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WARNING: Bad Debt Ahead

Helllo!~ Another week, another financial blog post. How has your week been? Mine has been going pretty well, and I am super stoked about today’s topic.

Did you know there are two types of debt? Now, I know if you’re reading this you think debt is most likely bad. That ALL debt is bad. Bad, bad, bad. But, what if I told you there is Good and Bad Debt? I mean… most debt is BAD, but there are some good guys too.

Today I want to focus in on those bad guys – the bad debt, and see what it is and how we can combat getting ourselves into it.

 

Defining Bad Debt

Bad debt, in the Personal Finance sense, is debt that has massive depreciating value or has an extremely high interest rate. A high interest rate I would consider as anything >6%, because that’s definitely worse than long term market gains. But, a mortgage isn’t bad debt and neither is a business loan (for the most part), so if an interest rate is >6% on either of those things, I would not consider them bad debt, except in extreme circumstances.

 

What is Bad Debt? – Common Examples

 

Credit Cards are the most common form of bad debt. Do you know the interest rate on your credit card? Most are >18%! This rate is significantly higher than most consumer loans. The payment schedules are also maximized so the debtor will owe as much money as possible.  Any type of balance on a credit card is never a good idea.

Cars are the second form of bad debt. How many people do you know with $30,000/yr income or $60,000/yr income with cars that are $30,000 or more? Thousands of Americans fall into this trap of having a high car payment. While the interest rate on car loans is often low, transportation costs per month should be <10% of your income. This includes gas, maintenance, registration, and a car payment. Having a car payment you can’t afford on an asset that loses thousands of dollars in value within months is never a good idea.

Consumable Goods America, and many globalized cultures value spending money and the “consumer debt”. Have you ever gone into debt during the holidays, or spent more than you planned? This is consumer debt and most things bought have no or little resell value.

“Transportation costs per month should be <10% of your income. This includes gas, maintenance, registration, and a car payment.”

 

How to Avoid Bad Debt

If you’re familiar with personal finance or the Femillionaire mindset, you know exactly what I’m about to say. If not, that’s okay! Welcome to the club.

Step 1: HAVE AN EMERGENCY FUND. I cannot stress this enough. Seriously, you need to have savings set aside for when shit hits the fan- because it will, and usually it’s a lot of shit all at once.  Just start. saving. now. Even if it’s only $15 a month, having a $100 emergency can compound into $200 very quickly when put on credit cards.

Step 2a: Be smart and have awareness of your financial situation, especially when buying a car! Buy a car that you can afford, has low monthly payments, will be paid off in 36 months, and that you can put a big, cash deposit down on. I know this is a lot and often means you won’t be buying a new car, but there are so many used cars that are only a couple of years old, have low miles and are incredibly reliable.

Step 2b: Buy a reliable car! Research which brand/years are most reliable. Generally, you can never go wrong with a a Honda Civic, Honda Accord, Hyundai Elantra, or Hyundai Sonata.

Step 3: Self Control. This is going to be one of the more challenging steps (if not the most challenging!). You can have an emergency fund and an affordable car, but still lack self control.  If you don’t have self control,  you’ll find yourself in a cycle of gaining bad debt, paying it off, and taking on more bad debt.

 

“You can have an emergency fund and an affordable car, but still lack self control.”

 

The Bottom Line

Bad Debt is, well, bad.  It’s bad for your wallet and your mental state. Avoiding bad debt at all costs should be your primary goal. If you already have bad debt, paying it off before all other debt should be your priority.

 

Have you ever had bad debt and paid it off or are in the process of paying it off? I would love to hear your stories below!

 

Female Fridays Finances financial independence
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Emergency Funds – How an Efund will Save You

Happy Fri-YAY! everyone! Will that ever get old? Probably. Will I start using something more original as an opener? Maybe one day! Hah! It is another Femillionaire Friday and I’m super excited because this is two Fridays in a row! How long can I keep it up, the world will never know.

Okay- great intro, Meredith, now to the point.

I want to write about Emergency Funds and why you need one, why your grandma needs one, why your dog needs one, and remind you of all the horrible things that happen when you don’t have an emergency fund.

First, do you want to know something terrifying? 56% of Americans can’t cover three months of expenses.

What is an Emergency Fund?

An Emergency Fund is a type of savings that is held in a savings account and used when an “emergency” occurs.  Generally, this is 3-6 months of living expenses, but all situations and plans of precaution are different. Expenses are inclusive of your mortgage/rent, food, kids daycare, insurance, electricity, trash/sewer, pet food, vet visits, gas, general car maintenance, student loans, personal care, etc. Any expense you currently have, don’t think of cutting it out, include it! I think a lot of people do this with child care, thinking they’ll be home, but you’ll be home and busy editing your resume, going on job hunts, and maybe even catching up on some work around the house/apartment!

What Constitutes an Emergency?

An emergency is anything that meets the UNU criteria:

Is it Urgent?

Is it Necessary?

Is is Unexpected?

This is where you need to build AIM (Awareness, Information, and Management Skills) when it comes to your finances. You need to be aware of how much you spend and use that information to manage your accounts!

A perfect example of this is car maintenance. You know a new timing belt is going to be needed at your next oil change, so why dip into your emergency fund? Save for that piece of car maintenance as best you can! I personally don’t measure out the price of maintenance (I hate dealing with cars), but I budget around $600 a year for car…. stuff. And if anything goes over that, I do dip into my Efund.

A true emergency is something you absolutely cannot plan or expect.

 

The most common reasons to use an emergency fund:

  • Loss of Job
  • Necessary travel (ill family member or death, NOT a wedding)
  • Car repairs
  • Unexpected medical bill
  • Unexpected pet illness (Save for your pets!)
  • Heater or A/c went out in unfavorable temperatures
  • Necessary and Urgent Home Repairs
  • Use to cover before insurance pays out

 

NOT Emergencies

  • Christmas
  • Birthdays
  • Spur of the Moment travel
  • Going out with friends

 

… What happens if I DON’T have an emergency fund? It’s Risky…

Have you ever been stressed out before? Was it about money? That’s EXACTLY what not having an emergency fund feels like, overwhelming, compounding stress that you can’t control the situation you find yourself. One of the main issues in marriages is money. One of the main causes of depression is money. You know what solves some of life’s biggest problems? An emergency fund!

Some more extreme examples include homelessness, being hungry, losing your home, or taking on bad debt (i.e. credit cards) and finding yourself in even more stressed out.

An Emergency is the definition of peace of mind.

 

Let’s talk about the Beneies- the Benefits of an Emergency Fund

The largest benefit of an Emergency Fund is peace of mind, aka not being stressed. When your car needs a new tire- or four and you can pay for them, it’s the easiest “yes” you will ever say. You might even get a little high from the sheer adrenaline rush of not having to worry about the expense.

The second largest benefit of an emergency fund is it stops you from taking on bad debt. Aka, it stops you from taking on debt with high interest rates that make you more stressed to pay back.

The third benefit is somewhat indirect- having an Emergency Fund teaches you to not spend money. Having a lump of cash in the bank takes huge amounts of self restraint to not spend. And if you can keep it there, you’re absolutely killing the mental game of savings.

 

How the Hell am I supposed to Build an Emergency Fund??

I’ll tell you right now, it’s going to take time, patience, and intelligence to finally have your emergency fund, especially if you already have a tight budget. My recommendation is to save at least 10% of every single paycheck into a savings account until you have the amount of money you need.

You can help yourself by opening a High Yield Savings Account outside of your current bank and set up automatic transactions. This means when you login to your normal checking account, you never even see your Emergency Fund.

If an emergency happens while you’re building your emergency fund, take a deep breath, use your cash, and start building again.

 

Meredith Foxx’s Approach to an Emergency Fund

What’s my personal approach to an emergency fund? I use my emergency fund for only the most true emergencies, aka loss of job. I have had to dip into it once for my cat and once for my car, but for the most part, I like to structure my savings.

I have accounts labeled (and yes, these are all seperate savings accounts):

  • Car account – $106/pay period, this is for gas, insurance, and $600 of maintenance a year
  • Kitty – $30/ pay period, this is for food, toys, clothes, and vet visits. Any excess I’m saving for a surgery he’ll need.
  • Travel – $200/pay period, this money isn’t used for any unexpected bills (although I could for unexpected travel), but I think it’s important to point out where my cash goes
  • Efund/General savings – $300/pay period, while my Efund has been maxed out for a couple of years now, I am in the beginning stages of saving for a house and other big purchases. I have all of this lumped into one high yield savings account. But I know, $10,000 of what’s in there is an emergency fund.

 

Really think about the Amount you Need

There are a couple of reasons why you should think critically of what you need. The more important one being, will you have enough money? 3-6 Months is the standard, but if you have a large mortgage, kids, a spouse that doesn’t work, pets, loans, a job that is high risk, etc, you might want to consider 12-24 months of cash reserve. You’ll be prepare when the shit hits the fan, especially because when it rains, it pours.

If you’re young, healthy, no pets, no dependents, etc, really think about not holding onto too much cash. You’re losing time in the market by keeping dollars in an account that doesn’t even keep up with inflation.

 

In Conclusion

I hope halfway through this article you opened up your bank account and started a new savings account called EFund. Having an emergency fund is so critical to being able to handle stress and impactful moments in life. An Emergency Fund takes the edge off and allows you to breathe easy, knowing you’ll be okay.

I know saving money isn’t always easy, but it’s so much better than the alternative.

 

I hope you enjoyed this article, thank  you for reading! Check out my Youtube video for more:

 

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2019 IRA LIMIT INCREASES by $500!

You heard it here first folks, in 2019 IRAs are increasing their limits from $5,500 to $6,000 per year. The $6,000 contribution is based on the government’s fiscal 2019 calendar, which starts in April 2019, but you should be able to start contributing larger amounts for the Fiscal Year starting in January. Just make sure you’re 2018 IRA account is already maxed!

How Much Should you Contribute per Paycheck to Max Your IRA?

  • If you are paid monthly (12 paychecks/year) and you max it out in 12 months, you need to contribute $500/paycheck to max out a 2019 IRA.
  • If you are paid bi-monthly (24 paycheck a year) and you want to max your IRA, you need to contribute $250/paycheck to max out a 2019 IRA.
  • If you are paid bi-weekly (like me! 26 paychecks a year) You need to contribute $230.76/paycheck to come close to maxing out a 2019 IRA. You’ll need to contribute an additional $0.24 to reach $6,000. Easy peasy.

 

For me, this increases my per-paycheck contribution up from $212 to $230. I’m not quite sure if I’ll be getting a raise this year as I plan to negotiate for more PTO, way more PTO.

But, I also may not be doing the per-paycheck method anyway. I anticipate a bonus of ~$3,000 and if I actually receive it I’ll dump it all into my IRA to already have it half maxed.

 

Do you max an IRA every year? What method do you use to max it out?

 

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