Money Monday: Saving for a Rainy Day

Note: This was supposed to be yesterday’s post (which, dear readers, I’m sure you will note, is also not Monday. What can I say? Life is beautiful, yet exhausting, so sometimes I’m just not up for blogging!)

As I write this blog post, it is currently pouring down buckets of rain.  The forecast for tomorrow is cold and rainy too, so this week’s Money Monday post seems appropriate.

One of the most important ways to win with money is to be prepared to weather a financail storm. A 2012 study by FINRA foudn that 40% of Americans couldn’t come up with $2000 in an emergency and 60% don’t have three months of basic expenses saved up.

This is one area where B. and I have significantly deviated from the Dave Ramsey plan.  In order, his steps involve saving $1000,  paying off debt and saving up 3-6 months of expenses.

I don’t know about you all, but $1000 in savings when you’re looking at a minimum of a five years paying off debt just doesn’t really feel that secure.  In the last two years, I can think of at least three major, surprise expenses that required more than $1000. Plus, five years is a really long time. There are a lot of things that could happen during that time- one of us could lose a job, we could have a major health event, or some other life event could happen.  I’m just not comfortable living for five years with no savings to fall back in, just in case.

Anyway, we’re doing this out of order, because we saved up about four months of expenses before we started paying down debt and I haven’t regretted it for a minute.  Still not convinced? Here are three good reasons why you really need to have three to six months of expenses in savings.

1. Life happens all the time– Cars break down, kids need surgery, dogs eat something stupid and rack up huge vet bills, and things in the house break (like the time our trees decided that growing through the drain line was a GREAT IDEA!) Three to six months of expenses in savings will more than cover almost any major life event.
2. Job security is not a real thing– Given that neither B. or I are tenured professors or union workers, we don’t have a whole lot of job security.  Sure, we do our jobs well, but it’s impossible to predict whether our positions will still make sense three or four years down the road.  Layoffs happen and it’s irresponsible to our family to not plan for that eventuality.
3. Major health events are no joke–  I work in health insurance, so maybe I’m paranoid, but I’ve seen firsthand just how much a major medical event can cost. Medical debt is the leading cause of bankruptcy in the country.  Most out-of-pocket maximums are set around $7000 a year- that’s a lot of money before insurance kicks in.  Having expenses in savings helps to absorb both the costs associated with a major health event as well as the opportunity costs associated with missing work.

So there you have it.  Three reasons why you need three to six months of expenses in savings.  It wasn’t easy for us to get there- we were often saving only $50-$100 a month, but we’ve been building for a long time and our savings are finally in a good place. Start small and you might be surprised how easy it is to find more money to save.

The usual caveat: none of this applies if you are struggling to meet basic needs such as food, shelter, clothing, health insurance and utilities. A lot of what I write about assumes an income sufficient to meet basic needs, but I fully recognize that there is a significant part of the population that doesn’t fit that criteria. I still think that Dave Ramsey can be helpful in this situation, but the application is quite different. 

Money Mondays: Why We Don’t Do Dave Ramsey “Correctly”

Are you gazelle focused? Source: Pixabay

The other day, Dave Ramsey’s team posted the following article about living like you’re on baby step one forever.  The idea is that once debt is paid off and your emergency fund is fully funded, there’s no reason to keep living with “gazelle intensity.”

Dave’s definition of gazelle intensity is, at times, quite rigid. You’ll know you’re “gazelle intense” when you’re:

• Living on beans and rice
• Driving a busted up, beaten down car because it still runs
• Selling everything you can do without to raise capital
• Forgoing all luxuries, up to and including new clothes, dinners out, meat and internet

This article really got me thinking about the way B. and I approach budgeting- I don’t think Dave would ever look at our budget and agree that we are “gazelle intense.” Because the truth is, we aren’t.  I look at our budget each month and I see a lot of opportunities to cut costs. For example, we could:

• Replace meat-based meals with bean-based meals
• Eat more junk (no kidding- it is way cheaper in the short run to eat pre-processed food than it is to eat healthy food, including fresh fruits and veggies)- $200 (ish)
• Get rid of the house cleaner -$200
• Get rid of the lawn service- $150
• Get rid of our restaurant budget- $100
• Dump our individual spending money -$200

See? Right there, off the top of my head, I came up with $850 a month that we could cut from our budget, which averages out to about $10,000 per year. Now, let’s do a little bit of math.

At our current spending, we’re hoping to pay roughly $40,000 on student loans this year. It’s an ambitious goal, to be sure, but I think we can do it. With roughly $150,000 in loans, paying $40,000/year means we’ll be debt-free in just under four years- 45 months, to be exact.  Paying $50,000/year means we’ll be debt free in three years- 36 months. That’s a nine month difference.  Less than a year.

Honestly? That extra nine months just isn’t worth the lifestyle change to us at this point.  I want to be out of debt more than I’ve wanted anything in my whole life, but not enough to give up living my life for the next three years. No matter what our budget picture looks like, the reality is that we’re in this for the long haul. If cutting our budget to the bone for six months would allow us to pay off all our debt, I think we could do it.  I could sustain that lifestyle for six months.  But 36 months? It’s really really hard to make the decision to live that way when you don’t need to live that way to survive. I just don’t have it in me.

I approach budgeting the same way I approach dieting- with an eye to what is sustainable long-term. Back when I first started trying to seriously lose weight after giving birth, I decided to cut my calorie intake down to 1400(ish) calories a day (which all the calorie calculators said was appropriate). I. Was. Starving. Two days in, I was cramming every cookie I could find in my mouth. Next, I tried a really complicated program where you track your food macros each day (I have friends who swear by this diet). Again, one week in, I gave up because tracking my food every day and trying to adjust was so freaking complicated. Netiher of these approaches ended up being a sustainabel lifestlye change, which is what I really needed. I wasn’t going to be able to follow either for the rest of my life, but what I needed was a diet plan that was sustainable.

I take the same philosophy to budgeting. We could get “gazelle instense” but I’d be burnt out long before that intensity produced any signficant payoff for us. And just like dieting, I’m afraid that my burnt out response would be a disporortiante spending spree.

Instead, I try to take frugality and budgeting in moderation. Because realistically, paying off debt for three+ years is the equivalent of a lifestyle change, not a fad diet. Walking to Starbucks with a co-worker once a week or so makes me happy.  Going out to eat occasionally is a nice break. Eating good food is a long-term investment in my health. Our lifestyle right now is sustainable, and I’m confident that once we reach our goal, our lifestyle won’t change that much (B. may beg to differ- he’s more  of a “stuff” person than I am).  To me, that’s success. Is our system perfect? Not at all. Is there room for improvement? Always. But our system is sustainable for us and for now, that’s good enough for me.

So if Dave Ramsey is intimidating to you, and the prospect of living off beans and rice for the next three years is overwhelming, just know that it is possible to find a sustainable balance that includes room for a few luxuries as well as room for money toward debt. A sustainable budget should never be an all or nothing proposition.

A note on these posts. A lot of the themes of money Monday posts are going to touch on some variation of spending choice and money not equaling happiness. I just want to point out that money doesn’t bring more happiness after a certain point. Choosing which luxuries to indulge in only matters after a certain point. There are many many people who are unable to meet their basic needs (food, shelter, clothing and health care) and I think that while budgeting is arguably more important in that situation, the reality is that conversations about spending choices are pretty moot. B. and I have definitely had our leaner times (i.e. new baby and one income plus piles of student loan debt) and are incredibly grateful for the relatively privileged financial situation we’re in now. If you’re there and you’re struggling- I feel you. I really do.