I don’t know about you, but I think Daylight Savings is dumb. Why not just let the amount of sunlight wax and wane naturally? I miss driving home when the sun is still up at 5 pm . . . not a big deal, but I would love to get rid of it. Here are some articles that I found interesting this week:

Ron from the Wisdom Journal posted the top 10 consumer credit card events of 2009 – a good read. I am not sure that our current credit paradigm is going to last much longer. We’ll see . . .

The Silican Valley Blogger give a few suggestions of the best ways to invest small amounts of money.

A guest post on Christian PF entitled “There is no such thing as a free lunch – or is there?”. Read it to find out.

Kevin, a staff writer at Moolanomy tells why the first time home buyer extension is a bad idea. I tend to agree with him.

Two weeks ago, I announced the return of Ask Me Anything. I have received several questions and I am working on responses. When I make the final edits, I will post them as a part of my Friday posts. In the meantime, if you want to “ask me anything”, send your questions to glblstew(at)gmail(dot)com.

Have a great weekend. Remember – don’t just spend money, spend time with family.

And the winners are….

Here are the 5 winners of the book “In Cheap We Trust”:

Kate

Financial Samurai

Jermaine

Rob Garcia

Sally Williamson

Winners will be contacted by emails over the weekend.

thx for all the participants!

Article by Stew

Photo by Chris Makarsky

• 10 Things not to do during an interview Photo by: Antonio Bonanno I'm an IT manager in the "real world" and as result,...
• Ask me anything 4th edition Photo by: NickStarr Each week I give the readers of Gather Little by Little a...
• 5 Simple ways I save money Photo by: HowdeeDoodat This is a guest post by Jaushwa who blogs about "his journey...
• Ask me anything - 5th edition Each week I give the readers of Gather Little by Little a chance to ask...
• Ask me anything #6 Each week I give the readers of Gather Little by Little a chance to ask...

This is Stew and I am going on six months of posting here at Gather Little by Little. I am thankful to Glblguy for originally giving me the opportunity to write for a blog of this size and also greatful to Mike for allowing me to continue in this role.

The internet is really an unbelievable medium. I have been an active member of the blogosphere for almost five years. I have run several of my own blogs – personal finance, sports, politics, and theology. I also happen to be a member at almost a dozen online forums that deal with those same topics. I use approximately half a dozen different pseudonyms as well as my true identity on those boards. The internet has helped me to explore thoughts and ideas as presented by a broad spectrum of people. I enjoy interaction on a broad range of topics and enjoy sharing my thoughts as well . . . I am a blogger after all . . . bloggers by nature are people who like to put opinions on a screen and hope someone cares.

Glblguy used to have a feature on this blog entitled “Ask me anything”.  You can read some of his entries here. I thought that I might try to bring back that feature with the hope that the thoughts of this writer as well as the collective wisdom of the GLBL readership can be focused on specific questions that many readers might submit.

From time to time, questions have some up on the comment threads of articles that I have written. In some instances, I have been tempted to answer in the thread itself, but long comments are seldom read and many times blog comments are not well researched. Also, if a question is handled on a comment thread, there is also a chance that the originator of the questions may never actually check back for the answer.

There is a principle in talk radio that says that every phone call represents the opinion of a thousand listeners, so one or two questions could indicate that a number of you are wondering the same thing. I would like to share my gmail address with the readership and from time to time, address a question or two that I consider “post-worthy”. I will probably keep the posts focused on finance since this is a personal finance blog, but there are a wide range of topics that have bearing on personal finance. My areas of expertise are in theology and economics, but I would be happy to research or at least give my $.02 on any question that you may have.

I have come a long way on my personal finance journey. I am not out of debt and I have a family and a relatively low income like most of you, but I believe that through discussing Scripture and all providing input, we can help everyone become better at handling money. Please send your questions to: glblstew @ gmail.com.

Article by Stew

Photo by Eleaf.

• Somebody is watching you Who's watching, Tell me, who's watching, Who's watching me Somebody's Watching Me, Rockwell, 1984 I...
• Friday Gathering: Away from home Edition I am almost 600 miles away from home tonight, but I can still write this...
• A Peek Under The Hood I thought it might be interesting for some of you to get a "peek under...
• Why I think P2P lending is a bad idea Photo by: Unhindered by Talent The rage around money lending these days, at least in...
• The Friday gathering for 5/30/2008 Photo by: ?ick Harris Looking at my subscriber numbers this week, I finally crossed the...

Since completing my introduction post, I have received several questions about personal finance. This one is coming from Cindy who is asking when should you file for bankruptcy? This is a very important question as the consequences of bankruptcy will follow you for several years. Therfore, you might want to think twice before choosing this path.

First, understanding what filing for bankruptcy means

I guess that some feel that filing for bankruptcy is one way to get out of debt fast and start over again. Personally I think that one must honor his obligations no matter how dire the circumstances. Having debt means that someone trusted you (even though it may be a credit card company charging you astronomic rates). So beyond the debt, you must honor this trust in you.

I am talking about trust because credit is all about that. Trust takes years to build with friends, family and your spouse but it can be destroyed in a few seconds. It is exactly the same situation with credit. Financial institutions will grant a facility based on your credit history and your credit worthiness. If you fail to make a payment, they may become reluctant to do more business with you in the future as a portion of their trust in your ability to repay has been tarnished.  If you file for bankruptcy, you totally break the relationship. Think of it as cheating on your wife; do you think she will trust you the very next day (let’s just hope she won’t throw the vase of flowers you just offered her ).

A few things to do before filing for bankruptcy

#1 Consolidate your debt before it’s too late.

This is why it is so important to keep a budget. If you notice that you are slowing taking money from your line of credit or your credit card in order to pay for your daily expenses, your monthly budget doesn’t balance anymore. Seek for debt consolidation advice right away. Don’t wait until you start missing payments. I as said before, if you miss a payment (only one small payment of $10), financial institutions will become reluctant to do business with you. Consolidation can help you liberating a few bucks a month so you can pay down your debt faster and avoid bankruptcy.

#2 Consider having a second job temporarily

Working extra hours will never solve your personal finance problems. If you are seriously deep in debt and are considering bankruptcy, the root of your problems doesn’t lie with your income. That being said, having an additional revenue stream applied directly to your debts for a few months may make the difference between getting out of debt and filing for bankruptcy.

#3 Contact your creditors

Another way to avoid bankruptcy is to contact all your creditors and explain the situation to them. While they surely won’t let you get away without paying, they will most likely work with you in order to find a mutually beneficial agreement. Financial institutions prefer to find a solution rather than turning over your case to a collection agency. Running after unpaid balances represents a huge cost for them and they will be happy to collaborate. They can offer to skip a payment, extend your amortization resulting in smaller payments or consolidate your other debts as mentioned in my first piece of advice. However, make sure to call your creditors before any payments are late. They may not be so kind if you are already behind by 3 months!

#4 Have a meeting with your banker

When we are in the midst of a personal financial crisis, it clouds our vision. We are blinded and strangled by the weight of our debt and we can’t see solutions anymore. Speaking with a financial advisor will help to clarify your budget and balance sheet. He will look at your situation with a different perspective and might provide solutions other than bankruptcy.

#5 I would not use friends and family

It is one thing to lose material things; it is another to jeopardize friendship and/or great relationships with your family. If you are on the verge of bankruptcy, I would try to solve the situation myself and not borrow money from relatives. The relationship may get tense if you are not able to reimburse or worst, if you file for bankruptcy later on. Friends and family will always be there to support you. Talk to them and seek their advice, not money.

Remember, once you have avoided bankruptcy, and get out of debt, you are not done with personal finance. Once the major problem has been solved, one must find the root of it. If you don’t find why you were so closed to bankruptcy, the very same situation may happen again in the future. Avoid the common answers like “I lost my job” or “unexpected expenses occurred” as those issues could have be resolved through a strong emergency fund.

• DIY Financial Planning When we first decided to get control of our finances and change the way we...
• How does your financial upbringing affect your stewardship today? All of us come from different family financial backgrounds and those experiences shape who we...
• 1 Year Ago Today - 10 things we've done to regain financial control One year ago today was a life changing day for my family and I. Honestly,...
• 10 Things not to do during an interview Photo by: Antonio Bonanno I'm an IT manager in the "real world" and as result,...
• ING Compare Me - See how you're doing against your peers I received an email from ING this week making me aware of a new site...

As previously announced by Larry, aka GLBL guy, he recently sold his blog to a guy called The Financial Blogger. Well that guy is me, Mike, and The Financial Blogger is the name of my first blog. Selling a blog is a though decision to make for both the buyer and the seller. While Larry has to “leave a part of his life”, I am taking a risk that you won’t enjoy my articles as much as Larry’s. This is why I thought of introducing myself as my first article.

First of all, I am a happy father of two little kids; William (4) and Amy (2). I have been married for 5 years with my wife; my very first and only love (we have been together since we were 15!). I work in the financial industry since 2003 and I have been a financial planner for the past 2 years. What I really like about my job is helping my clients achieving their dreams. Buying their house, quitting their job and returning to school, retiring happy (and wealthy), those are the kind of dreams I can help my clients with. I always say that I can’t complain about the pay cheque, but what I enjoy the most, is coming back home with the feeling that I have helped someone today.

I have been blogging on The Financial Blogger since November 2006. What I really like about blogging is that I can share my knowledge with a lot more people than I can do at work. It also gives everybody a great opportunity to ask questions or add comments on my thoughts. Personal finance is a very wide and interesting topic since there are no single right answers. Each situation is unique and there is more than one good solution for each of them.

I started my blog with the help of one of my friend and partner in our online company: Pierre. He is my best friend (and William’s godfather too!). He is also working in the finance industry, precisely in the wonderful world of stock markets. While you won’t see his name often (he takes care of other website and he is the “techno guy”), he will bring his great experience of the stock market once in a while. He also runs a blog called The Intelligent Speculator. Pierre had some interesting financial adventures.

After school, for numerous reasons, he started travelling, a lot, going to places like Asia, Australia, Africa. It was all great except for the fact that he got into a lot of debt in the process. He will be writing about this. And now that he’s out of debt, he is beginning the best journey of his life, preparing a wedding that will take place in 2010, with all of the financial changes that will bring.

We will both be working really hard to provide the best financial content on the web as we think that there is a huge lack of financial education in North America. There are no such programs at school and we basically leave our kids at the age of 18 with a credit card and tell them to buy whatever they feel like.

Good news! I am keeping Stew with GLBL!

In order to not make significant changes and because I like his writing skills, Stew will keep writing for GLBL on a regular basis. He will write 2 to 3 posts a week and I will write the other posts.

If you have specific questions, please feel free to ask them by email at mikael(dot)heroux(at)gmail.com. If you want to know something about me, I invite you to ask your questions by commenting on this post.

**Tomorrow, it will be the official launch with a contest and giveaways as we are looking for ideas and comments about what you like about GatherLittlebyLittle **

• My picks for emerging influential blogs Photo by: Nils Geylen Influential Blogger is running an interesting group writing project that identifies...
• Friday Gathering: Signing Day Edition If you are a college football fan, this was a big week. All the fans...
• Ask me anything returns This is Stew and I am going on six months of posting here at Gather...
• Ask me anything: More questions, more answers Photo by: brunkfordbraun Questions have continued to come in from you since I gave you...
• Delayed Gratification - A hard lesson for my teenage son Saturday is trash day.  Since we live in rural area, we don't have trash service...

Each week I give the readers of Gather Little by Little a chance to ask me anything. The only real rule is that I can decline to answer. I’ll do my best to answer as many questions as I can though. Have a question you would like answered? Just drop me a line or leave a comment!

Alisa writes and asks:

I wanted to know of additional ways to supplement my current income, which isn’t
very much. Thank you.

Alisa, there are far more ways than I could ever possibly list here. The trick is to focus on what you are good at. Do you have any hobbies? Think of ways that you might be able to monetize your hobby. Are you an expert in something? If so, write and eBook, start consulting or even start a blog on the topic. Here are a few links to help get the creative juices flowing:

• Alternative income from the internet
• 40+ Alternative Income Ideas and Resources
• My Sources Of Alternative Income And How I Make Them Work For Me.
• Why Alternative Income Streams Are Part of My Long Term Plans
• Why Many “Alternative Income” Ideas Aren’t Worth Your Time – And What You Might Do With It Instead

Hope this help!

Steve writes:

JJust like everybody else, my 401k is taking a beating.  I have about 90k, I’m 39 and plan to retire in about 15yrs.  My 401k is split 50/50, half in Government STIF and the other half in S&P 500.  Would it be a good idea to move it all into the government fund or just ride it out? Any input is appreciated.

Steve, I won’t mislead you, investing is not one of my strong points. The good news is that when it comes to investing, all of my experience is is around 401k programs. Others will disagree, I’m sure but you are still early enough in your 401k and career to continue investing in more fast growth (i.e. higher risk) funds.

You are the same age I am as well, and that is what I continue to do. Right now we’re all taking a beating, but believe that if we continue to hold and and invest, we’ll reap the rewards later once the market recovers.

I have all of my investments in higher risk funds and nothing in conservative or government funds. Right now I’m buying low to hopefully sell high as I get closer to retirement.

Readers, what’s your perspective on Steve’s question?  Anyone disagree with my approach?

Jill wrote and asked:

Quick question for you.  We have saved 3 months worth of monthly expenses in our
emergency fund ($15,000).  Where do you recommend that we keep that (mutual
funds, money market, ING)?

I would keep it somewhere that is easily accessible but separate from your normal everyday accounts. Remember, an emergency fund is just that for emergencies. It’s not an investment account nor should you plan to reap rewards from it. I keep mine in ING Direct.  I have $1000.00 in an ING Checking account with a debit card associated and the rest in an ING Savings account.

The important concept of an emergency fund is for it to be available when you have an emergency (i.e. car breaks down, hot water heater goes out, etc.).  It doesn’t really matter where you keep it, as long as it’s available.

Let us know what you decide!

Dave wrote and asked:

I was wondering if you could describe how you created your LLC and how it
relates to your websites. I have been researching LLCs online and it looks like
there are several sites that take care of most of the forms for you for a fee.
Is this the route you took?

Also, I am curious is to how you handle all the registration information for
your websites having an LLC. Did you register your domain and hosting
information under your LLC? For the financial part, did you open a separate bank
account for your LLC? If so, why did you choose this route?

I read your article about starting an online store and really liked it. It left
me wanting more though. I have been doing a lot of research and still not clear
on some things. I guess what I am not clear on is where you draw the line
between your personal information and your LLC for which services.

Sure Dave, I’d be more than glad to. I have a friend that had previously incorporated in North Carolina and he shared the two required forms with me and the address to send them too (along with the incorporation fee of $125.00). This information can be retrieved from the North Carolina Secretary of State’s website. Different states have different requirements, so you’ll need to check your states website and do some research to determine how to incorporate and what your states fees are.

As you said, you can also use online services such as Mycorporation or incorporate.com.  These companies will do the paperwork for you, for a fee.

Yes, I register my domains and hosting under my LLC.  I haven’t converted all of them over yet (some are still under my name), but I’m working on it.

I don’t have a business account, but may consider it next year.  I’m currently trying to find a local accountant to work with to manage my business finances for me next year.  I’d like to get their perspective on whether a business account is needed or not.  Right now, I just have an ING Direct account dedicated to my LLC.

If you would like help with building online stores, drop me a line.  I provide consulting services in this area and can either help you get set-up or do everything for you.

Where do the draw the line, well at this point everything goes through my LLC.  I use my name as the owner of Empty Cabin Media, but run all of my work, income, expenses, etc. through Empty Cabin Media, LLC (warning, still very much work in progress).

Dave, hope this answers your questions and if you have more, let me know.

Photo by: greefus groinks

• What should I have done? This article is part of the Ask the M-Network series. Molly submitted a question and...
• How I use ING Sub Accounts I have been a customer of ING Direct for several years now and although there...
• 10 ideas to help you teach kids to save money Given our new perspective on money, my wife and I have been looking for opportunities...
• 1 Year Ago Today - 10 things we've done to regain financial control One year ago today was a life changing day for my family and I. Honestly,...
• Online blog and business accounting I've been on a quest for the past few months to to find a better...

I give the readers of Gather Little by Little a chance to ask me anything. The only real rule is that I can decline to answer. I’ll do my best to answer as many questions as I can though. Have a question you would like answered? Just drop me a line!

Wendy asks:

We are selling a commercial property that we own with a bunch of family
members. The closing is set for early January, to maximize tax benefits. My
husband and I expect to receive approx $330,000 after taxes from the sale.

We have about $25,000 in debt, which we plan on paying off, and then we are
moving to buy a house. We are looking at homes in the $350,000 -$400,000 range.
I say to put down as much as possible, leaving about $20,000 in savings. We intend
to buy an entire household of new furniture, where we live now is
furnished. Is is smarter to put down whatever is left as a down payment, or to
put down less, and have a bigger savings account? I am a stay at home mom, and
want to keep our expenses low so that I can continue to stay home.

First congrats on being able to sell something and get such a great return! One thing you’ll need to consider is the down market right now. Not sure how much commercial properties are being impacted, but I know personally our house has been on the market for almost 6-months with no offers yet.

As you plan to, I would pay off that $25,000 in debt immediately. Now, whether you save the money or use it as a down payment depends. First off, I always recommend that people save 3-6 months in savings after they pay off their debt. This is right along with what Dave Ramsey suggests.  If you already have that, than I would definitely use the rest as a down payment.  If not, I’d save as much as you can, and use the rest for a down payment.

Another thing to consider is that I always recommend a 20% down payment.  This is not only to give you some immediate equity, but also to avoid having to pay PMI (Private mortgage insurance).  I’d just buy the furniture as you need it later.  I think “fully furnishing” a house is often overrated, especially if you don’t need it.

Oh, stay at home mom or not, keeping expenses low is ALWAYS a smart financial move.

Sarah asks:

Because my husband is striving to right our finances and build our investments,
I am trying to be an asset in that endeavor.  I was wondering what your wife
does in regards to your finances? I know you guys meet together and discuss the
budget, but does she have any frugal tips that help your family?

Hi Sarah. Many of the money saving tips I write about come from my wife. As you said, my wife and I meet together to review our finance and plan our budget. We also discuss our finances and purchases together. We seldom ever buy anything more than about $100 dollars or so without consulting each other.

As for how she helps, her biggest frugal tip is buying close in the off season. We automatically save money into a clothing fund that she uses whenever she finds off season clothing at a HUGE discount. I have about 10 different Nautica t-shirts that we haven’t paid more than $5.00 each for.

This also includes flowers and trees for our yard. She waits until winter and then buys left over trees/plants at the local Lowe’s or Home Depot. She did this last weekend. She bought 3 Japanese maples for $30. All three were well over $50 each during the summer.

She also helps us out on the income side by blogging a bit on Review Mommy and selling some crafts on Etsy.

Thanks for the question!

The next question comes from Clarrissa who asks:

If you delayed going to college for one year what would you do or gain from it.?

Well, I wouldn’t. Why wait? Sounds like to me you aren’t sure if you want to go. If you take a year off, it’s just going to give yourself time to further talk yourself out of it. Go sign-up right now and start ASAP! Going to college is one of the most important things you can do. It will open doors for you that otherwise can be difficult to open. I can’t see gaining anything by waiting. “He who hesitates loses”.

The final question this week comes from Gary who asks:

I know the FDIC is raising the protection limit to $250,000. However, I heard that the fine print states that even though your money may be insured, they have up to 99 years to pay it back. Can you confirm or deny this? Anything else about the FDIC you can share with us?

Gary, I researched and researched this and couldn’t find anything about that. I sent an email to the FDIC as well, but have not yet received a reply.  If I do, I’ll be sure to post it.  The increase is only temporary and the basic insurance of $100,000 will return on 12/31/2009.  Coverage for retirement accounts ($250,000) stayed the same and as not changed.

Have questions about your coverage?  Visit MyFDICInsurance.com.

Photo by: TheTruthAbout…

• Ask me anything #3rd edition Photo by: star5112 Each week I give the readers of Gather Little by Little a...
• Driving a BMW and dealing with temptation Photo by: Taekwonweirdo I've wanted a BMW for years. I've always admired the looks, the...
• Save money: buy an engagement ring online! As many of you that have read this blog for a while know, November of...
• Friday Gathering: Daylight Savings Edition I don't know about you, but I think Daylight Savings is dumb. Why not just...
• How much do your kids know about money? I know that many of us are still recovering from the long weekend, so my...

Each week I give the readers of Gather Little by Little a chance to ask me anything. The only real rule is that I can decline to answer. I’ll do my best to answer as many questions as I can though. Have a question you would like answered? Just drop me a line or leave a comment!

Kim from Always In Style NYC wrote and ask the following:

I have a question for you. I am trying to determine a reasonable budget for food in New York City. I’ve tracked my expenses in the past and had wildly different numbers month to month. Is there a good rule of thumb on what I should be spending to feed both my husband and I in a big city?

Kim, having never lived in New York City or familiar with how much things cost there that’s a tough one to answer. The guideline from my article on budget guidelines suggests allocating 10-15% of your income for food. Doing a little digging, it looks like in New York City food is 42% more expensive than the national average.

Here’s where I start making a few assumptions. I would also assume your income is adjusted to compensate for the higher cost of living and thus the 10%-15% rule would still apply. If your income isn’t adjusted, than you’ll need to go higher than 15% to say maybe 20% – 25%.

I personally don’t like lumping all of my food expenses together into one bucket. I prefer breaking it out to groceries and eating out. My eating out category is what I consider discretionary spending. In other words, I don’t have to eat out. Groceries are non-discretionary in that I have to eat. Preparing your own food is the least expensive option.

Since you are finding that your food expenses vary a great deal from month to month, I’d guess that’s primarily due to eating out. If you break eating out as a separate category, it will allow you to see this better and make the appropriate adjustments or at the very least set yourself an eating out budget so you can cap your monthly spending. Although, living in NYC you’re going to have to be diligent…way too many great places to eat!!

Any readers from NYC? If so, percentage do you spend on food? I think some real numbers would really help Kim out.

Photo by: barcoder96

• Budget Categories - Less is more Every so often we spend a weekend and just clean house.  I don't mean just...
• Personal budget categories - the key to tracking your money Creating and maintaining a personal budget isn't hard.  There are many different options including the...
• 7 Things I've Given Up to Prune My Expenses Getting out of debt is much harder than getting in debt. I know, I know...
• One year of gathering little by little Photo by: ritchielee Exactly one year ago today, I brought Gather Little by Little online....
• 95+ Money Saving Tips - From the readers! Last week I invited readers and bloggers alike to share (or blog) your favorite money...

Each week I give the readers of Gather Little by Little a chance to ask me anything. The only real rule is that I can decline to answer. I’ll do my best to answer as many questions as I can though. Have a question you would like answered? Just drop me a line or leave a comment!

I received two questions since last weeks Ask me Anything post. The first questions is from Jennifer who asks:

Is it better to take out student loans to pay off extreme credit card debt (over 12K), or to say no to the loans (not needed for living expenses due to a scholarship and family support). These are graduate school loans, both
subsidized and unsubsidized. Thanks!

Jennifer, to be real honest, I am not all that familiar with the process of student loans. My understanding is that student loans are to be used to pay for educational expenses. Assuming your credit card debt is due to education expenses and assuming the student loans would provide a lower interest rate than your credit cards, than yes I would recommend moving the debt from your credit cards to student loans.

Remember though, you aren’t paying off your credit card debt by doing this, just moving the debt from one place to another. Before you do this, I would recommend you really take a hard look at your spending and change your habits, otherwise you might end up in a situation where you move the debt over only to rack up the credit card debt once again.

If you can, go cold turkey on the credit cards. Establish yourself an emergency fund, cut up the credit cards, and begin paying off the student loans as quickly as you can.

The second question this week comes from Eric who asks:

Hey Glblguy! What do you do for fun?

Hi Eric, thanks for the question. Well, besides writing here on Gather Little by Little and working on my other various internet projects, I like to do lots of things. I enjoy reading both fiction and non-fiction.  Expect some book reviews coming soon as I got a great deal of reading done while on vacation for the past week.

I also enjoy playing with my kids, going out to dinner every so often with my wife, playing video games with my wife and kids on our Wii, working on our house (most of the time), watching movies, taking care of my fish aquariums, and playing Dungeons & Dragons with my kids and some friends (yes, I’m a bit of a geek).

Shawn writes:

Mac or PC?

PC, but only because I can’t afford a Mac right now. If I could afford one, I’d buy a Macbook Pro. Since college, I’ve long been a fan of Apple products. My current PC is a laptop running Windows XP.

• Ask me anything - The Answers Photo by: goldberg About 2 weeks ago, I gave my readers a chance to ask...
• Hey! My debt snowball melted Our debt snowball melted.  I'm not exactly sure when it happened, but I do know...
• Ask me anything: More questions, more answers Photo by: brunkfordbraun Questions have continued to come in from you since I gave you...
• Best Investment for 2009: Use your Emergency Fund to pay off your debt Just by writing this title, I already know that people won’t agree with this strategy....
• Switch to zero percent balance transfer credit cards About 2 months ago I got feed up with my Bank of America credit card's...

Each week I give the readers of Gather Little by Little a chance to ask me anything. The only real rule is that I can decline to answer. I’ll do my best to answer as many questions as I can though. Have a question you would like answered? Just drop me a line or leave a comment!

I received two questions since last weeks Ask me Anything post. The first questions is from Emily who wrote:

I have a question about the best way to pay-off a very large debt and save money at the same time. My husband just graduated from his doctoral program and is about to start his new job. For the past year and a half we’ve been living-off of a $50,000 loan. After we move for his job, we’ll have barely any money left from this loan, and thus no savings. This is a personal loan from my parents with a low interest rate (around 3%) that we can pretty much pay back how we want.

I’m confused about how we should tackle this debt since it’s so large and the interest rate is so low. Should we pay it in small increments over a period of about 15 years so that we can build savings, save for a down payment on a house, and start a college fund for our kids? Should we devote all of our extra funds toward knocking it out and ignore other saving needs for about 5-7 years? (probably the earliest we could pay it off with our salary) I’d appreciate any thoughts on this!!!!! Thanks!

Emily, the first thing I would recommend that you do is build up a comfortable emergency fund.  Since it’s just the two of you, $1000 should be sufficient.  Once you have the $1000 safely stored in a separate savings account you need to start tackling your debt.  The best way to do this is using a debt snowball.  It’s hotly debated on whether you should organize your debts by interest rate (highest first) or by balance (lowest first), but choose which one you feel most comfortable with.  Personally, I like paying off the lowest balance first as it gives you that emotional high of knocking out your debt.

While the interest rate on your loan is low, it’s a family loan.  Family loans can cause some really ugly situations, so personally I’d tackle that one first.  I wouldn’t even consider purchasing a house while you’re paying off your debt.  I’d put everything you can towards it, and just get it gone.  Look for opportunities to create some extra income and use that money to pay even more on your debt (often called snowflaking).

Our next question is from David who has a very similar question:

Question: Is it better to build up your savings OR pay off dept?

Situation: We have $16,200.00 in savings and a $16,100.00 pay off on our truck.
Monthly payment on truck is $375.00. We have been able to pay off all credit
card dept effective June 15th! YEA!

My thought is: Pay off truck, use $375 per month to rebuild savings.

IF something where to happen before savings was built back up.
We can sell off truck, that we would now OWN in case of emergency
Which would leave us with only house and operational dept, lights, food etc.
once truck was paid off.

My wife’s thought is: Keep paying monthly on the truck. Keep building up
savings as we have been so we have funds in case of emergency. Payoff on truck
is 5 years out.

Note: I am the main bread winner and my job is considered unstable. We have had
several lay-offs with more to come.

Thanks in advance
David

David, different people are going to give you different answers, but since I am allergic to debt, I’ll always say pay off debt.  Whenever you have debt, you’re paying interest.  With today’s savings rates, you’re paying more on a loan than you would be earning in a savings account.  Debt is also a dark cloud that follows you around, and if anything bad ever happens in your life that debt can cause you a great deal of trouble.

Here is what I would do.  I’d sell the truck and use the money to pay cash for a nice inexpensive used car or truck (with gas prices the way they are, a car might be a better option).  Take what’s remaining and add it to your savings.

Now, that’s all assuming you aren’t in the hole on your truck, if you are, than again I would sell it, and use your savings money to pay the difference.  Then use a reasonable amount of your savings to again buy an inexpensive used car or truck.

I was in a very similar situation, $300.00 per month truck payment.  I sold my truck, used the equity to buy a used 2001 Nissan Sentra and took the rest an applied it against my credit card debt.

Since you feel like your job is fairly unstable, you’re going to need that savings just in case you lose your job, so I wouldn’t recommend using it all to pay off your truck.  Selling your truck and getting rid of that truck payment (and associated debt) would free up even more money to save even faster.

Readers, what would you suggest Emily and David do?  Anyone have alternative advice?  Remeber, if you have a questoin you’ed like to ask either about me or about a personal finance situation you may have, just add a comment or drop me a line.

• Get Rid of Your Debt Instantly!! We decided to visit the fair last night. In the arena section of the fair,...
• Stuck in the Midst of Debt Debt is perhaps one of the most pernicious things known to modern mankind. As nobody...
• How to be debt free How to be debt free is a question I get asked often via email.  The...
• Is there a time to ignore your credit score? Dave Ramsey has done well for himself as a financial advice guru. He was one...
• Ask me anything - The Answers Photo by: goldberg About 2 weeks ago, I gave my readers a chance to ask...

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.

• How To Get Your Finances Under Control - Step 5 Establish an Emergency Fund Proverbs 27:12 - A prudent person foresees the danger ahead and takes precautions. The simpleton...
• Ask me anything #6 Each week I give the readers of Gather Little by Little a chance to ask...
• One year of gathering little by little Photo by: ritchielee Exactly one year ago today, I brought Gather Little by Little online....
• What should I do with tax refund? - Ask The M-Network This article is part of the Ask the M-Network series. Samantha submitted a question and...
• Ask me anything #3rd edition Photo by: star5112 Each week I give the readers of Gather Little by Little a...