Author Topic: Need help dealing with Debt vs Saving vs Emergencies  (Read 3408 times)

backyardfeast

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Need help dealing with Debt vs Saving vs Emergencies
« on: April 28, 2015, 01:28:19 PM »
So I love this forum and community, and I lurk like crazy.  I consider us part of the club, because I really want to be.  But participating around here over the last few years has also forced me to realize that we're really not doing very well, despite my *feeling* of being part of the tribe. :)

We were really on track about a year ago, gaining ground.  The credit cards got paid off, we started to save sinking funds.  We were using YNAB, starting to make those RRSP contributions regularly, working with a budget effectively for the first time in a long time.  But then we got derailed.  DH needed emergency dental care to the tune of close to $5000.  Then I needed emergency dental care too!  Then I lost half my salary for a month.  It seemed way to complicated to deal with all of this on YNAB, so I let it go.

To try and keep from relying too much on credit cards, we decided to use some of our sinking fund money to cover the gap, and we're now repaying ourselves.  The credit cards are almost paid off again ($500 out), and I was looking forward to getting forward to setting up YNAB again and getting back on track.  And then, Wham!  This weekend, we find out that my MIL across the country has a brain tumour.  DH buys an expensive one-way ticket to be with her before she goes into surgery, and I'd like to follow him.  We could be out another $3k, and of course possibly more, depending on how things go and how long DH or I wants to be off work.  We still don't have much savings; these expenses are going back on a credit card.

The issue seems to be that we're in a cycle of paying off debt like our hair's on fire, but then we don't have an emergency fund, so then the cc's get used again.  But then we're back in hair-on-fire debt-mode.  Rinse and repeat; never get ahead.

When I write it all out, the answer seems obvious: save up some emerg funds before paying down the cc's so aggressively!  I'm just wondering if that is indeed the answer?  What do the rest of you do who have debt and no savings?  In the long run, all that debt $ should accumulate into savings pretty quickly (there's at least $1000/mo to use, potentially), but we never seem to get to the long run.  Is this another version of "pay yourself first?"  I've never been very good at that...I've always paid the debt first.

At this point, I'm considering a no-spend month challenge specifically to build up some savings.  Once we save up that, say $5000, though, if life repeats itself, we'll end up using it.  Then what?  Spend 6 months of the year saving, spend, then repeat saving?  Will we ever get ahead? Sigh.

Thanks for your wisdom, mustachians.  I'm hoping someone out there has a magic wand for me...

tarheeldan

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Re: Need help dealing with Debt vs Saving vs Emergencies
« Reply #1 on: April 28, 2015, 01:42:19 PM »
Sorry to hear about MIL. No magic wand here, but I wanted to point out that the problem is not EF vs. pay off credit cards. (ETA: Not sure your interest rates, but definitely makes sense to be paying down the cards rather than saving cash.)

The problem is income < expenses.

Hopefully you won't have another of these expensive events anytime soon. But something will come up eventually, so you gotta kill the debt and then stash the cash. The main thing is that income >> expenses in the long run.

EDIT: And you've got $1000/mo going to savings/debt so you should average out ok.

Still, I would look hard at these things - both income and expenses - since $10k in emergencies in a year should not stop you from still increasing your net worth. Much easier for a higher earner than a lower earner of course,but hell I saved $10k/yr working at a non-profit straight out of college at $26k/yr.
« Last Edit: April 28, 2015, 01:44:57 PM by tarheeldan »

Retire-Canada

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Re: Need help dealing with Debt vs Saving vs Emergencies
« Reply #2 on: April 28, 2015, 03:29:13 PM »

At this point, I'm considering a no-spend month challenge specifically to build up some savings.  Once we save up that, say $5000, though, if life repeats itself, we'll end up using it.  Then what?  Spend 6 months of the year saving, spend, then repeat saving?  Will we ever get ahead? Sigh.

You won't get ahead like that, but as Tardheeldan pointed out you have a savings problem. Life will always have some curve balls to throw at you each year. You are saving enough to just about stay even, but not to get ahead.

We don't have enough information to know what the real problem is or offer too much advice other than to say your current situation/plan needs to change.

Sorry to hear about your MIL. :(

-- Vik

backyardfeast

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Re: Need help dealing with Debt vs Saving vs Emergencies
« Reply #3 on: April 28, 2015, 09:15:33 PM »
Thanks to both of you.  You're right that at this level of income vs expenses, maybe we're just always going to break even.  In theory, we have about a 30% savings rate (including pension deductions for me), but it just hasn't seemed to materialize.  I haven't posted a budget (afraid of the facepunches!), but perhaps it's time for DH and I to spend a couple of months on a really bare bones budget (ie NO luxury spending) just to put an extra chunk of cash in the bank.  Maybe right now our savings margin is just too small.  It sucks not feeling like there's much resilience in our accounts!

Anyone have any similar experiences?

Zamboni

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Re: Need help dealing with Debt vs Saving vs Emergencies
« Reply #4 on: April 28, 2015, 09:44:58 PM »
Sorry to hear about MIL :-(

An austerity budget that feels painful or depriving for the short term will unfortunately probably not make any difference in the long term. As you seem to realize, another bump in the road will come along to wipe out what you save, and then you'll feel deprived and discouraged.

Instead, you need one or both of the following:
1) confront your recurring monthly expenses and see if you can make lifestyle changes that will result in a permanent reduction in regular outflow every single month moving forward.
2) earn more money on a regular basis.

Both of these are hard.  #1 might involved moving to cheaper housing or giving up conveniences that you think you need. #2 might involve an awkward salary negotiation with a current boss, changing jobs, or moonlighting. Nonetheless, that is the path forward and you can do it!

mpcharles

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Re: Need help dealing with Debt vs Saving vs Emergencies
« Reply #5 on: April 29, 2015, 01:04:58 AM »
My answer in short was to save an emergency pile of cash (2000) or how much you might need ie 6 months of living expenses.  Then get rid of the cards. That is then your emergency credit.

Take a breath and sit down and plan out how to get back on track.  You will never do that when crisises and fear abound.

Crestlin012

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Re: Need help dealing with Debt vs Saving vs Emergencies
« Reply #6 on: April 29, 2015, 08:04:30 AM »
Here are some thoughts
Apply for a HELOC to use as your emergency fund. The APR is equivalent to a home loan, rather than a credit card.
Get a CC with a 0% APR on balance transfers. Discover has a pretty good deal for 18 months at zero APR for balance transfers.

SomedayStache

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Re: Need help dealing with Debt vs Saving vs Emergencies
« Reply #7 on: April 29, 2015, 08:53:46 AM »
So I also feel like a lurker on these forums - I hang out here because I want to be around people doing better than me so that I can get inspired and challenged...but am I really mustachian?  Not if being Mustachian means saving more than 30% of your income and having a realistic goal to retire in <15 years.  <Disclaimer end>

I'm going to vote for following your own suggestion of saving up some cash reserves (aka 'emergency fund') ahead of paying off cc debt.  This is wrong mathematically - but perhaps you will find (as my family did) that breaking into your nice round number emergency fund is hard to do.    When the choice was 'dip into our precious hard-fought e-fund' instead of 'just throw a bit more at the cc' we discovered that we could get quite creative.

If you are using YNAB - keep using it!  Handling the events you described is no more complicated then handling a normal budget month.  What really happened was that you didn't want to see reality in big red numbers on your screen so you ostriched your head into the sand with the lame excuse that it was too complicated to deal with in YNAB. 

Re-read this post: http://www.mrmoneymustache.com/2013/05/25/which-part-of-the-money-wave-do-you-surf/
You are in the difficult and tiring position of being just behind the wave.  Every time you start gaining ground a bigger wave is coming to knock salt-water into your mouth.  It sucks. But if you can get on top of the wave things will get easier.  From there they just keep getting easier.

Maybe you should post a case study to get some advice you can act on.  Heck, maybe I should do the same one of these days...

SomedayStache

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Re: Need help dealing with Debt vs Saving vs Emergencies
« Reply #8 on: April 29, 2015, 09:25:59 AM »
Since you asked about similar experiences:

In 2012 we became debt free.  At the end of the year we got some work done on our house - which ate up most of our reserves and we even had to throw some money onto a loan, but it was going to be okay because I was looking at an extra paycheck month in January 2013 and a hefty tax refund in February and we were going to pay off that debt in a few weeks time.

I found out I was pregnant 6 days later.  Suddenly we were a family in debt again.  Instead of using the extra income to pay off the debt and beef up our reserves we were saving the money for midwife bills and unpaid maternity leave (I'm the income earner in our family).  The year got more interesting when the federal government instituted furloughs and my paychecks went down by 20%.  Things were further complicated when pregnancy exhaustion caused me to withdraw from a graduate level class was my employer was paying for and I was on the hook to reimburse them for the ~$1500 tuition/fees.  Other things happened that year - our cars needed work, the new baby ended up in the hospital for a few days due to a high fever, etc etc.

2013 really sucked - even small hiccups seemed insurmountable.  Like when I thought insurance would 100% cover a Rhogam shot I needed so that my baby wouldn't potentially die in utero, but instead I was on the hook for the $300 shot myself.  This was in the same week that we got our first furlough paycheck, I got the bill for tuition reimbursement, and we had just paid for new car tires so I don't feel too bad about breaking down in tears in the doctor's lobby.

But we weren't spending all our time feeling sorry for ourselves.  My husband was picking up extra shifts at his hardly-worth-it $11/hour job and I was learning how to cook beans and bread on my furlough days.  At the beginning of 2014 and on the same day I got a paycheck totalling to $0 (unpaid maternity leave) my hubby and I sat down to budget for the new year and realized we'd oversaved and had enough excess in our Maternity Leave YNAB category to pay off our last remaining non-mortgage debt.  Things have really been steamrolling since then. 

One tangible thing that helped me to stay the course and realize I was making progress was a YNAB journal I kept going for about 4 years.  I've since drifted away from the YNAB forums because when I spend time there I end up with a laundry list of items I want to buy (?).  Looking back through my journal I was able to see that even though it didn't feel like it we were really making some progress.

Sibley

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Re: Need help dealing with Debt vs Saving vs Emergencies
« Reply #9 on: April 29, 2015, 09:58:36 AM »
First, you are making progress. You're spending so much time reeling from life that you can't see it. It happens! Get back on the budgeting. It can help, but only if you're trying. Post a case study so we can make suggestions.

I get that you want to be there while MIL is sick, but if you can't afford it then there's no shame. You and your husband need to figure out what you can afford, and communicate it to her and whatever other family. You don't live near her, so he can't be with her every time something happens. It's hard and unfair and sucks, but there are costs to living far away from family, and this is one of the biggies. You need to jointly figure out what can be afforded, and no last minute 1 way tickets. If you get a call that he needs to get there to say goodbye, then buy the ticket and price be damned, otherwise plan the trip in advance.

My mom was diagnosed with breast cancer and went through chemo and radiation while I lived 2000 miles away. I visited once during that time, because it's all I could afford. She understood. We would use skype at least once a week, and I talked to her every day. I did what I could from my home. But it's not the same, and I still feel bad I wasn't able to do more.

backyardfeast

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Re: Need help dealing with Debt vs Saving vs Emergencies
« Reply #10 on: April 29, 2015, 10:32:41 AM »
Thanks everybody; there's lots of helpful advice here.

Zamboni\: that's a wise caution to not swing the pendulum too far toward austerity into an unsustainable budget.  That's part of the problem now; what I imagine our budget to be doesn't always match the needs that come up.  And I think that happens because I'm trying to *create* a balanced budget, because it feels like it should theoretically be possible.  But I do secretly know that we have too much on our plate for the budget we have.

The good news is that there is (I'm sure) fat that could be trimmed that wouldn't feel like austerity, and even though it's $100 here and there, every little bit helps.  For instance, we just paid off a 0% interest Home Dept purchase that I was putting $120/month on.  If I could use YNAB to put those small savings safely away, it would add up.

The other good news is that I will earn more this year overall.  We are actually in the middle of working toward a new living situation, too, which would leave us almost mortgage-free!  Woot!  BUT, it will be a couple of years before we get there, and in the short term it means spending more money on this house to get it ready for sale.

Crestlin012 We've done a lot of those things over the years, but recently it hasn't seemed worth it.  We're not carrying much debt at a time, our interest rates aren't bad, and we're paying them off within a few months.  HOWEVER!  I think it may be time to take another look at this option.  Maybe it's time to consolidate a few debts into a few thousand dollars on one card with a low rate, so that we CAN take a break and amass that EFund, then turn our attention back to the debts.

SomedayStache: Thank you so much for those suggestions and for your story--that's exactly the kind of real-life example that makes me feel better!  In the long term, we have many things working in our favour.  But you're exactly right that we're close enough to see the crest of the wave, but frustratingly *just* behind the curve.  My DH's exact words last year when he broke his tooth were, "We were JUST about to get ahead!"  And he's the one whose worried about the cost of his being away, too, for that same reason.

You're also bang on about this:
Quote
If you are using YNAB - keep using it!  Handling the events you described is no more complicated then handling a normal budget month.  What really happened was that you didn't want to see reality in big red numbers on your screen so you ostriched your head into the sand with the lame excuse that it was too complicated to deal with in YNAB.

Hahaha!  I was actually JUST thinking this before I read your post.  It's partly going into the red, and partly that I found it confusing because I wanted to keep some debt floating, but YNAB seemed to "pressure" any money from the next month toward the negative balance (to pay it off as soon as possible?).  That's my fuzzy memory, anyway.  Maybe I should have another look, or sign up for a webinar?

SomedayStache and Sibley, thanks for the vote that we are making progress despite the way it feels.  You are correct!  Each time this happens, the cc's are clear, and we then use them for the emergency.  We're not adding to a pile of debt already there.  Last year, we had a stash we used up; it's just that it was a stash put aside for something else.  But we're repaying ourselves, not a lender.  The long term picture still looks good.

And Sibley, thanks SO much for the vote on being realistic about what we can afford, even in these difficult times.  I think DH is doing that and I'm the one who wants to throw caution to the wind and be there no matter the cost.  Truthfully, my Mom even offered us her travel points, but I'd been thinking, "no, we can still swallow it; things aren't THAT bad."  And at the moment, MIL's prognosis is reasonable; it may be a bit of an overreaction on my part (cause, you know, BRAIN TUMOUR!) to want to be there to hold everyone's hands indefinitely.  Maybe instead DH comes home once she's stable and we plan another visit far enough away to get a decent price on tickets and use my Mom's points.  Or something.

All of you are also reminding me that there is money out there that I just need some motivation to get off my ass and pursue.  There are some medical receipts to send in for reimbursement.  We pay too much for our life insurance.  etc.  If I'm feeling the pinch, then it's time to hunt down the accounts receivable!