by Matt Fildes
Happy Tuesday everyone!
From my last post, I discussed needing to save up for my car’s state inspection and emission’s test, which I had scheduled for November 9th. Well, that day came and passed and it hit me to the tune of $887.00, which was within the range I was expecting. I needed some work done, which I was told about over the summer, plus I decided to get 4 new tires. Although they passed inspection, the mechanic told me they would have failed given another month of driving. To be honest, I was surprised they even passed at all. Instead of delaying the cost to next year, I decided to get a new set and just take the hit today. But now that this is out of the way, I could either 1) Replenish my EF (or savings, or slush fund, I’m not sure what to call it at this point), again or 2) Start tackling my loans. Personally, I want to see how long I can do #2, before I have to do #1- which should take me into the New Year, at least. I want to get back to paying off my loans as soon as possible (I’m getting very antsy to do so), which could be as early as today, even with only $1,000 in my EF. My goal would be to get below $40,000 before the end of the year, before contributing to my EF again. What are your thoughts on this?
Also, I have some exciting news on the hobby front. After taking a month off from playing guitar in September and half of October, I got back into it, like REALLY into it. I’ve probably put in 2-3 hours a night during the week and 5+ hours per day during the weekend, even spending some time at our city library to try and wrap my head around music theory. A little background: being in a band has been a dream of mine for the better part of ten years. While I have had some jam sessions with other friends who play guitar, they’re mostly just starting out and weren’t as interested in starting a band. Anyway, I put an ad out last week looking for other people who may want to jam/start a band, and I received a reply! We hung out this past week, and I think it looks really promising! The whole experience of putting myself out there and taking action with it was such a rush, as I’ve only played for my girlfriend and those few friends before.
The problem with this whole scenario is that equipment is EXPENSIVE. I have a guitar that is performance quality, but I don’t have anything else that’s up to par. I would need a new amp and speaker cabinets, pedals, and all the other miscellaneous hardware that comes with putting on a live show. But…we aren’t even close to this point, and I’ll likely be out of debt before I worry about gigging. For right now, I guess, it’s just something in the back of my mind.
What are some hobbies you guys have? Has money ever become a factor for them?
I hope everyone has a great week!
Craigslist! I’m betting there are tons of people with equipment in their basements. Perhaps squirrel away some of you entertainment budget and post in the want to buy section.
The good thing about picking up equipment that will be used for gigs is that it no longer qualifies strictly as a Hobby, and you can/should reasonably decide on your budget for this equipment knowing that it may pay for itself…
I’ve been a BAD reader for ages, but this might be my first comment. I’m moved to jump into the fray because I’ve noticed an across the board disregard among the current group of bloggers for the importance of emergency savings. Geez guys, it’s one of the most, maybe THE most, important element of good financial planning. I’d venture to say that it beats debt payoff as a financial priority, and it sure as heck beats indulging in a guitar band hobby. Guys, you need at least three months (6-8 months is better) worth of living expenses sitting in savings, period. Look at what Hope is going through right now, for heaven’s sake. Why such disregard for the good ol’ emergency savings buffer? Get that money set aside then pay off debt, then buy that guitar. It’s like Suze Orman used to say, “You cannot afford it!”
I completely agree with NotFromHere! You are one emergency away from financial disaster. Your debt pay off win must wait. Rebuild your EF NOW!
Uh oh! I don’t want to be a bad influence but… I was totally going to vote for keeping the EF slim for now. : )
Here’s my logic (and this is very Dave Ramsey-esque, I know) 1) If you have a slim EF, you work that much harder because you’re motivated to be able to build it back up quickly. 2) We’re not talking about keeping a slim EF forever – just for a couple months. You said through New Years, so really like a month and a half at this point. 3) You still have a buffer…it’s called your income! If something bad were to happen, you’d have to divert your money that would otherwise have gone to debt payments, but its not like that money doesn’t exist. It’s there. If disaster struck you could still access it (plus you get paid weekly, which means it’s coming in consistently). And 4) You just got a credit card for emergency purposes! You didn’t specifically mention if you’d paid for the car stuff on the card or with cash, but if you have additional credit available, it would be able to float you a month (until the bill is due) for any sudden emergency that popped up.
From the sound of commenters I might be a minority (and I’m biased since this is what I’m currently doing), but I just wanted to explain my perspective and the reasoning/logic of why I think it’s okay to have a small EF for a short period of time.
You have a different situation in that you’re a two income household (pretty much 3 with your two jobs). Also, you rent which is another major difference. No catastrophic maintenance to worry about. Also, if you can’t pay rent you get evicted and lose your deposit. If Matt can’t pay his mortgage he loses all or most of the downpayment and principal he has put into it!! Major, major differences. I know that Matt and his GF seem like a forever couple but maybe that’s not the case. Unless she can provide financially for both of them indefinitely then there is a very strong need for an emergency fund!
If you get hurt in an auto accident and can’t work your income does nothing for a backup… Same thing with a job loss.
Small emergency fund is fine with multiple incomes. But by yourself? Rose colored glasses if you ask me. Especially since Matt has essentially no emergency fund because its also his non-regular expense and maintenance fund.
Another thing… With winter coming, at the bare minimum I think its prudent to have the money for the deductible available. Hopefully its $1000 or less?
I agree with Ashley – it’s ok to have a slim EF for a short period of time. I think it motivates us to keep spending lean to pay off some debt. Matt still has a $1,000 EF which will get him thru most minor emergencies…..
Hi all, I’m back because this topic of EF savings is just super-important to me. I totally appreciate the collective commitment of this awesome group of bloggers to getting out of debt with all of the energy and single-mindedness that they bring to it. It’s hugely important both in terms of experiencing financial freedom but also really “feeling” it. The reality is that debt is a tool that can be used for a lot of financial good, but it can also turn on you and make you feel powerless and hopeless. Clearly, the BAD crew is all about achieving the hope and power around their finances that they deserve.
I don’t think that my belief in setting up a strong EF is antithetical to or mutually exclusive with the goal of debt payoff. The goals are one and the same. And, no, your income or a credit card, by definition, cannot substitute for emergency savings. Your income could go away if your company restructures or if you get in an accident and can’t work. And for anyone who is a homeowner (um, Matt) you absolutely can’t afford to be relying on a credit card when your house all of a sudden needs a major repair. Let me tell you, $1,000 will not cover a major house repair.
Please think of an emergency savings fund as a tool that future-proofs your debt payoff plan. You’re guarding yourself against future debt and financial devastation with a good EF. So, you should make minimum debt payments until you have built up a good 3-6 month EF buffer, and you shouldn’t feel like your debt payoff plans are slipping away as you do that. Quite the contrary, you’re ensuring that your debt payoff plan is REAL and SUSTAINABLE. Otherwise, to put things bluntly, you’re fooling yourself.
Ashley, your husband has variable income, so your EF should be even higher than 3-6 months. Matt, you’re a homeowner who has already had a freakout about a potential roof issue that you seem to have papered over hoping it won’t come back. Hope, well, just look at your most recent post. You took debt payoff so seriously that you left yourself with nothing to get through tough times that a week before they happened you never saw coming.
I’m not trying to be harsh here. I’m really trying to help. I want to see all three of you succeed! Please, get those EF’s built up while your income is steady and reliable, THEN turn to aggressive debt payoff. This won’t take long for each of you to achieve as smart and focused as you all are!
NotFromHere…I would second that…that importance of a healthy emergency fund has definitely been driven home to me in this past month. And will definitely be something I focus on when I get back on my feet.
These are some awesome, awesome comments. NotFromHere- thank you so much for your feedback!! You have given me a lot to think and a ton of inspiration to build up my EF. A part of me wishes you had posted a comment months ago.
I’ve been reading and reviewing all of your comments since I posted yesterday, and after sleeping on it, I’m going to build back up my EF like you suggest. Instead of posting “Weekly Debt Updates”, I will post “Weekly EF/Savings Updates”. Next Tuesday will be my last “Weekly Debt Update” as I just posted a payment to Navient this morning.
I do have one question- what’s to stop me from saving up, say, $42,000 in the next year and change. Why stop at 3-6 months of expenses when I could save up 3 years of expenses? And if I feel I’m in a good spot 16-18 months from now (house repairs are complete, I feel security with my job and the construction climate isn’t tapering, etc…), pay off all my debt at once? Does this make sense? Doing it this way, I would be paying more in interest on my loans and getting little to nothing on my savings. I discussed this topic once before on this blog.
And Ashley- I used cash for my car bill, since I had that saved up from the past couple of weeks.
Sorry in advance for multiple and very long posts!
Matt I’ll check in, as I’ve chimed in a lot on your posts and I started the year with almost exact amount of student debt. I changed my strategy in January when all loans above 5% were paid off. 5% appears to be the unofficial threshold for most folks. Instead of paying them down I’ve been putting extra cash into VTSAX in a brokerage account. I’ve been tracking the balance of this account compared to my remaining debts. I’ll call them “paid off” when my brokerage account is more than my loans.
Taking away the exact amounts… The weighted rate on my loans is 4.0% (effective rate of 3% when including interest tax deduction). So far this year, the gains in my account has barely broke even with the effective interest rate paid on my student loans (3.14% returns on account). Now, this year’s returns appear to be lower than average. In theory this strategy should work out slightly to my advantage strictly going by returns as a conservative estimate for market returns is 5-6% annually.
Its interesting to follow you since you are taking the other route. After not having savings for my entire adult life, it feels good to know I have a fallback fund if I need it. Also, at one point in the next year or so I could pay off my loans in one payment if I really wanted to rid them for good. My main driver was just getting sick of feeling poor all the time. I could take zero risks in my job or personal life. I had no savings for any potential opportunities that could arise. It only made me feel more stuck in my situation. Having a brokerage account gives me a larger sense of freedom even if its completely earmarked for debt. At this point, I’d much rather pay minimums on my debt and have 30k in a brokerage account than have only 20k left in debt. But its a personal choice.
So is it worth it to change strategy? I’d say at this point it really depends on how you are driven emotionally and your comfort level. “Saving” definitely doesn’t give the emotional satisfaction and drive that snowball payments to debt gives. It also brings in the whole market factor. It can be really frustrating to see the account lose money even if its temporary (SEPT!!). If you are OCD about money it will make you watch the stock ticker all the damn time which will drive you crazy. Its done that to me and I still can’t stop looking!
In terms of E-fund.I’ve lived with <$1,000 for a long time but it was when my loans had a higher interest rate than my credit card. I feel most comfortable having a buffer of 1 month of minimum expenses so any delayed bills won't bounce and I can pay next month's rent in case of job loss. You seem resourceful enough that you would be able to find money beyond that. This amount is likely high enough that it would fully cover any car insurance deductible and surprise home repairs. Then there is only the risk that multiple emergencies don't happen at the same time.
Awesome!!!
I’m back with what I hope will be a more thoughtful reply to Matt’s post. The one word post “Awesome!!” was all I had time for yesterday. I’m really just thrilled, Matt, to see that you’re taking this seriously. And Hope, I have no doubt whatsoever that you’re going to get that next job and do great. And you too, Ashley! It’s been fun to see Ashley start to think seriously about retirement savings and 529’s, but I do worry that you’re getting ahead of yourself with little to no EF. A solid EF should probably be part of the Year of Becoming an Adult, right? I know that Ashley is a Dave Ramsey devotee, and Dave’s a big believer in paying off debt before saving for retirement. He also believes you should pay off all debt but the house BEFORE putting away a 3-6 month EF. His Baby Step 1 stops at a $1k EF, then he moves to paying off all debt but the house as Baby Step 2, then 3-6 month EF as Baby Step 3. I DISAGREE. For most people there’s just not that much difference, in the grand scheme of things, between a $1k EF and a 3-6 month EF. I say go for the 3-6 month EF, then move on to debt payoff. Otherwise your whole life could get derailed by the unexpected, and at that point who cares about the debt???
As for Matt’s query about how much to save and when to turn back to debt payoff, I have to say that I’m very, very wary of the approach that Angie suggests. Saving and investing are two very different things. You simply can’t worry about the fact that your savings is earning less interest than your debt is costing you. Your savings needs to be in a nice, boring account. A money market account is as risky as you should get, and you probably won’t do much better than about 1.5% interest about now, though it may tick up a bit as the Fed raises rates over the next year. Savings simply has to be there when you need it.
Just as soon as you have a decent EF cushion, one the that can sustain you for a little while should the unthinkable happen (the lost job, the injury, etc.), THEN go back to paying off debt. You’ll get a guaranteed return on debt payoff. You know exactly what that debt is costing you, and paying it off is more of a sure thing than any investment scheme out there.
Once you have the debt paid off, then, and only then, can you start to think about *real* investing where you’re putting your money at risk. You only want to put your money at risk when you have enough money that letting it sit is a bigger risk than investing it. Inflation is a monster in the LONG term, not the short term. And of course you can invest wisely by diversifying and lessening the overall risk. Nice boring total market index funds, and all that jazz. But don’t even start to think about that now because you need to save, then get a guaranteed return by paying off debt, THEN invest in the riskier stuff.
I just want to clarify. My investment fund is in lieu of extra debt payments. Instead of 3k to my loans I put 3k in investments. Prior to starting up the brokerage account, I slowly worked us up to a 5k emergency fund plus full months buffer in my budget. So really that’s around 3 months of minimum expenses. On top of that we are dual income which provides some further security.
I did live for around 6 years with 2k or less emergency fund. But that’s the risk you accept when you have 150k in 9% student loans and you have a credit card you can utilize that’s only at 5%. Racking up credit card debt (in case of emergency, otherwise it wasn’t even in my wallet) is the lesser of the two evils in that case.
I definitely believe in an emergency fund so you don’t dig yourself in a hole if something happens!
I love all the thoughtful comments and discussion on this post! I don’t want to hijack Matt’s comments section but I’ve actually already written 2 posts for Monday to post on this general topic. I hope to see more discussion (and get more feedback) there, too! I really find this to be an almost collaborative space (with reader suggestions, blogger changes/reporting on life, more reader feedback/suggestions, repeat). I am very grateful for it and all the insight I’m able to gather from others on the same path (or others that have come before and may be further along than I am)!