When the Emergency is Bigger than the Fund

Reader Question:

What should we do when disaster strikes during Baby Step 2? We are a single income household and my husband just lost his job. We have no emergency fund on hand, other than the $1000 from Baby Step #1.  We do have sizable retirement accounts, but are just trying to decide at what point do we tap them and have to pay that 10% penalty, and how much do we take out at that time? The regular savings accounts disappeared when the kids started college and we have been playing catch-up ever since.

The worst thing you can do when faced with a job loss is to continue to live on the ghost of yesterday’s income. Supplementing your phantom paychecks with credit cards or your retirement savings might make you feel better today, but it will only extend your financial pain.

When your income situation has changed for the worse, whether due to job loss, hours cut or a reduction in bonus – QUIT! Quit your old lifestyle – Today! Do not eat up savings or take on debt to maintain a lifestyle you can no longer afford.

Start by creating a crisis budget. Income is your unemployment + any other.

Just knowing exactly where you are will relieve stress. Having a plan will help you avoid emotionally driven mistakes.

Prioritize the expenses. Feed the family first, then utilities, then pay your rent or mortgage and secure your transportation. Let credit cards and student loans sit if need be.

Start the plan with basic food, no restaurants, no fast food, no steaks, no beer, just beans & rice, Mac & Cheese, PB&J; cut the budget to the bone.

Next, list the utilities, water, electric, gas, NOT cable – NOT internet. If the utilities are behind catch them up before doing anything else.

Shelter is our next priority. List the rent or mortgage.

Finally, secure transportation. List the car payment, get a bus pass, and set gas money aside.

Draw your first line on your budget when you have fulfilled these obligations. Don’t cheat – only include the most very basic Four Walls (food, utilities, shelter, transportation) expenses.

What if your income doesn’t stretch this far?

First go back and check again, are you sure you have each of the categories as low as you can go? If you cannot meet your four walls’ obligations, we may need more drastic action.

Sell your car and get a cheaper one with no payments.

Find a cheaper place to live, or get a roommate.

Get some Income – Quick!

Any income helps.  Everyone in the house over the age of 12 needs to get to work and once they have a job, they need to add a second job. Cobble together several part time jobs, do some babysitting, housecleaning or sell some stuff.

Now, prioritize the rest of your expenses; you need health, life, auto and homeowners insurance. You would like to keep the internet, the cell phones and pay the kids tuition.

Draw your second line when you have, on paper, spent all the income available. Everything below the second line is going to have to wait.

Don’t Panic

Retirement accounts should only be cashed in to avoid bankruptcy or foreclosure and you must be very, very careful even then. Not only will you pay the 10% on the withdrawal, you will be liable for the taxes on that previously untaxed income as well.

Breathe, take care of your relationships, accept help and understand that this is a temporary situation.

Safety Rules

We’ve been doing some boat work around here for the past several days. It’s hot, dirty, hard work that is sometimes dangerous. When working with heavy stuff under load it’s very important to follow several safety rules:

Never exceed the safe working load of a line

Never work in the bight of a line under load

Never try to control a loaded line with your hands, take a couple of turns on a winch or cleat

Always have an exit strategy

It occurs to me that this same thinking should apply to your money.

The real heart of these safety rules is Anticipate and Plan for the Worst.

We don’t seem to have a problem doing this when it comes to our physical safety, we wear seat belts and bike helmets and tread carefully on wet floors; but when it comes to our money and our life, most people I meet are unrealistic optimists.

If you are spending money on Baby Einstein DVD’s but do not have adequate term life coverage in place, you are an unrealistic optimist. I don’t care how bright your 4-year old is, she won’t be able to support herself should something happen to you.

If you are mindlessly accepting student loans for your private school degree in Underwater Basket Weaving, you too are an unrealistic optimist. I have no argument with the degree – only the fact that you are going into debt without any realistic plan of how you will repay it.

If you buy a house with no savings, less than 20% down, or mortgage to the hilt the home you already own; what is you exit strategy should you need to move?

If you are loading up the future you with consumer debt so you can have the latest gadget or car today, how do you know that in the future you will have the money to pay those bills?

Buying life insurance will not cause you to die. Planning for a layoff will not get you fired. It is not morbid or pessimistic to anticipate the worst; it is adult.

Is it time for you to grow up?

The Worst Person to Borrow From

Sometimes it’s the same thing said just a little different that causes that light bulb to come on.

This post, The Really Obvious Thing We All Forget When Borrowing Money says it just different enough that might help flip that switch for you.

The post asks: Who is really lending you money when you borrow?

This is really important! Is it Citibank or American Express or Ford Motor Credit loaning you that money? No, they are not. These credit companies are merely the vehicle.

You are borrowing that money from your future self.

When you use credit, you are guaranteeing you will have less – later. Not only will your future self need to repay the loan, your future self will pay interest on that loan as well. This is the opposite of Dave’s, “Live like no one else so later you can live like no one else”.

You’re really sticking it to your future self by borrowing. You’ll be poorer, less able to live within your means, further from financial freedom – and probably lumbered with an old PC that needs to be replaced.

If you have had exceptionally easy life up to this point, let me clue you in. Sometime in the future, there will be hard times and when there are, it will feel like the whole word is sticking it to you. Don’t pile on. Give the future you a break by not borrowing today.

And The Rich get Richer

Hating “rich” people because they are rich is almost a national sport these days. Those that are not rich love to see them fall, love to hear of their misery, love to gossip of their shortcomings.

Of course, it’s ridiculous to judge someone’s character based on his or her net worth. I have known many mean, greedy people who happen to be poor; as well as many compassionate, generous people who are also wealthy – and so have you.

Are there unethical and dishonest rich people? Of course there are. But, in Thomas Stanley’s,The Millionaire Next Door: Surprising Secrets of America’s Wealthy millionaires rated integrity [being honest with all people] as the number one factor that explains their economic success, ahead of wise investing or working hard.

Paul Sullivan of the Herald –Tribune recently wrote Financial Advice Gleaned From a Day in the Hot Seat about  his opportunity to participate in a “carefrontation” hosted by the Tiger 21 club. Tiger 21 members have a net worth of at least $10 million. They meet regularly to discuss investments and encourage one another to think about everything in their lives affected by their wealth. The “carefrontations” put one member on the hot seat to defend their current financial decisions. Sullivan thought he was doing well but the group encouraged him to dump his vacation condominium saying he needed to be more liquid. “If something bad happens, it’s easy to get rid of a dog walker; it’s hard to get rid of a house in Naples.” They also beat on him about the levels of life and disability insurance he and his wife are carrying.

Let’s Recap:

  • Your disdain for wealthy people will make it difficult for you to increase your wealth; so knock it off. Feel free to dislike mean people or dishonest people but don’t hate people because they are successful.
  • Many Millionaires cite “honesty” as the number one factor influencing their success. You can be honest, right?
  • Wealthy people deliberately set aside time to regularly review their finances, not just by themselves, but with trusted peers. You can start this today. Calculate your net worth monthly. Review your budget and investments regularly, find some like minded people to discuss money matters with.

It is time you give up your ridiculous prejudices against the rich. Most of us wish we had more money; more to give, more to help others or more to spend on travel or stuff. Resenting and demonizing the wealthy makes it nearly impossible for you to learn anything from their successes. And really, who do you want to listen to for money advice, someone who’s got some or your broke brother-in-law?

Waging Personal Peace

Contrary to what you learned from “Leave it to Beaver” or “The Brady Bunch” family peace is not something that naturally occurs.  If you want peace for yourself and your family, you have to fight for it.

One of the core requirements for peace is security. If you are currently living on more then you make, have debt, or have inadequate savings, you have no security. There is no peace while waiting for the consequences of your bad money behavior to catch up with you.

I meet people all the time who know their financial situation is precarious. They know they are one illness, one car repair, one temporary job loss away from disaster – but they act as if they are ok with it. In conversation, I hear that they know they should do something, but it sounds as if they just do not want to do the work.

Are they too lazy, self-indulgent, or stupid to make the changes necessary to give their families security?  No, they are none of these things. They are scared and they have lost hope. The debt looks insurmountable, the gap between income and expense too wide, the shame of facing their own failure too painful. So, their response is to quickly stick their heads back in the sand.

If you are one of these people, I want to give you hope. You really can change your future. I guarantee I have seen bigger mistakes; heck, I probably made bigger mistakes.

All you need to do right now is to get mad. Decide that this is not how you want to live and definitely, not how you want to teach your children to live. Make the commitment to Wage Peace for yourself and your family.

I loved this recent tweet by DaveRamsey, this is how you do it! “Get all Braveheart on your debt. Go crazy, paint yourself blue and charge into the chaos with fierceness.”

If you have successfully waged peace in your home but you have family or friends that have not, send them this post. Preface it with your story; give them the gift of hope.

If you know you need to do better but are not sure what to do, contact me and I’d be happy to get you started.

Other People and Your Money

Most of my failures with money had to do with me. My intentional inattention to the future consequences of today’s money choices cost me lots of money, but my worst choices were always reserved for choices involving others.

It is easy to make particularly poor money decisions when it comes to people we care about. When asked by a friend or family member for help, we want to do whatever we can. Unfortunately, many times the choice we make not only hurts our own financial situation, it also causes much harm to the relationship.

To avoid trashing your own financial goals and ruining your relationships, it is important to set some hard and fast family rules about other people and your money.

Cash Only Living recently posted their list of 10 Rules for Dealing with People Problems. This is an excellent starting point for your family to adopt their own rules:

  1. We never co-sign for anything for any one.

  2. We treat people how we would like to be treated, namely, with honor, respect, patience, humor, and firm parameters so as to avoid miscommunications and other inter-personal issues. We expect the same in return.

  3. We don’t take sides and we don’t like drama.

  4. We do keep a separate emergency fund to help others if needed.

  5. We don’t loan money to anyone for anything.

  6. We don’t bail people out of jail.

  7. We won’t buy from your MLM business; go to a presentation that is trying to sell us something; or become one of your MLM “downlinks”.

  8. I won’t enter into a business partnership with anyone.

  9. The hubby and I freely provide: someone to vent to/talk to, a free meal if you stop by the house, a place to sleep in an emergency, a free ride if you have been drinking, moral support, useful information, help with a wide variety of problems/projects  and provide other non-financial assistance whenever possible.

  10. We won’t sell you anything on credit.

Having these rules in place before you need them is key. Without predetermined rules, you are bound to find yourself in a long drawn out conversation of all your legitimate reasons for not helping someone you care about. Somewhere early in this conversion, all they can hear is that you don’t care.

It is so much easier on both parties if you are to say with confidence “I’m sorry, our family has a rule against co-signing” .

What are your rules about other people and your money?

Should I Refinance?

Here’s the quick answer.

If you can reduce your interest rate by 2%, will stay in the house at least 3 years and can decrease the term or at least not lengthen it, the answer is most probably YES.

A fixed rate mortgage with a term of no more than 15 years is your best bet. With interest rates currently so low, those with adjustable rate mortgages should be checking into refinancing to a fixed rate loan even if the rate is higher. Do not fool yourself by taking out a 30-year loan with the intention of paying it like a 15. Many people have said they were going to do that and 97.3% fail.

One loud word of caution, DO NOT roll credit card or car loans into your re-finance. See Bad Dog for more on that subject.

Let us look at real life example:

Our perfect family last refinanced their home in 2002 taking out a $150,000, 30 year 5.865% mortgage to do some needed home repairs. They plan to stay in their home when they retire in 11 years, but the current job market makes them worry they might have to relocate. Our happy family has at least 20% equity in their home and good credit. If they didn’t, that would change things. It might require them to purchase PMI or pay down the balance or it might make them ineligible for refinance.

To get the real (not the advertised) current mortgage interest rates, head over to Freddie Mac and click on the Regional Breakdown to see rates and Fee & Points. This shows us in the Southeast the actual average locked in rate last week was 3.68% on a 15-year mortgage with fees and points of .8%.

Use a mortgage calculator with amortization schedule like this one to find the interest paid each month, run a full schedule on the existing loan as well as the proposed loan.

We can use this information to compare the difference between keeping the existing loan and refinancing. For this comparison, we used the payoff amount of the existing loan + $1600 for fees and costs as the beginning principal amount for the new loan.

Rate Term Payment Total Payments Interest
Current Loan 5.865 21 years remaining $              886.35 $           223,360.20 $                  95,088.63
Re-Fi 3.68 15 years $              939.95 $           169,191.00 $                  39,319.56
Difference 2.185 6 years $              (53.60) $             54,169.20 $                  55,769.07

Reducing the interest by over 2 points and shortening the term by 6 years increases the monthly payment by $54. However, by the time the home is paid for (15 years on the new or 21 on the old) the new loan will save our family 55K in interest expense.

What if they have to move? In this example, the $1600 for points and fees is recovered within 7 months so if they manage to stay that long they will break even.

The real gift in re-financing this loan is the 6 year reduction in term. If our couple can find a way to pay $54 more a month now, later they can skip 72 monthly payments of $886.35.

Teach Your Children Well

Jim Collins over at jlcollinsnh recently lamented how he is fearful that he has failed his daughter because she is not greatly interested in managing her money.

I’m with you, Jim, I often worry I failed my son in the same way. Although it sounds like you did everything right to instill financial savvy, I know I did a lot wrong.

While you, Jim:

I started her early.  Allowance.  Envelopes for spending, saving and charity.  “The Richest Man in Babylon.”  Checking account.  Saving account.  Mutual fund.  Endless conversations (ok lectures) on the subject.  What child wouldn’t love this stuff?

I, in my son’s formative years, saved too little, spent too much and invested almost no time or effort in learning or teaching sound financial principals.

Disinterest in financial matters is absolutely the norm. We spend 40 hours a week making money and another 20 spending it. But most of us would prefer not to spend any time thinking about it. The 9 basic concepts you spelled out for your daughter are definitely worth consideration.

JLCollinssnh-The simple path to wealth

It starts with nine basics.

  1. Avoid fiscally irresponsible people.  Never marry one or otherwise give him access to your money. (Wow, this is a great point. Do everything else right except this and you still may end up with nothing!)
  2. Avoid money managers.  It’s your money and no one will care for it better than you.
  3. Avoid debt.
  4. Save a portion of every dollar you get.
  5. The greater the percent of your income you save and invest, the sooner you’ll have F-You money.  Try 50%.  With no debt, this is perfectly doable.
  6. Put this money in the Vanguard Total Stock Market Index Fund (VTSAX)   This is the fund you already own, so just keep adding to it.
  7. Realize the market and the value of your shares will sometimes drop dramatically.  People all around you will panic.  They’ll be screaming Sell, Sell, Sell.  Ignore this.  Even better:  Buy more shares.
  8. When you can live off the dividends VTSAX provides, you are financially free.
  9. The less you need, the more free you are.

Since my son left home, I thankfully have learned to live without debt and I’m freer (but not yet free) from the shackles of consumerism.

I still worry if his money decisions will be influenced by my new clearer thinking or by all the times when he was growing up when I was quick to flash that American Express card.

Then I remember he is  smarter, more aware and more self-disciplined than his mom so I think he’ll be fine.

Job, Career or Calling

Can you imagine working a job so mind numbing that you spend your workday memorizing pi out to 3000 digits to keep from going crazy?

I read about this guy, Tracy Thornton, in the spring 2011 Monarch Magazine, a Ford assembly line worker who did just that. Lucky for him he was laid off. He went on to earn a degree from Old Dominion University and now looks forward to a new life – teaching science. I think he must feel as though he’s been set free after 12 years in solitary confinement. I know I would.

I get that sometimes you just need a job. It doesn’t matter if the work interests you or it is the best use of your talents and skills. You need a paycheck and maybe you need some health insurance. In the world of jobs, you agree to trade time for money. Since your time is limited and your main incentive for working is the financial reward, you want to trade the least amount of time for the largest sum of money.

I’ve had jobs and I don’t mind them a bit, but a job is never going to be a long term commitment for me. You, as an employer, need something done – I can do it. If we agree on a wage, I’ll do the work – cheerfully and to the best of my ability. In the end, you as my employer are happy and I’m happy– just as long as you don’t start expecting this is to be a long term relationship. My motivation as a job seeker is money and when I need some it’s powerful; but once I have some-not so much.

One person’s job is another’s career. When you leave the job mindset and think in career terms, you have a much longer view. Working in your career field, you will be willing to make short term sacrifices for long term benefits. People often speak of paying their dues in less desirable positions in order to make themselves ready for advancement. Money remains important, but the opportunities to build skills, experience and connections are even more so.

I suck at the career mindset. In my experience, ladder climbing results in a lot of wasted effort in terms of the end product. Everyone is so concerned with their place and their next advancement that very little energy is left to improve the actual product or the service of the company. Many people are happy and successful in this mindset; it’s just not me.

My highest level of work satisfaction comes from a calling mindset. When your work is a calling, you focus on the work itself, you strive to improve your competency because it will improve the quality of the resulting work. Money still matters, but it’s not the greatest reward.

At my best, I love to work. I love to dive in and solve problems and improve efficiencies. I love to challenge others to learn and grow. I can develop a calling mindset with almost any job. I’ve learned over the years that I need three things to transform a job into a calling.

Autonomy-I work best when an employer is able to describe the problem they need me to solve, tell me what tools and resources I can use and then go away. In exchange for this autonomy, I will demonstrate ability to self-manage by keeping them informed and asking for help when needed.

Opportunity to Improve Competency-I cannot think of a skill I have that cannot be improved. The chance to learn new skills or improve old ones is a key factor in my ability to develop a calling mindset. Tracy’s repetitive task job on the Ford assembly line would not qualify as an opportunity for mastery for very long. Performing the same task every 50 seconds, 65 times an hour, 60 hours a week leaves little room for learning.

Purpose-For me, the work has to have some purpose beyond profit. I’m not stupid; I know I get hired because my work will make my employer more money, but I’m at my best when I can focus on the overall picture rather than just the dollars. For example, I’m stoked when given the opportunity to help an unenthusiastic workforce develop the skills and character required to be an efficient, motivated team. Does this affect the bottom line? Absolutely, but it also has a huge effect on the quality of life for the team members and their families.

The difference between a job, a career and a calling is primarily mindset. A cabinetmaker can have a job where 8 hours a day he uses his skills to complete the tasks his employer asks of him in exchange for a paycheck or he can make it his career, investing his energy in working to become the foreman, the shift manager, the general manager. Or it can be his calling, where the most important thing to him at the end of the day is the product of his work, his art, the cabinet. This does not preclude him from becoming the foreman or the general manager; managers whose focus is the product of the work can be very successful.

What conditions are necessary for you to turn a job into a calling?

If your current position does not allow for a calling mindset can it be changed?

I’m happy that Tracy found his calling; I just wish it hadn’t taken him 12 years.

What Do You Want ?

What I really want to do is ….get out of this town, this job, this debt….but

I heard this twice today, not that much different from any other day, except today it was from two different, very bright 30 somethings. Really? You’ve got the world by the tail and you’re letting that stop you?

As much as I’m blown away by people who actually do the work to get what they want, I’m saddened by the majority that just can’t commit.

I suspect in most cases the real problem isn’t the inability or an unwillingness to do the work, it’s the failure to clearly see the dream.

“What I really want” is too lightly spoken and in the heart of the speaker, they know it. It is not what they really want; it is something, anything to distract them from where they are right now.

Like most of us, they have no clue what they really want. They only know that they are not satisfied with what they have.

On the surface, it would seem easy to answer the questions:

What do I (we) want?


What is most important to me (us)?


Is the way we live in alignment with the first two answers?

but it’s not.

It takes a lot of time and effort to discover what is important to us- it’s world’s easier to let the marketers tell us what we want.

Start with why. Why do you want out of that job or that debt? Why did you get in?

If you are thinking, If Only, about your situation, your not looking deep enough. If only I had a better job, more money, less debt, could wear my skinny jeans, etc.- life would be grand. Bullshit. Someday, you are going to find yourself in your dream job with disposable income and a completely new list of If Onlys.


Continue on to examining where you are. What works and what doesn’t work about your current situation? What can you do to fix the part that doesn’t work?

Do this with the knowledge that the pull is always strongest to stay where you are. No matter how uncomfortable, unreasonable and future-killing your present situation; you will be compelled to find a bazillion reasons you cannot change it, at least not now – right up until you get the urge to bolt.

Don’t Bolt. Our first reaction when we have finally had enough but don’t want to ask the hard questions of ourselves is to bolt, to quit, to walk away without a plan.

Not smart. Sit with it. If leaving is the right thing, leave to go somewhere better. Leave with a much clearer picture of who you are and what you want.