Wednesday, March 13, 2013

Financial Update: Tax Refund and a New Plan

It's tax refund time! This time, I did things slightly differently.

At first, I thought I would use some of the funds to pay off my high-interest credit card; the one I had to use to get my car repaired last year. When I thought about these past several years, however, I reconsidered.

It's been a vicious cycle of running up credit card debt throughout the year, trying to pay it off with my tax refund, and then finding myself having to pull out the credit card again to pay for car maintenance or school supplies or other miscellaneous unexpected expenses.

I decided to save most of the money in my savings account this time. I took my car in, and paid another $600 to keep it in good condition (cash this time), and yes, I bought a few things. But I have an emergency fund. It's not 8 months, like Suze would want. It's probably about a month of true necessities. It's a start.

Soon after, I bought The Debt-Free Spending Plan: An Amazingly Simple Way to Take Control of Your Finances Once and for All (on my new Kindle Fire), and I was even more pleased with my decision, and have already started to implement the plan.

Now, I will say at the outset that this plan isn't perfect. Had I not just put a big chunk in my savings account, I probably would not be as enthused about the plan as I am with that cushion. Even with that, I can still imagine scenarios where I won't be able to stick to the plan of never incurring another credit card charge again. Still, I can see that with time, it can work.

Living within your means is not a new concept, by any means. But what was different for me about this plan is the idea that you don't completely deprive yourself even as you learn to live within your means. You actually budget for eating out and entertainment and clothing. And unexpected expenses.

So how do I do this as a paycheck-to-paycheck earner? By only paying the minimums on my credit cards.

For me, that was something very different. I had read over and over I should be paying down the debt as fast as possible. Instead, Nagler understands how this enables the vicious cycle to continue. There is nothing left over for the car repair or the new printer or the baby shower gift. So what do I do? I plunk down the credit card. Because there isn't another way. And once you start, it gets easier to continue to pay with credit because hey, there's already a balance.

Unless, that is, I have only paid the minimum on the card. And while that sounds counter-intuitive to paying off debt, it is the only way to have cash left over. So that I don't have to pull out the credit card for my textbooks or Riley's uniform pants.

The key to keeping that cash is the Magic Little Notebook. While I've been budgeting for years now, I admit, if there's still $$ in my checking account, I will most likely use it. So instead of just letting that "free" money go, the Magic Little Notebook keeps me in line to truly live within my means and only use the money available for each line item. (Those line items include Fun and Savings.)

I also like her 1/3 rule when it comes to unexpected cash. (Probably because I did something similar with my refund.) She suggests spending 1/3 on whatever you like, saving 1/3, and paying down debt with 1/3. This way, you don't deprive yourself completely, you continue to build up the cash reserve so that you don't have to turn to the credit card, and you pay off some of that debt a little faster. Sounds a lot like balance to me!

I can't go as far as Nagler suggests when it comes to cutting up or freezing the credit cards. I can't guarantee that I will never put another charge on the card. Even Nagler says that it takes about three months to get the Plan's kinks worked out for each individual. Still, I have more confidence that my credit card balances can go down and stay (relatively) down. I like not feeling like we have to say "no" to ourselves all the time, but I can still make progress on financial stability.

*this is not a sponsored post. I paid for the book myself, all thoughts are my own, and I wouldn't even call this a review. It's just a post inspired by a book. And my tax refund.

1 comment:

Rose ASL said...

The book sounds great. I'll try to get a copy when I start working again. This was an awesome post, but I couldn't comment from Mom's computer lol.