Gather Little by Little

Photo by: brunkfordbraun

Questions have continued to come in from you since I gave you the chance to ask me anything. Here are two more questions I’ve recently been asked:

The first question comes from Shiri who asks

I am very young, in fact, I just recently turned twenty-one (hooray!).

In March, I signed the lease on my first apartment, and then lost my job. As you can guess it was a struggle from March until May (I have a job currently).

Considering I live in a large metropolitan area, the cost of living here is higher than it is in a small city, and my unemployment was nowhere near enough to make ends meet. So I ended up racking up near $2,000 of credit card debt and completely depleting my savings.

Now, my question to you is this. What should I focus on first? Re-establishing my savings, or knocking out my debt? I know I cannot do both on my income, and I am having a hard time choosing which one to prioritize over the other. Credit cards are terrible, but at the same time, the interest on a credit card is three times as much as it is on a savings account.

First off, Happy Birthday Shiri! 21…I think I remember what it was like to be 21…

I am sincerely glad you found another job. That must have been pretty scary! The good news is you were able to experience a situation like this at a young age and learn from it. I think this experience will be very beneficial for you going forward in life. I’ve learned that sometimes it takes a scary or life changing experience to get your attention and get you focused in the right direction.

Now, to answer your question. The very first thing you need to do is establish an emergency fund. You’ll need to determine what amount that needs to be, but I would suggest $500 – $1000 as an initial starting point. The amount will be driven by how confident you are with the stability of your current job. If it’s pretty stable, than a smaller emergency fund should be fine. If however, you aren’t confident, than I would recommend building up an emergency fund that is 2-3 months of your salary. This will allow you to deal with unemployment if necessary without resorting to credit cards. So savings first.

Once you have an emergency fund in place you’re comfortable with, you should then begin knocking out your debt. I recommend a combination of a debt snowball and snowflaking. You can read in detail about the debt snowball process in an article I wrote called: How To Get Your Finances Under Control – Step 6 Get Out of Debt. Snowflaking is a term originally coined by Paidtwice from I’ve Paid For This Twice Already. The concept here is all about taking any extra cash you receive and applying it against your debt.

I’d recommend you read through my series How to Get Your Finances Under Control, One Small Step at a Time. The series takes you step by step through the process of developing a financial plan, setting goals, creating a budget, building an emergency fund, and starting your debt snowball.

Hope this helps Shiri and thanks for asking your question!

The second email question I received from Dave, who actually asked two questions:

I have been reading your blog for several months and really like it. I read at least a dozen or so, like The Simple Dollar and Get Rich Slowly. I actually want to ask this to many of the people that blog about personal finance that had/have debt (maybe you can create a post and ask other bloggers to respond). They all tell their stories about their financial problems and the struggles/successes that helped them turn it around. My main question is that I would like to know if there is anything that anyone (friend/family, or other) could have told you that would have prevented you from hitting your financial rock bottom?

I have successfully turned my finances around and have been thinking about that question a lot lately as I send in the last payment to the credit card company this month. I was fortunate to realize my problem and fix it before it got really out of control. Just to give you an idea, I was approximately $12,000 in debt about a year ago (I don’t have the exact numbers readily available). At the end of this month, I will have ZERO debt, over $1,000 in an emergency fund, and successfully budgeting each month (using YNAB). I was wondering if there was anything anyone could have said to me to warn me. Or, at least scare me to the point of changing my spending ways before I got to that point. The more I think about it, I feel that depending on the person, they have to reach the bottom for themselves in order to seek help, or change.

Do you feel this was true for your situation?

First off, thanks so much for reading. Also, I’m honored to be included along side Trent and JD’s blogs. They are the first two I started reading and are top notch.

Like you, I would be interested in hearing what other bloggers have to say. For me though, I was pretty much told everything I needed to know. My Dad taught me how to save, manage my money, and about credit cards. My problem was I always have to learn the hard way. I was always like that (and still am most of the time), so even though I was told better, I didn’t listen.

My journey into stupidity was gradual, one small charge here, another small charge there. A few years later I had a big’ol hunk of debt on my hands that I had no idea how to handle. I am definitely one of those “have to reach rock bottom” people.

Dave, congratulations for paying off your credit cards. You are doing what many of us are all striving to do very soon! Paying off $12,000 in debt in one year is AMAZING. Sounds like you did all the right things, and literally lived on “beans and rice” to get it paid off.

Other PF Bloggers: I’d encourage you to join in and provide your answer to Dave’s question: Is there is anything that anyone (friend/family, or other) could have told you that would have prevented you from hitting your financial rock bottom? If you decide to join in, make sure you link to this post or contact me and I’ll add a link to your reply.

Thanks for the great questions Shiri and Dave.

If you have a question you would like to ask please contact me and I’ll do my best to answer it in an “Ask me anything” article like this one.