What will you do with your refund?

Okay, now that this is out of the bag, a recent survey shows that more Americans plan to save – and not spend – their tax refunds this year.  According to The National Retail Federation’s (NRF) Tax Returns Consumer Survey conducted by BIGinsight (this survey polled 8,716 consumers), 43.8 percent of those expecting refunds will place some of their cash in savings, up from 42.1 percent who said so last year and the greatest number in the survey’s nine-year history. Two-thirds (66.2%) of tax payers are expecting a refund this year, the exact same as last year.  Nearly four in 10 (39.4%) Americans who expect a tax refund will use some of the money to pay down debt and 28.7 percent plan to use this “free cash” for everyday expenses.  A few will use their refund for a major purchase, such as a car or new television (12.3%) and vacation (11.3%).

More so this year than in the past, Americans are eager to file their taxes. According to the survey, 64.4 percent of Americans will have filed their taxes by the end of February, the highest since 2006. An additional 21.3 percent will file in March and 14.3 percent will wait until the last minute and file in April.  I guess when you are expecting to get money back the incentive to file earlier than normal is pretty apparent.  Pam Goodfellow, Consumer Insights Director of BIGinsight, sums up tax refunds well by saying, “For some, tax season is a way to reward themselves, for others it is the perfect opportunity to get ahead on their bills or other expenses.  Whatever the decision, many consumers this year are looking forward to taking back some of their hard-earned money from Uncle Sam.”

If you are getting a refund back this year, I strongly encourage you to set some of this aside in your emergency fund or mark it to pay bills that you know will come this year.  For example, I use some of our return money to pay for medical expenses that will probably come this year, our car insurance that we pay for in April and our Christmas fund.  I have these broken into separate sub-accounts in our savings account – we have one main savings account and these funds (along with others) are identified as such in this one account – and, when it comes time to pay for these things, I already have the money earmarked for them.  I could adjust my withholding, bring home more each month and set this money aside into each account at the end of every month but doing this with our income tax return has worked well for Tracy and me.

Do any of you have ideas on what to do with a tax return?

1.  Cut Expenses

Certainly it’s important to cut expenses to save more. Personally, I think you have to establish a budget first, before you can really get a good idea of expenses.  I know some people cut their expenses down to almost nothing, but still can’t save. This is generally when you have to work to increase income to offset expenses.

2.  Stop Investing in Your 401k [Temporarily]

I know this advice might raise some eyebrows, but I agree that the first priority is emergency savings.  If you’re not making any progress on your savings, pausing the 401k for 6 months or a year may provide the cash savings you need.  However, you have to be disciplined to begin investing your 401k again after your emergency savings is established.

3.  Pay off Debt

Certainly, getting out of debt provides more money to be used for cash savings.  It’s important to avoid any temptation to accumulate more debt (new cars, etc.) which makes matter worse.  Hopefully, by the time you have your savings established the debt will be paid off too. The extra money used to pay off the debt can then be allocated to save even more or contribute to retirement.

Overall, I thought this was pretty good advice for this particular couple’s situation.  Of course, every situation is different, but for them it probably makes a lot of sense to pause the 401k investing for a while.  If you can’t make forward progress in building an emergency fund after cutting expenses, pausing investing is probably the right choice. If you don’t have an emergency savings account you’ll end up going into credit card debt sooner or later.

Do you think it’s wise to stop investing in your 401k to budget for your emergency fund?

A while back (about the time I started blogging) I became interested in online savings accounts because of their attractive savings rates.  Obviously, savings rates are lower in general these days, but online savings accounts still beat out brick and mortar savings.

There are typically no monthly fees, no balance minimums, and you can access your money anytime. You can also easily link your online savings account to other accounts, so it’s just as easy to deposit your savings as it is to access it.

I’ve done some research for you and have found what I think are the best online savings accounts available today.  They offer attractive savings rates, have secure environments, and are all FDIC insured.

ING Direct – Headquartered in Wilmington, Delaware, ING is one of the largest financial institutions in the world.  It operates in 50 countries and is on the NYSE under the symbol ING.  There are no fees or minimum balance requirements with the ING Orange Savings account.  You have account access 24/7 and can contact a customer service representative during business hours.  The interest is accrued daily, compounded monthly and credit to your available balance at the end of the each month.  It’s easy to apply and link to your checking accounts and monthly transfers are free.  ING is the most competitive in my opinion and serves as home for our emergency savings.

ING DIRECT USA makes saving money simple! Open your account online today. No fees and no minimums!

American Express – American Express is a brand we’re all familiar with.  They are a strong global company that can be trusted based on the way they do business and for the customer service awards they’re received as noted on their website.  The American Express online high yields savings account offers a competitive rate of return and no fees to open or maintain the account and no minimum deposit!  Your money is safe with FDIC insurance up to $250,000.  You can link up to 3 personal checking accounts so you don’t have to worry about switching banks for your checking needs.   Automatic transfers can be set up as well as direct deposits if you choose to send a portion of your paycheck to your savings account.  To open an account, simply provide personal information, submit your application, receive confirmation by email and then fund your account electronically or by mailing a check.  Overall, the American Express high yield savings account offers a good way to save for emergencies or expenses that occur just a few times per year.

Ally Bank – Ally was founded in 1910 as the General Motors Acceptance Corporation (GMAC) to provide auto financing services.   It was renamed to Ally Financial in 2010.  Ally offers incentive with $0 required to open, no minimum balance, and no monthly fees (for the first 6 transactions).  24/7 customer service, interactive phone support, email and online chat are also available.  You’ll get daily compounded interest for maximum earnings.  Finally, you can receive sleeping money alerts to prompt you when you could be earning more on your money.  FDIC Insured.

Discover Bank – Originally known as Greenwood Trust Services, in 2000, they became a part of the Discover network of financial services. Minimum $500 initial deposit requirement and no minimum balance requirement. Interest on Discover Online Savings Accounts is compounded daily and credited monthly. Has an auto savers plan which automatically transfers money from your personal checking account into your savings account each month. FDIC insured. Also manage your accounts with the Mobile banking iPhone app.

WT Direct – WT Direct is a division of Wilmington Trust FSB, part of the Wilmington Trust family of companies which has been around for over 107 years.  WT Direct offers no monthly fees and no minimum balance.  Customer service 7 days per week, call you back feature and email. Balances of $10,000 or more earns higher rates unlike some banks. High transfer limits. Unlimited links to external accounts. Interest compounded daily and credited to account monthly. Mobile banking feature available.  FDIC Insured.

HSBC Advance – HSBC Advance is part of HSBC world – wide bank. HSBC Advance (previously HSBC Direct) offers no monthly fees and no minimum balance requirements and $1 to start the account. Customer service 24/7, call you back feature and email. Connect as many external checking accounts as you want.   Secure banking and FDIC insured.

FNBO Direct – FNBO Direct is a subsidiary of First National Bank of Nebraska.    The bank was originally opened in 1857.  FNBO Direct offers no fees and no minimum balance requirement and you can open an account for as little as $1.   Daily balance method is used to calculate the interest which applies a daily periodic rate to the principal balance in the account each day. Use PopMoney mobile application to send and deposit money.  FDIC Insured.

Zions Bank – Zions First National Bank is a subsidiary of Zions Corporation which operates through over 500 offices in 10 Western states.  Zions offers no minimum balance and no fees.   Interest is compounded daily and is paid once a month at each statement.   Has been in existence since 1873 and is one of the oldest banks.  Your money is FDIC insured.  You can also manage your money on the go with the Zions iPhone app.

SmartyPig – SmartyPig is a unique online savings tool where you fund your savings goals.  It’s not a bank but the money is held by BBVA Compass the nation’s 15^th largest bank.  You can also turn your savings into gift cards.  There are no fees or minimums.  Interest is accrued with quarterly postings to your account.  Finally, you can share all your savings goals with family and friends via social networking sites.  Others can contribute towards your goals too.

Even though we had advance warning, many people did not start making preparations until Sunday morning – less than twenty-four hours before the weather turned bad. The stores were jam-packed with people buying water, batteries, firewood and milk. I started thinking, “Why do we wait until the last possible second to prepare?” We do this not only with weather but also with our finances.

How many people wait until there is an emergency until they realize they need an emergency fund? How many people wait until they hit 55 before thinking about how much money they need for retirement?  Early retirement planning is a second thought in society today!

Here are a couple of sobering statistics to show how ill-prepared many of us are:

• According to The Wall Street Journal, nearly 70% of consumers live paycheck-to-paycheck.
• According to USA Today, due to a lack of savings, 60% of the 77 million baby boomers will not have the means to support their current standard of living when they reach retirement.
• According to a 2008 survey by the National Foundation for Credit Counseling, roughly 76 million adults say they do not have any non-retirement savings. Of those who do have a cash fund, 61% don’t have enough to cover 3 months of income.
• 28% of Americans spent more time watching reality tv last month than they spent planning and preparing for retirement over the past 10 years.

Pretty surprising, huh? The sad thing is I was not too shocked by these. I still see people who were living paycheck-to-paycheck only 6 months ago revert back to their old ways once they started making money again.

If you live in an area where it gets cold, it will probably snow at some point and you need to be prepared. If you live in a house long enough it will probably need some repairs. If you live to be 65 (most of us plan to), you will need money to pay for your expenses.

Start preparing now so your life does not come to a stand-still when that storm comes.

Photo by Kevin Burkett.

Now with the economy being what it is, our sacrifices and long-term planning have enabled us to have the same lifestyle we always have had.  We never argue about money and have not had to make any major changes.  I get to go to a job that I love and Tracy gets to stay home and raise our daughters – that is PRICELESS!  Those same people that used to mock us and think we were crazy are now envious of us.

Many people thought that having a lot of money and nice things made you rich.  I think if there is a silver lining to this recession, it is that people are starting to think differently.  They are beginning to place importance on things that are really important to them – their spouse, children, passions – and not just materialistic stuff.  I feel this is a great lesson and hope many will continue to live this way once the economy improves.

Note from Jason: Danny makes a couple of good points here I thought I would highlight:  Even when times were good and we had two incomes coming in, we lived very frugally and paid-off as much debt as we could and boosted our savings.  Economic swings, or outside forces such as financial emergencies aren’t as a big of an impact on a family when following a spending plan each month.  I think the other thing Danny points out is paying off debt.  The debt certainly gets heavier during a recession or in financial emergencies.   The key to long-term financial peace is getting out of debt and having enough left after expenses each month to have a 3-6 month cash safety net.

How has the recession impacted your family?

Why have an emergency fund?

The abscense of an emergency fund puts you at great financial risk if you were to lose your job.  I’m convinced that no job is 100% secure no matter your skill level, relationship with the company and how well you perform.  No one can control economic down-turns or shifts in company strategy that can leave one jobless.  Believe me, I know as I was laid off about three years ago.

An emergency fund also helps protect against Murphy as Dave Ramsey says.  In case you don’t know, Murphy comes from Murphy’s law.  According to Wikipedia Murphy, or Murphy’s Law is an adage or epigram that is typically stated as:  “Anything that can go wrong, will go wrong”.  So, when that thing does go wrong (and it always will)  you need to have emergency savings to help protect you from debt or the use of credit cards.

How much emergency savings do you need?

So, back to our original question.  How much emergency savings do you need?  I came across an interesting article from Sound Mind Investing discussing challenges with saving before investing.  The article wrestles with a common problem.  You spend your time and effort to build savings before investing and then an emergency occurs and you have to start over.  Will you ever get to the point of investing?  It can be simply frustrating sometimes.

What I liked about the article is that it asks the question:  “Is all this caution about having an emergency fund really necessary?” Certainly, we can all agree an emergency fund is necessary, but to what degree.  Afterall, there is a solid argument you could end up saving for (and rebuilding for) emergencies forever without getting your retirement investing started.

Sound Mind Investing suggests building an emergency fund reserve of at least $10,000.  I think this is an excellent approach because it gives you some freedom to make some choices at that point while also having some good protection against Murphy acting up.

What’s your risk tolerance?

With $10,000 saved you can then decide how much risk you’re willing to take (it’s different for everyone).  As I mentioned above, no one’s job is secure.  We could all be unemployed tomorrow.  But some people certainly have more risk associated with their work than others.

So, what are those risk factors you need to consider before deciding how much to save towards emergencies?  You might have more risk and need more savings if…

• You are a one income family
• You have children
• You have known health problems in the family
• Your employed by a small company in a volatile market
• There is a larger financial expense on the horizon such as medical or new baby
• You’re not getting good performance reviews at work
• Your company or department is making a lot of strategic changes
• The economy is down
• Your marital relationship isn’t strong
• You have elderly parents who are in retirement and need additional help

As you can see, these risks are definitely things that many of us can relate to and are a part of life.  They are all risks that could turn into issues which require contingency money to fund.  It’s up to each person to weigh these risks and determine the right amount of emergency savings.

Hint:  for just a consistent savings of $19.23 a week you can build an initial $1000 emergency fund in 1 year!  Most people can find $19 per week, so get started!

How much emergency savings do you think you should have?

Build an emergency fund versus getting out of debt?

If you look at The Crown Money Map or Dave Ramsey’s Baby Steps you’ll find both suggest saving $100o before paying off debt. This is suggested to help you avoid the use of a credit cards should an unforeseen emergency related expense arise.  However, The Money Map, differing from the Baby Steps, suggests you save one month’s living expenses after paying off credit cards to further establish safety.  The Baby Steps suggest paying off all debt before saving more money.  Obviously, the Money Map is in favor of more initial cash savings.

Believe me, I’m all for taking Dave Ramsey’s approach of using gazelle like intensity in paying off debt.  I hate debt.  But, I also don’t think it’s wise to spend too much time paying off debt with only $1000 in the bank.    Of course, Dave suggests you should be motivated to getting out of debt and making sacrifices to do so in a short amount of time.  I agree, but many people may pay down debt slowly with only this $1o00 in savings for a couple of years.  Having only $1000 in savings is unwise unless you can approach your debt pay reduction with the intensity he talks about.

So, emergency savings or paying off debt?  The answer, is both.  You should save the initial $1000, pay off your credit card debt and then grow your cash savings to one month’s living expenses.  Once you’ve attained that savings goal, continue your debt pay off plan with Dave’s gazelle-like intensity.

Use your emergency fund to get out of debt?

But, perhaps you’re unlike many people today and already have several months in emergency savings, but are still carrying some amount of debt around with you. Should you use some of your emergency savings to pay off your debt?

The previous answer helps answer this question too.  In this particular situation, I go back to keeping the one month’s emergency savings on-hand.  For example if you have 3 month’s of expenses saved and are still in debt (other than the mortgage), I suggest paying off the debt and leave 1 month’s living expenses in your emergency savings account.  You can then build your emergency savings back up when you’re out of debt.

The bottom line is you are still furthering your journey to financial freedom if you pause debt pay off to get to save one month’s living expenses.  One you start your debt pay off plan again, you’ll be much more financially secure and the chances of you going back into debt for surprise expenses will be much less.  But, make sure you’re using intensity, motivation and dedication in saving the one month’s living expenses, otherwise, it will drag on too long while your debt limits your freedom and costs you more money.

What do you think about an emergency fund versus getting out of debt?

Why you should save

When I think about saving there are a couple of Biblical scriptures that come to mind.  First, Proverbs 21:20 tells us: “the wise man saves for the future, but the foolish man spends whatever he gets.”  I don’t think this scripture tells us we shouldn’t spend, but it does plainly tell us that we shouldn’t spend all of our money without preparing for the future.  As mentioned, it’s important to find the right balance and make sure savings is a permanent category in the monthly budget.

Also, Proverbs 30:24-25 (NIV) tells us:  “Four things on earth are small, yet they are extremely wise:  ants are creatures of little strength, yet they store up their food in the summer.”  We all know that ants store up their food for future use.  This example illustrates that saving is wise and it protects us in the future.

Types of saving

There are two basic types of savings.  Short-terms savings, which I discuss in this post, are savings in which we’ll need in the near future.  This type of savings includes an emergency fund, savings for replacement of items such as automobiles and appliances and entertainment items such as the family vacation (ideally saved after more important areas are covered).   Most financial gurus recommend saving 3-6 months of short-terms savings in case of job loss or for an unplanned expense such as medical or automobiles.

Long term savings includes a couple of different areas.  First, long-terms savings is investing money for the latter years in life, commonly referred to as retirement.  This savings includes investing money in your company 401k, IRA or other retirement account.

The other type of long-terms savings is investing to build wealth.  At a future point along the financial freedom journey, once we are saving for retirement and children’s education, we can further invest to build wealth.  This may include investing in mutual funds, company stock, real estate, etc.

When should you save?

There is an opportunity to begin saving immediately.  In fact, both Dave Ramsey and Crown Financial Ministries recommend saving $1000 in short-terms savings to begin an emergency fund before paying off debt.  Many people immediately think they should focus on paying off debt, but in reality, emergency savings is important to have because when an unexpected emergency occurs, it could drive you deeper into debt if you don’t have the money to cover the expense.

I think what is often not as clear is when you should begin saving for replacement items such as automobiles and appliances.  Both of these things can be considered major expenses and without adequate savings we may fall into the temptation of using credit or a loan to purchase them.

I think the Crown Money Map provides a clear plan for when to start this type of short-terms savings.  Once all consumer debt is paid off and one month’s living expenses have been placed into an emergency savings account, it is appropriate to start saving for such items.

Giving before savings – an important message

Before we go further, an often area considered after savings is giving.  Giving for a Christian should be the first step on the plan to financial freedom.  If we are saving before giving, our focus is on fulfilling our purpose for money rather than God’s purpose.

How much should you save?

If you look at the percentage guides from Crown Financial Ministries, you’ll see that short-terms savings should be around 5% of your monthly budget.   Yes, I mentioned short-term savings because investing, or long-term savings is a separate budget category.

I think this percentage may be more if you’re in the early phases of your journey because you will be trying to build your emergency savings as quickly as possible.

Then, much of this short-terms savings could be used for investing, or long-term savings.  Note:  a short-terms savings category in the budget will always need to remain because you will continue to save for replacement items and eventually entertainment such as a family vacation.

Tips for saving

It’s a good idea to set up an automatic deposit into a savings account so that savings is automatically deducted from your paycheck or transferred from your checking account each time you’re paid.  You can typically work with your HR department to split your paycheck for deposit into multiple accounts.

Ideally, short-terms savings should never be considered for anything outside of its designated purpose in the monthly budget.  Otherwise, there is temptation to use the money.  And believe me, you can always find a need for it.  The automatic deposit into the savings account helps avoid this temptation.

Try to get the short-terms savings into an account that isn’t easily accessible.  For example, you may want to choose a savings account at different institution than your regular checking account.

Internet high yield savings accounts such as ING Direct, Ally Bank, WTDirect or HSBC Direct are all good options to consider.  They each require a few business days to transfer money to a checking account with another financial institution.  This is a decent barrier to keep you from easily digging into savings and spending it during the month.

How have you been successful in planning for the future with short-term savings?

Personal Finance Carnivals

• Carnival of Personal Finance #233
• Carnival of Personal Finance #231

If you’re just joining, this is article #3 in a series about The Baby Steps and Money Map. I invite you to follow along with me as I walk you through both approaches, discuss my observations, hopefully, stimulate your thinking and raise some questions. I’ll round out the series with some summary thoughts.

Baby Step 3 – Money Map Destination 3

What does the Baby Step say?

• 3 to 6 months in savings.

What does the Money Map say?

• Pay off all consumer debt & increase savings to 3 months living expenses.

Observations and Questions

• The Money Map pays off remaining consumer debt in this phase.  Remember, in Money Map Destination 2 you saved 1 month’s living expenses before paying off car loans, student loans, etc.
• Both approaches discuss saving up to 3-6 months of living expenses for an emergency fund.  This seems to be a standard recommendation from financial experts in books and around the internet.  Interestingly, there is a large gap between 3 and 6 months of living expenses.  Depending on how much you’re contributing to your savings, 6 months of living expenses might keep you in this phase for a while.  Obviously, the more emergency savings you build up the more you reduce the risk of going into debt which is a great thing to consider.
• The Money Map scripture in this phase is Romans 13:8:  “Keep out of debt and owe no man anything”.

What are your thoughts on this phase?  Are you in favor of 3 to 6 months of living expenses in savings?  If so, do you lean on the lower or higher side?

Is there a right or wrong answer or a better or worse solution?  You can see that both are clearly working towards the same objective of financial freedom or peace.  Both focus on savings and debt elimination which eventually positions one to build wealth and give more.  But more on that later.

Versus the right or wrong or better or worse question, it may be more appropriate to determine which approach works best for your situation.

I invite you to follow along with me in this series as I walk you through both plans, discuss my observations, hopefully,stimulate your thinking and raise some questions.  I’ll round out the series with some summary thoughts.

I plan to do one post for each phase (this one includes phase 1), so there will be 7 posts in total (including the summary post).

Disclaimer:  I’m a Money Map coach so you might expect a bias towards the Money Map.  I’m going to do my best to take an objective view point.  I’m not necessarily for the Money Map.  I’m all about finding what works best for the situation.

Baby Step 1 – Money Map Destination 1

What does the Baby Step say?

• Baby Step:  $1000 in an emergency fund

What does the Money Map say?

• Begin using a spending plan & save $1000 for emergencies.

Observations and Questions

• Crown suggests creating a spending plan as part of destination 1.  I think Dave assumes you have one when starting The Baby Steps.  I haven’t gone through Financial Peace University (FPU), so I’m not sure.
• Is $1000 the magic number?  I’m just curious as to what is so special about $1000.  I’ve only heard this number from these two sources.  Why not $1500 or $2000?  One thought is that $1000 isn’t a small amount of money, but it’s not big savings either.  It can probably handle most small to medium emergencies.
• Crown uses a scripture theme for each them which is pretty cool.  “The wise man saves for the future but the foolish man spends whatever he gets.” (Proverbs 21:20 TLB)
• Things to do sooner than later are also included on the Money Map.  I recently wrote an article on these suggestions.

What are your thoughts on this phase?

All the articles from the series:

• The Baby Steps and Money Map – Post #2
• The Baby Steps and Money Map – Post #3
• The Baby Steps and Money Map – Post #4
• The Baby Steps and Money Map – Post #5
• The Baby Steps and Money Map – Post #6
• The Baby Steps and Money Map Round Up

We all have financial storms.  The severity of the storm depends on how well we’re prepared for it.  If we don’t have money in savings and are swimming in debt the financial storm might turn into a hurricane.  However, as the unexpected storm approaches and we have 3 – 6 months of living expenses in savings we might downgrade that storm to a rain shower.

Manage financial storms

To manage a financial storm, you must become a good storm forecaster.  Financial storm forecasters see the storm on the horizon and make changes to account for what lies ahead.  Of course no one can be perfect at forecasting as you probably understand from watching your favorite weather man, but paying attention can make a dramatic difference in the type of storm you have to weather.

Anticipate changes

The first question we need to ask ourselves is: do we see clouds in the sky?  In other words, do we anticipate life changes within the next year?  Good examples of these might be a new addition to the family, moving, poor company performance where we’re employed, health complications and more.  All of these things may be good indications that we’re going to need to spend some money and we need to get prepared.

Is it really a financial storm?

After seeing something on the horizon, we then need to ask ourselves – is the storm really a financial storm?  Questions we might ask to identify a financial storm include the following:

• Is their cash on - hand in emergency savings that might be sufficient?  If so, this may downgrade the urgency.  Emergency savings is there for a reason.  Sure it was hard work building it, but it’s their to use for an emergency, so don’t hesitate when you need it.
• Is it truly a need?  In other words, can we wait several days or longer before making a decision?  If so, delayed spending may bring clarity to help us really determine a want from a need.
• Is it money required for health, shelter, food or transportation?  Generally, these areas rank highest on the family priority list.  If the expense is lower in priority, we need to try to delay the expense as discussed.

Steps to deal with a financial storm

So, we have determined this is a storm and action is required.

1. Don’t panic!

There is hope in God.  God can do amazing things when it comes to our finances by way of trusting Him.  There is a reason for this storm which may be unknown to us. Trusting God in the situation, no matter how grey or ominous it looks, will bring peace and comfort.  Pray, stop and listen for guidance!

Seek first his kingdom and righteousness, and all these things shall be given to you (Matthew 6:33, NIV)

2. Involve others who can help

We can’t be afraid to ask for assistance or counsel.  We need to seek assistance from a financial counselor or church pastor.  Believe me, having another perspective on the situation can be valuable, especially if it helps us make a decision that would prevent the use of credit cards or debt.

The way of a fool seems right to him, but a wise man listens to advice (Proverbs 12:15, NIV)

3.  Conduct serious and focused brainstorming to identify options

There are too many ideas to list and it depends on the size of the storm, but the below may be a good start if a series amount of cash is required.

• Sell a large asset such as a boat or motorcyle.
• Have a yard sale.
• Get a temporary part-time job.
• Reallcoate budget spending to account for the expense, i.e., cut out entertainment or eating out for a defined period of time.
• Slow down the debt payment plan or seek credit counseling assistance to decrease payments if there is no wiggle room in the budget
• Seek assistance from family.

A last resort

The last resort would be the use of credit or debt.  This is a hard thing for me to mention because of my strong desires to pursue debt free living, however, if health is involved or other serious issues this may be necessary.  However, we shouldn’t take this step without financial counsel.  If credit is used, the important next step is to put a debt plan in place to pay it off and get back on track.

Financial storms, while unpleasant, are a test of our faith and can help us determine quickly how orderly we are managing our finances.  The better prepared, the less severe.

What are your thoughts on steps to take to manage financial storms?  Can you think of other steps that may be important to consider?

Top financial experts recommend saving $1000 in a savings or money market account to weather financial storms before you do anything else.  If you encounter a financial storm, the $1000 may just help you avoid using a credit card to repair your car, fix or replace the washing machine or some other unplanned expense.

Financial storm

Yesterday evening I encountered a financial storm only to be rescued by my emergency savings account!  I tried to drive our SUV into the garage and discovered a strange noise coming from under the hood.  I decided to restart it (sort of like a computer reboot) thinking it would resolve the issue, but it didn’t work.  Thinking it might be the battery (that’s as far as my car knowledge takes me) I hooked up the jumper cables to our other car. 

Although it restarted, it soon stalled.  Long story short, after a tow to the repair shop and a call this morning from the mechanic; I encountered a financial storm of just over $500 for a new alternator and some other maintenance. 

Use a credit card?

Pull out the credit card and pay?  No way!  Fortunately, we had the emergency savings to cover the expense. 

If you’re tracking along without an emergency savings of at least a $1000 and you have debt you’re trying to snowball, consider stopping the snowball until you have the savings.  It could prevent you from using a credit card for a storm and increasing your debt.  Financial storms happen to everyone, so you’re at risk if you don’t have the savings.

What financial storms have you encountered and did your emergency savings come to the rescue?