The Debt Dance

I have been reading an awesome book that I would like to share with you: The Complete Cheapskate: How to Get Out of Debt, Stay Out, and Break Free from Money Worries Forever! by Mary Hunt. You may remember Hunt from her famous newsletter The Cheapskate Monthly.

There are many topics in the book that I found helpful but my favorite is her idea of the Freedom Account. Basically she has taken this old concept–the emergency fund–and dissected it, creating a much more powerful tool.

I always had a problem with emergency funds,primarily, defining what is an emergency? My husband and I would set up funds and they would be depleted in a month or two because some minor (or major) crisis would come up. But “crisis” could mean “we need clothes for the funeral,” or “we don’t have money for the xyz payment this month,” or “dryers are on sale…” You get the idea.

Hunt has designed the Freedom Fund to be a mechanism that will not only let us sleep at night but also keep us from debting because of some unforeseen event.

Here is the simple process:
1. Track back through your last years bank statements or check register and find all of the IRREGULAR EXPENSES. These are simply incidents that you do not pay for on a monthly basis. Car repairs comes to mind, gifts, vacations, home repairs/remodeling, clothing, big ticket purchases, taxes, insurance…

2. Record in a notebook or on a spreadsheet, or in bookkeeping software if you use it, all of your categories (try to limit them to about six, advises Hunt, or you will tend to get overwhelmed) and the totals for the year.

3. Divide these totals by 12 (e.g. divide a total of $3,200 in car repairs by 12–$267–, emergency home repairs of $520 by 12–$43–, etc.)

4. Add these subtotal (the $267 and the $43…) 12ths. This is your monthly total to be deposited into a separate account for your Freedom Fund.

Here is an example of what we did:
First, our irregular categories of spending divided by 12.

Auto Repairs–$71.78
Travel/Vacation/Unexpected Events–$77.84
Gifts/Christmas–$84.60 (this number was inflated because we only had 9 months to save for Christmas)
Home Repairs/Planned Remodeling–$207.90 (this is a large category but important as we want to sell our house)
Big Ticket Items–$46.00
Product for Business–$80.00
Medical/Dental–$125.00

Our Total Freedom Account Monthly Deposit: $693.12

When we first stared at this HUGE number we shook our heads and said “No way! We can’t afford that!” But then we really looked at it and these categories, these expenses from the last year, were quite often charged. These unexpected events were a biggggg reason why we are in debt.

Within our regular spending plan we had been trying to account for these issues but with little accuracy. So that when we shifted everything around, removing some items since they were now included in the Freedom Account, we found that miraculously everything fit. There is little wiggle room but that’s okay.

On a daily basis this account works by setting up your categories as sub-accounts. Each account has a running total. There is absolutely no borrowing from one account to the other.

Again, as an example, here is how our Gift/Christmas Sub Account works:
We started in April depositing $84.60 every month through December the total deposits equaling $761.40.
During this time period we had a birthday present for $52, a baby present for $39, and another birthday for $71.00.
Subtracting (on a month by month–running total–basis) we end up at Christmas with $599.40. No more charging Christmas!
Each subaccount is treated the same way.

This tool, when implemented honestly and with dedication, will, in time, bring great tranquility and peace of mind. I encourage you to check out Mary Hunt’s book, The Complete Cheapskate.

NOW HERE IS ONE OF MY FAVORITE FUNNIES:

Jackie Gleason was asked if he thought he would get to Heaven. He said, “Under the present rules, maybe not. But I’m counting on two things: God having a sense of humor… and His grading on the curve.”