My Saving Grace
Posted by Christi | Filed under Christi
When paying down debt, savings is often one of the farthest things from our minds. It was for me, anyways. “Pay yourself first,” I would hear. “ORRR,” I thought, “I could pay down my debt since I’ve got so much of it.” On paydays, if I found an extra $100, you bet your patootie that I was going to put that extra payment on my credit card. What good was it sitting in a savings account earning next to nothing? That wasn’t going to help me!
Then I got a significant tax refund. At this point, I was around $35 000 in debt. I had a balanced budget that I could live with and was actively attacking my debt load. I wanted so badly to see my credit card balance decrease by a couple thousand. But instead, I put $1000 from my refund into a savings account. What for? I wasn’t sure. But I followed the advice of the pros.
MY $1000 “RESERVE FUND” WAS ONE OF THE BIGGEST CONTRIBUTORS TO MY DEBT FREEDOM! I can not stress the difference this $1000 savings account made in our life. When I miscalculated, under planned, or just plain overspent, this reserve fund was our saving grace. The reserve fund meant I was safe. It also gave me a sense of pride, knowing I consistently had $1000 sitting there if something were to happen. You NEED a reserve fund if you want to get out of debt. Can you help me down from this soapbox now?
Let’s be clear. I’m a planner, but I can’t plan for everything. Despite my efforts, some unexpected expense comes up every couple of months. Every once in awhile as I’m planning out my next pay cheque, I realize that I don’t have enough to cover everything. When I didn’t have a reserve fund, I reached for my credit card for every “emergency” (*cough* CLOTHES) that came up. Now that I have a fund, I borrow a couple hundred dollars from my $1000 reserve fund when I miscalculate. Do you know how hard it is to do that? To be on the receiving end of an IOU… from myself? To see my beautiful $1000 savings go down to $600? My heart hurts. I get sad. I don’t want it to go away!
The reason I am so passionate about my $1000 reserve fund, is because of how I feel when I have to borrow money from it; from myself. Do you know how much harder I work to get that savings account back up to $1000? Way harder than if I had borrowed the money from my credit card! When I was under a mountain of debt, regardless of how much I owed on my credit card, be it $5864 or $400 less at $5464, all I saw was that I was in a lot of debt. I didn’t care to work any harder than I was already working to pay that extra $400 back. But, if my reserve fund went from $1000 to $600, it looked different. It felt different.
I had a complete mental shift. For the first time, I actually noticed when I didn’t plan properly. I noticed if I was overspending. I noticed that I probably didn’t need to go and spend $300 on clothes because I didn’t like my wardrobe. I started noticing my behaviours. I came to realize that credit cards were too “out of sight, out of mind” for me. And that awareness, my friends, has changed my entire financial picture. Today, I am in control, I am aware, and I am excited to see my savings grow.
Do you work harder when you see your savings balance decrease? I encourage everyone to try and create a reserve fund if you don’t have one. It just may become your saving grace.
- Christi (@ChristiPosner)
Christi Posner is a Credit Counsellor for the Credit Counselling Society, a non-profit, charitable organization. Born and raised in Winnipeg, Christi is a newlywed, a new homeowner, and with the exception of car loans and a mortgage, she is newly debt-free. Her goal is not merely to survive, but to financially thrive; and to do so with some passion, empathy, humour, and a smile.
June 9, 2012 at 8:19 am
Since the break-up of my marriage I (miraculously) have far better control of my money and one of the things I have – thanks to Gail’s advice – is a little saving’s account with – you guessed it – $1000. I can’t plan for every contingency, like when my car needed some work, so that money is worth WAY more than $1000 to me just for the peace of mind it brings me.
I still don’t budget properly, and that’s next on my list, but that $1000 has kept me from wracking up my credit card or overspending on stuff I don’t need because, like you, I hate to spend it!
September 9, 2012 at 3:08 pm
It’s amazing, the feeling that $1000 can bring. It is so much more than $1000, you are right.
June 9, 2012 at 8:55 am
Bang on. I used to feel like savings could wait until the debt was behind me. That wasn’t working so I tried something different and built up a little, for emergencies.
The first time I ran short and was able to lend myself money, it all fell into place. I don’t know why but owing yourself creates a greater sense of urgency. Replacing those funds does not feel like such a big deal when the consequence of misplaning is just a slight increase in the consumer debt you’re carrying.
September 9, 2012 at 3:11 pm
It does create a greater sense of urgency! It would be one thing if your credit card had no balance, and you wracked up $400. But when your credit card balance is $5464 after spending that extra $400, it’s harder to notice in the big scheme of things. Borrowing from your savings is noticeable and you are constantly reminded that you want to replace it. Thanks for the comment!
June 9, 2012 at 11:27 am
I hate owing money to anyone, credit cards, medical bills etc. But I HATE owing money to myself even more.
September 9, 2012 at 3:11 pm
We are peas in a pod!
June 9, 2012 at 12:41 pm
Yep! Savings is wonderful. We use our Canada Savings Bonds that come right off of our paycheques, for our emergencies. They are “just out of reach” for quick spontaneous spending but close enough to use when needed. Once we started using CSBs it seemed that things started to change. I think a regular savings account would be too easy for me to dip into…what are your thoughts on Canada Savings Bonds?
June 11, 2012 at 11:42 pm
I’ve been doing the CSB deduction since I re-entered the work force. Started it to save up money for Christmas presents. But now it’s like a safety net. It has helped me when I had to fix my car, removal of my son’s wisdom teeth etc. The fact that it takes about 3 days before the money gets deposited into your account makes that you don’t use it on a whim.
September 9, 2012 at 3:14 pm
Canada Savings Bonds are a great way to delay the temptation of using for “emergencies” (clothes, manicures, etc.) and use for ACTUAL emergencies. It feels more formal to cash in CSBs, which makes you think twice. Thanks for pointing this great savings vehicle out!
June 9, 2012 at 1:55 pm
That’s so TRUE. When you see the mountain of debt getting slowly smaller it’s less of a drive than seeing your own savings go down. Thanks for the intelligent word, Christi!
June 9, 2012 at 3:48 pm
I agree, something about seeing that $1000 safety net start to fray and get holes in it doesn’t make you feel so safe. Makes you want to keep budgeting to keep your savings!
June 9, 2012 at 3:31 pm
I’m not sure I entirely agree on this one, Christi!
I understand there might be a psychological benefit to holding a reserve fund: it helps you sleep, and may help you modify your behaviours.
However, it comes at a cost. Capital users (debt) will always pay more interest than capital providers (savings) will earn. So a savings account, almost by definition, will generate a lower return than reducing your debt. (With the obvious simplification that there are different way to save, and different types/yields of debt.)
So your suggestion might help behaviour, but it is a more “expensive” thing to do. Assuming the same set of behaviours, a low risk savings facility will result in a lower overall net worth than a debt re-payment strategy!
June 9, 2012 at 3:46 pm
You’re absolutely right, Mike. It is definitely the more “expensive” thing to do. But sometimes, it’s more than just a mathematical equation. I can only speak to my experience, but that simple $1000 reserve fund was what changed my mentality.
When you’re $35,000 in debt and have been just spending to your hearts content for years, without living on a budget, without having ramifications, sometimes you need to dig deeper to see what it causing the debt. When I began budgeting and could see the direct consequence of my overspending, it changed me. It was great to spend $300 on clothes, but it sucked to see my $1000 go down to $700 and then not spend anything on clothes for months to make up for it.
I don’t disagree with you, but if it’s going to make the psychological difference to make someone more conscious and aware of their finances, I think it’s worth taking the financial loss on that $1000. To each their own though, some people don’t have the same emotions tied to finances, and that’s awesome too! Whatever works.
June 9, 2012 at 3:49 pm
It’s an excellent point Christi, and speak to how we motivate ourselves. A reserve fund like you describe would be considered a “commitment device”. This is an active area of research with psychologists and “behavioural economists”, and is quite fascinating. It appears to be an open question about how effective they are, and where they can and should be used. (All of us use them to one degree or another in all areas of our life).
Freakonomics recently did a good podcast on the topic, which I recommend:
http://www.freakonomics.com/2012/02/02/save-me-from-myself-a-new-freakonomics-radio-podcast/
Freakonomics » Save Me From Myself: A New Freakonomics Radio Podcast
http://www.freakonomics.com
Our latest podcast is called “Save Me From Myself,” and it’s about the use of co…
See More
June 9, 2012 at 4:21 pm
I very much agree. Although i do not keep a set amount, like your $1000 in my account, I do have (thanks to Gail) an emergency account that I keep growing with every paycheck, and I love seeing it grow. It makes me feel like as long as that amount is growing and is there for me, nothing bad can happen.
The other such money psychological thing that I do is I always keep a buffer. That’s the money that I have after all the budgeted, saved, emergency, planned spending money that is really just there to be used but I just can’t see it go to totally 0. If it did I would still be fine financially, but I need to see that buffer. For stuff like a friend invites me out to an expensive restaurant or a party or any unexpected, costly, but by no means emergency cases. This amount is usually a min of $100 available any time.
September 9, 2012 at 3:16 pm
It’s addicting, isn’t it? A buffer is another great idea. I’ve been in the position where something unexpected comes up, and I use a credit card because I’m not exactly sure what my “allowance” bank account balance is. A buffer would prevent me from using the credit card. Good idea!
June 11, 2012 at 12:21 pm
My emergency savings account has been a hard thing to grow. We made progress for a while, then bought a house (and all that entails!). Then we had a baby, and I was on mat leave. Then back to work to build it up again and off on another mat leave, etc. Life goes at its own pace.
I found myself last night going through the bills due this week and realizing I need some more cash in the chequing account so we don’t use credit (have been trying Gail’s credit fast since the end of May–it’s amazing how much thought goes into my head before even stopping in a store now, “How much is in my chequing account? What else do I NEED to buy? When is payday?” and so often I’ll just forgo the store. Easy enough). Now I think of it as a payday loan to myself, because I hate to touch that account when it’s not technically an emergency, but I want to pay interest charges to the credit card companies even less. So I transferred the funds, and immediately set up a transfer back into the account for my next payday. This is probably what I should have been doing every time I borrowed from myself! Then I know the money will be there when I get paid and will go back where it ought to be before I find somewhere else to spend it.
Keep up the posts–I’m enjoying your perspective!
September 9, 2012 at 3:18 pm
Thanks MamaHobbit! Emergency savings are meant to be used. Don’t feel bad because you had to use it! You did really well by building up savings, and being able to use them instead of credit. I enjoy your perspective as well, keep letting me know what you think!
June 13, 2012 at 8:49 pm
When you are trying to break the cycle of accumulating debt you must have cash on hand. It does seem counterintuitive because of the interest, but having cash to pay for unexpected expenses allows you to develop new habits. Otherwise you wind up in a one step forward two steps back situation with you debt repayment.
I also find it hard to borrow from myself! Even for the things that I put the money aside for! It really makes you think…is this really what I want?
September 9, 2012 at 3:20 pm
So very, very true Melanie. If anyone is reading this and can’t imagine why it would be important to keep a reserve fund while paying off debt, I encourage you to try. You will understand how it feels to borrow from yourself, and how it completely changes your mindset. Thanks for your comment Melanie!
July 16, 2012 at 5:29 pm
I LOVE this post!!! It’s so true. Even though interest rates are tragically low, it’s important to get into the habit of saving, even if you are in debt. You have to pay yourself first! Even though your savings may not be accruing much in interest, if anything happens you don’t need to rely on credit to pay for it. Relying on credit in an emergency will definitely cost you a ton in interest, and that can be avoided if you had of saved the money in the first place. I know though, easier said than done.
When I was paying off my student line of credit, I had been pouring almost all of every paycheck into it. When I made my last payment I actually emptied out what little was left in both my chequing and savings accounts, just because I was so eager to have my debt gone. It took months to rebuild those funds. And I can relate to how Christi feels- it feels different when you know you are not prepared. It hurts a little to take money out of that account, because I know how hard I worked to save it up!
September 9, 2012 at 3:22 pm
Thanks for your comment Andie! It is counterintuitive, yet so essential to becoming debt-free. It’s a mentality shift, and I one that I am so happy I got to have.