Debt on Hold? Is that Possible?

Yes, it is.

We are still paying on our debt (of course), but we are not paying extra right now.

As you may or may not know, my family and I have accepted a job in Nashville, Tennessee, and will be moving at the end of March. We have all-but sold our house (it still has be be inspected, but we haven't had any large cracks in the walls or large mice crawling around), and have had an offer accepted on a house near Nashville (Hermitage, Tennessee, if you are keeping score at home).

With all the extras that come up in moving, we have decided to put away money for the move--just to be on the safe side. We have really been blessed in that we will have zero closing costs on either end of the house selling, and the congregation where we are moving is paying for our move (unless we can't get a decent estimate). So we should not have any major costs.

However, there are always little things that pop up in a move, and we know that. So, for the time being, we are saving up cash for "moving costs." We won't spend the money unless we absolutely have to, but we want to have it ready in case it is needed. It is serving almost like a "moving emergency fund."

But then...

whatever we don't spend?

Straight to debt!

"The Automatic Millionaire" (Chapter 5)

NOTE: I'm sorry it's been so long since our last update in this series. I really don't have any excuse for the delay, and I apologize.

Chapter five of David Bach's book is entitled "Automate for a Rainy Day." As you might expect, this chapter deals with building an emergency--or "rainy day"--fund. The chapter even contains a purpose statement: "This chapter answers two basic questions: How much money should you put aside in order to protect yourself from the proverbial 'rainy day,' and where should you put it?" (pages 135-136).

Nearly every financial planning book contains this step, because, no matter how much planning we do, things go wrong. There are emergencies. Sadly, these emergencies often sidetrack people's financial goals and lead them back into, or further into, debt. If we have a plan, though, we can avoid such a serious setback.

Bach, as Dave Ramsey does, uses "months" instead of "dollars" to figure out a rainy day fund. On page 136, he writes a short "sleep well at night" test. Here it is:

My monthly expenses currently total $_________.
I currently have $___________ saved in a money market or checking account.
This equals _______ [insert number] months' worth of expenses.

The numbers can be estimated, because most of us have a pretty good idea how much those are. Tragically, for many of us, the second number is $0!!!

The next step, after realizing that you need money to handle emergencies is to follow Bach's "Three Rules of Emergency Money."

1. Decide how big a cushion you need. Bach sets the minimum bar at 3 months' worth of expenses. He goes beyond Dave Ramsey by suggesting that some people may even need as much as two years' worth! The main thing is that it is enough (1) to cover a certain number of months, and (2) to help you sleep at night.

2. Don't touch it. Bach mentions that many people start saving their fund, only to have an "emergency" all the time! Notice what Bach says, which is worthy of reading and remembering:

What's a real emergency? Be honest with yourself. You know what a real emergency is. A real emergency is something that threatens your survival, not just your desire to be comfortable. (140)

3. Put it in the right place. While Bach doesn't think we should put the money in something like stocks or bonds (because it has to be liquid), he also points out (with a GREAT story, I might add) that we don't need to bury it in our backyard or stuff it under our mattress. You should earn at least some interest on this fund, because you need at least a small hedge against inflation.

Bach's suggestion is to "shop for a rate like you'd shop for a car" (143). His primary location for a rainy day fund is in a money market account, but some pay terrible interest and others have a lot of fees. If you are frugal, you will shop for a car very carefully, trying to get the best deal. The same should be true of a money market fund. Just a small percentage difference, over time, can pay off in a large way.

Over the next several pages, Bach walks the reader through the process of setting up an account and answers several important questions which are worthy of your reading. He even lists several places that have money market accounts that are fairly easy to use.

He then mentions using US Savings Bonds as a possibility. I disagree with him here. While buying bonds has become easier (you can do it online), they have a terrible rate of return and, in my mind, you are helping the government use debt!

Finally, Bach mentions the question, "What if I'm in debt?" In other words, if you aren't debt free, do you need to build up an emergency fund. Bach differs from Dave Ramsey here slightly, bu the principle is the same. Whereas Ramsey says you should start off with $1000 in your emergency fund, Bach says you should work toward building up one months' worth of expenses, then go back to paying off debt aggressively. To me, either is acceptable and both are reasonable.

Of course, Bach says over and over that you should automate the savings into this account. In other words, when you set up your rainy day account, make sure you set it up to automatically come out of your paycheck (or your checking account) at a specific time each month.

With these steps out of the way, Bach has you paying off your debt and building up your emergency fund at the same time. While that's not my favorite way of doing it, the benefits are there, if you can stick with the program.

WYTI Links: 11/21/2007

Here's a mid-week set of links to go around...have a great holiday week!

10 Easy Ways to Save Money Without Much Effort (via Consumerism Commentary) Thanks to Adam for submitting this link last week...

What If You Make Maximum Retirement Contributions For 20, 30, 40 Years? (Roth IRA, Traditional IRA, 401k, 403b) (via No Credit Needed)

Organization 101: A Visual Guide to How I Manage the Information in My Life (via The Simple Dollar) Trent uses a system very closely akin to David Allen's "Getting Things Done" philosophy. Here he spells it out...and includes pictures.

Would Jesus Have an Emergency Fund? (via ChristianPF) This addresses an interesting thought we probably have all considered about the balance of saving for the future and using our blessings for God's good.

MP3 Players for Nine Year Olds? Whatever Happened to Simple, Inexpensive Fun? (via Money, Matter, and More Musings) In the holiday shopping spirit...

Is It an Emergency?

Part of having an emergency fund is knowing what is, and what is not, an emergency. For those who are following Dave Ramsey's "Baby Steps," you know that step #1 is to put $1000 (or $500 if you are single and living alone) in the bank as a "beginner emergency fund."

After you are debt free, the third step is to "finish" the emergency fund; fully funding it to have 3- to 6-months worth of household expenses.

The reason a solid financial plan includes an emergency fund is because there are rainy days. While we don't like to think about it, we will have an emergency at some point. Having the money available is such a help.

I am now faced with the family dilemma of whether we are really in an "emergency" or not. We have our $1000 fund (it's actually nearly $1100), and we are now working the debt snowball. While we have quite a way to go (almost $20000), we are really making good progress.

And then...

The engine blows on our second car.

Here is what makes this a dilemma: we already have one car, and it is really good. While we think we need two vehicles, we might be able to make it on one for awhile. And, we really don't want to go deeper into debt just to have a second car! Add to that the fact that $1000 would not buy much of a car, and we don't want to completely deplete our emergency fund for this purpose.

Such are the times that make our heads spin!

What would you suggest?

WYTI Links: 10.25.07

Thursday links this week:

• How I Live Without Using Credit Cards - My Simple System for Living on a Budget (via No Credit Needed) Thanks to Adam for recommending this worthwhile write-up.
  

• Budgeting is Like Baking Cookies (via ChristianPF) I'm a big fan of analogy/comparison articles. These are some excellent points about budgeting.

• An Annoying Email I Got (via I Will Teach You to Be Rich) The end of this conversation is where this really gets interesting. Finances are no different from faith in this perspective: advice (even Biblical) is of no use unless we are willing to change.

• Where To Stash Your Emergency Cash (via Michelle Singletary, Washington Post)
  

• Inexpensive Ways to Woo Your Wife (via Clever Dude) This is a guest post by Clever Dudette (Clever Dude's wife) about cheap ways to keep the spark lit with your wife. You've still got time this afternoon to implement some of these suggestions :).
  

WYTI Links: 10.19.2007 (Almost) The "Third Saturday in October" Edition

The "Third Saturday in October" is always a big day in the south...'Bama vs. Tennessee. Too bad it's been relegated to the 11:30 am slot on LFS. Here's Friday's links...

• Why Money Doesn't Buy Happiness (via Newsweek)

• How to Best Handle Old Credit Card Accounts (via Consumerism Commentary) Having "old" credit card accounts can be a good problem to have...here's some advice on what to do with them.

• 10 Ways to Build the Habit of Saving Money (via Get Rich Slowly) It's subtle, but I love how the title says "Build the Habit of Saving Money." Becoming a responsible steward is a process. Hopefully, children are reared in this direction from an early age. If not, adults need to have the patience to change bad habits into healthy ones over time.

• Thirteen Ways to Reduce the Effect of "Bad Luck" in Your Financial Life (via The Simple Dollar)

• Two for one: 5 Ways Paperless Personal Finance Saves You Money & Risks of Paperless Finance (both via Blueprint for Financial Prosperity)

Have a great weekend...

WYTI Links: 09.05.2007

Three links for you today...

• The One Hour Project: Clean Out Your Media Collection (via The Simple Dollar)

• Creating a Basic Budget and Organizing Your Financial Documents (via No Credit Needed)

• Can I Use My Emergency Fund For That? (via We're In Debt)
  

WYTI Links: 08.16.07

• The Frugality Cheat Sheet: 147 Tiny Tips to Live Healthier, Happier, Greener, and Better (via Frugalist)

• Building a Personal Finance Library: 25 of the Best Books About Money (via Get Rich Slowly)

• Like Those 100 Calorie Packs? You're Paying Twice As Much (via Consumerist)

• Why I Keep My Emergency Fund at the Low Interest Bank (via Chief Family Officer)

• Look at Debt in the Context of Your Life, Not Everyone Else's (via Mighty Bargain Hunter)

• Starbucks @ Target: Buy 1 Get 1 Free (via Money, Matter, and More Musings)
  

WYTI Links: 07.23.2007 (Back from ICYC Version)

Top 25 Personal Finance Myths (via Ask the Advisor)

The Best Time to Buy Everything (via Smartmoney)

8 Ways to Save for a Short-Term Emergency Fund (via Getting Finances Done)

Earn $1 Million by Not Watching TV (via Free Money Finance)

Handle Your Online Life After Your Death (via Lifehacker)

5 Great Ways to Leave a Tip (via Personal Finance Advice)

The Total Money Makeover (Chapter 6)

Having finished with the "attitudes" section of The Total Money Makeover, Dave Ramsey now turns our attention to his famous "baby steps." For the next several chapters, Ramsey will teach us how to follow these not-so-simple (by his admission) steps to wealth.

Chapter 6 is entitled Save $1,000 Fast: Walk Before You Run. It is actually the subtitle to this chapter that underlies the entire theory behind the Total Money Makeover. So many try to retire wealthy while they are still deeply in debt. We have to walk first, so we can, eventually, begin to build wealth more quickly--and safely.

The reason Ramsey wants us to save $1000 is to begin a small emergency fund. Many people begin their "run" to wealth--and begin making progress--but, then, as Ramsey would put it, "life happens."

Before even starting the savings process, though, Ramsey preaches that we must (must, must) live on a budget. While we may not like it, it is absolutely necessary. We need to know where every penny is going to go for the month, so we can put every possibly dollar toward building up this $1000.

Some of you may have $1000 laying around in a CD (or a savings account). If you do, then you simply need to put that money in an account (such as a money-market account, savings account, or online savings account) where you can get to it--BUT ONLY IN AN EMERGENCY. (Page 104 has a humerous paragraph discusses what is and is not an emergency.)

If you don't have $1000, you need to get that amount of money as fast as you can. Sell something. Get another job. Do whatever it takes to put a barrier up between you and "life."

For most, this step won't take that long. For others, it may take a month or more. But, do whatever it takes to get that barrier up! Then.....

....well, wait for baby step 2.

Product Review: ING Orange Savings Account

When you read other financial blogs and websites (okay, so you only read this one, I'm sure!), this product is the one you will see most often for online banking.

The ING Orange Savings account has several advantages that make it a great place to put money for an emergency fund (or, if you like online banking, your regular savings account).

1. It is FDIC insured up to $100,000.

2. The interest rate is first-rate (averaging around 5%).

3. Unlike some other decent places for an emergency fund, the Orange account does not have a minimum to get the interest rate. By way of contrast, some money market accounts have good rates for an emergency fund (3% or higher), but you must have a certain amount (usually $1000) in the account to get ANY interest. That is how they offer the good rates. ING's Orange Account gives the rate to all customers. So if you can just start an emergency fund with $100, you will still get something in interest.

4. Their site is quite easy to use. You don't have to be a computer geek to figure out how to use their online banking service.

For more information, including a short (and decently informative) demo video, click here.

And, by the way, if you decide to use this product for your emergency fund, set up takes about 5 minutes.

Product Review: HSBC Online Savings

Okay, so you're finally ready to get out of debt. Good for you! Just admitting that is a major step in the right direction.

As you begin your journey, though, something happens. You have to stay in the hospital for a week. Your brakes go out. You find out you need a new roof. These are major expenses that can ruin a financial plan...

...unless you have money set aside for emergencies.

We'll have more to say about emergency funds on this site in the future, but one thing you must decide is where that money is going to go. It needs to be liquid enough so you can get to it in an emergency, but you don't want to make 1% or less on the money either.

One possible place is HSBC's Online Savings Account. Personally, I don't use this one, but I am thinking about it. While interest rates change often, today (June 12) the account is at 5.05%. I'm willing to say that's probably more than you are making at your local bank!

The account has many good features. One of my favorites is free electronic transfer of money. Also, the account comes with a debit card, so getting to your cash in a real emergency is possible.

As with any account, please take the time to look over the information and choose the one that is right for your situation. If you don't see a feature that you'd like to have, send a question to the company.

There are many good places to put money for an emergency fund, and we hope to highlight some of the best here over the next few days, but HSBC has a good history of online banking. Check them out for more information...

...but more importantly, get started on that emergency fund!!!

HSBC Online Savings Account information page