Beating Broke

Personal Finance from the Broke Perspective

The Importance of Fixing Things Sooner Rather than Later

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A few years ago, my brakes started making noise whenever I pushed the brake pedal.  I procrastinated quite a while before I took the car into the shop because I didn’t have the money for the repair.  However, because I waited so long, the brakes had worn down to the rotors, so my repair was much more expensive than it would have been had I come in right away.

But Wait! I Hadn’t Learned the Lesson Yet!

You would think I’d have learned my lesson, but no, I haven’t.

We own a minivan that is 11.5 years old and has 167,000 miles on it.  A while ago, one of the back sliding door handles broke, so we could no longer use it from the outside.  No worries.  We simply herded all the kids in through the other side door.  Was it a pain?  Just a little bit, but we didn’t want to spend $200 to $300 on a door handle repair when we had so many other pressing expenses.

But, then the other sliding door broke.  The wire coil started to fray, so we couldn’t open the door.  The repair for the outer wire coil?  A cool $900 to $1,000.  Ouch.

Fixing Things
Fix it now!

So, we started opening the driver’s side door and reaching around to open the side door with the outside broken handle by using the inside handle.  By now, we were starting to feel a bit, um, special, I’ll say, because of our unusual way to open the door.  Still, we put off the repair because we had other expenses like a $210 garage door repair and a $90 air conditioning tune up along with a $900 deposit for braces for our son.

All was okay until the inside door handle broke.  Now, the only way the kids can get in and out of the car is through the front doors.  The special meter has gone up enormously, and even the kids are talking about how embarrassed the are to get in and out of the car.  Now that the repair is inevitable, I called the shop to find out the repair will likely be $400 to $500 because they’ll have to remove the door and replace both the inside and outside door handle.

Lesson learned.  When a repair is needed, make the repair.  If you don’t, you’ll likely end up paying more in the future.

How to Get the Money Together

If your budget is tight like ours is, there are ways to get the money together to make a smaller repair immediately so you don’t have to pay more for a larger repair later:

Raid your emergency fund.  This is the easiest.  If you have an emergency fund, use the money and then rebuild the emergency fund as quickly as possible.

Have a pantry challenge for a week.  We spend approximately $150 to $200 a week for groceries.  By taking just one week to eat only what we have in the house and not going to the grocery store, we could have had the money for the handle repair before it got worse.  Lesson learned.

Sell stuff.  Everyone has stuff around the house that they don’t need or don’t use.  Sell things at second hand stores, sports resale stores, or eBay or Facebook.  You’ll be surprised how quickly the money will add up.

Do you procrastinate on repairs because your budget is tight?  If so, like us, has that rationale ended up costing you more money?

Saving vs Investing: Investing for Income

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Saving and investing go together like milk and cookies, sweet and sour, and Elvis and banana peanut butter sandwiches, right?  Right.  Well, almost right.  It’s easy for us to say that saving and investing are important parts of a personal finance plan.  It’s easy for us to say that and then move on.  After all, we just said they’re important, right?  Not so fast.

Saving and Investing ARE important

They just aren’t equally important.  Heck, it’s another whole post, but even the different types of investing aren’t equal.  Just as important as saving and investing together is the concept of when to use which, and how much.  The mix of liquid savings in the form of cash accounts and CDs with the amount of your money that’s invested can be one of the most important parts of your overall personal finance plan.

Traditional advice tells us that cash accounts and CDs are the super safe way to keep your money with you, and investing, in it’s varying forms is all kinds of risky.  Investing in stocks?  Risky.  Investing in pork bellies?  Risky.  (unless you really like bacon.  Just kidding, still risky.)  But, is the amount of risk involved in investing more or less risky than leaving too much of your money in the bank to rot away at current interest rates?  How about you ask the people of Cyprus if they still feel safe having their money in the bank?

Saving vs Investing : Investing for IncomeSuccess is risky.

Few who accomplish success do so without some element of risk.  In fact, the easier the path to success is perceived, the less chance there is of truly obtaining it.  I don’t say that to seem philosophical.  I want to make a point, however.  You’ve got to have a little risk, if you want to succeed.  You’ve got to have Investments if you want to succeed financially.  And, I think the ratio of investments to savings should probably be much higher than most would suggest.

Investing for Financial Independence

One of the key tenets in a financial independence plan is that you need to replace your income in order to free yourself up to be independent of a job.  Not independent of work, but of a job.  There are, obviously, many ways that you can go about replacing that income.   Decreasing your expenses is usually a part of most plans.  But, most people’s expenses will only decrease so far.  Sure, you can go extreme, and get them lower, but for many that isn’t what financial independence is about.  Even with your expenses decreased as low as you’re willing to take them, you’ve still got to replace the income to pay those expenses.  Investing can be a very good way to get started towards replacing your income.

Investing for Income

In order to replace income with investing, you’ve got to invest for income.  You probably try and do that by becoming a super successful day trader and making up the income in profits from all the great deals you made.  First, find yourself a few super successful day traders who have done that.  Come back when you’ve given up.  If you’re going to invest for income, it’s got to be reliable.  It can’t rely on your ability to find a good bargain and then sell it at a massive profit a few days later.  There are traders who are still waiting on Facebook to make a comeback so they can even get their money back.  Reliable income is the key.  For this, we need investments that are steady, don’t require the continued increase in value of the stock, and also don’t require us to sell like a fiend in order to create the income.  What are these mysterious investments, you ask?  Dividend stocks.

Dividend stocks are stocks that pay a dividend on each share of the stock that is held.  The amount of the dividend can vary, but there are many that you will find that pay dividends in the range of 2-4%.  Depending on the policy of the company, they usually pay quarterly, but there are some that pay monthly and yearly.

Dividend stocks aren’t the only way to invest for income, however.  Investing in peer-to-peer lending in a program like Lending Club is one.  Rental real estate is another.  A business can even be a way to invest for income.  Each has varying levels of passivity, or the amount of direct interaction on your part to earn the income.  A business that you run can mean well over 40 hours a week of direct interaction to create the income.  Something like Lending Club or rental real estate can be brought down to a level that borders on passive income entirely.

Savings vs. Investing

With any investing tool, whether it be dividend stocks, lending, real estate, or some other instrument, there will be risk.  With risk usually comes reward.  I’ve been earning over 8% return on my Lending Club portfolio.  Dividend stocks can lose value, or even stop paying dividends.  The real estate market can dry up, and you can have problems finding renters.  Risk is inherent.  Unless you want to directly trade your time for money (call it a job), you’ve got to take on a little risk and begin setting yourself free.

Savings shouldn’t be shunned completely.  I still believe that an emergency fund is an important tool.  I still covet a debt free lifestyle.  But, once my debt is paid off, and my emergency fund is full, you can bet the rest will go towards investing for income, and building my wealth towards financial independence.

How about you?  What is the role of savings in your personal finance journey?

Original img credit: Two men with pipes posing as boxers / Deux hommes, pipes à la bouche, prenant une pose de boxeur by BiblioArchives / LibraryArchives, on Flickr

Are You Ready for a BIG Emergency?

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Are you ready for a big emergency?  Do you have the required 6 to 12 months’ emergency fund?

I can hear your groan now.  Who has enough extra money to put aside 6 to 12 months in the bank?  If you have expenses of $3,000 a month, an ample emergency fund of 6 to 12 months would be $18,000 to $36,000.  Definitely not small change.

An emergency fund is hard to build, and that may be part of the reason why many people never even try.

Big Emergency
Original image credit: https://flic.kr/p/7KLtYi

But there will be an emergency that will occur sometime in your life.  You will need that money.

Financial Death by a Thousand Nicks

We relocated to Arizona 10 months ago.   Doing so drained our meager emergency fund.  For a few months, we were doing pretty good and getting back on our feet until we started facing endless financial nicks—braces for our son, $2,000 in medical and dental expenses, $1,500 in car repairs, etc.  The last five months have been financially very difficult.

If we would have had a 6 to 12 month emergency fund, our job now would be to rebuild the emergency fund, not do constant damage control.  I think it will be a few more months until we are financially in the clear, assuming no other major expenses come up.  Meanwhile, we feel extremely vulnerable financially.

The Big Emergency Worst Case Scenario

However, our current financial difficulties are nothing compared to what others face.  My daughters’ therapist is living a financial nightmare.  Her husband had a stroke and now has locked in syndrome, which means he has his full mental faculties, but he can’t move his body.  He is no older than 40.  No one would expect this to happen.

The therapist’s life now is driving to see her husband and advocate for him as well as juggling the finances of losing one income as well as the rapidly mounting medical expenses.  She does work but has had to take frequent days off.  Even with a Go Fund Me page that brought her nearly $50,000 in donations, I have no idea how she is handling the expenses.

Of course, this is a worst case scenario, but still, an emergency fund to liquidate in this situation would be nice.

Take Baby Steps to Reach Your Goal

Right now, my husband and I are struggling to stay out of debt.  So far we’ve succeeded, but we’re right on the edge.  Still, our plan is to put a small amount away in our emergency fund, say $50 a month.  Something is always better than nothing.

In the next few months, we’ll amp that amount up to a couple of hundred a month and keep increasing as we are able.  We won’t have a sizeable emergency fund anytime soon, but we will have some money put aside.

Too often, it’s easy to look at your finances when everything is going right and say to yourself, “We’re doing alright.  I can afford to splurge.”

But that’s short-sighted thinking.  Look at your finances and ask yourself how would you be financially if you had several smaller emergencies of a few hundred or thousand dollars or if the worst case scenario happened?

My advice is to wait to splurge until you have that emergency fund.  Trust me, one day you’ll be glad.

Do you have a 6 to 12 month emergency fund, or do you find it too difficult to achieve?