A $1,000 Emergency Fund Savings Account: One Thing Dave Ramsey is Right About

I don’t mean to imply that Dave Ramsey is wrong about a lot things.  Generally, his advice is very good, although it does tend to be a bit simplistic and one-size-fits-all.  And there is a raging debate about paying off debt using the “debt snowball” method he recommends.  But if there’s one thing that he gets 100% correct, it’s his “Baby Step Number One”, setting up an Emergency Fund savings account getting $1,000 in it.

Emergencies are certain to happen.  Anything mechanical — such as a car, washer, dryer, furnace, air conditioner, water heater, oven, dishwasher, etc. — can break down.  Roofs can leak.  Pipes can leak.  Computers crash and die.  Pets need veterinarians.  People need doctors.  Or lawyers.  Or bail.  It’s not a question of “if?”, it’s a question of “when?”.

$1,000 might not be enough to take care of every emergency.  Some emergencies will cost a lot more.  But $1,000 will take care of a lot of the emergencies that will come your way.  Even if it’s not enough, at least $1,000 is a start.

If you live paycheck-to-paycheck, if you earn just enough each month to pay your predictable bills and you have nothing saved in an Emergency Fund savings account, then you are unprepared for anything unpredictable … and “unpredictable” is part of the definition of “emergency”: an unforeseen combination of circumstances or the resulting state that calls for immediate action.

Maybe you think you can just use credit cards.  Big problem: If you have no savings, and all of your income in a normal month goes to pay that month’s predictable non-emergency expenses, then you won’t be able to pay off the credit-card bill when it comes due the next month.  That means the credit card will start charging interest — effectively increasing the cost of your emergency.  As if the emergency itself isn’t costly enough, you want to add to it?  If you can’t pay the minimum amount due on that credit card bill, then you’ll have compound interest working against you.  This is bad.  (Hint: compound interest should be working for you, not against you.)  Also a problem: The banks can say “no” at any time, cancelling your card or reducing your credit limit as they see fit.  When it rains, it pours, right?  This also holds true for using a home-equity line of credit.  If you’re living paycheck-to-paycheck, how are you going to pay back a home-equity loan?  And again, you’re at the mercy of the bank: The bank can reduce or eliminate your home-equity limit at any time, and are likely to do that if you’re unemployed or if the economy shows signs of recession.

The smart thing is to be prepared.  Now.  Open a savings account at your credit union or bank and start putting something into it — $100, or $75, or just $50, or whatever you can — every time you get paid.  Pay yourself first: Put that money aside before you spend any of your take-home pay on anything else.  If you get paid twice each month, $50 from every paycheck will get you to your initial goal of $1,000 in less than a year.  If you can set this up to happen automatically, so much the better.  Keep putting that money into the account until you have at least $1,000.  As you savings grow, you will enjoy the sense of well-being and security that comes from having a little something set aside.  You will sleep better at night.  One less thing to worry about.  You can take care of a $1,000 emergency!  As it says in The Richest Man in Babylon, “Soon ye will realize what a rich feeling it is to own a treasure upon which ye alone have claim.

keep_calmOnce you have your $1,000 Emergency Fund, make sure you don’t use it for anything except a genuine emergency: an unforeseen combination of circumstances or the resulting state that calls for immediate action.  Don’t give in to any temptation to spend it on anything else.  Once you have met your goal of saving $1,000, it’s time to set yourself a goal of having $2,000 at the ready.

Sooner or later, that unforeseen combination of circumstances or the resulting state that calls for immediate action, i.e., the immediate spending of money, will happen.  When it does, don’t borrow money by using a credit card.  Instead, you “borrow” from your own emergency savings.  Spend carefully, but take care of whatever needs taken care of.  Then, as soon as you are able, you “pay it back” by making your usual deposits to your Emergency Fund every time you get paid, building it back up to where it was before the  emergency, and then beyond that.

If you don’t have an Emergency Fund, why not?

If you think you can’t save $1,000, then think again!

You can work more.  Work more hours.  Get a second job.  Mow grass.  Wait tables.  Flip burgers.  Whatever it takes, get that money into your Emergency Fund.

You can spend less.  Get a cheaper cellphone plan.  Cancel your cable.  Don’t eat anything you didn’t buy at a grocery store and cook at home.  Whatever it takes, get that money into your Emergency Fund.

You can sell some stuff.  Downgrade to a cheaper car.  Turn some unneeded clothes into cash.  Clean out the whole house and have a yard sale.  Whatever it takes, get that money into your Emergency Fund.

The four paragraphs above are very important.  Saving money and putting it into an Emergency Fund isn’t just a good thing because it prepares you to better handle an emergency.  It’s also an exercise in living below your means, spending less than you earn.  You know, “Do not save what is left after spending; spend what is left after saving.”  Imagine your income is water flowing into a tank and your spending is water flowing out.  If the water flows out as fast as it flows in, the tank will never get full.  No matter how high the income, people who spend all they earn — people who are unable to live below their means — will never have wealth.

The same thing that builds your emergency fund is what will build your net worth.  If your net worth is negative (your debts are greater than your assets), then spending less than you earn will allow you to pay off those debts.  If your net worth is zero or not much more, then spending less than you earn will allow you to save and invest.  Remember, the Emergency Fund is the first step.

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I Don’t Want to Charge Anything (I’m Just Here for the Bonus)

Credit-card churning.  Is it for you?

credit_card_offersThese days, many credit cards come with a sign-up bonus for just applying for and getting approved and then using the card by charging some minimum dollar amount within a certain period.  For example, charge $500 within the first three months and get a $150 bonus.  Some cards will apply the bonus as a statement credit, some will send you a check.  Others give you the bonus in rewards points or airline miles, instead of money.  (Note that this sign-up bonus is separate from earning some percentage, say 1% or 2%, of your total charges in miles or rewards points.)

Credit-card churning is defined, basically, as doing everything you can to get as many credit card sign-up bonuses as possible.  This means signing up for lots of credit cards, spending just enough (but no more than necessary) to get the bonus, then putting the cards aside and eventually cancelling them.  Of course, you have to pay off everything you charge, but that shouldn’t be a problem if you only charge things that you would normally buy anyway.

The problem of course is meeting the minimum spending (i.e., charging — which actually means borrowing) requirement in order to qualify for the bonus.  Buying $500 worth of stuff you don’t need in order to get $150 doesn’t make you better off — just the opposite, you should avoid that like the plague!  But if you can charge the required amount by just spending what you normally would on things you have to pay for anyway, … then it’s a lot more like getting $150 (almost) for free.  (Of course, there’s the cost of your time and trouble and maybe some fees for using a credit card for certain purchases.)

This is where credit-card churners get creative.  Instead of going on a spending spree, the successful churners use their new credit card to buy their ordinary purchases such as groceries and gasoline.  Another way to accumulate the charges necessary to get the bonus is using the card to pay for things like phone, internet, cable, electricity, natural gas, and water and sewer services.  You might be able to pay for your car insurance with your new card.  Perhaps you can pay some small monthly bills, such as video or audio streaming services, in advance by paying for a year of service instead of paying monthly.  Local taxes (such as property taxes, vehicle registrations, etc.) might be credit-card chargeable.  Some credit-card churners even pay their rent or mortgage with the new credit card, though doing this requires some additional effort (see below).  All of these can be done online; the bonus wouldn’t be worth it if the bill paying couldn’t be done  just sitting in front of your computer.

It may or may not be possible to pay your utility bills with a credit card — whether these service providers take credit cards varies from place to place.  If you’re going to be a credit-card churner, you need to do some research.  Also, unlike using a credit card at a grocery store or gas station, you might be charged an additional fee to pay for things like electric, natural gas, and water service with a credit card.  Likewise for your property taxes and vehicle registration.

The easiest way to get up to the spending minimum is to put your rent or mortgage payment on the card.  In the past, landlords generally didn’t accept credit-card payments (after all, they have to pay a fee to the credit-card issuer and it’s not as if you’re going to buy more from them if you can put it on a credit card the way that restaurants and shops hope you will splurge when you’re not spending cash).  However, many landlords now accept credit cards for the convenience of their renters, but they pass the fee along to the renter.  Mortgage lenders pretty much never accept credit cards, at least as far as I have ever heard.  But now — the internet to the rescue! — there is a company called Plastiq that will allow you pay your mortgage (or just about anything else, … your university tuition, your utility bills, etc.) and charge it to your credit card.  You sign-up on their website, give them the name and address of whoever you want to pay, they send a check to whoever you so designate and they charge your credit card … and tack on a fee of up to 2.5% to cover their costs and make a profit for themselves.  2.5% of $500 is $12.50.  (Btw, here’s a link you can use to sign up for Plastiq.  If you click thru and sign-up you might be able to pay a bill via Plastiq for a reduced fee and I’ll get similar reward too.  If you sign up for Plastiq, I thank you.)  You need to decide: Is the credit-card churning bonus worth it if you have to do the work of setting up these credit-card payments and you have to pay $5, $10, or $15 in fees?  So ask yourself: Is it worth paying that to get your bonus?

Of course, it helps your bottom line if you avoid interest charges in addition to avoiding paying fees just to use the card.  In fact, if you rack up too many fees and interest charges, you might entirely offset the bonus.  Many new credit cards include an interest-free period during which 0% APR (annual percentage rate) is applied to your purchases; this interest-free period might last 6, 9, or 12 months, maybe longer.  Some credit cards come with an annual fee on the card itself.  In some offers, this fee is waived for the first year, but might be around $100 every year after that.  Check the details before you sign up.  You must read the fine print.  Carefully.

My experience: Over the past several months I’ve signed up for 4 credit cards that came with a sign-up bonus.  Three gave me a $150 bonus (or points worth $150) for charging $500, the fourth was a $200 bonus after charging $1,000.

  • With the first card, I used Plastiq to make an additional payment to my Bank of America mortgage.  Everything went perfectly.  BoA got the check for $500 from Plastiq and I got a $150 check from the card issuer.  I usually throw an additional $500 or so above the required payment towards my mortgage balance each month, so this is just normal spending.  However, as an added benefit, I can pay off that $500 over the next 10 months at 0% interest.  I put my check into my emergency savings account.  Kind of financial poetry, that I will be able to use that money to take care of some future emergency instead of putting it on a credit card.  Adding money to my emergency savings for just making an additional payment to my mortgage as I usually do … that’s good!
  • For the second card, I more than met the spending requirement by paying for a medical procedure.  This wasn’t exactly normal and typical spending, but it was something that was definitely necessary.  Some weeks later I got a statement credit which reduced the balance by $150.  I paid off the remaining balance during the zero-interest period.
  • I used the third card to pay my electric, water + sewer, natural gas, phone and internet, and car insurance bills (but I couldn’t use it to pay my cable bill, because I don’t have cable!).  The fees required to pay by credit card were lower than Plastiq’s usual 2.5% fee.  In order to get to the bonus level, I paid the electric bill for the current month and about the same amount in advance; this didn’t cost any more in fees, because the fee was a flat amount regardless of how much I paid with the credit card.  As soon as these totaled $1,000, I got a statement credit, which I used to buy groceries.  In essence, a free cart full of groceries just for spending money as I normally do.
  • I used the fourth card for groceries, clothes, and some Christmas presents.  For that one, I transferred the reward points I accumulated to my Amazon account, which allowed me to purchase $150 worth of food and household supplies, some tools, and a clock radio.  $150 for me for just spending money as I do normally.

Overall, I’m quite happy I’ve done this.  I’ve “earned” $600 for “work” that took about an hour or so and was mostly just doing what I would have done anyway.  To my way of thinking, it was very much worth it and I look forward to doing it more, just as I like opening checking accounts to get bonuses.

However, there are some downsides and considerations …

Temptation.  The only to win at the credit-card-churning game is to get a credit card, use it just enough to get the bonus by charging things you normally buy, then stop using it and eventually cancel it.  The sum of the credit limits on the 4 credit cards I got recently totaled about a quarter of my total annual income.  I could have used those cards to go on a cruise, fly off to a tropical-island resort, and gotten new furniture, TVs, and stereos for every room in the house.  That’s exactly what the banks want you to do.  Of course, I didn’t because that would mean compound interest would be working against me, making me a slave to credit card companies.  But if your financial discipline is not sufficiently stalwart, you shouldn’t have any credit cards, let alone credit cards you don’t need.  If you can’t trust yourself to resist the temptation to use the card extravagantly and buy things you can’t pay for the same month you charge them (unless you’re sticking it to the credit card issuer by making full use of a 0%-interest period), then you shouldn’t attempt credit-card churning.

Organization and Execution.  Getting the bonus only makes sense if you can avoid the fees, which requires research to know what could go wrong.  You have to read the fine print.  It’s a good idea to record the pertinent facts (like when the zero-interest period ends, when the annual fee comes due, etc., for each each card you have) in a notebook or spreadsheet.  You not only need to know the details and have them at hand for reference, you also need to remember to act so as to minimize your costs: this means you have to pay off the entire card balance as soon as it’s due or before the 0% interest period ends, definitely before any late fee accrues.  It means you have to remember to cancel the card before you’re charged an annual fee.  If you can’t manage this, forget about credit-card churning.  (Related: Banks are more than happy to issue a credit card to you, allow you to make charges, and then say you’re not getting the sign-up bonus because you already had the same card and canceled it some time earlier.  Keeping good records and reading the fine print or making a phone call to ask a question can spare you from this disappointment.)

Basically, you and the credit-card issuer are making a bet.  You’re betting you will be able to resist temptation and play (and pay) by the rules.  They’re betting you can’t.  If you fail, you might get the $150, but end up owing the bank many times that amount in interest and fees — which is exactly what the bank wants.

Your Credit Score.  Opening a lot of credit-card accounts and making charges will almost certainly cause your credit score to decrease, maybe by 30 or 40 points or who knows how much?  This is something you should not be doing if you are going to be applying for a loan to buy a house or a car any time in the next several months.  You might also want to abstain from credit-card churning if you’re applying for a job as some employers look at credit scores.

What Counts Towards the Getting the Bonus.  Banks are wise to credit card churning and certain charges may not count towards getting the bonus.  Cash advances and balance transfers don’t count.  Buying gift cards doesn’t count (although I wonder if the bank would know if an eBay purchase was a gift card?).  Some cards won’t allow you to use Plastiq to for a mortgage payment.  I’ve considered the idea of meeting the bonus-level spending requirement by buying something on eBay that’s valuable and easy-to-resell (maybe a collectible gold coin?), but I haven’t done this yet.  The transaction and shipping costs, along with the risk that the resell price might be a little lower than the price I paid, might be worth it — if the bonus was large enough.

Problems .  Things can go wrong in unexpected ways.  I logged onto the the website for my water and sewer service and paid the currently-due bill on one of my new credit cards.  A week later, they deducted the amount due from my checking account, as they normally do.  I had to call them to get a refund.  You would think their system wouldn’t take a payment when none is owed, but, oh well.  I guess I should have discontinued the automatic bank drafts payments before I paid with a credit card.  I’m afraid something similar could happen if I pay my property taxes with a credit card while they’re still being paid from an escrow fund by the bank that holds my mortgage: I would pay with a credit card and then the bank would pay too, and then I’d have a dickens of a time getting the extra payment back.

Credit card churning: for some it might be easy money … for others it might be playing with fire.  Proceed with caution.  If you want churn, make sure you first learn, then make sure it’s the bank that gets get burned!

A Dehumidifier Helped my Dryer

Spend here, save there: How installing dehumidifier helped my clothes dryer. Sometimes spending on one thing saves you money on something else.

Several years ago I realized that the basement of my house was too humid and I definitely needed a dehumidifier.  The basement doesn’t have water seeping in through the walls, and it’s actually pretty dry during winter.  During summer, however, the seasonal humidity combined with the cooler temperatures of the basement created a rather unpleasant and unhealthy environment.  It was never moldy, but it didn’t seem to be too far from being so.

damp_basement.jpgClearly, I needed a dehumidifier.  Luckily there was one at the local Goodwill that seemed to be in good condition.  I bought it and installed it.  I knew it wouldn’t do much good if I just put it on the floor and plugged it in.  A dehumidifier has a bucket that needs to be removed and emptied when it gets full.  When a dehumidifier’s collection bucket is filled with water — taken right out of the air, like magic — it automatically shuts itself off and waits for its human master to empty the bucket.  I was afraid that emptying the dehumidifier bucket was a task that wouldn’t be done as often as it should.  I wanted my dehumidifier to work whenever needed, bucket be damned.  So I suspended it on cables attached to the overhead floor joists directly above my basement sink and connected the discharge pipe to a garden hose leading to the drain.  The discharged water goes right down the drain, completely bypassing the bucket.  Thus, no need to ever empty the dehumidifier bucket … one less thing!  Also, it’s nice to have it out of the way and not taking up floor space.

Just a day after I turned on the dehumidifier, the air in the basement was noticeably dryer and more pleasant.  I saw that the basement sink dried more quickly after doing a load of laundry.  I was also glad to know that the basement was much less hospitable to vermin, like cockroaches.  But, I worried: how much electricity is this thing going to use, i.e., how much is it going to cost?

As it turned out, I didn’t notice any change in my electric bill.  Maybe part of the reason is the dehumidifier doesn’t use as much electricity as I feared it might.  But I noticed something else: the clothes dryer (which is also in the basement) was drying clothes more quickly than it had before I installed the dehumidifier.  I don’t know exactly how much more quickly, but I do know that I never had re-start the dryer because the clothes were still a bit damp after the dryer stopped (which happened sometimes before the dehumidifier).

It makes perfect sense.  To dry clothes, the dryer uses a lot of air pulled from the area around it.  Before I had the dehumidifier, the air in the basement was full of water.  Once the dehumidifier was doing its thing, the dryer has nice dry air to work with.  To some degree, the electricity used by the dehumidifier is offset by reduced electricity usage by the dryer.  Spend a little here, but save a little there.

My Computer Was Beeping

dell_inspironSome days ago, a member of my household decided to move some furniture, which including moving our family computer.  She said she was careful and handled it gently.  But when we turned it on, all it did was make a beeping noise: beep-beep … beep-beep … beep-beep … beep-beep.  Like the Looney Tunes Road Runner.  The screen stayed blank.

Of course, I immediately searched the internet (using another computer).  In no time at all, I learned that computers communicate with “beep codes” to indicate a start-up error occurring before the computer starts to communicate via the monitor screen.  In other words, when something is wrong, you might hear a beep-beep before you see a blue screen.  Different manufacturers have different codes.  For my computer, repeated sets of two beeps evidently meant there was a problem with the computer’s main memory, the RAM.  Removing the RAM boards and re-installing them seemed like a possible cheap and easy fix, so I tried that.

A few years earlier, when I initially purchased the computer, I had installed an additional RAM board, so I knew the procedure.  I unplugged the computer, unscrewed a few screws, and removed the computer’s side panel.  It was a little dusty inside, so I removed the fan and cleaned everything with a Shop-Vac.

My computer has two RAM slots, let’s call them 1 and 2, and each has a RAM board, let’s call them A and B.  I removed both boards.  Just as an experiment, I plugged in the computer and turned it on.  With no RAM at all, it was an immediate beep-beep.  I installed board A in slot 1 and turned it on.  It started normally.  I removed board A and installed board B in slot 1.  I turned it on and it started normally.  I installed board A in slot 2.  Beep-beep.  I put board B in slot 2.  Beep-beep.  No matter how I arranged things, I got the beep-beep error code whenever there was a RAM board in slot 2.

I was wondering whether I wanted to use the computer with only one RAM board (which would be half as much RAM as I had before the computer was moved, and more RAM is the best way to make your computer run smoother and faster) … or if I wanted to spend hundreds of dollars to buy a new computer.  Then I decided to try one more thing.  I removed both RAM boards and set them aside.  I got a clean paper towel and some rubbing alcohol.  I poured a little rubbing alcohol onto the paper towel and gently cleaned the RAM slots and the connectors on the RAM boards.

(Note: For cleaning electronics, use rubbing alcohol that is 90% or more pure isopropyl alcohol.  The higher the percentage of alcohol, the lower the water content — and you definitely shouldn’t be cleaning electronic equipment with water.  Most rubbing alcohol sold for household use is 50% or 70%.  You may have to shop around to find isopropyl alcohol in a purer form.  And be careful: at higher concentrations it’s even more flammable.  When using isopropyl alcohol, ensure that equipment is unplugged and you’re not near any flame.)

When I looked at the paper towel I saw a small bit of debris (maybe a tiny piece of a dried leaf?).  Had it gotten into the computer and fallen down into the RAM slot and interrupted the electrical connection?  I don’t know if it was actually causing the problem, but …

I waited for the rubbing alcohol to dry, plugged the computer in, and turned it on.  It worked perfectly and has been working fine ever since.  Hundreds of dollars saved for 15 minutes of work.

Scrooge Was Right: You’re Smart to Wear Warm Clothes in Winter

Perhaps it’s odd, as we approach the Christmas season, to come to the defense of Ebenezer Scrooge.  But I think it’s fair to say that the old miser does make a good point and seems to be an early proponent of frugality and personal finance efficiency (at least in this video version of “A Christmas Carol” from 1984 starring George C. Scott as Ebenezer Scrooge).

You can save a considerable amount of money during the heating season by not heating your home to the point where it’s comfortable to walk around you house with bare feet wearing shorts and a t-shirt.  At my house, where the heat doesn’t come on until after Thanksgiving, I simply do not hear pleas to turn on the heat from people who are wearing shorts and no shoes.  Scrooge points to coats and waist-coats, but today we have flannel shirts, sweaters, sweatshirts, and (my favorite) flannel- or fleece-lined jeans.  Don’t burn coal or gas to heat your entire house.  Warm yourself with comfy clothes and snug slippers.  Stay cozy under a sherpa blanket while reading or watching television.

In my experience, flannel shirts and sweaters are easily obtainable at thrift stores at very low cost.  I’ve never seen flannel- or fleece-lined jeans at my local thrift stores, so I’ve purchased them at retail prices, but as Scrooge says, once purchased they may be used indefinitely.

A fleece-lined flannel shirt (practically a jacket, actually), a long-sleeved shirt and a long-sleeved t-shirt with fleece-lined jeans is my indoor uniform during the winter.  I actually don’t wear my fleece-lined clothing out of the house.  I’ve even thought about buying fleece-lined overalls.

Experts claim you will save 2 to 3% on your heating bill by lowering your thermostat 1 or 2 degrees.  Are you frugal enough to see how much you save if you set your thermostat to 65°?  62°?  60°?

(Interestingly, this exchange between Bob Crachit and Ebenezer Scrooge does not appear in the original text of Charles Dickens’ “A Christmas Carol”.)

DIY Neighborhood Watch

windows_at_nightYears ago I attended a talk about safety and crime prevention given by a local police officer.  One thing he said led me to develop a habit, something I’ve done ever since.  He recommended that everyone should look out their window for a few minutes each night and call the police to report anything suspicious or out of the ordinary.  Sounded like a good idea to me.  If a lot of people do this, it adds up to many hours of crime-preventing observation.

Before I go to bed at night, I look out one of my windows for a couple minutes.  I just take a look at the street, sidewalk, parked cars (including my own), my neighbors’ houses and everything I can see.  If I see anything suspicious, I call the police on the non-emergency number.

I’ve called the police twice.  Once it was because I saw some young men driving around with a man seated on the top of the car!  Pretty weird.  I guess they were drunk or high.  Another time I saw a man walking up one side of the street and down the other, stopping and peering into parked cars.  Both the car and the man got out of sight before the police arrived, but both times I did see a police car drive by soon after I called.  Did I prevent some crime?  Maybe.

Everyone should do their part.

Listening to Dave Ramsey

If I took the time to think about it, I’m pretty sure I could find some things, especially things outside of personal finance, that Dave Ramsey and I don’t agree on.  In a few cases, I’ll say his financial advice isn’t good or at least it’s not good for me (which, I’ll admit, means it might be good for some people) — although on the need for an emergency savings fund, he’s completely correct.  I think his radio show often contains too much kitsch and silliness and not enough detail about financial topics that are sometimes complicated.  Kitsch and silliness are good for ratings, I guess.

dave_ramseyBut, I must say, there have been many times when I’ve been at work, knowing full well that snacks and cold beverages are readily available from vending machines and fast-food restaurants that are just minutes away from my desk.  But I have made myself the promise to eat and drink only things I have brought from home.  So I go to the Dave Ramsey website, click the button to listen to his radio show, hear someone do the debt-free scream and quick as that I’ve got an immediate boost to my willpower.  When I leave work and head home towards a delicious home-cooked meal, I think, Thanks, Dave Ramsey.