Why an Emergency Fund should be your first financial priority

In the personal finance community there is a lot of debate about emergency funds vs. debt repayment and which you should focus on first if you’re trying to fix your finances.  Some experts say that, if you have debt, then debt repayment should always be your first priority.  For example, in his Baby Steps program, Dave Ramsey has advocated starting with a $1000 emergency fund and then moving on to pay off all of your debt (save for your mortgage) before saving a more substantial emergency fund of 6-9 months of living expenses.  On the other hand, I’ve seen many other sources, such as The Financial Diet, arguing that saving a substantial emergency fund comprised of about 3-6 months of living expenses should come before focusing entirely on debt repayment.

The argument for prioritizing debt repayment is pretty simple: debt is a huge barrier to financial freedom and you should get rid of it as quickly as possible.  This is especially true if a lot of your debt is high interest consumer credit card debt.  I agreed with this philosophy when I first got interested in sorting out my finances because the debt that I had was feeling like a heavy burden: I wanted it off my shoulders immediately.  While paying off my credit card debt I had been saving a small emergency fund and had about $3000 put away.  In a particularly antsy moment, I withdrew $2500 to finish paying off my credit card.  Unfortunately, almost immediately after I did this, I was diagnosed with cancer and needed to take time off work.

This situation left me with no credit card debt, but also with nothing set aside to tide me over while I was off work.  I had some understanding of this risk when I was making the decision, but at the time I thought the risk was minimal at worst.  I was living at home, where most of my major expenses were covered, and I had a stable job that was paying me a decent wage where, if I was careful, I would be able to save up a nice chunk of money quite quickly.

But then, as I mentioned above, I got sick, was hospitalized, and then I was diagnosed with cancer.  If I had been careful, the $3000 that I had saved could have lasted me 6 months or more, since my expenses are now so low.  Due to my emotional spending at the holidays and some unexpected medical expenses, I now have that amount sitting on my credit card and only a little money in the bank.  My government Employment Insurance sickness benefits ran out in early February, so I don’t have any income to fund my current expenses or begin paying off the debts that I have incurred since being diagnosed.

Obviously this is not an ideal situation.  If my long term disability claim is denied, this will turn into a very bad situation and, as such, I have completely reversed my opinion on emergency funds vs. debt repayment: saving an emergency fund should always be your first priority.  Debilitating illnesses or accidents can happen at any time to anyone.  It doesn’t matter if you work out and eat blueberries and kale and meditate every day, they can still happen to you.

I know that saving 3-6 months of living expenses probably seems like a lot of money, especially if you have debt.  It is a lot of money, but it’s good to keep in mind that your day-to-day expenses should be reduced in emergencies.  You’re not looking for 3-6 months of net pay, but 3-6 months of keeping a roof over your head, keeping the lights on and paying your most basic bills.  It’s also important to remember that if you don’t have money set aside for an emergency and you wind up in a situation similar to mine, you’ll likely wind up incurring further debt and risk putting yourself in serious financial jeopardy.  If you don’t have savings and you don’t have a steady paycheque, credit cards might be your only option.

Regardless of what happens with my disability application, my plan for the future is to never wind up in a situation like this again.  Lesson learned.  I can’t wait to get better and get back to work so I can start executing my financial plans and saving the substantial emergency fund that I have envisioned for myself.  In the meantime, I’ll just have to take it all one day at a time and see what happens.

Time for a spending freeze!

3712392Despite the fact that my parents and I intended to not buy tons of presents for Christmas this year, I wound up overspending on gifts, both for my parents and for myself.  Right now, due to my current financial circumstances, I feel like the best way to get back on track is to go on a spending freeze, which I will be starting this week.  I have attempted this challenge twice previously and I have found it to a great tool for boosting savings or debt repayment.

As I said in Part 1 of my Goals for 2018 series, I learned a lot about personal finance in 2017 — something that I had avoided dealing with for the majority of my adult life.  I’ve always been terrible about money and I felt like I was so stuck in my irresponsible ways that I was beyond help.  I began to realize, however, that in order to move forward with my life and give myself options for the future, I needed to make a significant change.  There’s nothing that can make you feel more stuck than having a large amount of personal debt and no savings.

I did a lot of research —  mostly through YouTube.  I wanted to know how normal folks were managing to make smart financial decisions to pay down debt and save money and I needed to start with the basics.  It turns out that there’s a substantial frugal living community on YouTube from which I was able to glean a lot of simple tips and basic best practices.  It was in a YouTube video that I first heard about the concept of a spending freeze.  The more I learned about this technique, the more I felt that it might be useful for my situation.

At the time, I had also been watching a lot of videos about minimalism and de-cluttering.  These videos stressed using what you have instead of buying more things that you don’t need and might never use.  The minimalists got me thinking about the things that I owned that I hadn’t yet used and I started to take a rough inventory.  It turns out that I own loads of manga I haven’t read (though in most cases I have read the scans and just not the hard copy English releases), games I haven’t played, books I haven’t read, and I have a stash of arts and crafts materials that I haven’t yet used, such as yarn, needle felting kits, and colouring books.  What, then, other than food, basic bills, toiletries, and a few aesthetic treatments I have regularly, did I need to spend any money on?

Absolutely nothing.

And so I decided, toward the end of February, that I would have two spending freezes in 2017: one in March and one in September.  I chose those months in particular because they were my extra paycheque months for 2017, thus I could maximize the amount of money that I would pay toward my debt.  I set the following rules for myself:

  1. I will purchase no video games, books, manga, crafting supplies, home decor, clothing, stationery or any other consumer goods.
  2. If I run out of any toiletries, such as facial cleanser or hand soap, I can re-purchase the same item or replace it with something in a similar price range.
  3. I have a small allowance set aside for eating out and I cannot exceed that amount (if my mother wants to buy dinner once in awhile, this does not count against my allowance).
  4. I may have one or two pre-planned video game purchases.  I can purchase these when they are released; however, it may be better to wait until a price drop if I am not going to start playing them immediately.

My attempt in March was a disaster.  I fell off the wagon almost immediately and consistently over-spent my takeout allowance.  I was poorly prepared (both financially and mentally), but I did manage to reduce my spending significantly and pay a solid amount toward my debt.  My September attempt was a huge success and I came very close to paying off my credit card balance ($8000 at the beginning of 2017) entirely, a feat I would proudly achieve in October.

Right now, my net income has been substantially reduced.  I am earning about 35% less than usual; however, I have been spending like I am earning my full income (or even a little more than that).  This is mostly emotional spending.  Some of my purchases have been necessary as they are mechanisms that I believe will assist me in achieving my goals for the 2018, but many of my purchases have been “Hi, I have Cancer, so I will now treat myself” in nature.  I don’t feel any guilt about making those purchases, because I am happy with them and I feel like we all need to be a little frivolous at times, but now it’s time to reign myself in.

Throughout the rest of January and all of February I will be following the rules that I have set for myself above.  This will allow me, hopefully, to pay off my holiday spending quickly and set me on track for another financially responsible year in 2018!  I’ll be posting some periodic updates on my progress, so please check them out!


Finance Post: My Money Philosophy

A few months ago I purchased a financial advice book called Why Didn’t they Teach me this in School by Cary Siegel.  There is an accompanying workbook with exercises meant to assist the reader in learning more about personal finances.  In order to use my free time a little better and to get the most out of writing again, I have decided to blog the exercises from this book that I think are useful to me.  Some really are decent blogging prompt.

Exercise 1: “Write about/discuss your money philosophy.  Are you a spender or a saver? If someone gave you $10000 to spend on whatever you want, what would you do with it?”

It should probably be said right from the start — I am notoriously bad at managing my money and I have always been a spender, to my detriment.  My family was well off and inclined to spoil me, so as a child I never wanted for necessities or luxuries.  We went on nice vacations, I had lots of toys and lessons and sports and books to read.  I never had to worry about money.   As a teenager, this trend continued.  My parents were what you would now call “helicopter” parents.  They were strict and wanted to exert a significant amount of control over my life: part time jobs were not allowed.

Unfortunately, my lack of experience with money as a child and adolescent didn’t serve me particularly well.  I didn’t learn money management through osmosis and, once I started working and had to manage money on my own, I had no idea what I was doing.  When I finished school and started earning more from a full time job, things just got worse: I spent every cent I had and more.  When I started work on my Masters degree in 2006 I paid off my max-ed out credit card ($5000) on my new student line of credit, and then continued to spend irresponsibly.

More debt cycles followed and only over the past year or so have I been trying to live below my means.  I am working hard to transition from being a spender to being a saver and to develop more frugal living habits.  I do still want to enjoy my life, however, so I am a little more relaxed with my budget than I think some would be in my position.  I am particularly fortunate that I don’t have to pay any major living expenses at the moment, which is allowing me to pay off debt quickly and save a little bit without worrying too much.

This month I will finish paying off my credit card (which was maxed out at $8,000 earlier this year).  After that, I will be moving on to paying off my latest student loan (currently sitting at $18,200).  It is my hope to be completely debt free by June of 2019, though hopefully I will manage it several months earlier.

I think it’s fairly obvious, then, that if I received $10,000 that I could spend on anything I like, I would use it to pay down my student loan debt.  While the urge to spend and treat myself is strong, getting a 10 month head start my current plan would be incredible.  The sooner my loan is paid off, the sooner I will be able to save at least one full paycheck per month.

Starting over

After several years of not blogging, I have decided that it’s time to start writing on a regular basis again.  On the recommendation of my therapist, I have tried using a paper journal, but while I find writing on paper to be quite satisfying, it can be a little time consuming and I have trouble sticking with it.

And thus I am blogging again and I have some grand plans.  For the past few years I have taken an interest in self-improvement and self-actualization.  I’ve tried out a lot of different things like tarot readings, goal setting, journals, wellness wheels, watching lifestyle videos on Youtube, planning, all to varying levels of success.  I have found wellness wheels to be particularly useful, as they provide me with an overview of which areas of my life need work.

Every year I do two particular wellness wheels, both of which have an interesting crop of categories.  I tend to do well in areas such as fun and leisure, personal growth and learning, romance (because right now I am in a good relationship), spirituality and intellectual health.  None of this is surprising as I generally excel at pushing myself up steep learning curves in my spare time and I have a lot of interesting hobbies that I enjoy.

My lower scores are almost always in the friendship, physical/mental health, career and money categories.  This is also not particularly surprising, as my main career choice has been a huge flop, I have been unemployed for long stretches, I have been diagnosed with several chronic illnesses, I suffer from depression, and I have been in significant debt for the past few years.

I have been making positive changes, particularly with regards to my finances.  I have nearly paid off my credit card (which was maxed out at about $8000), which has carried a balance for about 17 years.  I have also made a responsible budget and, while it is a little complicated, I have confidence that I can stick with it.  When I do my wheels again in January of 2017, I know that this score will improve a great deal.

I am proud of myself, but I feel like there is more that I can be doing to make improvements in other areas of my life that need attention.  I had a significant falling out with an old friend this week and, while I think he was being a tremendous asshole, he made a few points about me that were accurate.  This was a significant wake-up call for me and I spent most of my day yesterday thinking about (and writing down) the main aspects of my life that need the most attention:

  1. I have isolated myself and almost completely withdrawn from all of my friends.
  2. It is likely that I have been in a depressive episode since mid-2014. I have felt better at times, but I suspect that I have never fully snapped out of it.
  3. I have not been managing my chronic medical conditions as well as I could and, due to my depression and various other issues, my emotional binge eating has reached a level that is extremely damaging.
  4. My previous career path is not working and I need to embark on a complete career change.

In order to work through these issues, I am going to do my best to go to counseling once per month.  I am also considering medication to assist me, but I will discuss that with the counselor.  Sometimes I think that counselors think I am doing quite well, because I am good at assessing and analyzing my issues; however, I am not good at dealing with them.

I will also be blogging.  Writing has always been a hobby that I enjoy and I believe that it can help me with a number of the issues that I discussed above.  My plan, for now, is to primarily write about my journey through a CBT (Cognitive Behavioural Therapy) workbook, my feelings around depression and taking medication and how I do with counseling.

And finances, I will probably write about finances.  I purchased an interesting book about finances that has weekly exercises for improving and adding to your knowledge about  money.  I have become a lot more interested in personal finance, and I think it will help to keep me honest and on track with my budget.

Here’s to hoping I stick with it!