MInTheGap

Standing in the Gap in a Society that's Warring with God.

My War On Debt: Do This Before You Pay Off that Debt

April 2nd, 2007 Visited 3818 times, 1 so far today
This entry is part 5 of 11 in the series My War on Debt

Debt and DemandSo, you’ve made the choice to stop being a slave to a bank or creditor.  You’ve decided to get out of debt, and you’re ready to get the past behind you, pull out the scissors and cut up those cards.  You’ve planned a zero-sum family budget, and now you’re ready.

The only thing left to do is some saving.

What?!  You read that right, you need to start your emergency fund before you start paying off the debt.  No, you don’t need a full emergency fund– $1,000 will do.

The reason behind this is based on the way the brain and your emotions work.  If you stop using your cards and put them away, and something big comes along, what are you going to do?  You’re going to bite the bullet, pull out the cards (or get a new one) to pay.  That’s going to wreck your momentum and discourage you.

If you save an emergency fund (and it must be an emergency), then you won’t need to go back to the cards if your alternator goes out on your only family car!  You’ll be able to hit the emergency fund and keep moving in the right direction– without debt.

No, the emergency fund should not be stored in a CD, the stock market or anything with a penalty for withdrawal.  Dave Ramsey notes that one person used $100 notes in a picture frame in her closet marked “If Emergency, Break Glass.”  We personally use a high interest Internet savings account with HSBC.  Currently, money deposited there earns 6.00% for a few months before dropping back to 5.05 which is very competitive.  It has bank to bank transfers, online banking (integrates into Quicken) and has a $1 minimum deposit and no transfer charges or minimum balance!

In any case, before doing your debt reduction, build the emergency fund.  The interest can help you get your debt down, and you’ll need a place to store a real size emergency fund when you get to that step.

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  • Stephen Kingston says on: April 2, 2007 at 9:50 am

     

    That males a lot of sense. I am not sure that I would suggest an emergency fund invested in the stock market though. The stock market should be strictly for long term onvestment, because if the value of your investment falls, taking your money out in the dip will merely realise your losses. You can pretty much guarantee that your emergency will coincide with the dip!

    Some institutions allow you to ffset accounts in credit against debts held at the institution for purposes of calculating interest. Thus, if the Hong Kong and Shanghai Banking Corporation were to offer this, and you consolidated all your loans with them at (say) an interest rate of 8%, then you could subtract your emergency fund from the debt, and calculate 8% on the remainder.

    In this way you are paying interest as though you had used the emergency fund to pay off the debt, but still have access to the cash if you need it.

    I’m not sure if any US institutions offer this facility, but it would be worth looking into.

    Regards,
    Stephen

  • MInTheGap says on: April 2, 2007 at 10:32 am

     

    No, you should definitely not have your emergency fund in the stock market or any other place where there is a penalty for withdrawal. That would prevent you from taking advantage of it in an emergency!

    That’s why mine is in a money market account that has an interest component (like a savings account) with 0 minimum.

    I really like the option that you mention, Stephen, where you can do both at the same time. Don’t know if I’ve seen that kind of option here in the states.

  • Stephen Kingston says on: April 2, 2007 at 10:45 am

     

    Ah, I see I misread the original. Thanks for clarifying that. Also, read “makes” for “males” in my comment above!

    :whistle:

  • Mary says on: April 2, 2007 at 9:04 pm

     

    Now that is VERY good to know…about the internet savings account! Timely too…thanks a lot for this informative post, MIn!

  • Deborah says on: April 3, 2007 at 10:15 am

     

    The emergency money fund is an excellent idea. I know we usually use credit cards when there is an emergency or large expense that we were not planning on. It would be so much better to reach for the money saved back…and as you said, it doesn’t have to be a lot. Most of our expenses like that are under $500.

  • MInTheGap says on: April 3, 2007 at 11:25 am

     

    A full emergency fund should be stocked with 3-6 months expenses– usually around $10,000. That way if the father/mother were to be laid off it would not effect the family until a new job was found. (The side benefit would be that with a $10,000 you would be making roughly $50 a month in interest at a 5% interest rate!)

    So, what are you waiting for, Deborah? Put some money aside and build the fund! When you get into an emergency is the worst time to get into debt!

  • Deborah says on: April 3, 2007 at 3:20 pm

     

    Point taken MIN! I really like that $50 a month interest at a 5% interest rate! I had read somewhere a while ago about ‘paying yourself first’…taking out any money you have for a savings account FIRST before bills, etc. I always want to have everything paid first and then there is not usually anything left over for savings! :cwy:

  • MInTheGap says on: April 3, 2007 at 4:58 pm

     

    Well, like I said, the first thing to do is get the starter emergency fund. To do that, you pay minimums on your credit cards/loans until you get the fund up to $1000.00.

    Since the whole plan to get out of debt means that you’re going to be out within a year to two years, you’re not taking that big of a hit now. The emergency fund is a cushion as well as behavior modification.

  • DLOGAN says on: April 3, 2007 at 10:45 pm

     

    Wow, 6.0% is very good. I’ve been using http://www.emigrantdirect.com , which is 5.05% rate… but they don’t have a teaser rate. I might have to see about opening a HSBC account for at least the teaser period.

    Do they accept ACH transfers in and out of the account?

    BTW, another very cool finance website is Yodlee. http://www.yodlee.com . Yodlee is the company that writes all the little interfaces that Quicken, Microsoft Money, etc use to download all your account information into the finanicial software. They have a free web tool that allows you to keep track of all your accounts, setup budgets, etc. It will track your networth and all sorts of other interesting things.

  • Stephen Kingston says on: April 4, 2007 at 5:22 am

     

    But does it keep your data private and secure?

    I am not sure I would trust a web tool with my financial information.

  • Mrs. Meg Logan says on: April 4, 2007 at 7:30 am

     

    Actually Stephen from what I hear, tools like Yodlee are generally safer than paper tools at banks and stores. I am sure my dear hubby will correct me if I have my information wrong. But seems to me that the encryption programs used for internet based sales and financial information has gotten better by leaps and bounds. And I don’t know about you but I can’t remember the last time I saw a news headline about financial and identity stealing on the internet (outside of email scams which people willingly and naively participate in themselves), I have however just seen a major break in security at the TJR company that own TJ Maxx and Marshall’s. Their computerized data was being stolen for a long long time and people have had credit cards charged up like crazy. I seem to recall this same sort of scenario happening just last year with a different company.

    I also do not think that my husband would recommend a website that was not of the highest security. And since he uses this program, I am sure you can be sure he has checked it out to be sure it is safe. I mean this is the man who makes me shred anything with our address on it! (practically)

    Mrs. Meg Logan

  • MInTheGap says on: April 4, 2007 at 8:11 am

     

    I’m glad that your husband is very security conscious, Meg. Now, the question is the terms and policy agreements. As long as there’s good encryption used and the terms of you having your account information there are good (i.e. they won’t sell any of your information or give it away if they close, then they sell it) then you’re ok.

  • DLOGAN says on: April 4, 2007 at 7:03 pm

     

    When I first ran across Yodlee I was concerned about security and especially privacy in regards the the financial data I put on there. I read a lot about the company, what they did, and what people were saying about them. Everything I read was very positive and seemed to have a high priority on security. I have yet to hear of any stories of someone getting into someone’s Yodlee account and wrecking havoc, but if you are very cautious you might not want to use it ;-). Certainly at a bare minimum you should choose a very good password.

    Then again, if you’re very cautious you probably shouldn’t have that financial data on your computer. The chances are probably better that your individual system would be compromised than a company like Yodlee would have their systems hacked. Its much more likely that should your Yodlee account be compromised that it would happen because you followed a phishing link, had a trojan on your computer, or otherwise inadvertently divulged your key password. If this was the case chances are good that the financial data on your computer would be given up as well.

    Personally I find the risks associated with Yodlee minimal in comparison to the benefits of being able to see a complete financial picture without having to log into 6-8 different websites. In the 5 years I’ve been on Yodlee I have not gotten a single spam message from them (not even a site update message). The e-mail address I setup for Yodlee doesn’t get spam at all, so they’re not selling my data. As for security, I can only say that no one has broken into my accounts… at least yet.

  • Stephen Kingston says on: April 9, 2007 at 4:39 pm

     

    Then again, if you’re very cautious you probably shouldn’t have that financial data on your computer. The chances are probably better that your individual system would be compromised than a company like Yodlee would have their systems hacked.

    Certainly the chances are that it is easier to hack most home systems, although Yodlee would make an attractive target, so I would guess there is more effort against it.

    But it is possible to be paranoid about security and still have financial information on a home system. Norice for instance, that I use Macs and Linux systems. These are less likely to be hacked by virtue of their sane system of security contexts, and the venerable Unix core. On top of this, I keep my financial information in encrypted file systems on a system that is not this laptop. My network is protected by a firewall, and as I teach systems administration and security, I feel that the design of my security is sufficiently strong that I can be paranoid, without resorting to invisible ink paper ledgers 🙂

    My concern with Yodlee is not in transmission to them, nor in the belief that they will deliberately misuse my data, but in that someone might get hold of my data through their system. There are, of course, many sites that hold parts of my financial data. The extent to which it is worth being paranoid about all of these sites is debatable.

  • MInTheGap says on: April 9, 2007 at 4:45 pm

     

    Speaking of invisible ink, this reminds of an episode from the TV show “Monk” where one person hid his wealth in gold by melting it down, mixing it with ink, and writing as much has he could in journals. Then left the clue that the gold was in the journals. Hilarity ensued.

    I once looking into a yahoo aggregator for my financial stuff, but didn’t like the idea of having all of my user ids and passwords trusted to one person. I remember reading just a little while ago about how you have to have strong security whether it’s your e-mail address or your bank account password, because if they can hack one, they can get the rest.

    Don’t know about Yodlee per se, but I understand the argument. Same one could be used to say that Windows is an attractive target because a majority of desktops run it (contrary to what some Web 2.0 guys want to say).

  • DLOGAN says on: April 9, 2007 at 7:54 pm

     

    But it is possible to be paranoid about security and still have financial information on a home system.

    I probably should revise my statement. I do not disagree with your comment. If you know what you are doing the most secure place you can have your data is in on your own system. The chances of someone targeting you individually is slim. If you are more difficult to get information from than 70% of other people there is little chance someone is going to waste their time with you. However this requires that you are paranoid about your data AND computer savvy. This is a very small percentage of the population. Your average user is probably better off having their data at Yodlee where there is a team of knowledgeable individuals protecting their data then they are keeping their data themselves under the illusion that its more secure.

    With that said the weakest link in any security system is the actual people involved. Whether your data is on your computer or Yodlee (or both), it is usually the user that will compromise the data not the system (Think Phishing). Now days its not that difficult to have your OS stay up-to-date in patches and have a good firewall, none of which does you any good if you follow a phishing link.

MInTheGap

Standing in the Gap in a Society that's Warring with God.

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