Patti, a concerned listener, doesn’t have a lot of debt but is concerned about her dwindling savings. It appears that she has made 80 purchase on Amazon in the past six months and her rainy-day fund is dwindling to pay her monthly Visa bill.
Once discovering this hole in her budget she deleted her Visa number from Amazon, creating an extra hurdle to spending money. This allows her to think twice before clicking once with “One Click”.
She has also cut up her credit cards and will be using her debit card to purchase things online instead. Smart move.
But the biggest thing Patti will have to deal with is her desire to, as she puts it, “Fill a void” by shopping. I don’t think she is addicted to shopping, but I do believe we all tend to spend money in places without realizing what it is doing to our finances, our figures (I snack too much), and our futures.
How do you beat an addiction to shopping?
Apply the Displacement Factor: Spend time doing something else instead of money on something else
One way to make sure we don’t spend money where we hadn’t planned is to avoid putting ourselves into situations where we make foolish decisions.
Indiana University gives some great advice for curbing shopping binges:
- Pay for purchases by cash, check, debit card (always a smart move)
- Make a shopping list and only buy what is on the list (especially important around Christmas)
- Destroy all credit cards
except one to be used for emergency only(I disagree with using plastic for emergencies – it causes another emergency 30 days later)
- Avoid discount warehouses. Allocate only a certain amount of cash to be spent if you do visit one
- “Window shop” only after stores have closed. If you do “look” during the day, leave your wallet at home
- Avoid phoning in catalog orders and don’t watch TV shopping channels (AMEN!)
- If you’re traveling to visit friends or relatives, have your gifts wrapped and call the project finished; people tend to make more extraneous purchases when they shop outside their own communities
- Take a walk or exercise when the urge to shop comes on
- If you feel out of control, you probably are. Seek counseling or a support group such as Debtors Anonymous
The common theme in their advice:
Avoid situations that tempt you to spend.
Use paper, not plastic
Email question by Super Saver Sally
Sally has some money in savings and two goals: To live debt free and create a plan to retire in 20 years. She is in a super situation because Sally has
- $40,000 in savings
- $16,000 in emergency fund
- $7,000 in liquid cash (checking acct)
Super Save Sally is awesome! She only makes $30,000 a year but has been able to keep this money and not blow it.
Sally has $55,000 left on her mortgage and wants to know “Should I use my savings to pay off $55,000 mortgage debt once and for all and start saving all over again?”
Her finances must be more complicated than her 6-sentence email, so I gave her two suggestions and spelled out the reasons why for each scenario.
Here is what I suggested – see if you agree with me:
You said you have $40k in savings. I am to assume this is not a retirement account of any kind? If it is retirement then I would recommend you leave the $40k there and let it grow for retirement.
I would also not touch the $16k emergency fund because you just never know what will happen.
That leaves $7k liquid to be used for your next goal. Are there major repairs to your home that need to be done? Are you saving to replace a car? If the $7k isn’t earmarked for anything like this then I would put it into a retirement account. You could even put $5,500 into a ROTH this year and $1,500 next year to give your retirement plan a kick start!
If the $40k in savings is NOT in a retirement account then I might put it towards the mortgage along with the $7k liquid. That would cut your mortgage down to $8,000 which you could probably pay off in the next year or so if you watch what you are doing. How would that feel?
I wouldn’t touch the $16 emergency fund quite yet. You never know what’s going to happen. However, I would revisit the amount needed in the emergency fund once I got closer to paying off the mortgage.
For example: Your normal monthly expenses (not income) are $3,000 a month (mortgage payment is included in this number). That means you need $9k – $18k in emergency savings to take care of 3-6 months of bills if you were to lose your income.
However, if your monthly mortgage payment is $800 a month then your monthly expenses with a paid-for house would only be $2,200. That means 3-6 months of an emergency fund would be $6,600 – $13,200. You could take out $2,800 from your $16k emergency savings to pay off the last few months of the mortgage.
Note: You will still have to save for property taxes and home owners insurance. Many of us have that added to the principle and interest portion of the mortgage payment (ESCROW). Check to see if that is part of your monthly mortgage payment and adjust accordingly.
Either way, Super Save Sally is in a great situation. She said she wants to live debt free and create a plan for retirement in 20 years. It would be very difficult to do both at once in her current situation. However, if she doesn’t lose sight of those goals then she will get there. She just has to keep doing, don’t quit.
My challenge to Super Save Sally
I believe Sally can pay off her mortgage by January 2016. My wife and I are scheduled to pay off our house in February 2016.
So I am challenging Sally to stick to her moneyplan, pay down her house with the savings without touching the emergency fund, and knock out the last $8,000 before we finish paying ours off.
The loser pays for dinner!
Thanks for the email.
Other segments in this episode:
I almost blow a gasket in Holla From The Impala: Dude, get away from my Mom!
What are you doing with the extra gas? Prices are low now, what are you doing with the extra cash? I refer to an old article http://moneyplansos.com/how-to-prepare-for-5-gallon-gas/
Changing a company’s policy on how they charge customers of their stores http://usa.visa.com/personal/get-help/checkout-fees.jsp
Link to my wife’s blog post: “Keeping it Hot because, baby, it’s COLD outside”
On Navigate the Rapids with Will Hanke, SEO expert and Supporter of all things Small Business http://redcanoemedia.com/ntr-episode-8/
Presented to STL Small Business MeetUp Group: How Can A Podcast Help My Business?http://yesyoucanpodcasttoo.com/30-minute-presentation-what-can-a-podcast-do-for-your-business/