Tag Archives: Emergency Fund

Travel Hacking: Round Three

This post is the third post in my new series on Travel Hacking.  In Travel Hacking: Round Two, I was expecting the third round to be about using the Chase Southwest Rapid Rewards Card.  Life happened and I had to amend those plans.

The change in plans was due to an unexpected expense that recently occurred.  When you own a house, unexpected bills occur.  When you own an older house, they tend to pop up more frequently because things get old, wear out, and break.

These unexpected repairs always seem to occur at inopportune times.  Our most recent major repair came when we returned from vacation.  We came home and noticed that we did not have hot water.

The lack of hot water was due to our oil furnace not working.  It was installed in 1992 and I knew it was on its last leg.  Over the years, I replaced valves that wore out, but I was aware that the boiler was getting old and that I was going to have to buy a new furnace soon.

The benefit of having an emergency fund is to cover unexpected expenses.  Some people debate that, but I am not one to split hairs about when an emergency fund should be used.  In my opinion, if your house does not have heat or hot water, that is an emergency. 

The cost to replace my furnace was $6,300.  Talk about tossing six grand out the window.  The benefit of my new furnace is that it is more efficient.  I swapped out a 150 BTU furnace for a smaller 118 BTU furnace.  I live in a rural area, so switching to a lower cost heating option like natural gas is not available. 

The cash for the repair was sitting in the bank.  There was not any panic about this repair.  I just did not want to spend that much money without being rewarded. 

The next set of credit cards that I was planning on using were the Chase Southwest Rapid Rewards Card and the Southwest Rapid Rewards Premier Business Credit Card.  Those two cards are set-up for all of my household bills.  It is forecasted that I will have enough points to earn the sought-after companion pass soon.

Since I had this large unexpected bill, I wanted to pay for it on a premium credit card.  This single purchase was large enough to cover more than the required three month’s worth of spending to qualify for bonus points on a top card.  Most of these premium cards reward bonus points are earned when a new cardholder spends $5,000 in three months.  I was more than covered.

Another aspect that I had to consider was that I am following a plan similar to the Chase Gauntlet that was made popular by the guys over at the ChooseFI Podcast.  As part of the Chase Gauntlet, the Chase 5/24 rule is a major aspect.  The Chase 5/24 rule restricts people from opening fewer than 5 credit cards in the past 24 months.

The way that I was able to open another card that did not apply to the Chase 5/24 rule was to open a business card.  I was able to open a business card because of this blog.  It was created as a business.

The business card that I decided to open was the American Express Business Gold Card.  This card had a $0 introductory annual fee for the first year and then $175 per year after that.  The welcome offer was 50,000 points with $5,000 of qualifying spend in 3-months (I had more than that with one purchase).

The American Express Business Gold Card had impressive featured benefits.  Cardholders have many options to earn 3X points.  3X points can be earned when flights are purchased directly from airlines, on advertising with select media, at U.S. gas stations, U.S. purchases for shipping, and other business expenses including U.S. computer-based purchases from specific providers. 1X points are earned on every other purchase.

Premium Roadside Assistance is a great benefit for cardholders.  I will not have to renew my AAA membership this year ($100 in my pocket).  The American Express Business Gold Card offers roadside assistance in case of a breakdown or flat time.  They will pay for emergency services up to four times per year.  They will even come to your home if it is for a jumpstart or flat time.

This card includes some nice travel benefits.  It includes car rental and damage insurance.  You can receive baggage insurance.  Travel insurance is a benefit.  There is also a Global Assist Hotline that provides medical, legal, financial, and other emergency assistance services when a cardholder travels more than 100 miles from home.

The American Express Business Gold Card offers shopping benefits.  Cardholders can shop with confidence when they use this credit card.  Some benefits shoppers receive are extended warranties on eligible purchases, purchase protection, return protection, and entertainment access for presale tickets.

While all of those benefits are nice, the main reason that I signed up for the card was to earn points.  How much are those 50,000 points worth?  According to the Points Guy, they are worth about $950 in travel rewards.  Those points will come in handy when it is time to book next year’s vacation. 

As a personal finance blogger, I enjoy saving money and building wealth more than spending money.  When I do spend money, I like to do so on things that I enjoy.  While I do enjoy hot showers and a warm house in winter, buying a furnace is not an enjoyable purchase.  Being able to score over $900 in points reduced the pain of having to replace my furnace.

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Debt: Reaching Step Zero

The first step in correcting a problem is to admit that there is a problem.  Prior to admitting that there is a problem, there is another step.  That is when a person reaches their breaking point and cannot go on living the way that they are living.  That is often referred to as step zero.  Step zero is when a person says to themselves “this crap has to stop”.  It is the breaking point.  It is the point where a person becomes willing to take corrective action.  They become willing to try a different approach of living because of a psychic change.

Have you reached the point where you realized that your way of managing money is not working?  Are you spending more than you earn?  Does all of your earnings go towards paying bills?  Do you have creditors calling you who want to be paid?  Do you have to borrow money when an emergency occurs?  Do you find yourself spending money that you do not have in order to keep up with your friends, neighbors, or relatives?  Do you feel broke even though you work hard and earn a good income?  Do you contribute any money to your retirement savings accounts?

Have you reached step zero? Do you want to change how you manage your finances?  Do you want to take control of your life?  Do you want to break away from the bondage of debt?  Are you at a point where you are totally dissatisfied with how you are living because of debt?

The good news is that there is hope.  It can get better.  It is all up to you.  It is based on your willingness to change.

Now that you have admitted that your way of managing your finances does not work, how should you start the mending process?

Measuring the Damage

Start by measuring the damage that you created.  Before you can move forward, do an analysis of what you owe.  My favorite tool to assess debt is the debt-to-income ratio.

To calculate your Debt-to-Income Ratio, see the formula below:

Debt-to-Income Ratio = Monthly Debt Payments/Monthly Income x 100

Example: $1000 in Monthly Debt Payments/$3000 in Monthly Income x 100 = DTI of 33%

What is considered a bad DTI Ratio?

If your DTI Ratio is higher than 36%, you are in the danger zone.  The higher your DTI Ratio is, the less money you have to cover your living expenses.  A healthy DTI Ratio is less than 16%.

Where to Start

After you know your DTI Ratio, it is time to start paying down that debt.  Start with paying off all of your bad debt.  Pay off all of your payday loans, credit cards, and auto loans.  Next, start to pay down your student loans, mortgage, and business loans if they exist.

Stop the Bleeding

Stop buying stuff you do not need on credit.  Identify what you need and only pay cash for those needs.  A few examples of needs are food, clothing, medical supplies, transportation costs, and housing expenses. Wants are fancy cell phones, cable TV, designer clothes, eating at restaurants, or any other expense that is not required to live.

Income

If you are part of a dual-income household, learn to live off of one salary.  Use the higher of the two salaries to pay for all of the household living expenses.  Use the lower of the two salaries to pay down debt.  After your debt is paid off, you can start to focus on saving money.

Get a second job.  Find a side gig to earn money to pay down debt.  If you spend your free time working, you will be less likely to spend money on stuff you do not need.

Create a budget.  A budget is a plan that allows you to break down where your earnings will be allocated based on a percentage.  For example, 25% for housing, 11% for transportation, 20% to pay off bad debts.  Once you have a budget established, all you need to do is follow it.

Recreation

Even though you have debt, you still have to live your life and have fun.  Find ways to enjoy what your local community has to offer.  Instead of going to high priced movies or amusement parks, go to local parks or free museums.  Instead of going to a high priced gym, exercise outside by walking.  Instead of going on a luxurious vacation, take a staycation.

Guilt & Shame

There is no use in feeling bad about having debt.  You have identified the problem.  Now is the time to move ahead and to make positive changes.  Having ill feelings is not a solution.

Focus on the positive and on everything that is possible once your debt is under control.  Try to take small steps and to monitor your progress.  Don’t strive for perfection.  If you have a slip, don’t beat yourself up.  Pick yourself back up and keep striving for progress.

Conclusion

Debt is similar to hiking.  Once you walk 5 miles into the woods, you have to walk 5 miles to get out.  Now that you have decided that a change is needed, it is up to you.  At this point, there is no use in looking for someone or something to blame for your debt.  You cannot change the past.  You can just pick up what is left and apply a solution.  If you learn from the situation, it was not a waste.  As you move forward, you can also use it to help other people who are struggling with their own financial issues.

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You Can Live Debt Free

Do you dream of living debt free?  As long as a person has debt, they are working for someone else.  Unfortunately that someone else is a bank.  The ticket to be debt free is to change how you are managing your finances.

Today, debt is as American as apple pie with trillions owed in mortgages, auto loans, and credit cards. Household debt in 2017 stands at $12.35 trillion.  It is only slightly lower than the 2008 figure of $12.68 trillion. The average American household owes a little above $28,535 in auto loan debts, $172,086 in mortgage debt, and $16,000 in credit card debts.

Considering those statistics,  Americans have too much debt.  To improve their financial future, debt needs to be managed more prudently.  To become debt free, people need to be educated that debt makes them a slave to creditors.  The answer is based on becoming willing to change, finding a solution, and following it up with action. 

How to be Debt Free

Most people have similar financial goals.  Most of these goals are about achieving a better quality of life.  More specific goals include becoming debt-free, savings more money, improving personal relationships, and building a secure financial future for their family. 

Of course, everybody who is in debt wants to be out of debt.  They also want to break the cycle that keeps them going back into debt.  The majority of people never learned how to be debt- free.  In high school, students learn how to cook in Home Economics, but are not taught how to balance checkbooks, save money, and invest for their future.

High-interest credit cards are one of the key factors driving people to excessive debt levels.  Wouldn’t you rather pay yourself instead of paying creditors high-interest rates?  It is possible when you implement a couple of simple practices.  By learning a new way to manage money, you will have a brighter financial future.

Steps to Reducing Debt

One option is to consider debt consolidation if you owe money to many different creditors.  This approach allows you to combined many different credit cards or loans into one simple payment.  It also helps to reduce the pressure from collection agencies if you have delinquent debts.   

While it may seem complicated now, reducing debt is quite easy and is the first step in achieving financial freedom. All you need to do is make a few small adjustments to what you are currently doing. Doing this will help shed off the debt holding you hostage to these creditors.  It might also let you pay off your debt much quicker than you thought and prevent you from going back into debt.  Just imagine how much control you will have in your life when you stop paying creditors high-interest rates just to use their money.

Imagine enjoying life instead of joining the more than 70 percent of Americans that are unhappy with their jobs because they feel disengaged, unappreciated, and overworked.  It is time you learn how to manage your finances.  Do you want long-term financial stability?  Today is a great day to change.

The Debt Snowball Strategy

The debt snowball strategy is perhaps the oldest practice for getting yourself out of debt.  It is a simple plan and it works. This popular strategy is based on ranking your current debts based on interest rates.  Focus on paying off your high-interest debts like credit cards or payday loans.  Next, pay down auto loans and student debt.  Last focus on mortgage debt.  As soon as you pay off a high-interest debt, add the same payment amount to the next loan, and continue the process until you are finally out of debt.

To find extra money to pay down debt, you have to drastically cut expenses.  This includes cutting off excessive spending on items like coffee, dining out, and vacations.  All of the money you save must be applied to deb.

This approach also requires you to stop funding retirement accounts.  Only contribute enough to capture the match that your employer contributes.  You do not want to miss out on free money.  Once your Debt-to-Income Ratio is brought down to 25%, you should start ramping up the amount that you contribute to retirement accounts.  

To calculate your Debt-to-Income Ratio, see the formula below:

Debt-to-Income Ratio = Monthly Debt Payments/Monthly Income x 100

Example: $1000 in Monthly Debt Payments/$4000 in Monthly Income x 100 = DTI Ratio of 25%

When you combine the money that you have from reducing expenses with what you were contributing to retirement accounts, you will soon realize that you can make double monthly payments high-interestst debt as you make minimum payments to other loans. 

Advantages: The snowball debt strategy works as people can free up money and pay off their debts once they follow the plan. It is also a good way of strategically reaching your desired debt-free lifestyle.

Disadvantages: The strategy requires that you reduce your contributions to your retirement accounts and sacrifice the quality of life to pay off debt. It also has a very low success rate because most people are unwilling to give up the small pleasures of life for years.

Create an Emergency Plan

When you take all that money every month and sink it into paying debts, you will be making a noticeable step towards achieving a debt-free life. However, when you run into a financial emergency or hardship, the first place you will want to turn to is to use credit cards and loans. 

Rather than using all your available money for paying debts, work on saving up three months of living expenses in an emergency fund.  Start by putting $25-$50 per week to the side.  keep this money in a checking or savings account.  By having an emergency fund, it will prevent you from using credit cards and going into debt.  Whenever you require money for an unforeseen expense, you just withdraw the funds from your bank.

Write and Follow a Plan

Write a financial plan.  Stick to your plan and use it as a guide.  Let it guide you to escape debt. It might be hard at first.  You are modifying your lifestyle.  Change is not easy, but it is necessary to make progress in your financial life.  Your written plan should spell out the steps above and include additional layers including investments, insurance, and education to make the most of the opportunities that you will be able to take advantage of after you pay off your debt.

Conclusion

While this sounds simple, it is not easy.  This is common sense information that you might have heard before.  Your debt reduction plan is your ticket to becoming debt free and it will also increase your retirement dollars. The best time to get started on this life-changing financial adventure is now.