Get a plan, Stan…just set yourself free!Fiscal Fitness Clubs of America
50 Ways to Leave Your Lover by Paul Simon
The song refers to breaking up with an unwanted girlfriend (which by the way happens a lot around Valentine’s day), but we think it can easily apply to our financial patterns that just aren’t getting us to where we want to be.
FEBRUARY CHALLENGE: “Taking Stock” Part 2
In our last blog, we suggested tracking Key Indicators that will tell you how you are progressing and what the issues are that you need to address. Two consistent issues we see are debt ratios that are too high and liquid reserves that are too low. These two are interrelated. Why? Because if you had the reserves, you wouldn’t use as much credit. Right? It’s a circle! So let’s talk about making plans to get yourself free. (If you have enough reserves and a debt free plan, you don’t need to read any further! You can start working on how you are going to make sure you are putting your money towards the goals you want to achieve this year.)
The liquid reserves are frequently called emergency funds. We like to call them the “Curveball” account and combine both money for emergencies and money for those expenses that we know will come, but aren’t included in the routine monthly spending, a.k.a. variable expenses. These include things like birthday and holiday gifts, car repairs, new tires, medical co-pays and deductibles, car registration renewals, annual memberships, wedding gifts, home repairs, back to school expenses, clothes…we could go on and on just like the expenses! If you aren’t projecting these expenses out and saving monthly for them, two things happen. First, you see money in your account and say “Yea, I don’t feel like cooking…let’s eat out!” and/or say “I can afford that new tool that’s on sale!” You quickly forget that you need tires next month. The second thing that happens is that next month comes and you don’t have all the money for the tires, so the whole balance goes on a credit card. Now, the price of the tool or dinner is way more than any discount you got, because until you have paid off all the debt from prior charges, the interest on this debt will accumulate. That $60 dinner could end up costing $200 by the time you get around to paying it off.
So, here are some steps to getting free:
- Project variable expenses: If you are using Mint or another tool, you may be able to look up what you spent last year in different categories and start there. For home repairs, research shows about 1-2% of the value each year should be set aside. (Sometimes there will be nothing one year. but then the next…whammy! The furnace/dishwasher/garage door/etc. goes out.)
- Divide the total by 12, add some extra to start building the emergency fund for the REALLY big curve balls (job loss, serious medical problems, legal problem, house burning down, etc.)
- Set up an automatic transfer from your checking to the Curveball account.
- Pre-fund the Curveball account with what you can. The goal is to get the emergency part up to at least 3 months of expenses. Get a tax refund or bonus? Put some towards paying down debt and and some here.
- When you have one of these expenses, go to this account for the money. Murphy’s law says the first month you’ll have an expense that is bigger than what you put in. Just keep doing it, eventually you’ll get ahead of the game. If you can’t cover it all here and have to use credit, ONLY charge the balance, not the full amount. Honest, the car repair place will take part check and part credit. If you really can’t do that, then immediately take the money from the Curveball account and add that to your debt payment. (There’s more than one way to play this game!)
- Get a debt restructure plan, if you don’t have one already. There are some best practices to paying off debt that can speed up your debt free date, and we can help!
Finally, if you find yourself wanting to raid or short change that Curveball account, chant this mantra:
I’m going to continue to S.A.V.E. because…
S = I’ll be Safe no matter what ‘cause I’ll be able to pay all my bills!
A = My Auto will continue to run!
V = I’ll get a Vacation, yay!
E = Is for Everything Else I forgot to put in my budget! I’ll be able to pay it without building debt!
Okay, Stan. Now you’ve got a plan to get yourself free!