Baby Step One
This week we began Financial Peace University. The first week of class introduced the baby steps and talked about the importance of savings. The importance of savings is included in several of the baby steps, but first things first, baby step one, creating an emergency fund.
Creating an emergency fund was an idea that Tim and I resisted for a long time. Logically, it doesn't make much sense to have money sitting in the bank practically earning nothing when you have debt that is continually costing you in the form of interest charges. About two years ago we decided that logic was keeping us in debt as we continually used our credit cards to meet "unexpected" expenses. I shared a bit about our change of heart in Limited Resources and Hard Choices, but the way Dave Ramsey explains it in the video was exactly our experience.
He tells a story about a couple who receives a credit card in the mail. They decide not to use it, but instead of throwing the thing away, they keep it, just in case of an emergency. Soon the car needs repaired, and that certainly qualifies as an emergency. The repair goes on the credit card. Then school is just about to start, and the kids need clothes. Pull out the plastic again. A few months later, Christmas. Now how could that be here all ready? The credit card balance keeps creeping up as does the amount of interest being paid out every month. It really makes more sense to have cash in reserve to pay for those "unexpected" expenses.
Dave Ramsey recommends starting with $1000 emergency fund. Obviously, that amount of money is not going to cover any large emergency or unexpected expense, but it is a place to start. A larger emergency fund is created later, after the credit cards are paid off.
We double that amount. We keep a higher emergency fund to cover our drop in income during the summer. With the high gas prices and one unexpected expense after another last summer, that amount was not even enough. This year we are keeping a little more in the emergency fund.
Our Baby Step One is almost complete. We recently sold a car, and the majority of that money went to funding our emergency fund. We will top it off with our tax return. Then it is on to step two, paying off all the debt except the house. That step will not be completed so quickly or easily, but we are taking a deep breath and digging in for the battle!
Photo credit: icopythat
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paying on debt
9 comments:
Keep working at it! It really works!
The best thing we've ever done is create the debt snowball. We transfered it to a large poster that hangs in our dining room. It's really encouraging to SEE the debts getting paid off. It gets you excited when you get a little bit of surprise money and you can pay off another debt. Dave Ramsey was the best thing that could've happened to our family. Good for you on getting that emergency fund put together! It makes you feel so much better to know that you've got a little in reserve.
Good for you! And thanks for letting us all in on your process. People don't talk about this subject enough. It really helps to hear what others are going through.
Wow, it's awesome to see your progress, and watch Dave Ramsey's plan work. Much of it is just good old fashioned money sense. I love the way he lays it out - very easy to follow.
If you think that keeping an emergency fund is a waste of money, which I agree with, why is it that you are using your tax refund as a savings account? This is a bigger waste of money, you are loaning your money to the government interest free that you could be using elsewhere more efficiently.
Have your husband increase his withholding allowances and get your refund throughout the year instead.
Eddie,
I understand the logic about the tax return. My husband does have the withholdings set for six. With the size of our family, at our income, almost no taxes ever come out of his pay. I think it was about $300 last year. When we do our taxes we qualify for tax credits (even more this year b/c we took a big loss in our rental property) and that is how we end up with a large return.
I am so glad you are taking these classes! We took them two years ago at our church and it changed our finances so much. I was always the saver and my husband was the spender. We did not agree and it caused a lot of tension. Now we both agree and things are much better. Funny that I read this today because my post tomorrow is about the envelope system.
I agree that for some circumstances a $1000 emergency fund isn't enough.
For our family, our EF needs to be $1500-$2k (and we finally got it all after our tax refund!) We depleted our fund over and over and over (yes, for emergencies! And not Christmas, either.)
Part of the reason is that our rent is $1500 - and I think our emergency fund should at least cover a month's rent so we have a place to live while we work out whatever other problem we have!
About tax refunds... in our case, my husband has it set to the highest level and we still get quite a refund (several thousand) because of child tax credits. The government pays us!
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