To EF, or not to EF?

[DaveInPgh]

Steve, I understand the point you are making but still disagree regarding the high interest rate debt. Unless a person is maxed out and unable to use their credit card for an emergency, I favor paying off the debt before putting money into an EF.

I also understand the importance of learning to save and using credit cards wisely.

However, that $100, $200, $300, etc. that was put into an ER last month in anticipation of the flat tire, x-ray, etc. would have had a much bigger impact paying down the debt. Unless there is a "CASH PRICE" for that unexpected expense, the cost would be the same whether it was paid from an ER or via credit card.

[disneysteve]

However, that $100, $200, $300, etc. that was put into an ER last month in anticipation of the flat tire, x-ray, etc. would have had a much bigger impact paying down the debt.

From a strictly dollars and cents standpoint, this is true, but learning to be responsible with money is largely about modifying behavior. This is why Dave Ramsey's plan works for so many people. For example, his snowball method of debt repayment isn't the best option financially. Paying highest interest rate first saves you the most money and gets you debt free the fastest but paying off a few small debts is much more motivating. There's value in that.

For someone buried in credit card debt who is starting to dig their way out, which do you think would make them feel better about what they're doing and be more encouraged to keep at it?

A) Set aside a small amount of money from each check, perhaps $50, and in a couple of months when an unexpected bill comes along, they have $100 in savings and pay the bill with no problem

OR

B) Send every penny to the CC debt. They're starting to see the balance go down and then an unexpected bill comes along and they need to charge $100 back onto the card since they have no savings, making their balance go back up.

I say that B) would be much more likely to feel like a failure and that they're never going to be able to get the mess cleaned up whereas A) might make them realize that there is another way to live besides putting everything on the credit card and that they can keep working toward that goal.

[Nutria]

From a strictly dollars and cents standpoint, this is true, but learning to be responsible with money is largely about modifying behavior.

That's when/why we put the CCs in the back of the metaphorical sock drawer (but didn't cut them) and pulled out the debit card for everything.

(Using a DC for so much was a real mental hurdle for me to cross, since I was deathly afraid of a crook cloning our card and draining our accounts while the bank just shrugged. But the real CC debt was more important than maybe theft.)

This is why Dave Ramsey's plan works for so many people. For example, his snowball method of debt repayment isn't the best option financially. Paying highest interest rate first saves you the most money and gets you debt free the fastest but paying off a few small debts is much more motivating. There's value in that.

For someone buried in credit card debt who is starting to dig their way out, which do you think would make them feel better about what they're doing and be more encouraged to keep at it?

A) Set aside a small amount of money from each check, perhaps $50, and in a couple of months when an unexpected bill comes along, they have $100 in savings and pay the bill with no problem

OR

B) Send every penny to the CC debt. They're starting to see the balance go down and then an unexpected bill comes along and they need to charge $100 back onto the card since they have no savings, making their balance go back up.

I say that B) would be much more likely to feel like a failure and that they're never going to be able to get the mess cleaned up whereas A) might make them realize that there is another way to live besides putting everything on the credit card and that they can keep working toward that goal.

We had some definite reversals and flat-lines on the road to zero CC debt. Instead of making me feel like a failure and giving up, it made me feel like a failure at not being able to reduce the debt while earning so much more than the median income and not driving Lexuses or Beemers.

That led to replacing the CCs with a DC and a concerted effort to really look at unnecessary expenses and make a reasonable and workable budget system.

For us, the workable budget system turned out to be a "forward looking check register".

[disneysteve]

That's when/why we put the CCs in the back of the metaphorical sock drawer (but didn't cut them) and pulled out the debit card for everything.

The debit card is only a viable option if you have savings. If you don't, there's no money in the account to use the debit card and you're stuck continuing to use the credit card. That's why having some modest amount of savings is important.

[Nutria]

That's when/why we put the CCs in the back of the metaphorical sock drawer (but didn't cut them) and pulled out the debit card for everything.

The debit card is only a viable option if you have savings. If you don't, there's no money in the account to use the debit card and you're stuck continuing to use the credit card. That's why having some modest amount of savings is important.

Let me clarify: everything in the monthly budget (which had and has a bucket for "Miscellaneous"). Sorry for the misunderstanding.

[LuckyRobin]

As someone who has paid off a massive amount of debt, I have to say that having the Emergency Fund was very important psychologically. We had made a very big commitment to not charge again and to have to use one again during our payoff period was a major emotional blow and felt like so many steps backwards. That was when we went ahead and did the $1000 Emergency Fund. We didn't have to use our cards again for anything that came up and we slowly added to it after the $1000 mark at $10 a week.

Could that $10 a week have gotten us out of debt a little bit sooner? Yes. I did the math once. It would have gotten us out of debt 2 months sooner. The $1000? No. Because we used it often enough over the years that we would have been putting that amount on the card and being charged interest on it. Was that 2 months earlier worth the peace of mind we had by having an Emergency Fund in place? No, it wasn't. Sometimes it isn't about what makes the most sense logically or on paper, it's about what makes the most sense for sticking to a long term plan. For us that was the Emergency Fund. The mind is a very powerful thing when getting out of debt. The EF was our safety net.

[Nutria]

As someone who has paid off a massive amount of debt, I have to say that having the Emergency Fund was very important psychologically. We had made a very big commitment to not charge again and to have to use one again during our payoff period was a major emotional blow and felt like so many steps backwards.

A Ramsey devotee?

(Our commitment was to not use the CC until we became disciplined in our spending habits. Because that's the real cause of debt, just like "guns don't kill people, people kill people". Honestly, it took about 6 months, but held out for 2 years out of fear of reversion.)

[LuckyRobin]

A Ramsey devotee?

Gosh, no. I've never even read him. From what I've seen he goes too far away from common sense in certain areas, like never using credit ever again except a mortgage (how do you reserve a hotel or a rental car without a cc?). And paying off the lowest amount owed as opposed to the highest interest rate first.

No, not a fan. But we paid off $150K in medical debt on credit cards and loans over ten or eleven years. Adding to that debt was always a major blow. Although the number didn't change much with little things, the fact that it went up was very difficult to take. And it did go up with 6 surgeries and hospital stays in 5 years, but adding small things to it, we could prevent. Once we had the EF in place we removed the issue of small unexpected things and life went much more smoothly and we didn't stress all the time.

[disneysteve]

how do you reserve a hotel or a rental car without a cc?

Both can be done with a debit card, apparently.

The problem is that they generally place a hold on your card so you need to know how much the hold will be and how long it will remain in place. And you need to have sufficient funds in your account to cover the hold and the actual charges.

I seem to recall there were problems a while ago when gas prices spiked because stations were putting large holds on debit cards when swiped at the pump and then it was taking a couple of days for the hold to be released. In the meantime, people were bouncing checks because they weren't aware of the hold. For example, you swipe your debit card and pump $15 worth of gas and go on your way, but the station placed a $75 hold on your account. You think your balance only dropped by $15 but it really dropped by $90.

[tripods68]

Both can be done with a debit card, apparently.

The problem is that they generally place a hold on your card so you need to know how much the hold will be and how long it will remain in place. And you need to have sufficient funds in your account to cover the hold and the actual charges.

Exactly, I no longer need a CC card to reserve hotel/car rental. We gladly provide them with a debit card, works all time.

[GoodSteward]

I have been to the place before where I was putting every spare dime into paying back off credit cards, and didn't try to create an EF first. I kept thinking once I had gotten to the end of the debt, I would save up the money for an EF. The problem is I kept falling back on the cards for things the EF should have covered.

For me the bigger problem isn't the lack of an EF, it's obligating all your cash flow so there is nothing left. That's what drove me to use credit cards over and over. All my money was tied up into payments, so I had to use CC when things happened.

Now, after being scarred by the impact of 0 cash flow left over each month for years(due to payments) I can't stand to use even my EF for something. I know this may sound crazy, but I would rather put it on a card, and eat cereal every day to pay the card off before interest just to keep the cash in the bank. If I can't pay it off before interest, I'd then dip into the EF to avoid it carrying over. I try to avoid using cash in the bank to the extreme as far as savings goes.

[tripods68]

I know this may sound crazy, but I would rather put it on a card, and eat cereal every day to pay the card off before interest just to keep the cash in the bank. If I can't pay it off before interest, I'd then dip into the EF to avoid it carrying over. I try to avoid using cash in the bank to the extreme as far as savings goes.

We use a multi-tiered layer approach to which to 'draw' from unexpected expenses so NEVER have to touch our true EF.

[GoodSteward]

We use a multi-tiered layer approach to which to 'draw' from unexpected expenses so NEVER have to touch our true EF.

Right, I treat it as an apocalyptic fund, as in all else is lost this is what we have left to use. lol.

[Nutria]

Right, I treat it as an apocalyptic fund, as in all else is lost this is what we have left to use. lol.

For us, that's the Job Loss Fund.

After the Medical, Car, Appliance, Christmas/Birthday, Vacation, Uncategorized and Tuition accounts have been depleted, we'd hit the... hmmm.

Actually, after the Medical, Car, Appliance, Christmas/Birthday, Vacation and Uncategorized funds are depleted, if we still have jobs, we'd probably start putting those catastrophe expenses on credit cards and tighten our belts so as to pay off the cards ASAP through cash flow.

Because if we lose jobs with a huge CC bill and no cash on hand, that would be even more catastrophic.

[GoodSteward]

Because if we lose jobs with a huge CC bill and no cash on hand, that would be even more catastrophic.

Agreed

I will only use the card within a reasonable amount, however, because once I hit a point I know I can't pay it back without rolling debt that constitutes EF territory for me. I will only allow myself to dig up to the point of paying it off before interest. I know my limits, because I've done this more than once to avoid using the EF.