The Lean Years Part 3: Savings & Debt

When I was in the early stages of learning how to manage my money, I heard from two camps: 1) Save up an emergency fund before paying down debt; and 2) Save money in the long run by throwing all your money at debt first, then start aggressively saving for the future.

I wasn’t sure which was right or wrong, or best for me. I decided to just start vigorously attacking my debt so that I could save money in interest. For 3 months I made very aggressive payments towards my Visa with the highest interest rate. It was incredibly satisfying to knock off $1,000 after only 90 days.

It was even more satisfying to pay off that much while still being able to make ends meet. I was diligently keeping a checkbook and had decided to live only on cash.  After my bills were paid, I used cash envelopes to make sure I stuck to my budget: one for food and one for gas. I never spent that money outside of those 2 categories and had virtually stopped using my Debit Card. It.was.AWESOME.  I was so proud of myself, and my progress towards my goal of becoming debt-free.

But — then I had a medical bill come due. And then an unexpected car repair. Since I was being so aggressive about putting all extra money towards my debt, I had no savings and no “left over” money to pay either of those bills, which totaled just under $1,000. I suddenly realized why saving  up a $1,000 emergency fund would have been the smarter thing to do right off the bat, rather than leaving myself open to losing my job because I had no money to fix my car.

Since I needed to get my car fixed, the only option was to pay with a credit card. Suddenly I was back in the position I started in — no savings, no leftover money at the end of the month and no credit available. All because I didn’t build that safety net before throwing all of my money at high interest.

Somehow, I stayed motivated. I don’t know how I kept my positive attitude towards my goals, other than maybe knowing that I couldn’t live with the stress of being tied down by debt.

I decided to start over.  I recreated my budget with a focus on getting $1,000 saved up in an emergency fund. I didn’t yet trust myself to not spend that money on a not-so-emergent item like groceries or new boots, so I set up an online savings account with ING rather than a Brick-&-Mortar bank where I could easily access the funds at the ATM. To get the money into and out of the savings account, I had to set up an electronic transfer between my checking account and my savings account. The transfers take a minimum of 3 days, so it bought me time to think through my decision to spend the money, and spend it wisely.

It didn’t take me long to get that safety net established. Once I did, I went back to my budget and got re-focused on paying down the credit card with the highest interest rate first.

However, this isn’t the end of my story. I had a lot of mental and emotional baggage to deal with in order to truly get control of my spending habits. Getting the big picture via Excel spreadsheet didn’t solve my “need” to spend money unnecessarily. Check back soon for some of the curve balls I threw at myself during The Lean Years.

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