Could you come up with $400 in an emergency?

in an emergency
Rich Legg/iStockphoto.com NPR

“If a financial emergency struck — say, a health problem or a car that needed repair — would you be able to come up with $400? According to the Federal Reserve Board, 47 percent of Americans would have trouble doing so — they would have to sell something, borrow money or simply couldn’t pay.”

$400 in an emergency? Of course!
Without borrowing it? Sure, just put it on my credit card! (um…)

Yesterday on Weekend Edition, NPR reported the startling findings that almost HALF of US Citizens couldn’t come up with an emergency $400 without borrowing it or selling something to get it.

And think of what “in an emergency” means:

  • $400 is a simple car repair.
  • $400 is an airline ticket to your Aunt Ruth’s funeral.
  • $400 is Fido’s vet appointment.
  • $400 is a chipped tooth.
  • $400 is Jr’s emergency room visit.

Before we got control of our finances, a $400 emergency would have caused us to go into a panic! And then we would have sucked it up and charged it on our already-maxed-out credit cards.

This is why we have a $1,000 starter emergency fund before we do anything else. Click To Tweet

Before you can save for college, before you can budget, before you can start aggressively paying off debt, before you can invest, before you can vacation, before you can be truly generous, you must have a baby emergency fund. If you don’t, every little $400 emergency will set your whole plan back by a year!

These 47% of Americans aren’t all poor people. These are the American middle class. And they’re living paycheck-to-paycheck.

Here’s another quote from the interview:

“We have been taught that a middle-class existence is … maybe a $250,000 house, and a vacation every year, and a car for each adult, and education for the children. And, indeed, those are the very metrics that the commerce department has used in defining what a middle-class life is. But as I point out in the article… the price tag for that middle-class life is $130,000. Only 1 in 8 Americans makes $130,000. So the middle-class life that we’ve all been taught is ours — if only we work for it — is out of the reach of all but a very small number of us.”

So some of this is about contentment:

Would you be content living a lifestyle you can actually afford? Click To Tweet

And some of this is about processes:

Are you doing the right things in the right order to win with money? Click To Tweet

If you find that you wouldn’t have $400 in an emergency, you may need help with contentment or help organizing your finances. Who do you know that could help you with that?

Why we stopped our debt snowball

debt snowballThe debt snowball is a powerful way to pay off your debts fast! It’s motivating to pay off your smallest debt and then roll that payment into paying off your next smallest debt. As debt after debt gets paid off, the debt snowball gets larger and picks up more speed to pay off your big debts.

Click here to use our debt snowball calculator

Over the last 30 months, we’ve been able to pay off over $40,000 of debts, including medical debts, credit cards, a car loan, and a student loan! We only have about $12,000 left until we are finally debt free! (applause)

But we’ve stopped our debt snowball. We’re no longer paying off our debts fast. And we stopped on purpose.

Why? Is it because we love our debt and want to keep it around and keep feeding it?

No. We stopped our debt snowball for two reasons:

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Who to pay when you can’t pay everyone

When we first made a commitment to NEVER use debt again and started putting together a real budget, we realized we were coming up $300 short of being able to make all of our payments each month!

who to payThis isn’t as rare as it should be. Most Americans are living paycheck to paycheck and have no emergency fund or savings they can go to if something goes sideways.

So when you’re short of funds, which bills do you pay and which ones do you let slide? Who to pay first?

Believe it or not, most people prioritize the wrong payments. And that can really get them into trouble.

I’ve counseled several pastors who can’t pay their rent, but they’re all up to date on their MasterCard payment… You’ll notice that your credit card payment is all they way down at the bottom of this list.

Here’s who to pay first and why.

1. Tithe
Biblically, tithing is not just about funding the church. We return 10% to God as a radical core understanding that God owns everything and we are His managers. This is about prioritizing God and trusting our lives completely to Him. This is also about building a habit of giving and generosity into our characters. For many pastors, tithing is actually a condition of employment. If you don’t tithe, you may get fired. I know that takes the joy out of giving. But seriously, why are we pastors if we can’t get this one right?

2. Food
This is a “necessity.” You need food to live. Buy food.

3. Housing and Utilities
This is a “necessity.” You need to make sure you and your family have a place to live–with heat, electricity, and water. If it doesn’t fit your budget, you might need to live in a smaller place, but you MUST pay your mortgage or rent.

4. Transportation
You probably need transportation to do your job. You may not need the SPECIFIC car you have… But you do need transportation to get where you need to go. If this means you get rid of your car and use Uber or public transportation, fine. But some form of transportation is a “necessity.”

5. Taxes
Taxes and government obligations, like child support, come before your other “debts.” The IRS is notoriously nasty if they don’t get their money, so be sure to pay them on time every time. If you don’t pay them, the penalties and fees are high and they’ll garnish your wages (i.e. you’ll pay them anyway, just more).

6. Secured Debt
Secured debt is anything you bought on payments using collateral. Your home improvement loan may have placed a lien on your house. That means if you don’t pay your debt, they can come and take your house. If you buy a new sofa or dining room set on credit, they can come take away your furniture if you don’t pay. Car loans are also secured debt. If you don’t pay your car loan, they can come take your car away. Pay secured debt BEFORE you pay unsecured debt.

7. Unsecured Debt 
Unsecured debt is the LAST thing you should pay. I know it feels like it’s the first thing you should pay, but that’s because you’ve been using your unsecured debt (credit cards) in place of an emergency fund. So you’re afraid if you don’t pay your debt, they won’t let you use your credit card anymore. Yes. That may be true. But unsecured debt, like credit card debt and medical debt are the safest debts to let slide.

If you find that you can’t pay all of your debts, don’t hide in shame from the debt collectors. Be proactive. Call your creditors before they call you. Tell them you won’t be making a payment this month and why. Tell them what you can afford to pay, if anything.

We were able to work with a credit card company to reduce our monthly payment from $980 down to $422 per month. That gave us just enough wiggle room in our budget to start getting some traction. They shut down the card and we couldn’t use it anymore. But the new arrangement brought the interest down from 24.24% to a measly 2% for repayment.

Let me know if there’s any way Clergy Financial Coaching can walk alongside you and support you in your pursuit of financial wholeness. It’s our specialty. Schedule a FREE 30-minute strategy session and I’ll be more than happy to help you get on the right path with your finances!

Step 8. Save a 3-6 month emergency fund.

emergency fundYou know you need an emergency fund, right? 

After you’ve paid off all of your debt, you need to stay motivated and frugal to save up a full emergency fund.

This is money that is sitting there not earning much interest, but keeping you from the edge of disaster. It needs to be money that you can get to fast! Some people have their emergency fund in a simple savings account or in a money market account. Others keep cash at home. If you keep your emergency fund in CDs or investments, there’s a good chance that you’ll have to pay heavy fees to liquidate it or it might even be gone when you need it.

Financial planners will tell you that a fully-funded emergency fund is 3-6 months of household expenses.

“Household expenses” means the irreducible bottom line that your family needs to survive: housing, utilities, transportation, and food. So maybe your normal budget is $5,000 per month. It wouldn’t be surprising if your monthly “household expenses” came in at $3,500 or less.

But there’s a huge difference between three months and six months.

How much should you actually save? Remember, an emergency fund is about managing your risk.

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Step 6. Make a realistic spending plan

We try not to use the “B” word around my house. “Budget” sounds like a grey cinder block prison meant to keep you from living life the way you want to. “Budget” food sounds like it might taste bland and gritty somehow. I imagine a “budget” vacation in a roachy motel with a broken pool. Nobody wants to be on a budget! And even if they’re convinced they NEED to be on a budget, nobody wants to stay on a budget!

Spending Plan, budget
A screen shot of a small part of my spending plan. As you can see, we’re still paying off debt.

That’s why we don’t budget. We make a spending plan.

Before the money comes in at the beginning of the month, we have a plan for where all of that money is going to go.

In Step 3, you dreamed with your spouse the kind of life you’d like to live and some goals you’d like to reach at different time horizons. Now is the time when you make a plan to spend your money toward those goals.

With a spending plan, you and your spouse get to dream about next month and decide how you want to spend your money. There will be some expenses that are fixed (housing, utilities, certain bills, student loans, credit card payments, a certain level of food…), but beyond that, you get to decide where your money is going to go.

If you don’t have your baby emergency fund (Step 4) in place yet, you’ll want to put money toward that.

If you have a baby emergency fund and have significant debts to pay off, you’ll want to be sure your spending plan reflects the goal of paying those off quickly (Step 7).

But together, you get to decide where your money is going to go.

When Kendra and I did our first written spending plan, we freaked out.

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