Photo courtesy of dbking

I don’t have quite enough in savings to pay off my debt, fully, but as I continue to accumulate money in my emergency fund I’ve started wondering if it makes sense to use some of that cash to pay off debt.  If I used all of our available savings we would be almost back to zero, and would need to use a credit card if a large emergency came up before we could rebuild the emergency fund.  That scenario reminds me of the hamster wheel of debt that got us here in the first place!

Interest Rates Matter, Some

The argument for using savings to pay off debt is made easier in this environment of low interest rates.  Sure, interest rates on my credit card accounts have dropped, but are still significantly higher than any rates I’m able to lock in on savings.  Just last week ING Direct lowered the interest rate on our Orange Savings Account to 2.75 APY.  That is still much higher than the rate earned on my local emergency fund, but several percentage points lower than the interest I am paying on revolving debt.  However, since I am not overly concerned with the interest earned on emergency savings–it is just for emergencies, not investing–it is hard to justify cleaning out my emergency fund to pay off my debts.

The Psychological Benefits of Having Savings

Often times people do have significantly more in savings than they owe, but are still hesitant to pull the trigger and become debt free.  That’s where the psychology of money comes into play.  When you know several thousand dollars are sitting in an emergency fund ready and waiting to tackle your family’s next big emergency, it is a comforting feeling.   Draining that fund down to zero, or close to zero, immediately brings out pessimistic thinking.  What if the roof starts to leak?  What if the car dies?  What if I get horribly sick and miss several weeks of work?  These are legitimate concerns.  After all, those are the very events we hope to avoid, but are prepared for with a solid emergency fund.  Without that cushion it feels like we are living life too close to the edge.

Bottom Line, We’ll Probably Use Some Savings to Pay Down Debt

Even though we don’t have enough in savings to completely clear our debt, we have enough to make a significant dent.  However, with an ongoing medical emergency in the family, I am reluctant to use the majority of these savings for debt repayment.  What we will do is use about $1,000 to finish off an old consolidation loan that’s been hanging around since I finished school.  The loan has a large monthly payment, and by using that $1,000 to clear it I’ll be able to put a couple hundred dollars a month towards something else rather than continuing monthly payments for the next three or four months until the loan balance finally reaches zero.  Since we have beefed up our emergency fund a bit, we can do this without dropping the emergency fund down below our comfort level.  Admittedly, the thought of knocking out yet another debt is exciting!  One step closer to debt freedom!

Photo courtesy of .craig

We have all read stories of shocking things people have done to get out of debt.  However, a recent US Weekly story takes things to a new level.  According to the story (via Fox News), the 22 year-old Sacramento State graduate has agreed to give up her virginity in exchange for repayment of her student loan debt.  Some Nevada house of ill-repute has agreed to host the “event.”  Disgusting.

Where to Begin

There are several sides to this story that I find particularly troublesome.  I won’t get into the morality or immorality of prostitution, but I will say that this is a perfect example of the biblical reference, “The borrower is slave to the lender.”  This girl must be feeling completely hopeless to agree to sell her body to release her from the bondage of student loan debt.  There are certainly many other reputable alternatives to debt repayment.

• Charity for Debt.  Many programs are cropping up that allow graduates to volunteer their time to a cause sponsored by someone willing to repay a portion of their student loan debt.  This is a fascinating concept, and one that I hope catches on.  If I had enough money sitting around to pay off this young lady’s student loan debt, I would offer it to her through the Charity for Debt program.  She could volunteer her time to a worthy cause, avoid turning to the world’s oldest profession, and I would receive a tax deduction.  Everybody wins.

• Get a job.  I know, how old-fashioned.  After only two years of college I recognized student loans were not the way to go.  I got a job and decided to work my way through the remainder of school, and through the student loans I had already accumulated.  Try to find a company that offers tuition reimbursement if you are still pursuing a degree.  If you are already finished with school, but still paying for it, hold your lifestyle in check those first few years and throw everything you can at repaying those loans.

• Seek help from a family member.  Often times, extended family members may be willing to help shoulder the costs of college.  Services like Freshman Fund allows family and friends to contribute to a student’s college savings plan by offering a single point of contact online where family can make donations.  Behind the scenes these donations can be spread around 529 college savings plans as designated by the student or parent.  If already out of school, it is still not too late to accept help from family.

This article underscores the importance of living a debt free life.  When you are deep in debt your options may be so limited that you turn to things you wouldn’t normally in effort to escape the debt trap.  I hope this serves as a cautionary tale for students entering college, and that they will seek alternatives to student loans.

photo by Faeryan

Regardless of which side of the fence you sit on when it comes to how to implement a debt snowball, there is one thing we can all agree on–it is highly motivating to see debt balances falling.  So much so that when you have to put the snowball on ice it can be a bit demoralizing.

Murphy Has Set Up Shop at Our House

Over the weekend I mentioned all the things that have gone wrong over the past few weeks, and the various hits to our emergency fund.  Fortunately, the emergency fund was there to cover these expenses so we didn’t have to turn to credit cards, or try to cash flow them by completely rearranging our budget.  Unfortunately, we will now have to put debt repayment on the back burner while we rebuild our emergency fund.  I’m just not comfortable living with a reduced emergency fund and throwing every extra penny at debt.  With a reduced emergency fund the next rash of emergencies could deplete our savings entirely and force us to once again turn to credit cards.

Here are some of the steps we’ll use over the next few weeks to get the emergency fund back up to our $3,000 goal:

1. Pay only minimum payments on credit cards. Instead of piling anything extra on debt, we’ll be diverting it to savings in the short term.  After attacking debt so aggressively the last few months this will prove difficult.
2. Snowflake any extra money into savings rather than towards debt.  I normally take any found money (snowflakes) and apply them directly to the debt snowball as they are received to boost the amount going towards debt repayment each month.  Now, I’ll pile up those snowflakes in savings.
3. When the emergency fund balance reaches $3,000 we will turn our attention back to our debt reduction plan.  I’m not sure how long it will take to get the emergency fund back to a fully funded status.  Thankfully, we didn’t have to dip too far, and I have a couple payments due for some freelance writing work I’ve completed recently–that should help.

Flipping the Switch

I believe this exercise is actually good for us (not that I want more visits from Murphy).  When we are finally debt free we will need to flip the mental switch to savings rather than debt repayment, without increasing our spending.  Sure, we might add back a few small expenses that we’ve eliminated to become debt free, but for the most part our budget won’t change much.  Shifting from debt paying to savings mode and back again should help us get comfortable with both styles of living on less than we make.

I write a lot about our goal of becoming debt free because at the present time it is my family’s number one financial priority.  A number of my recent posts have been centered around the mechanics of getting out of debt, such as sharing strategies for repaying debt faster, earning extra income, to snowball or not snowball, etc.  One aspect I haven’t covered much is the “why.”  Why do I want to be debt free?  Before embarking on any personal improvement project, financial or otherwise, it is important to identify the “why.”  When motivation starts to fade along the way revisiting the “why” can often fire you back up to the level of inspiration you felt day one.

Identifying the “Why”

A couple of my favorite blogs recently shared their motivation for getting out of debt, and the motivations of their readers.  I agree with many of their points, but wanted to identify my own and record them here.

Financial Security for My Family.  Long-time readers know that nearly 100% of my motivation is derived from my wife and kids.  I’ve worked bad jobs, worked side jobs and worked several jobs at once to support my family.  I’m not a martyr - just a Dad who cares far more about the security of his wife and kids than his own well-being.  I recognize that carrying around debt has somewhat reduced my ability to provide additional security for my kids’ futures.  Before they were born I wondered if it was even wise to have a baby while in debt.  I’ve had to scale back college savings, and a few other financial goals for my kids while paying down debt.  It’s hard not to play the “what if” game.  What if we were debt free?  How much more would we have in college savings?  How many more memories could we have created on family vacations?  Playing “what if” isn’t very healthy.  The past cannot be changed, but the path of our financial futures is certainly within our control.

I want to save more so I can give it away.  That sounds like a strange statement, doesn’t it?  What I mean is that over the last couple years there have been several opportunities for us to help a neighbor, family member, and even a stranger or two, but we have had to pass because the majority of our earnings is going to debt reduction.  I long for the day when I can help others, financially.  I want my children to be givers, and I want to set the example.  However, I also believe charity starts at home.  Until my own financial house is in order it makes little sense to try to help others in a significant way.

Reduce stress.   Debt has a way of eating away at you.  When I was deeper in debt than I am now, and before I had a real plan to get out, my debt balance was the last thing I thought about before falling asleep.  And falling asleep was harder to do back then.  I can’t help but wonder if the increased cases of depression, suicide and anxiety disorders aren’t directly attributable to the increased amount of debt we carry as a society.  I’ve heard stories of people taking their lives to escape the bondage of debt, and it is always such a sad reminder of the chains debt can have on our lives.

Simplifying our financial life.  Having payments means more to keep up with each month, and I’m trying to eliminate the number of things to worry about for a more simple existence.  If you have a balance on five credit cards, a mortgage, a car payment, and a department store account you have eight debt payments to keep up with each month.  Sure, they can be automated, but they still have to be recorded, balanced and tracked each month.

One of my favorite lines from the movie Forrest Gump is when Forrest tells the story of Lieutenant Dan investing their shrimp boat money in “some kind of fruit company” (which we know to be Apple Computers), and then told him “we don’t  have to worry about money no more.” Gump replied, “That’s good.  One less thing.”  Gump lived out the remainder of his life in a beautiful debt-free family home caring for his wife and son and not worrying a bit about money.  What an enviable lifestyle!

Having options.   I mentioned working in dead end jobs and toxic work environments because I simply didn’t have a choice.  I had payments to make and mouths to feed.  But what if I had not had those payments?  It is a lot easier to walk away from a bad job when you don’t owe anyone money. How many people do you know (yourself included) who are just going through the motions at their job because they can’t afford to quit?  Just think of all that unrealized potential bottled up thanks to credit card payments.  I want to be free to live out the rest of my life energy applying it to a cause I truly believe in, and doing something that I truly enjoy.

If you are working towards debt freedom, have you identified your “why?”

I’m way off the pace to accomplish my 52 books in 52 weeks campaign, but sometimes life just gets in the way of our plans.  No big deal.  Considering I only read five books all of last year it didn’t take much to out-produce last year’s totals.

I recently picked up a copy of Debt is Slavery:  and 9 Other Things I Wish My Dad Had Taught Me About Money by Michael Mihalik.  There were a couple things that intrigued me about this book.  First, I like the title, because I hate the idea of being a slave to anything, especially debt.  I also liked the parenting reference because I often wonder myself what things I could do to better prepare my kids for handling their own finances some day.  I thoroughly enjoyed the book.  It’s short - a weekend read for me at only 123 pages, but it is packed with good information.

Debt is Slavery, My Favorite Chapters

Introduction

I thought the introduction of this book was very well done as it provides some background information on both the author and the history of money.  Mihalik’s father passed away when he was just 13, which explains the subtitle of the book.  Like most of us raised by a struggling single parent, or by two parents that were bad money role models,  Mahalik made some bad choices early on borrowing heavy debt loads while in college and immediately thereafter.  It reminds me of my own story of borrowing money to finish school, and then borrowing money to pay for various life expenses when I was newly married because we were living beyond our means.

The introduction also includes an excellent section on how to select a teacher for the world of finance.  Two basic questions are really the key to this section:  Have they done what they are teaching?  Do they have your best interests at heart?  If the answer is no to either of these questions you ought to move on.

Chapter 2:  Time May Not Be Money, but Money Definitely is Time

I think the technique of converting purchases into hours worked is a great one.  Let’s assume you bring home $12.50 an hour from your current job.   A new Nintendo Wii game just released and retails for $49.99.  Are you willing to work half a day at your job to pay for a video game?  The seriousness of that question grows as you consider larger, more expensive purchases.  Let’s say your local bike shop has an awesome deal on a mountain bike you’ve had your eye on–$600 and you can ride it home from the store.  Earning $12.50 an hour it would take you over 40 hours to pay for that bicycle.  That is a week’s worth of full time employment.  There are only 52 weeks in a year.  Are you sure you want to give up one of them for a new bike?  So you see how converting the price of something to hours worked can be an effective strategy to weed out the needs from the wants.

Chapter 6:  Don’t Sell Your Soul for a Salary

I sold my soul for a salary for a long time (and not a very good salary, I might add!).  I worked for a credit card processing company, and I just hated my job.  It was a toxic environment, I didn’t believe in the work I was doing, and I was all-around miserable.  Why was I there?  Because I thought at the time it would lead to something better - more money, more perks, etc.  In this chapter Mihalik looks at the various reasons why we choose the jobs we do, and why we stay there when things go bad.  Lesson learned:  Do not choose a company/profession/position for the money–choose it because it is something you love to do.  And if you find yourself working in a job you hate, find a way to change and fast.

Chapter 9: Save 50 Percent of Your Salary

I’ve written about the 50 Percent Savings Plan before, and when thinking about it I find myself wishing I had a time machine to go back and start the plan in my twenties.  At the moment I’m devoting a large portion of my earnings to debt repayment, so saving half of my income is not feasible.  However, I fully intend to save 50% when I’m debt free.  For every year I accumulate half of my earnings I’ll earn one year of financial freedom, without a change in lifestyle.  Pretty cool idea!

Conclusion

Debt is Slavery was a short, enjoyable read with tons of nuggets of wisdom on repaying debt, living frugally, and finding financial freedom.  At around $10 on Amazon.com I consider it a steal.  It’s going on the bookshelf at home, which is rare for most books I read.  I typically send them back out into circulation via eBay, or just check them out at the library.  But not this one–it’s a keeper.