Dip up, Don't Dip Down

Unexpected Expenses 

Emergencies happen. Unexpected car or house repairs, job loss, medical expenses can all lead to spending more than what you initially planned. Funerals, weddings, unexpected pregnancies. There are lots of events that can lead to needing to spend more. The question is whether you need to dip up into savings and investments or dip down into debt. If you have a budget you should be saving some amount of money whether it be in a savings account (emergency fund) or investment account. If you are living paycheck to paycheck you are going to have no choice but to dip down into debt. Throw the extra expenses on a credit card, line of credit, payday loan store or maybe even the bank of mom and dad. 

Failing to plan or budget now limits your future options, often making your bills more expensive in the long run. Unfortunately, those who struggle financially end up paying interest fees, which takes even more money out of their pocket—ironically, the exact opposite of those who can afford extra expenses like interest fees. A $5000 dollar car repair turns into $6,100 repair after one year on a credit card. Even on a line of credit at 12% it adds $600 from $5,000 to $5,600. Nothing says oh I am struggling to pay my bills so lets throw extra money into the garbage fire that is interest fees. It is kicking you when you're down, but it is completely preventable and self inflicted. 

Delaying Gratification

You may look at an expensive purchase like a car and think there is no way you will be able to save up $20,000 - $30,000 but guess what. If you purchase it with debt you will end up saving for it, just on the opposite side, paying it down in monthly car payments. Whether you dip up or dip down you will pay for that car. Dipping up is interest free and dipping down adds 8% interest. Do you feel like paying an extra $6,497.51? Do you have an extra $6.5k sitting around that you couldn't use.

Example: 5-year loan (60 months)

Loan amount: $30,000

Interest rate: 8%

Term: 5 years

For a $30,000 car loan at 8% interest over 5 years, the monthly payment would be approximately $608.29. Over the life of the loan, you would pay about $6,497.51 in interest. ​

You could have simply "charged" yourself the same car payments, saving/investing that money each month until you hit your targeted car value. But buying a car with car payments forces you to save. You cannot take months off from paying your car or they will repo your vehicle. People can always manage to budget when they threaten their physical property and automatically deduct payments from their account. Having discipline is much harder when there is no consequence to not saving but if you delay your gratification and wait to have the money before purchasing, not only will your purchases be less expensive (no interest fees) they will actually be cheaper since the money you save away each month will be making you money (interest and dividends).   

You might say, what about dipping into investments that are earning 12%+ interest. Wouldn't it be better to dip down to 8% since its less than 12%. Well, yes technically that is the mathematically correct decision, but it still comes with drawbacks. The 8% is guaranteed, whether the market goes up or down you are paying the agreed upon interest rate for the car loan. The 12% investment is Not guaranteed. Sure the S&P 500 has averaged 11% over the last 20 years but it also has down years where it earns much less. It comes down to your risk tolerance. There is also the feeling of freedom of being debt free that has an intangible value. Anything over 7% is a good return so just looking at avoiding a car loan as a 8% a guaranteed 8% return.  

Now if you are dipping down into credit card debt, it doesn't matter how good of a return you think you are going to get, it is probably not higher than 21% and even if it is, it's not going to be consistent. You will always be safer dipping up into your investments and savings to avoid credit card debt. 

Emergency Fund

It's hard to talk about not dipping down without talking about emergency funds. An emergency fund is recommended to be 3 months expenses to absorb unexpected costs, if not more if you're a solo earner or self-employed with irregular income. This prevents dipping into long term investments and prevents dipping down into debt. Before you can grow an emergency fund you first need to budget. Budgeting is key to so much of financial health and this is no different. Not having a budget is a surefire way to never have an emergency fund and eventually dip down. An emergency fund provides peace of mind reducing financial stress and anxiety. 

Overdraft Fees

Dipping down doesn't just happen with unexpected expenses it can trickle into all facets of money. Take overdraft fees for example. There is a popular tweet in personal finance groups going around by Eliza about overdraft fees making banks $34 billion dollars which seems quite predatory. Which it is, and it has sparked a fierce debate between personal freedom and protecting oneself from making stupid decisions. But let's tackle that another day. 

Say it is predatory and most banking customers do not actually realize what will happen if their account hits zero. There is still the fact that so many millions of people are having their bank accounts hit zero. That is a huge red flag. Many of them have probably hit hard times with job loss or large life events (which is a huge social issue to tackle with social safety nets and closer community and family ties). I am positive many of them are simply not budgeting, going paycheck to paycheck dancing a little too close to the sun and getting burnt. They don't dip up because there is nothing to dip up into. Dipping down is the only option. They have backed themselves up to a precarious position with no fall back plan. 

"You cannot Budget your way out of Poverty"

This is the common retort to giving financial advice to those struggling with paycheck to paycheck living, which I actually agree with. If you are spending as little as possible being frugal, doing everything in your power and still coming up short, then no amount of budgeting advice will fix that situation. But in most situations there is always something you can do. If you live in an expensive city you can live with roommates. If you have kids and cannot have roommates, you can move home. If you don't have a family to move home to, then you can move cities to family support. If you can't move because of shared custody with your ex then you are screwed. I am sorry for your tough situation. I am glad you are reading this blog trying to better yourself financially but that is a difficult situation. 

But, with that being said, with people I have worked with and those I see struggling financially I see a huge lack of financial literacy. Sure, you can be poor and financial literate, but I think that would be the minority not the majority. If you are in poverty making poverty wages yet driving a brand new car, eating out 5+ times a week, spending hundreds on your appearance (nails, hair, makeup, skin care) then you can for sure budget. You may not be able to budget your way out of poverty but it definitely won't hurt. The amount of people that budgeting won't help has to me less than 1% of people. So yes, you cannot budget your way out of poverty but you also can't spend your way out either. 

Budgeting can prevent those dips down, by giving you something to dip up into. You cannot dip up, if you don't save, and you cannot save, unless you budget.   

If you found this helpful and would like help budgeting or investing please email me at taylormckeecoaching@gmail.com