The Importance of a Buffer

age of money
YNAB ages your dollars, basically it is rate of spending vs. rate of deposit. Read more here.

Are you living paycheck to paycheck? I’d say many people do in an American society of debt overload and over indulgence do. We just weren’t raised to be savers. We look at our grandparents and great grandparents who still cut the bruised parts of fruit out and finish eating the rest and shake our heads. We think, “I will buy you a whole basket of peaches if you’ll just NOT EAT THAT!” We throw out vacuums when the belt breaks, think buying a brand new car on loan is cheaper than fixing the one that’s paid for and go pick up a burger at the local fast food joint when we just don’t want to cook. But saving is important, and over indulgence has entire generations in financial ruin. That’s why it’s important to create a buffer.

A buffer is a category you create in your budget; it’s rule four for my favorite budgeting software, YNAB. It’s different than saving for rainy day expenses, those expenses that only come up annually, or on an as-needed basis, like doctor visits and vet bills (which you should be planning for them as well!) It’s the one to six month’s salary you save so you are no longer living paycheck to paycheck, and you add to it each and every paycheck. It can be a small amount, or it can be large, It’s totally possible and most people can raise a one month’s salary buffer within 6-9 months of budgeting.

The question is, why is it so important? There are many reasons why you want to have a buffer, number one being a little thing called Murphy’s Law, which the financial guru Dave Ramsey suggests always happens where money is concerned. Murphy’s Law is an old adage, “Anything that can go wrong will go wrong”.  What if you get fired, hurt, sick, there’s a death in the family, you have to have hip replacement, your car catches fire, your house catches fire, you hit someone with your car, and so on and so on. There are so many reasons to have that extra money handy, just in case those paychecks stop rolling in.

How much do you want to save in your buffer? Start with one and keep adding to it, you can never have too much “just in case” money. When I started using YNAB, I usually had about $30 on payday, debt, no savings, no investments, nothing. Now, three years later, we are debt free (minus our mortgage), we have an ever-growing, fully funded buffer , a separate emergency fund of $1000 and still manage to save for our 52 week savings plan. We did remove all but about $200 of our investments from Lending Club and Betterment and just put it in to savings and CD ladders. We still have the $200 because they were notes that wouldn’t sell on Lending Club so they’ll just sit there til they pay out, (one of my issues with Lending Club).

Where do you want to keep your buffer? You can keep it right in your checking account, along with your rainy day funds and your every day expenses funds.You can also consider moving it to a savings account, simply to earn a higher interest rate off of it. Either way, you want to have it tangible if you need it. YNABers aren’t usually fans of lots of accounts, it can get messy and confusing, but I am also not a fan of putting all my eggs into one basket, especially in this day with identity theft and debit card thieves out there. Basically, it’s your money, put it where you want it.

BONUS THOUGHT: You know those people who say you shouldn’t save while you still have debt? Well, I think they are wrong, especially in this particular circumstance. You may have a problem come up way before you will be out of debt, and if you need to choose between adding an extra $10 to your credit card payment and adding an extra $10 to your buffer, until it’s funded with at least a month’s worth of wages, I would choose the buffer.

How to Take Extreme Measures Against Debt

Debt is a cancer-cut it off.

Declare War on Debt
Declare War on Debt

Taking extreme measures against debt is one of the keys to financial success. Without debt, you can save and invest for sinking funds, college savings, retirement, or just that once in a lifetime vacation that you could not afford otherwise.

The first measure is to declare that debt is not a tool. Debt is not going to bring you riches beyond your wildest dreams. The person who says you have to spend money to make money has money to spend. The every day individual with a car payment, ten to twenty five thousand dollars in debt, and a mortgage cannot afford to use debt as a tool.

Next, pay what you can plus a little more. Get debt out from under you. If you can comfortably pay $300 a month on your debt but have an extra $150 a month that you blow on frivolous things, put it toward your debt. The faster you get away from debt the better off you are. It only takes one extra loan to wipe you out financially for the next ten years. Really consider what you can afford and don’t think that just because you pay on time that you are at the top of the game.

Since the new credit card bill came into effect just this month, credit card companies are already starting to penalize the ritual payees. The companies have been restricted to penalties and fees of late payers and over chargers. If you are a ritual payee, who pays every month on time, more than minimum payments, who never goes over the limit, you are no longer going to reap the benefits. Companies are going to have to make up these payment losses. Annual fees, loss of rewards, and high interest rates are already on the rise. The faster you declare war on the credit card companies, the better off you will be. Pay everything you can, sell stuff on eBay or amazon, have garage sales, and maybe get a part time job. Every cent you have to spare needs to go to paying these companies off.

If you are on the verge of financial despair, even more extreme measures may be needed. There are prioritized payments you will have to make. Dave Ramsey calls it the “four walls”. This means mortgage, utilities such as power and water, food, clothes. These need to be paid first. You should never let your mortgage go to pay for your car or your credit cards. You cannot live in a plastic card. Prioritize these items and send IN WRITING to your credit companies the following: a letter stating your plan,( i.e., I will pay you this much every month an only this much, I will talk to you on Tuesdays at 5:30 every week and will take no other phone calls from your company, etc.), Send them a “Pro-Rata” sheet, This is a written plan showing your debts, the payoff the percentage of your money they are getting, disposable income and how much you can afford to pay them afterwards. You can find a sheet like this at www.daveramsey.com. Stick to this plan. Do not be harassed everyday by these companies. If they call when not stated in your letter, hang up. Show these companies you are in control, they may moan and groan, but you are doing what you can.

 Side Note: Should you consider bankruptcy?  It is never something to be recommended just to pay off your debts. It is not the answer and the rules have changed. There are still debts to be paid with bankruptcy. Consult a financial planner before you consider this. Let them help you find your way back.

The last measure is to declare that you will never fall back into debt again. Declare to yourself that you will no longer be a victim of your own stupidity. Begin sinking funds, allocating cash in hand to emergency funds and repairs. Never again declare Christmas as an emergency to be put on credit cards again. Save during the year for Christmas or buy gifts throughout the year and put them back. Never again say to yourself it is OK to use the card if you pay the balance off next month. Never again even put the card in your wallet. Cut them up, freeze them, put them in a safety deposit box, whatever you must do to not use them. Buy cheaper cars that you can pay cash for or sell your car and take the bus. Scream out loud that you will do the most extreme and outrageous things to never again be close to foreclosure vs. starvation.

So, how do you get out of debt? Pay, pay, pay. Do what must be done! Declare war on the creditors; declare war on debt. Stop using credit as a tool.  It is a growth, a virus – a cancer; cut it off.

Read more about eliminating debt at http://www.daveramsey.com

The New Credit Card Rule

the best advice is to avoid the credit card all-together

Several months ago, just before Obama went in to the white house, there was a  bill proposed, making new rules on credit card companies, to better help Americans pay off their debt.   I was once a victim of my own stupidity and the credit cards profited off of it. Once I came to my financial senses, they continued to profit off of my past stupidity and so when this bill came my way in an email, I felt I had to try to make my tiny voice reach out for once and mine and many others voices succeeded all these months later; unfortunately, it was not the answer I so desperately hoped for.

Wisebread.com listed the changes as follows:

  • Credit card companies will be required to mail a bill 21 days before it is due.
  •  Universal default will no longer be allowed.  This means that borrowers who are late or default on one card would not have their rates raised by another lender as long as the second lender is being paid on time.
  •  Rates may not be raised on borrowers until they are 60 days past due.  As long as the borrower becomes current and pays on time for 6 months after they were delinquent the rates have to be lowered to its original amount.
  •  Extra fees for paying over the phone or on-line will be disallowed.
  •  Issuers have to notify customers of rate changes 45 days before the change.
  •  Late fees cannot be assessed if the issuer delayed crediting the payment.
  •  Rates cannot be increased in the first year and promotional rates have to last at least six months.
  •  Penalty fees for going over the credit limit is disallowed unless the cardholder agrees to it.  If the cardholder does not agree to transactions over the limit then the transaction would be rejected.
  • Issuers must disclose the time and total interest costs it would take for consumers to pay off a balance if only minimum payments are made.
  •  Consumers under the age of 21 must have a co-signer who is willing to take on the responsibility of the debt.  Most likely a parent has to co-sign.
  •  There are good points and bad points to this bill. I will say that the good outweighs the bad.  Perhaps most people dislike the fact that consumers under 21 must have a co-signer. Many would think a restricted credit limit is good enough for first time card owners; or a restriction on how many credit cards a person under that age can own. But at that age, you will not have enough credit to get a larger credit limit and that is no different than before. Considering that credit card companies practically camp out on college campuses and give away free tshirts for a filled out application, there must be some way of helping teach young america to be fiscally responsible and perhaps having a co-signer is one method; however, I do foresee a issue when that co-signer wants to be released of this obligation. 

    Another issue I forsee is that credit card companies will begin to attempt to make up their money by re-applying annual fees or hidden charges but I believe this will be their downfall. One of the many incentives for having a credit card is no annual fee and rewards. Perhaps credit card holders should be more restricted on their credit limits instead, making the credit card companies less greedy and more fiscally sound. 

    Our society has become handicapped when it comes to making sound financial decisions and credit cards are one of the reasons. I also believe that this is teaching a very poor lesson to the consumer, that lesson being they do not have to be responsible. By that, I mean they don’t have to pay their bill on time and they aren’t responsible enough to make their own decisions.  

    Anyone who reads this blog knows by now I do not like credit cards and prefer to use cash. But this was not always the case and I still have debt I am paying off. Unfortunately, none of these changes and restrictions will affect my debt because I pay on time, I do not pay over the phone, my credit score is high enough I don’t have to worry about universal default, and I am over the age of 21. One part of the proposal that they took out before it was passed is the ceiling limit on annual percentage rates these companies can charge which could have truly helped the consumer. At this time, I am paying on a card that they just raised the  APR to thirty percent although my FICO score is in the very high 700s, with no late payments or penalties, and no new credit. Now tell me that is deserved. If they would have left this APR limit in the bill, consumers would not be subjected to such blatent appropriation. Lita Epstein writes in Credit Card Industry to Sock it to Good Payers that those who pay loyally and on time may soon feel the affects of this new bill. Perhaps that is why my APR has already gone up.

    All of these new restrictions in this bill have their own pros and cons but perhaps the best advice is to avoid the credit card all-together and avoid whether this will affect you one way or another.  Just know that, even by being a good payer, you may suffer the consequenses.

    Save Money: Don’t Be a Victim

    DO NOT LEAVE CASH OR CREDIT CARDS IN YOUR GLOVE BOX.

    Just this month alone, the county I work for has had 107 vehicle break-ins. Here are a few tips on how to avoid being a victim.
    1. LOCK YOUR CAR -many times simply locking your car will deter a criminal
    2. PARK UNDER A LIGHT OR IN A GARAGE -thieves don’t want to be where people can see them committing the crime, parking in a well lit area may help the criminal move on to someone else.
    3. ALARM SYSTEMS -a simple alarm system installed can help, that little blinking light is like a force field.
    4. DO NOT LEAVE PERSONAL BELONGINGS IN YOUR CAR – many people are victims to their own comfort level. When a thief sees a purse in the floorboard or a wallet in the door, you are assuring you will be a victim. THIS INCLUDES LOCKING IT IN THE TRUNK. If a thief gets in your car, they will surely go through the trunk as well.
    5. DO NOT LEAVE CASH OR CREDIT CARDS IN YOUR GLOVE BOX. If a thief gets in, they will check this and the center console for just these type of things. THEY WILL TAKE YOUR GUNS TOO. Many people keep a pistol in their vehicle, if you don’t take it inside with you, it will be gone too. FACE PLATES ON RADIOS ARE PRIME. If you have a removable face plate, take it with you.
    These will not assure you will not be a victim, but it will assure that you will surely be able to get your life back together without further crimes happening to you, such as identity theft or credit card fraud.

    Wake Up and Smell the Green

    In the time of our parents, credit became a way of life. Now this generation, we are so much in debt that we cant claw our way out.

    Being blinded by money schemes no more. When you become awakened to the world of marketing and banking, you notice the hypocrisy of it all. Rejecting the idea of credit is the start. Once you have determined to live a life without credit you notice a few things about marketing for credit. You see commercials that show fathers dancing with daughters at her dream wedding in Hawaii, or kids graduating college while giving them keys to a brand new vehicle, picking up baby items with pregnant mom and flashing your credit card. You see people buying “green” friendly products at a time when gas is at an all time high and credit cards marketing with cents off gas incentives, while all the while charging you 29.99% interest. Playing to your wants, instead of your needs. When you consider the average American owns at least two credit cards, carry a maxed out or almost maxed out balance, paying only minimums and being charged more for finance charges than their actual minimum payment, we should all think twice about charging up our next television set. By the time you’ve paid for your $4200 dollar flat screen television plus interest over the average two years of aggressive payments (seven years of minimum payments) it will take you to pay the television off, you’ve paid twice that amount and it is time for a new television set. Really be careful too, when paying just minimums. When your finance charge is more than your minimum payment, your balance can go up instead of down. Many American’s credit payments (including loans, vehicles, student loans, lines of credit, and credit cards) is as much as their entire mortgage put together.
    In the time of our great grandparents, it was looked down upon to borrow money. In the time of our grandparents, it was only OK to borrow money for major things, like a home. In the time of our parents, credit became a way of life. Now this generation, we are so much in debt that we cant claw our way out. Wake up to the hypocracy of it all. We get excited that they “accept” us as customers, when we are paying them thousands upon thousands to loan us hundreds. Save up your money and pay yourself the interest. Move forward from the credit vortex.