Keeping Out of Debt – The Speakers

Now THAT’S a system!I’ve got some pretty crappy speakers. They’re from a set I bought almost 15 years ago. They work (well, 3 of them work and that’s enough.) But they aren’t very good quality and I’m not sure how much longer they’ll last. They don’t sound too great, but they are making do.

They definitely aren’t essential, but they sure do make watching movies nicer than just using the speakers on the TV. And for music or radio from the stereo receiver, it’s kinda tough to get that working without them. I do have a portable Sony CD player that gets radio though. That should be enough.

If they go out tomorrow, I’ll be fine. I’ll “suffer” through. But part of me wants new speakers. So now I’ve started allocating some money in a separate account (thanks to the sub-account functionality at ING) and I’m saving up until I have enough to buy them. This will ensure that I don’t get into debt for something I view as a luxury and not a necessity. I’m not saving much, only $25 a month (my entire “fun money” budget), but that will add up over time. Even though it’s in a high interest savings account it won’t earn much quickly, but at least it will earn some interest.

When I’ve got enough money to buy the speakers, I’m going to look for a deal where I can buy the speakers I want, at a reasonable price, and possibly take advantage of a 0% interest and no payments plan. Why would I do this instead of just paying for them outright? I guess it’s kind of like the credit card arbitrage game. I’ll have the money set aside earning interest but I’ll wait to pay off the debt until the end of the 0% deal. I’ve never played that game, but when it comes to a situation like this, I think I would take advantage of it. I have pretty good discipline when the money is out of sight and out of mind. I would just need a reliable reminder when the 0% timeframe is up. I think I can handle that.

The reason the speakers are on my mind now is that in our new house the living room will be wired for surround sound. I haven’t had surround sound for a long time, and I don’t have enough speakers to get it to work now. It’s definitely a luxury, but it’s one I think I would make good use out of.

That’s my plan. It’s not much, but it will be the first time I’ve saved up for a big purchase rather than just splurging and trying to rationalize and deal with the debt later. It’s something I’ve been telling myself I need to do for these kinds of purchases, but haven’t followed through on in the past. Since I’ve been developing my new, more frugal habits, I think I’m ready for this. I’ve kept myself from buying much of anything “for me” for a while now. I think it’s time to start the new habit of saving before buying.

Image Source: jurvetson

The Non-Emergency “Emergency” Fund

That sign’s pretty clearI’ve Paid For This Twice Already‘s article on giving yourself a payday advance is a very good concept.  It’s easy to see why payday loans have such an allure for those strapped for cash.  For people living paycheck to paycheck tapping their emergency savings to help them get through the tighter periods can be very helpful.  It acts as a “payday loan” without paying the high fees typically associated with those short term loans.  I am all for avoiding payday loans.

However, I think using your emergency fund for these types of short term loans can start to erode the meaning of that fund.  Ideally that fund is for emergencies.  For me, that means serious (and hopefully rare) problems like unemployment, car repairs, huge medical bills, and critical home repairs.  We want this fund out of our immediate reach in a high interest savings account.  It needs to feel untouchable.  I fear that if we got used to withdrawing from it for small, non-emergency things it could create a “slippery slope” that blurs the boundaries.  It loses it’s distinction as the almighty emergency fund and becomes yet another savings account for me to use at my discretion.

Although running short on money before the next paycheck can feel like an emergency, technically it is simply going over budget for that time period.  Instead of pulling money from our emergency fund, we’ve found that it’s better for us to keep a fund specifically for “everyday” shortages and frequent transactions.  We call this the overage fund.

Let’s say you find a spectacular sale on paper towels and you stock up, spending more than you have set aside for the household that month.  Maybe it’s time to get your oil changed but fuel costs ate up the car budget.  Or perhaps the first part of the month has a higher proportion of the bills and you have unexpected expenses that result in that paycheck running short.  Are these really emergencies?  In most cases, probably not.  But they could put you in a situation where you could be in a real pinch or even go into debt.  These would be cases to use an overage fund.

Our overage fund is a couple hundred dollars and we keep it in our normal checking account as a cushion.  Basically it’s a small amount of savings that we dip into whenever we have to and replace as soon as possible.

We use the overage fund for two main reasons:

Temporarily using money from the overage fund can help you make it to the next paycheck without going into panic mode.  Mostly we use ours to help us avoid debt by using it to supplement months where we go over budget.  We can pay the extra expenses from our overage account without having to keep a credit card balance.  This saves us on potential interest charges. In the upcoming months we make sure to pay back the amount we took by reducing our budget accordingly.

An overage fund can be in any form you feel comfortable with.  Maybe this fund is just the cushion you keep in your checking account.  Maybe it’s a savings account from which  you can easily transfer funds.  It just needs to stay close to home so you don’t have to wait for the funds to transfer if you need them quickly. 

Always aim to keep a certain level in this fund.  It could be something like $200.  If you go below that amount work to stay under budget in order to replenish it.  If you are using it as a floater until the next payday be sure to replace the funds immediately when you get paid next.  If you have to tap these funds due to unexpected bills pushing you over budget it should be a priority to pay them back, just like other debt payments.  Only this time you’re paying yourself back and not the bank. 

Whether you are pulling cash from your official emergency fund or an overage fund you are using your own cash instead of relying on a payday loan or credit card.  It’s a very positive thing that can help keep you from paying fees and interest.  Using this method, we’ve been able to stock on some sales, go out to an unexpected dinner with friends, and manage to pay for our car registration (which we had completely forgotten about) without having to dip into our emergency fund or leave a balance on our credit card.  Within a month or two we’ve usually managed to reduce our spending enough to replenish our overage account so we’re ready for the next unexpected expense.

Image Source: StuSeeger

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