Saturday, July 28, 2007

The Road to Financial Peace Gets Rocky

I'm a huge fan of Dave Ramsey's work on personal finances. If you haven't got a copy of his book, Financial Peace, I highly recommend it.

In that book, he lays out a simple, seven step plan for managing your money. Some of the steps were easy for me, like paying off all of my non-mortgage loans and moving from a credit card to a debit card. Now comes the hard part. Saving money.

Once the bills for my car and credit card stopped coming and I found myself with some extra money each month, the driving force behind my financial discipline melted away. "Yes, yes, I'll save my money," I would tell myself, "but wouldn't it be nice to finally have a stereo system in the garage? I'd really like a TV in the living room, too." One thing piled on another and I started cruising Craig's List and eBay with the feeling that I had cash in my pocket.

The problem was that I didn't really have cash in my pocket. I had paid off my debts, but I had yet to build up my savings. Dave recommends that you have 3-6 months of living expenses in liquid savings. I had something like 3 weeks worth of expenses saved. I could see that progress towards 3 months of savings was going to be slow, too. Did it really make a difference if it took a little while longer to save the money? After all, that smoker for making great BBQ didn't cost that much and it would really add to my cooking repertoire.

Wondering about the wisdom of buying stereos and smokers, I deferred my purchases and didn't spend the money. As I sat and thought about my financial history, I recalled that every month seemed to bring a large, unexpected bill. In my old house, it was usually related to something breaking down in the house. Here, it could be child or vehicle-related. Without that liquid savings, I'd be back on the credit cards in no time.

Then the troubles started to hit. My PC died. My TiVo died. My microwave's front door glass broke. Our family vacation ended up being more expensive than I had expected because Dollar Rental Car had been giving me AA miles instead of Dollar points and I had to pay for my rental car instead of getting it for free. All of them were small to medium-cost items, but they added up quickly.

Luckily, I hadn't given in to my impulses to buy things and I had my savings to draw upon. My problems quickly ate away at my storehouse of cash, but it never got to the point where I had to draw out the credit card and use that. Now I'm convinced. The money goes into savings until at least 3 months of expenses are there. It's hard to do and it's not always fun, but when you need the cash and you've got it on hand, you feel really, really good about yourself.

Frugality is the order of the day over at the Festival of, well, Frugality.

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