Wednesday, February 22, 2012

Why have an emergency fund?

Well, for starters, if you really buy into the Ramsey plan, you are paying for everything with money you already have. There is no more credit card to save you. Having an emergency fund gives you a cushion when you suddenly need money you haven't budgeted. Such as locking the keys in the car and needing a locksmith to jimmy the door open. *ahem*

Once you have a Baby Emergency Fund of $1000 set up, leave it at that amount until all debts are paid off. Yes, this will mean replenishing it if you have to tap into it. That's OK. That's what it's for! After you are debt-free (except for the house), Ramsey suggests saving enough to cover 3-6 months of expenses. Note he doesn't say salary. We can safely assume that if times were tough, we wouldn't go to the opera or out for a sushi dinner. Just enough to cover expenses.

The nice thing about an emergency fund, in my limited experience, is that it eliminates the need to reach for a credit card when times are tough. After all, we were supposed to have cut them up (we have them in the desk drawer until they are paid off. Paul can't quite cut them up yet. He'll get there.) In my little snafu the other night, it was easy to transfer the $40 from my ING Emergency Fund savings account into the Main Checking account. Now I need to add $40 back in - no biggie. After my next paycheck I'll put it in and we'll be back in business, ready for a larger emergency (which hopefully we won't experience!)

Having an Emergency Fund is what makes the cash system work for me, emotionally. I don't think I could successfully plan for every little bump in the road. This way, it's been pre-planned, in a way. It is a really great feeling to only spend money that we have. I wish, oh I wish, we had lived this way ten years ago! Oh well. Better late than never!

Thursday, February 9, 2012

Book Review: One Bite At A Time

I know, I've talked about One Bite At A Time before, but I just can't let it rest. I'm moving through the book rapidly, excited about how organized my life is becoming.

I started out with Projects 1, 3, 4, 11, 12, 13, 19, 39, and 47. These tasks center around more organized home management. I can't tell you how relaxed our mornings are, or how satisfied I feel before hitting the hay at night. With a Morning Routine, an Evening Routine, and Cleaning As You Go etc., my seemingly-endless chores seem to take less time now, and I seem to get more satisfaction out of doing them. Love!

About three weeks ago we started into the Money-Management Projects, 2, 28, 40, and 48. And with a zero-based budget, sinking funds set up in ING and our cash envelopes at the ready, we began February with a lot more hope than we have most months in the past. We have a PLAN.

This plan, introduced by Tsh's book, led me to Dave Ramsey's site and all his quick little e-tools that helped me realize just how to pay off our debt. As a singer and substitute teacher, I receive irregular income and February has already brought me four small checks. But each deposit into our bank account (rather than into my "coffee fund") has made me more excited for the future.

This little gem of a book is only $5 and I just can't stop recommending it to everyone I know. It's the best $5 I have ever spent in my life. It's changed everything! I hope you'll give it a try. I know you won't be sorry!

Here's the link: click here to buy the e-book.

Tuesday, February 7, 2012

A Zero-Based Budget

If you already know what a zero-based budget is, then you are miles ahead of where I was. I knew what a budget was, and we have tried budgeting, but "things just kept coming up." Sound familiar?

I've used the cash envelope system for years and it really helps me curb my spending, especially in the groceries and coffee areas! I hate to think of what our finances would look like without that system in place!

But I had never heard of a zero-based budget. Assigning a category to each dollar? How would this work? Here are Jan and Joe again.

Jan and Joe make a monthly combined income of $500. Remember their debts? They pay $60 in minimum payments. They are also adding a $20 snowball to their budget.

They also have monthly bills, like car insurance and utilities. Let's say their monthly bills are $200. These are mostly fixed fees.

Then there are other categories that would be best budgeted with the envelope system, because they have more control over these areas. Things like Dining Out, Groceries, Retail, and Emergency Fund... you get the idea. I've marked those with an asterisk*.

Their zero-based budget could look something like this:

Monthly Combined Income: $500
  • - Monthly Debt Payments: $60
  • - Monthly Bills: $200
  • - Snowball Payment: $20
  • - *Groceries: $100
  • - *Dining Out: $20
  • - *Retail: $10
  • - *Joe's spending money: $20
  • - *Jan's spending money: $20
  • - Emergency Fund: $50
Total Left Over: $0

It's a great system, don't you think? 

Let's say Jan has book club at the end of the month and she usually spends about $5 on a cocktail with the girls. Knowing that, she needs to budget her spending money for the month, not blow the entire $20 on one fancy lunch and shopping spree on the 3rd of the month. 

We know Joe really wants a new TV. With this system, he must choose between saving until he can pay cash for it or going without. 

So, for the first time, we are trying this method of budgeting. I like it. I like seeing where every dollar is going. 

What is the Emergency Fund? We'll cover that next! 

Sunday, February 5, 2012

Snowballing 101

A few friends have asked me to explain what snowballing debt is, and why it is a good thing. I am happy to oblige! Snowballing is perhaps the major thing I've learned from all this Dave Ramsey business, besides a successful budget, which I'll explain next time!

So, let's say Jan and Jim Minivan have 3 major monthly debts. They have a credit card debt of $100, a student loan for $200 and a car payment for $300 (not to mention the mortgage on their house). Let's say the minimum payment on each of those is 10%. So they are already spending $60 per month and the finance charges keep acruing. And perhaps Jan keeps shopping at Nordy's. And Jim wants a new TV. You get the pictures.

But what if they decide to snowball their debt? They can do it over a year, and while they may have to cut their spending by a bit, they won't be eating rice and beans every night, unless they choose to! Let's say they are able to pay an extra $20 per month to pay down their debt.

Snowballing means paying the most you can on your smallest debt while still paying the minimum on your other debts. When that debt is paid off, you roll that amount on to the next debt, and so on. Here's what it looks like:

Month 1: CC: $10 min + $20 snowball = $30 ($70 left)
Month 2: CC: $10 min + $20 snowball = $30 ($40 left)
Month 3: CC: $10 min + $20 snowball = $30 ($10 left)
Month 4: CC $10 min = $0 left!  Credit Card Paid Off! Take the extra $20 and celebrate, or put it towards the next debt...
Month 5: SL: $20 min + $10 CC + $20 snowball = $50 ($150 left)
Month 6: SL: $20 min + $10 CC + $20 snowball = $50 ($100 left)
Month 7: SL: $20 min + $10 CC + $20 snowball = $50 ($ 50 left)
Month 8: SL: $20 min + $10 CC + $20 snowball = $50   $0 left! Student Load Paid Off!!!
Month 9: Car: $30 min + $10 CC + $20 SL + $20 snowball = $80 ($220 left)
Month 10:Car: $30 min + $10 CC + $20 SL + $20 snowball = $80 ($140 left)
Month 11:Car: $30 min + $10 CC + $20 SL + $20 snowball = $80 ($60 left)
Month 12:Car: $30 min + $10 CC + $20 SL = $60 $0 left!  Car Paid Off! Take the extra $20 and celebrate, or put it towards savings...

See how this works? If the Minivans had continued to pay the minimum and continued to charge on the cards, they might never have paid them off. With a little tightening of the budget and a strict no more credit cards philosophy, the Minivans have successfully eliminated their debt. Now they can save for the future and not simply pay for the past.

Will it be hard? Yes. Will Jan get grumpy when she can't purchase a new pair of jeans on a whim? Sure. But she'll love being able to, eventually, perhaps upgrade their old minivan for a snazzy new Mini Cooper. Who knows what they will decide to save for?

Will Joe grumble and fuss with the controls to get better color on his old 30" TV? Yes. But in a few years, with a healthy retirement fund and savings in the bank, he will be able to upgrade his entire entertainment system, if he chooses. Who knows if he will even want to by then?

I love this plan. I am so grateful to 52 Bites for introducing it to me! Love it! You can buy the $5 e-book by following this link, or clicking on the picture on the right. Or you can simply research snowballing debt - I'm sure you'll find a lot of information. 52 Bites just has that, and more!

Next up - the zero-based budget!

Saturday, February 4, 2012

When "Enough" Really Is Enough

Why is it that while Americans are some of the richest people on Earth, we still feel as if we don't have enough? It's ridiculous, if you stop to think about it. A tight "Dining Out" budget should be something to be grateful for, really. We are so lucky to have the variety of restaurants around us and the extra money to indulge in a meal away from home.

Did you know our 13-year old Saturn has manual windows? But it is paid off, and has been for a while. We are so lucky to even have a second car! Yet, other new and flashy cars are so appealing. Why is this?

I think, for me to be successful in our new budget plan, I need to re-think what "enough" really means to me. Because I think I have it, and always have. What a pleasant thought.

Here is a lovely list of ways to grow more appreciative of what we already have. Pop over here to Andrea's blog to read her list.

Friday, February 3, 2012

Getting itchy

Paul gets paid early in the month, but not on the 1st. So I've been watching the bank account like a hawk, ready to jump in and transfer money to ING like a crazy person. We got one of the two Electric Orange debit cards in the mail. I'm ready! Very excited.

Have I mentioned where I got this idea from? One of my favorite blogs on the planet is Tsh's ebook "One Bite At A Time" has 52 little tasks to do, one for each week in a year, though I'm doing them until I get them ingrained. One of them, "Make a Debt-Free Plan" is what inspired my Dave Ramsey reading and everything that goes along with it.

Tsh's book is only $5 - you should check it out! Go here to see the projects!!

Projects #1-26
Projects #27-52

And you can download a sample chapter here:
Project 5: Start Menu Planning

If you'd like to purchase it for yourself, a link to the book is up on the right! I think her book is an invaluable resource and I'm so happy I found it and am using it. I love it!

Saturday, January 28, 2012

On a roll

Without giving in to the numerous cliches coined by Dave Ramsey, we are on a roll. I've read Total Money Makeover (and even bought the workbook today with a gift card we had lying around! Score!) Our ING Direct bank account is verified and I've set up our sinking funds accounts. Tonight we are forgoing a HHS Fundraiser for a quiet date night, funded with a coupon from the Entertainment book we purchased from Horizons. We'll talk, work on the workbook, and hopefully come together more on what we're doing. Paul is more "don't spend any more money" while I'm more "let's have a plan so I am not tempted to spend any more money." Sometimes it's tough to speak the same language.

Here are our sinking funds accounts. These are things that don't happen monthly, but can sneak up on us every few months.
  • Quarterly Taxes
  • Western Disposal
  • Allstate Umbrella Policy
  • Horizons K-8 Various Fees
  • Emergency Fund
  • Vacation Fund 
Once we are debt-free (except for the house) we will add more to the kids' 529 Funds and our Retirement Fund. I am super excited and motivated to get out of debt and have all that money to ourselves. I like the idea of not paying for the past but saving for the future. 

Here are Dave's 7 Baby Steps:
  1. Save $1000 for a Baby Emergency Fund.
  2. Begin Debt Snowball Plan.
  3. Finish Emergency Fund (3-6 months of expenses)
  4. Invest 15% of Income for Retirement.
  5. Save for kids' college.
  6. Pay off mortgage.
  7. Build wealth (invest).
Hopefully we will complete all 7 steps (usually in 4-7 years, for most people following his plan) and actually have enough money to give - to whatever causes we like. I'd love to help my parents, send money to Mae's orphanage, help the synagogue, help Horizons... I'd love to. We shall see.