No FFEF - Is it OK in my situation? Seeking advice (long post)

[frank3246]

Normally I would recommend having a FFEF as DR says, but...

My wife and I are both DR fans, particularly me. I first heard DR on the radio in Jan '09 and decided starting in Feb to adopt his envelope system to reduce discretionary expenses and more quickly become DEBT FREE! I've read "My TMMO" and listen to the radio show about 30 mins a day. We watched a few of DR's TV episodes but no longer have Fox Business channel due to cutting satellite TV costs (love the irony, eh?). I read DR's free TMMO forums almost daily (I'm not a member).

I am the nerd, but fortunately my wife is debt-averse and doesn't like paying interest. I am in IT and years ago created a sophisticated one-page spreadsheet to help manage our budget. I've since added a second page to serve as our "virtual" envelopes.

This budget reflects some compromises with my wife, who works hard and deserves some breaks (e.g. cleaning service)...

MONTHLY INCOME
------------------
After taxes: 10700
   13% 401K: -1400
              ----
             $9300

MONTHLY EXPENSES
------------------
Mortgage PITI:2300 / 73,000
HELOC:         600 / 45,000
Grocery:       400*
Eating out:    300*
Auto fuel:     200
Electric:      150
Cleaning svc:  150
Entertainment: 100*
Clothing & Rx: 100*
Cell phones:    90
Auto insurance: 80
Internet:       50
Trash pick-up:  25
              ----
             $4545

MONTHLY SINKING FUNDS
------------------------
Home maint.:   250 (house is 22 yrs. old)
BLOW:          200 ($100 each, get to carry over unused)
Propane:       150 (we use a programmable thermostat, max 69 degrees)
Landscaping:   100 (live on 5 acres)
Auto maint:    100 (may be a little high)
Xmas/annivers:  80
Vacation:       80
Swimming pool:  60
Pest control:   30
               ---
             $1050
              ====
             $5595

* These are envelopes.

If we don't spend the full allotment on any budget item, the money goes toward debt, be it an envelope (monthly) or sinking fund (annually). This discipline renders moot the amount we've budgeted for many items.

- My wife and I are both 46 yrs. old and have no children
- Our only debt is the house
- We're on schedule to have the house & HELOC paid off and be totally debt free by Dec, 2011
- House value: $275,000
- 401K total value: $350,000.
- Term life insurance (each): $300,000
- All our bank accounts are shared

Yes, we budget $700/mo on food and generally spend it. Much of that is due to our successful low-carb diet (a lot of meat). Food is the biggest candidate for reduction in our budget, as well as the bi-weekly cleaning service.

We have used the HELOC -- and of course paid interest on (ugh!) -- over the last eight years to:
- Put in a swimming pool
- Bought two new Hondas (we both work for Honda, so we get a small discount)
- Bought a homesite lot in Laughlin, AZ
- Bought a homesite lot in central OH upon which we plan to build in a couple of years
The total land value is now low, perhaps $130,000, though more than we paid.

We apply a monthly total of about $3700 toward our mortgage & HELOC, and kick in an additional $500/mo in snowflakes from reduced spending (thanks, Dave!) and earnings on-the-side (selling stuff, building a Web site, making candy bar wrappers, etc.).

Our annual vacation to Mexico is mostly paid by my wife's eBay business. Though I love my Honda Ridgeline, I would have kept the 2000 Ford Explorer if I'd heard Dave's show just a few months earlier .

WHERE I DIFFER FROM DR'S PHILOSOPHY (for us, anyway): We purposefully have no FFEF! Just a $500 BEF. Rather than keeping our monthly savings/snowflake accumulating in an EF, we instead apply it monthly to our HELOC. We just can't bring ourselves to pay interest (currently 5%) on a HELOC while our EF money would otherwise sit idle. Our thinking is, in the event of an emergency, we'd simply withdraw from the HELOC ($140,000 available).

Both our mortgage and HELOC are through our employer's CU. I heard DR say the danger of a HELOC is that they could call the note due. If the CU did this (or drastically reduced our credit line), it would of course put us in a bind if we found ourselves relying on the HELOC in an emergency. I called the CU and they said that, even if we were laid off, they would not call the note due as long as we make the minimum payment. Well, that's what they said! FWIW, each of our FICO scores are 780+.

SIDEBAR: For a lender to measure a consumer's trustworthiness by their ability to make the payments on any line of credit is a fallacy. Assuming it isn't maxed out, one could simply take money out every month and use that same money to make that month's payment. The cost to the consumer, of course, is in the interest paid.

Anyway, my wife and I are certainly blessed to have the jobs we have. However, we both work for the same company (increased risk), and it's in the auto industry (further risk). They just offered a buyout -- regardless of age -- of one year's salary plus about $30,000. We don't really feel we're at risk of losing our jobs, but this offer is rather eye-opening if you think about it (more risk?). I have a bachelors degree in computer science, but my hard-working wife has no such "marketable skill". We have no plans to leave Honda.

So... Should we continue to "risk" lack of an EF, or would you suggest another approach?

[ladykemma2]

well, i would be very nervous about not having an emergency fund. would you borrow against the heloc if your car broke down or the air conditiner broke?

you live the lifestyle I used to live, complete with housekeeper. If I were running your life, i would cut the eating out, the entertainment, and the housekeeper in order to build an emergency fund. you have a big shovel. You may have a lay off in the future?

what are your car payments? what is your credit card debt?

[ladykemma2]

i forgot to say: i would put 5000 aside for contingency, then snowball that debt with the huge shovel.

[DJ1972]

I would have the emergency fund instead of depending on the HELOC. It all comes down to risk for me. I would rather have money in the bank for an emergency instead of knowing that if something big comes up I am going to have to dip into the HELOC, therefor adding to my debt again.

p.s. You can watch the DR show on hulu.com

[ladykemma2]

you can listen to the radio archives all 3 hours for free on his website. I put it on and listen to monday-friday straight through while doing saturday chores.

[kmonokwe]

Frank, it sounds to me like you are making many very wise decisions with your money right now! You've got a great income, and your debt is relatively low, considering its all on your home.

That said, I see a pretty strong contradiction in your ideas. First, you and your wife are both hating the interest on your mortgage and heloc (I know what you mean!) - and yet, you're willing to borrow on your heloc and pay interest on your (inevitable) emergencies.

The way I see it, you could cut back for just ONE MONTH and increase your BEF from $500 to...probably a couple thousand - simply by cutting back on spending (just one month!) and rather than adding your unspent budgeted items to your debt (just one month!), add it to your BEF. With your income and your status of living, one month could make all the difference.

As others have said, I'd keep at LEAST a couple thousand in a BEF. You're sacrificing a small amount of interest savings to ensure that you don't have to pay even more interest on a bad transmission or a broken window, or a whatever Murphy might throw at you. Counting on a LOC (home equity or not) is a risk, for sure, but considering how much you and your wife hate interest, I think that having no emergency fund is a bigger risk - and one that you don't have to take. You're in a GREAT position to hold back a relatively small amount of cash in case something happens.

The uncertainty at Honda is also a pretty big risk. You never know. Considering the fact that they're offering buyouts, and considering all of your other information, and my assumption that you're debt free except the house and heloc, here's what I would do:

Cut back drastically for a month or two and get a BEF of $3000-5000.
DESTROY the HELOC. Pay it off, close it out and stop depending on debt.
At this point, you can either snowball your heloc payment into your house, or increase your BEF to a FFEF. If I were you (or your wife!) I'd be 500% more comfortable having $25,000 in cash laying around in case of a layoff or other emergency, than having no cash and a $150,000 credit line available. Imagine you get laid off and you live off your heloc for 3-6 months while you're finding new work. You're going to spend another 10 years in bondage! Dumb idea - get a FFEF.

I might mention: Dave says to cut down your retirement contributions while you're getting out of debt. I notice yours is at 13%, which is awesome - but that, too, could be reduced until you get into a better cash situation.

I'm glad that you've found Dave! I admit that when I first began to read/listen to DR, I was a bit of a skeptic. I thought that most of his ideas were wise, but his tactics might not be the best for every situation. However, we're almost finished going through Financial Peace University (13 week program), and the more I listen and study and practice his principles, the more I support his financial ideas 100%. They just make sense. Again, I think you guys are in a great spot financially - you have an incredible opportunity! - but the potential for disaster is strong in your situation. Check out FPU and continue listening and reading - and welcome to the world of Financial Peace!

[frank3246]

well, i would be very nervous about not having an emergency fund. would you borrow against the heloc if your car broke down or the air conditiner broke?

you live the lifestyle I used to live, complete with housekeeper. If I were running your life, i would cut the eating out, the entertainment, and the housekeeper in order to build an emergency fund. you have a big shovel. You may have a lay off in the future?

what are your car payments? what is your credit card debt?

Thanks for responding, ladykemma! My wife and I have no unsecured debt, only the house (mortgage & HELOC). Basically BS6 w/no EF. We pay an extra $2000/mo. to pay it off in 2.5 years rather than 5+.

My point is, this extra $2000/mo could build an EF, but we are choosing instead to apply it toward the HELOC. We prefer a smaller HELOC balance rather than a larger savings (EF) balance to save paying interest.

What if we need emergency funds (car break down, A/C, etc.)? We would use this $2000 to pay it. If it cost more or involved a layoff, then yes, we'd use the HELOC. I'm trying to understand why we should trade increased debt (on the house) for a savings account (EF) in this scenario.

If the EF were crucial, I could withdraw all the extra moneys I've applied to the HELOC over the past 18 months and have my FFEF today. That's exactly where I'd be had I been contributing toward my EF the entire time, correct? Mathematically, it's all the same money.

Two practical problems I can see with my approach:

• The HELOC could somehow be taken away as a source of emergency funds. DR wisely says HELOCs are bad because you may have to requalify annually, or they can be called due. These aren't the case for us (at least presently, and according to the CU).
• I'm trading unsecured debt for secured debt. But again, one can use HELOC funds to pay the HELOC payments for an extended time if needed, as I alluded to originally.

I truly buy in to DR's methods, even when they aren't mathematically best (i.e. not always paying highest interest rate CC first during BS2) but are designed for important psychological reasons. But the reasoning here escapes me.

[frank3246]

Some good thoughts you have, thank you. So far what I'm hearing from you and others is a recommendation to stop and build an EF with a few thousand in it, then resume the path I'm on.

It makes sense, let me think about this for awhile!

Frank, it sounds to me like you are making many very wise decisions with your money right now! You've got a great income, and your debt is relatively low, considering its all on your home.

That said, I see a pretty strong contradiction in your ideas. First, you and your wife are both hating the interest on your mortgage and heloc (I know what you mean!) - and yet, you're willing to borrow on your heloc and pay interest on your (inevitable) emergencies.

The way I see it, you could cut back for just ONE MONTH and increase your BEF from $500 to...probably a couple thousand - simply by cutting back on spending (just one month!) and rather than adding your unspent budgeted items to your debt (just one month!), add it to your BEF. With your income and your status of living, one month could make all the difference.

As others have said, I'd keep at LEAST a couple thousand in a BEF. You're sacrificing a small amount of interest savings to ensure that you don't have to pay even more interest on a bad transmission or a broken window, or a whatever Murphy might throw at you. Counting on a LOC (home equity or not) is a risk, for sure, but considering how much you and your wife hate interest, I think that having no emergency fund is a bigger risk - and one that you don't have to take. You're in a GREAT position to hold back a relatively small amount of cash in case something happens.

The uncertainty at Honda is also a pretty big risk. You never know. Considering the fact that they're offering buyouts, and considering all of your other information, and my assumption that you're debt free except the house and heloc, here's what I would do:

Cut back drastically for a month or two and get a BEF of $3000-5000.
DESTROY the HELOC. Pay it off, close it out and stop depending on debt.
At this point, you can either snowball your heloc payment into your house, or increase your BEF to a FFEF. If I were you (or your wife!) I'd be 500% more comfortable having $25,000 in cash laying around in case of a layoff or other emergency, than having no cash and a $150,000 credit line available. Imagine you get laid off and you live off your heloc for 3-6 months while you're finding new work. You're going to spend another 10 years in bondage! Dumb idea - get a FFEF.

I might mention: Dave says to cut down your retirement contributions while you're getting out of debt. I notice yours is at 13%, which is awesome - but that, too, could be reduced until you get into a better cash situation.

I'm glad that you've found Dave! I admit that when I first began to read/listen to DR, I was a bit of a skeptic. I thought that most of his ideas were wise, but his tactics might not be the best for every situation. However, we're almost finished going through Financial Peace University (13 week program), and the more I listen and study and practice his principles, the more I support his financial ideas 100%. They just make sense. Again, I think you guys are in a great spot financially - you have an incredible opportunity! - but the potential for disaster is strong in your situation. Check out FPU and continue listening and reading - and welcome to the world of Financial Peace!

[ladykemma2]

baby step 1 - 1000 bucks in bank (i would do more)
baby step 2 - kill the heloc
baby step 3 - 6 month of savings , establish sinking funds
baby step 4 - 15% to retirement
baby step 6 - pay off mortgage

you have the dave ramsey steps out of order.

mary hunt would say
give 10% (tithe, charity)
save 10% to 10,000 contingency fund and then freedom accounts established
live on the remaining 80 percent which includes rapid debt repayment.

either way you have the steps backward.

[kmonokwe]

I wanted to add something, having re-read my post again. I said

With your income and your status of living, one month could make all the difference.

I wanted to amend that. With your income, one month could make all the difference. However, considering your standard of living, you may have need for a bigger BEF than most of us bringing in 30-50k. You have more assets than some of us do, and so you have more things that could go wrong. Having a bigger BEF ($3000-5000 instead of Dave's usual $1000) will certainly help in that area. Also, in the long run, please consider BS3, which is 3-6 months of expenses (not income!) in a liquid account - perhaps a money market.

I have to say it again and again, your situation looks GREAT. I'm jealous! I'm glad you're giving the EF a chance - I think it is a safeguard that is soooo worth it! Great job!!

[frank3246]

baby step 1 - 1000 bucks in bank (i would do more)
baby step 2 - kill the heloc
baby step 3 - 6 month of savings , establish sinking funds
baby step 4 - 15% to retirement
baby step 6 - pay off mortgage

you have the dave ramsey steps out of order.

Yes, I've thought about that! Where am I at in the baby steps? If you consider me in BS2, I think I'm following them at this point.

1. BS1: 1000 bucks in bank. I have over $1000 held back in case I need it (i.e. emergency).
2. BS2: Kill the heloc. I am currently here, paying all extra funds on the heloc (and not the 1st mortgage), though I admittedly could cut expenses further and do more.
3. BS3: 6 month of savings , establish sinking funds
4. BS4: 15% to retirement
5. BS6: Pay off mortgage

Like many other DS enthusiasts posting in DR's forums, I refuse to reduce my 401K contributions (yes, I'm stubborn )

I don't understand waiting until BS3 to create sinking funds, as I must have them to pay predictable semi- and annual bills that are coming.

Once the heloc is paid off, my challenge will then be to proceed to BS3 and create the 3-6 month FFEF, rather than paying off the house over the following two years. Challenging indeed!

FYI, visit whatsthecost.com for a great snowball calculator.

[ladykemma2]

Yes, I've thought about that! Where am I at in the baby steps? If you consider me in BS2, I think I'm following them at this point.

1. BS1: 1000 bucks in bank. I have over $1000 held back in case I need it (i.e. emergency).
2. BS2: Kill the heloc. I am currently here, paying all extra funds on the heloc (and not the 1st mortgage), though I admittedly could cut expenses further and do more.
3. BS3: 6 month of savings , establish sinking funds
4. BS4: 15% to retirement
5. BS6: Pay off mortgage

Like many other DS enthusiasts posting in DR's forums, I refuse to reduce my 401K contributions (yes, I'm stubborn )

I don't understand waiting until BS3 to create sinking funds, as I must have them to pay predictable semi- and annual bills that are coming.

Once the heloc is paid off, my challenge will then be to proceed to BS3 and create the 3-6 month FFEF, rather than paying off the house over the following two years. Challenging indeed!

FYI, visit whatsthecost.com for a great snowball calculator.

I'm all out of order too. I follow mary hunt's plan but i listen and heed dave ramsey.

[frank3246]

I wanted to add something, having re-read my post again. I said



I wanted to amend that. With your income, one month could make all the difference. However, considering your standard of living, you may have need for a bigger BEF than most of us bringing in 30-50k. You have more assets than some of us do, and so you have more things that could go wrong. Having a bigger BEF ($3000-5000 instead of Dave's usual $1000) will certainly help in that area. Also, in the long run, please consider BS3, which is 3-6 months of expenses (not income!) in a liquid account - perhaps a money market.

I have to say it again and again, your situation looks GREAT. I'm jealous! I'm glad you're giving the EF a chance - I think it is a safeguard that is soooo worth it! Great job!!

Thanks for the kudos! But don't be jealous. It's been a long, arduous path, starting with a motorcycle accident of my own doing at age 18. Due to serious injury, I could no longer be an auto mechanic. The next few years I was very poor, but had a supportive family. I eventually received free tuition to Ohio State thanks to United Way, and things improved from there. 25 years later and I couldn't be more blessed!

[frugalfriend]

p.s. You can watch the DR show on hulu.com

Thank you!! I didn't know that!

[ladytoysdream]

frank3246
My question is......
if you have a very small EF....
what happens if you and or your wife both got laid off.....
where is the money coming from to pay the monthly bills ?
I realize there would be unemployment but.......
that is not a large sum of money coming in, for your situation.