to pay down the debt and see all the progress made in the first couple months from tracking expenses, cutting back, and not charging more. The momentum is awesome, the motivation is great, and everyone I know sits down with a pencil and paper and figures out how it will all be paid off months or years sooner than they thought.
At this point I want to say “No, it won’t” but don’t want to be a demotivator, plus they don’t believe it anyway (just like I didn’t).
Then everyone decides to use the cards as the emergency fund at first. I want to say “It doesn’t work that way” but you have to come to that conclusion yourself. It doesn’t make sense until you’ve had a setback and tapped the fund the first time and not borrowed any more to feel how that works and why it’s right to have the money in the bank even with outstanding debt. In spite of all the numbers, a lot of finance has nothing to do with “the math” including when to have a mini e-fund.
There are more strange things to come. Like how when you get rid of the debt somehow your income seems to go up faster than it did before. Or how once you get your Full Monte emergency fund in place, for some reason you almost never have to tap it. But nobody buys it from the guy that’s been there. You have to experience it to believe it.
Oh, and one more thing that can’t be explained but has to be experienced – when you get there it’s even better than you think.