Spending Paralysis

Now that we've become debt free (except for the house), saved over 3 months of expenses in an emergency fund, set aside a couple thousand to buy some things we want, my wife and I are at a standstill. We put together a wish list of items that we want to purchase, such as full-house air conditioning (her choice), an HDTV (my choice), etc.

Not wanting to take the first move, we agreed last year to wait until we had enough saved to purchase one item for each of us at the same time. Well, we have now reached that point.

We've been on such a tight budget over the last couple of years to reach our debt-free and emergency fund goals, that we've forgotten how to spend money on luxuries. We do know how to spend on essentials (last year we dropped $1700 on a new bed), but I always over analyze our spending on non-essentials. Case in point: I currently have a couple of hundred dollars saved up in my blow account. I can't get myself to spend it on anything other than lunch once or twice a week.

Looking back, it seems like my wife and I spent more on luxuries back when we were poor college students. Now that I have a stable job and a much higher income, I can't get myself to spend any money on non-essentials unless it's a birthday or Christmas gift.

We do have plans to do some travel soon. I don't mind spending our temporary savings on hotels and other travel-related expenses. Who knows, maybe this will be the best Christmas (whether we spend extra on gifts or go on vacation) since college!

Life Without Credit Cards: One Year Later

It was May of 2009 when my wife and I closed our last remaining credit card. How, you ask, have we survived? Very well, thank you. We found that most places (not all) will allow us to use our debit cards as credit cards (to run the transactions through Visa's system which gives us the same fraud protection as a credit card).
In the few cases where the card reader won't run it as a credit card, we simply enter our pin numbers. Most of the time, however, we spend cash.
But what about our credit scores? Did they take a hit when we closed those accounts? Funny you should ask. I've been thinking about checking my credit score over the course of the last couple of weeks, so today I finally checked my score on MyFico.com (use Retailmenot.com for discount codes, I got my score for $11 instead of the retail price of $16).
After creating an account and opting out of their email solicitations, I got to see my Equifax score. Guess what: my score is 778. I believe that's higher than it has ever been. The only negative item on my credit report is that there is no recent activity on my revolving accounts. I guess I'll be seeing that notice the rest of my life, as I've decided not to borrow money except for our next home purchase.
Our only outstanding debt is our mortgage. It appears that an outstanding mortgage alone is enough to prop up a FICO score.
Why did I want to see my FICO score? The first reason is that my wife and I are thinking about replacing our Vonage phone service with two smart phones in the near future (more on that in a later post). When we sign up for the required two year service contract, they will run credit reports one one or both of us. I wanted to be sure that we wouldn't be denied when we went and purchased the phones. The second reason is that I wanted to see if closing our accounts would have a negative affect on our credit score.
Finding out that my score is that high debunks the myth that closing a credit card account negatively affects your credit score. I have also learned that we can live quite well without a credit card.
What are your experiences without credit cards? Please post in the comments below.

We're Debt Free: One Year Later

It's been one year and a month since my wife and I paid off our last debt (not including our house). How are we doing financially? We've been able to save over half of our 6 month emergency fund. Over the last six months, we've had to repair my car a couple of times, and replace our water heater.
Because we don't have any debt payments, we've been able to cover our emergencies, and in some cases, work it into our budget without touching our emergency fund.
During the six months when we were paying off debt, we tightened up the budget so much that it seemed like we were holding our breath. Once we wrote that last check, it felt like we could breathe again. We've since loosened up the budget and we don't save as much per month as we probably should. We're still saving regularly, which is the most important thing. Once we've met our six month emergency savings goal, we'll start buying the things we've been putting off for the last couple of years.
Would I make the decision to go back into debt? Definitely not. Once you find out how stress-free it is to live without payments, you'll agree that life is better on this side.

Emergency Savings vs Credit Cards

Well, we finally made it. My wife and I now have more in our emergency savings account our credit limit on our last credit card before we closed the account.
Every year I would call our credit card company to ask them to reduce our APR (8.9%), and they would decline. What they did offer, however, was to increase our credit limit. I would politely decline, because I didn't want to be tempted to spend more than I could afford to pay back.
When my wife and I decided we would no longer borrow money, we burned up our credit cards and closed the accounts. We kept them for "emergency" situations, but as we began to budget and save, we found we could live without them.
As of this week, we now have more money available in our emergency savings account (almost 3 months worth of expenses) than we had available to us as a line of credit.
This is a big deal! When an emergency expense comes up, we will be pulling out the plastic, but it will be our debit card that is tied to our savings account, not a credit card. Just the other day we had to have a plumber stop by and replace our water heater. A credit card company didn't have to act as the middleman for this transaction, we had the money available to pay him. There were no finance charges, no interest payments, and no fighting between my wife and I over how we were going to pay for this service.
How do you pay for expenses? If you had more money available in a savings account, would you stop using and possibly get rid of your credit cards?

Living Paycheck to Paycheck

I attended an informative, hour-long financial seminar the other day in my neighborhood. Near the end, someone asked the question "How do I know if I'm living paycheck to paycheck?"

I raised my hand, and the speaker allowed me to answer her question. In short, living paycheck to paycheck means that if you didn't get your next paycheck, or a month's worth of paychecks, you would be unable to pay your bills. You would most likely need to borrow money to pay the rent, pay the mortgage, and/or buy groceries. Living paycheck to paycheck also means that if a financial emergency occurs, such as a $500 automobile repair, you don't have the cash on hand to pay the bill.

How do you get out of the cycle of living paycheck to paycheck? Here are a few ways to break this cycle:

• Build your emergency fund
• Pay off debt
• Plan and save for for future expenses (such as auto repairs)
• Get adequate insurance

You'll find peace of mind when you have an emergency situation and you have enough money in the bank to take care of the situation.

Spending Priorities

Over the last couple of months, we have had two devices at home start to give us trouble.

The first is a computer that we used to record over the air TV (our digital video recorder, or DVR). This computer started freezing at random times during the day. Freezing even while running a live CD operating system such as Knoppix or Ubuntu helped me come to the conclusion that this was a hardware issue, and not an issue in Windows. I began shopping around for a new or refurbished computer, but wasn't willing to spend less than $500, so I could get a PC that would last a few years. We have several PCs throughout the house, and one day I was looking at the specifications on one of these computers. It turns out that the processor was fast enough to work with Windows Media Center, but the PC needed more RAM. A $75 order for more memory on Crucial.com allowed me to re-purpose a PC we already owned and save a wad of cash.

The second device that started acting up is an older CRT TV. Lately, it would show the picture in color, but after a couple of minutes most of the colors would turn green, and almost make it unwatchable. One night, I got tired of the green color, and told my wife I was going to replace it. I started looking online for a nice LCD HDTV. I found several sales at local stores that I planned on visiting the next day. I planned on spending between $300 - $400, money that I had previously budgeted to go to emergency savings, but had not transferred to savings just yet. The next morning, I decided to look in the local online classifieds, and found the perfect replacement: $10 for a used 26" CRT TV (the same size as our failing TV). I called the number on the listing, arranged to pick it up, and brought it home. You know what, it works great, and even fits in the cabinet where we had our old TV.

For $85, we were able to get our home entertainment back to where it was before the devices began to fail. I could have spent around $1000, but this money had other priorities. Upgrading an existing PC and purchasing a used TV helped us stay in our budget.

$1773

$1773. That's what it recently cost us to replace our failing water heater and pressure reducing valve (PRV) in our home. We've known that both items had issues, and finally called a plumber. He showed up, said we needed a water new water heater, a pressure tank, and a PRV. Knowing that these items needed to be replaced sooner rather than later, we agreed to the estimated price and he started to work. After about 3 hours, he had replaced each item and the hot water and water pressure in our house was back to normal.

How did we handle the cost? Simple. We paid for the repairs out of our emergency savings account. Repairs of this type couldn't wait any longer, and we're glad we had the money available so that instead of this financial burden becoming an emergency where we would need to borrow money to pay for the repairs, it was simply an issue of transferring money from our savings account to pay the plumber once he had finished his work. No big deal at all. We even went out to eat that night because paying for emergencies from our emergency fund doesn't affect our regular monthly budget.

We will need to replace the emergency savings we spent on repairs, but we will tackle that one month at a time.

What are your experiences when an unexpected expense such as plumbing repairs comes to visit? Please leave your comments below.

Savings

How will I handle an emergency? What will I live on when I retire? How will I send my kids to college or pay for their braces and weddings? Most of us have asked ourselves these and other questions relating to events in our lives that require a substantial amount of money. When one of these events occurs, where will the money come from? The answer is you. All it takes is a little bit of planning and a lot of patience. I know, I know, it sounds boring, but having money available when it is needed will pay off in the long run.

Personal and family savings can be broken down into the following categories:

• Emergencies
• Retirement
• Planned purchases/expenses
• Investments

Each of these categories can and should be handled differently. I'm going to explain why you need to break your savings into separate categories.

Emergencies
It's recommended by most personal finance authors to have at least 3 months of expenses set aside for a rainy day. Why? Let's say you get laid off from your current job. How long would it take for you to find another job with the same pay and benefits? If it took you 2 months and you have an emergency fund in place, you can continue to pay the mortgage or rent, buy groceries, and keep the lights on while you look for your next job.
Your emergency fund should be set aside in a savings or money market account that gives you quick access, but is somewhat inconvenient (so you don't spend your emergency fund on non-emergency items). Some authors suggest setting aside 6 months worth of expenses (if you are a single-income family, if you have one or more dependent kids). Once you reach your goal of 3 or 6 months (or somewhere in between), you should stop putting money into this fund and move on to another fund that earns more interest (see retirement and investments below).

Retirement
The U.S. government offers many tax-advantaged retirement options (and I'm not talking about social security), such as a 401(k) through your employer, an Individual Retirement Account (IRA) and variations on those two accounts (Roth 401(k) and Roth IRA). The advantage to a 401(k) and an IRA is that you can put money in those accounts before paying income taxes on that money. When you become old enough to retire, you will pay taxes on that money when you begin to withdraw from those accounts. The Roth 401(k) and Roth IRA require that you put money that has already had income taxes paid, and when you retire you can withdraw the principal and interest tax-free.
A retirement account is a long-term investment (5 or more years of adding principal and earnings from your investments in the account). Why should I set up and contribute to a retirement account? As stated above, its tax advantages are either no taxes when you deposit into the account (401(k) or IRA), or no taxes when you withdraw (Roth 401(k) or Roth IRA). This translates into a lot more money for you to keep when it comes time to retire.

Planned purchases/expenses
Got your eye on a new car? How about a new computer? Instead of signing up for payments (which require you to pay back the original amount plus interest), find out how much the item costs and decide how much you will set aside (save) from your paycheck each month until you can pay for the item. An advantage to delaying purchases is that during the saving period, you may find a better deal or decide that this thing won't make you happy and you no longer want it.
Infrequent expenses, like the dreaded car insurance payment, can be managed by determining how often you pay the bill. If you pay it once a year, take the total amount, divide by 12 (months), and save that amount each month in a savings account. When it comes time to pay the bill, you have the total amount available and can pay the amount in full without giving it a second thought.
Why save for planned purchases and expenses? Peace of mind comes when you already have the money available to pay for an item or to cover an expense. Yes, sometimes it hurts to spend your hard-earned cash, especially when you begin saving and it starts to add up.

Investments
Investments are vehicles that allow you to build wealth (earn money) outside of your day-to-day job. Interest works 24 hours a day, doesn't take vacations, and when compounded, adds up to a lot more than the original principal. You can either be on the receiving end of interest payments (investments) or on the paying end of interest (carrying a credit card balance, car loans, etc).
Contributing to long-term investments ensures that you have a sustainable income in the future that isn't dependent upon your current day-to-day job. It ensures that you will have money available to send your kids to college, buy a newer car every couple of years, buy a summer cabin, or whatever you dream of doing.

What are your savings goals? Do you contribute to each of the categories above? Please contribute by leaving a comment below.