Ask me anything: More questions, more answers

By glblguy

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.

9 Responses (including trackbacks) to “Ask me anything: More questions, more answers”

  1. Kristen Says:

    I do blog, but for my credit counseling agency, so I can’t link to it here. But, I’ll share my little story here. Before I worked in the industry, I accumulated debt that I am still working to pay off.

    Watching a family member hit rock bottom was what stopped my bad financial habits. Someone close to me had to file for bankruptcy. I watched him deal with creditor calls, avoid creditor calls, have to rely on family for financial support. It was awful. I sat down and took a hard look at my financial situation and realized that I was barely squeaking by, and if I didn’t do something ASAP, I was going to be in the same boat. I haven’t used a credit card in two years, and I’ve been working to pay off my credit card debt.

  2. Nancy Says:

    I’m a blogger, although not a PF blogger. I’m a very intelligent human being,but I had to hit bottom twice before I started digging myself out of debt. My finances looking much better now. I am determined to live a debt free life and Glbl Guy is helping me do it. Thanks.

  3. David Carter Says:

    I never got into debt and probably never will. I think the reason I didn’t/won’t is because I learned the importance of saving early. I knew I was going to have to buy myself a car if I wanted one and pay myself through college if I wanted to go. So naturally that made me start saving most of my money at an early age. My parents also gave me an allowance at a very early age and let me do whatever I wanted with it. Even though I always chose to save it!

  4. Shiri Says:

    Thank you so much for your advice. It helps a lot. I was just torn between the two and I didn’t know what to do. I will continue to make slightly more than the minimum payments on my cards to try and curb the interest but I will definitely make savings my main priority.

    I think this was God trying to tell me that I needed to make a change in the way I managed my money . . . I used to live a frivolous paycheck-to-paycheck lifestyle and I would buy lots of things I didn’t need . . . CDs, video games, clothes . . . you name it. I mean, I am a very financially educated twentysomething, I just didn’t take heed of the advice. I was all, “Oh, I’ll worry about it tomorrow, etc.”

    I made a lot of changes in order to save money and get out of debt quicker . . . the largest of which was giving up my car permanently and taking public transportation. It’s been hard but it is my sincere hope that I will reap the benefits of my sacrifices in the future.

    Thanks again!

  5. Zee Says:

    I wish my parents had shared their approach (or *any* approach, really) to finances with me as a kid. They never really talked with me about money – except to say “we can’t afford that” – and as a result I always ended up feeling deprived, which I think is what led to my “I’ve worked hard, I deserve that” misperception about the world and finances when I grew up.

    I can’t say for sure if I’d have avoided debt altogether if my parents had been more transparent about their own finances, but it sure would have been nice to have internalized some of the principles I have learned in the last year: give away (some of your) money to others, plan ahead for expenses you know are coming, save money for a rainy day (because sooner or later, it will rain), live on less than you earn.

    My parents told me all these things at one point or another, but they never showed me how to do it, or how they were doing it. These all seem so basic now but for some reason I didn’t get it when I was younger.

    Ultimately, like you, I had to hit bottom (actually, like Nancy, I had to hit bottom twice… :-P ) before I was truly ready to do things differently, take responsibility for my own financial well-being and grow up.

  6. Make Friends, Earn Money Says:

    I agree establishing an emergency fund is key and it is possible to do it no matter how much or how little you earn.

  7. Gina Says:

    Ditto to Zee’s story … wish had more guidance from mom (no dad in picture), besides the ‘we can’t afford it’.

    By the time I was 14 and had my first job I lived like Shiri – key point “Oh, IÂ’ll worry about it tomorrow, etc.”” And when I bought my first term life ins policy at 26, I really started to live a ‘material’ life b/c I knew the life insurance money would be there to pay off my debt if anything happened to me. 12 yrs later, “the borrower is slave to the lender” and these lenders are getting heavy.

    I recently read one sentence that has stuck in my mind … “live on 80% – save 10%, give 10% away”. I think if someone had told me that by age 14, I would have stayed away from debt. Even a 5th grader knows how to figure 80% of a number.

    Today, I will be ‘changing my family tree’ by teaching my daughter how to manage her money. Thanks to inspiring words from Glbl guy and Dave Ramsey, I am “living like no one else so later I can live like no one else”.

  8. battery-stores Says:

    Thanks for sharing the post.