Wednesday, June 19, 2013
Out of Debt For Good- The Power of Budgeting
When we first were married and trying to keep the household running, we used credit cards for various reasons. We had thousands of dollars in charges on our cards, and not all of them wise choices. A meal out with friends here, a charge at a store there for items I might well have lived without, etc. I soon began to see the foolishness of many of those charges and stopped making them. If dinner out with friends meant using a credit card, we invited them over for a pot of homemade chili instead. Gradually we paid down the balances on all but one card. We'd pay it down but soon it was slipping back up. That credit card worked as a pseudo emergency fund for those bigger expenses we couldn't quite cover ourselves like medical costs not covered by insurance, car repairs, etc.
Eventually we realized the deep wisdom in having an emergency fund. It took many years to reach a suitable number of months of salary in our account, simply because there were, well, emergencies. One way we began to establish our emergency fund was to divide our insurance, tags, and taxes for car and home into monthly payment amounts. Our insurance companies worked with us and yes, we paid a bit extra (about $5-$7 per month) for this privilege but it was necessary and more than worthwhile at the time. Once we stopped removing the semi-annual insurance bill from our savings, we found it far easier to look ahead and plan to set aside a small amount in the tags/tax categories as well. Nowadays, we also set aside small amounts each pay period for other annual expenses (HVAC maintenance for instance, AAA membership, etc). That has allowed our savings to spend more time earning interest, however small, and to gradually build into the emergency fund we have today.
Recently someone close to me shared that they had paid off their credit cards. Again. I complimented her on her achievement. But as an older, wiser person, I added quietly and gently, "The harder part of this is to keep them paid off." She nodded, well aware that I wasn't being mean. "I know...we've already charged something on them but I've paid off half the balance and expect to get the rest paid off next month." When she told me what was charged, I nodded. "I'd have done the same, I think." In this instance she'd taken advantage of a very good sale on home remodeling items that they needed for an upcoming project. It made sense to buy the items in that time frame and to use the card to charge it. She saved far more than she'll pay in finance charges for that one month delay in paying off the balance in full.
John and I talked it over the other night. We discussed our credit card usage history and both agreed that we much prefer our current usage of the card. These days it generally is used for convenience to prevent the need of carrying large amounts of cash or giving out a check in strange places. The credit card is protected against theft and has ID protection. We have one rule for usage: can we pay if off NOW? If we cannot pay off the item right now, then we don't buy it. And yes, it sometimes means going without something we'd very much like to have. We might not pay off the card until the bill arrives, but we know that the money is in the bank. The credit card company charges no annual fee, and no interest on charges paid within 23 days of billing.
We've relaxed our formerly stringent requirements for what constituted an acceptable purchase a little, but not completely. I've mentioned before my small personal savings account wherein I deposit leftover allowance, all birthday and Christmas gift monies and the occasional charitable donation from my husband, lol. I will use the credit card to purchase things for our home or for my clothing needs, then pay the balance from that account. This year I've had less funds to work with in my savings and I won't be spending anymore from that account. That means, plain and simply, no more clothes, no further home purchases. It can wait until funds are forthcoming! We use the card for online purchase, reservations and such. What we DON'T use it for: meals out, groceries, gasoline, casual shopping that isn't planned, routine monthly expenses. We are very strict with our usage and it's only because we are agreed in this area that we keep that one card active at all. It's a very slippery spot to be in if you ever slip up and use the card when there are no funds...I know that too well! It's one of those "I've done it 20 or 30 times already' lessons. I simply don't want to ever go back to being slave to that credit card. I want that card to work for me, not me to work for it!
John and I enjoy being debt free. It's very freeing. To know that every single thing in your home is yours, that your home is yours, as is the property you live on, the car in the garage, is a wonderful feeling of security. And no, I don't think if you have a mortgage you can say your home is yours. When our home was financed, we were at the mercy of the lender. We had a certain way of paying our bill that actually meant we were making extra payments on the loan. Do you know we actually were told we were paying our loan WRONG? Yes, really. And there were many times that the company sold our mortgage to another lending company. In the 10 years we made payments on this house, our mortgage was owned by five different companies. It was very unsettling to hear that the holding company had gone bankrupt, or to send a payment to one company one month and then get notice it should have gone to another. Fortunately we never had a payment 'lost' between companies, but you can just bet I was relieved to have that mortgage paid once and for all.
Our home is getting older. It needs a few updates,and there are some areas we'd like to improve upon. Interest rates are very low right now and we've discussed taking out a home equity loan and having the work done right away. We've discussed it and we're agreed, unless there's some major work that HAS to be done and we haven't the funds to cover the immediate need, only then would we consider the option of a home loan. As for the updates and improvements we'd like to make, we'll do small jobs ourselves (most all of these are cosmetic changes) and set a budget for bigger jobs. We're getting a quote now on renovating the back deck into a back porch. We know what our budget is and fortunately our favorite carpenter knows us well. He's already alerted us to a major area of savings If the final quote comes in over what we'd planned to spend, we'll keep saving until we reach the amount needed.
And I think that is the final key in remaining debt free: we set a budget for every thing whether it's new flooring or a car or major work on the house. Our 'idea' of what we think a job might cost isn't always on target, but we're usually not too far wrong. However, once we make up our minds how much we can spend we don't decide to go over by $5000, or $500 or $50. We stick to our budget. When we were looking for a car, we knew about what we wanted to spend. We didn't buy a car that cost more. When we got a quote for flooring this past fall we didn't budge when we were told we could 'finance' the work after the quote came in nearly $750 more than we planned to spend. The gentleman knew our budget but he failed to comprehend our stubborn refusal to spend more. We didn't get new flooring. Instead we've continued to look at other options. I think we've found a very reasonable one for the tile floors.
It's not a matter of being cheap, it's a matter of being sensible. I love to watch the transformations on the home renovation shows on television but I get so distressed listening to folks decide to go over budget. I often wonder how often those same people are lying in bed wide awake in the next month or two after the work is done, wondering how on earth they are going to pay their mortgage that month and regretting that 'extra' $50,000 they spent? After years of being in debt and living daily with the fear that I'd lose every thing, I never lose sleep over money these days. And I like it that way.