Friday, August 17, 2007

Artificial Scarcity

We've had two whopping car repairs this month, the kind that emptied our "car envelope" and then some. What do you do in this situation?
  1. Put the car repair on a credit card and pay it off monthly with interest. You might do this for the airline miles, but my family doesn't do debt. Not an option.
  2. Drain the budgeted car repair fund and pull the rest from our savings account. I am so grateful that this is an option. However, we try not to use our savings unless disaster strikes. Sometimes we disagree about what constitutes disaster!
  3. Create a period of "artificial scarcity" by taking the repair money from cash flow. In this case, we paid for the huge car repair from our checking account. If I manage the next paycheck carefully, we will have just enough to pay the mortgage and essentials. Just enough. Even I am nervous about pulling it off!

Why deprive yourself for a month when you could simply save a little extra the next 3 months?

How many times have you said you would pay back your savings account, and then never did? Artificial scarcity challenges you to beat your budget right now. It gives you the panic you need to crack down on unnecessary spending. It makes you feel poor, and that's a good thing.

The tighter our money, the more creative our budgeting becomes. If I can "make do" for this pay period, then I don't have to pay back my savings from the next 3 pay periods. We can refill the car repair envelope instead.

I'm grateful that this temporary poverty is an artificial construct. Many Americans don't have that luxury. Those of us who do should not take it for granted.

15 comments:

hsgbdmama said...

Great post! There are times when we have had a larger emergency expense and we have had to put it on a credit card, but in most cases we have paid it off that month or I have committed to paying it off in no more than three months and adjust our finances accordingly. We haven't had to do this in several years (PTL!) because we have been saving as well, but it is good to have that emergency option available.

If you do need to incur some temporary debt, then make a plan to pay it back quickly and commit to that plan ... that is a problem too, the lack of follow through, which then causes problems.

SongBirdy said...

At this point in our lives, we are seriously into debt. Student loan debt.

Anyways, I visited several financial advisors and basically was told not to pay off our student loans. They are Government held loans. They are charging us interest rates higher than our Credit card. We use the credit card to buy gas and then pay it off each month.

Anyways, in an emergency I use the Student loan money. At just under $1000 a month, that covers pretty much any emergency we've had so far. That way I can pay cash and stay on top of our daily living expenses. If we are still short the only place I can kind of strip the budget is for groceries.

Over the years I've stripped any non-essential from our budget. We 'rent' movies from our friends and the library for entertainment. $40 bought us bunny ears so we can get a t.v. channel. Otherwise, our legs and bikes provide the other entertainment. Gifts are home-made. My husband is the only one who gets new clothes because his mother buys them for him for Christmas. The rest of us get hand-me downs or thrift buys. I sew the rest. And so on!

Then the next month, or next bi-weekly pay I pay the student loans.

Our mortgage, our car payment, and monthly bills (water & electric, phone & internet, natural gas, insurance(house & car), and gas credit card) are always paid immediately.

You'll make it! Trust Him! That's how we've had to live as long as I can remember!

We've tried saving money for a car but unless we really did not pay of our student loans there would be no where to take the money from. To me, the greatest use our money has now is not in a savings account but at chipping away our Student debt and its interest (at 9.75% now). So there is no savings account for us!

Lu said...

Fantastic post! I think we've all been faced with your situation. We also do not "do" option #1. We try very hard not to touch our emergency fund, but sometimes we have to. We do tighten up our spending belt during times like these and ALWAYS replace it! By the way, love your pantry!

hsgbdmama said...

Songbirdy, have you considered refinancing to a lower-interest loan with a fixed rate so you can pay them off faster? Being told to not pay them off is bad and irresponsible advice. The interest still accumulates and only makes the loan that much more difficult to pay off.

Margaret Mary Myers said...

Thanks for sharing your financial adventures and attitudes. We are paying off huge debt from a business, and so credit is not even an option for us anymore. It's amazing the things one learns to do...and the things one learns to rejoice in and trust in God for. :) As much as I groan every time I look at how long it will take us to get out of debt, I have so much joy each time I see God's providence in the little things (and big things too). Thank you for sharing your tips and ideas with us.

Harmony said...

The good news is that you do have the savings -- so if you find yourself just short of making your mortgage payment this month (instead of just being able to pay it), you will still be able to make it. That's the beauty of emergency funds. :)

We do use credit cards, but it's for the cash back (I don't think frequent flier miles are worth it). We pay off the card at least every other week (usually weekly). It's just like a check clearing the bank for us, because the money floats for about as long. We have never paid finance charges or interest, and we have our 6-month emergency fund -- so it works for us to get a $50 check in the mail every 4-ish months.

HOWEVER, I totally respect your no debt thing. I've seen way too many people get into trouble with credit. If we didn't get about $150 in 'income' each year from it, there would be no reason for us to use it. And if we were not being responsible with it, even the $150 wouldn't be worth it.

Jennifer said...

Meredith, I totally know where you are coming from. Since last November we have spent $7700 on various car repairs. Some routine things that needed doing during that time, some repairs we weren't expecting. The latest in July, was a new transmission in my 6 year old van (a must have to get our family of around).

Panic set in at that point. Up until then we had been able to take from our car repair account and either cover the whole thing, or enough that we could cash flow the rest. But during those months, we were never able to rebuild the car repair account very much, because we kept getting hit with more repairs.

So, while we had the money in savings, we put it on the credit card to buy ourselves a month to try to scrounge up the cash. Dh is off for the summer and was able to write some articles for money as well as work for my dad some. I was able to also write extra articles for money as well as take on a part time job of delivering fliers for a construction company. In that month we were able to increase our income and cover almost $1000 of the repair. When the credit card bill was due, we paid it in full, like we always do if we use it, pulling only $2200 from savings, instead of the full cost of the repair.

Now we are tryiing to rebuild our EF as well as rebuild our car repair account, because the repairs have not stopped and dh's car is 11 years old, so we need to be prepared for things to break.

I totally agree with your deprivation method. We also did this too, to allow us to use more of our regular income for the car repairs. I try to always keep a full pantry with lots of extras bought on sale. This is like an emergency fund in itself. My normal grocery budget, can then be slashed for a time while we live off our stockpile. Sometimes unexpected things come up, no matter how much planning you do to avoid those things. Having the option of depriving ourselves for a short time in order to avoid using savings has always appealed to me as well. In fact we are doing a little of that now, as dh has to go 3 weeks between paychecks instead of the usual 2. Oh and we just found this out last week - we had been expecting a 3 paycheck month and they went and reworked the pay schedule, not letting anyone know until the last minute. That was nice of the school district wasn't it?

I hope you have no more car repairs in your future!

Ewokgirl said...

This is a timely post. We've had some extra expenses lately, and we're about to have 2 deductibles with our insurance company because of 2 leaks under our house. We have enough in savings to cover one deductible, but the other deductible will have to go on the credit card for now, which really makes me mad. In order to pay that off quickly, we'll have to seriously tighten our belts.

Of course, it doesn't help that we have several youth group events coming up that all cost money... *sigh*

Anonymous said...

Question.....is your car repair envelope a real envelope or is it a book keeping one. I have a tendancy to keep cash on hand but my dh doesn't like the idea, for safety reasons. He is a police officer and has seen too many people lose cash this way.....just wondering what your advice is on this matter. Sometimes it can be a real pain to have to run to the bank to get cash, although we use our debit card (direct withdrawl for our account) alot.

Shari

Amy said...

It sounds like we are in the same exact boat right now. We have had two trips for car repairs and towing charges..not to mention a dishwasher that broke down and a septic system that could not be found and required special tracking. It was a bad month for us financially and I am cracking down over here too. It is amazing how many parallels our lives have!

Good luck with reaching your goals this month!

SongBirdy said...

hsgbdmama,

That's a good point about refinancing. However we currently don't hold enough equity to find a lender that will refinance our Government held student loans. And the Government keeps upping the interest.

Actually, my father and brother are both Chartered Management Accountants, and I've taken a lot of financial courses. We all think the advice we received, which was via the church and provincial programs, was bad advice and we've never followed it. Dh and I are paying off our loans but we simply occasionally do have to choose to pay for our utilities first and then get back to the student loans when the finances allow, usually a week or two later.

Originally we despaired of getting a mortgage because of our debt load, but we found out that Dh and I have excellent 'credit scores' and that when we said something 5 private lenders will willing to help us change our rent payments into mortgage payments. Simply because they knew we were good money managers. I can't share what the interest on our mortgage is, but it is very good and we have been blessed in this area.

We are hoping that in five years we can refinance with our house and get our student loan debts out of the government's management! Seeing as we just bought our home this past May.

Melissa said...

I think that having no debt is the way to go. We are working now to pay off the debt we do have as quickly as we can with the "snowball method" (Paying as much as you can over the minium payment on the smallest loan each month, when that is paid off, applying all that money towards the next largest loan and so on) It's a simple concept, but it should work. We have just started living frugally with me being a new stay at home mom, so I have been trying to find lots of ways to save money and I stumbled upon your blog. It is wonderful. You are such an inspiration. I love how you find such creative, frugal solutions for what you need/want and you do it cheerfully. I am a faithful reader, keep up the good work! Oh, I was wondering, what do you do about Christmas? Do you save all year for presents? Do you make or buy most of your presents? Any ideas for frugal (but nice) presents?

Denita said...

Very good post! Our family is doing the exact same thing right now. It always helps to be able to look around and see friends, other bloggers or dh's co-workers who do this as well and understand the concept.

Abbi said...

I think doing something like what you are doing really brings out the creativity in people. I like challanges like that - as long as they don't happen to often.

hsgbdmama said...

Melissa to answer your question:

Oh, I was wondering, what do you do about Christmas? Do you save all year for presents? Do you make or buy most of your presents? Any ideas for frugal (but nice) presents?

I started buying all year round about 10-12 years ago and it has worked out very well for us! We start with clearance sales right after Christmas and basically clearance sale & really good sale our way through the next year. :-) We purchase very little, other than maybe gift cards, during the official "holiday shopping season."

Unfortunately, I'm not crafty enough to be comfortable making gifts. Gift cards also work well for those who are very difficult to buy for.

For our kids' Sunday School teachers, I've been doing jar mixes the past few years and that has worked out really well.