Friday Q + A with Maddy!

It’s Friday! That means Q + A with Maddy. You can always submit your question to be answered by me anonymously by submitting here.

Hey Maddy,

Below is a proposal I just sent to my Spouse. We are finally both earning again, and I desperately want to get back on track with our finances. What do you think? Any comments or suggestions?

A: I just opened 4 savings accounts for the following purposes:
1) Emergency Fund: build toward 3-6 months living expenses.
2) Vehicle fund: repairs, insurance deductibles, new purchases.
3) Housing fund A: renovations, upgrades, improvements.
4) Housing fund B: new purchases

I am making direct deposits to each, every pay period. I can add you to these accounts if you’d like to match me?I also think we should have a savings plan for gifts (holidays, birthdays, etc). What do you think would make sense?

B. I also have the following investments:

403b: 5% pre-tax of each paycheck, matched by employer (but it takes 5 years to be fully vested). These are retirement savings.
Roth IRA: 5% after-tax from each paycheck. Principle funds can be withdrawn without penalty at any time. This is retirement savings, but can also be used to fund other investment ventures, if appropriate.
You are the beneficiary on these, but cannot contribute directly. However, you probably have both of these options available from your employer, and I encourage you to fund your own.
Acorns: just for fun.

C. I’d like to set up a debt elimination plan as follows:

1) Pay the minimum on all our debts (M).
2) Establish an extra payment amount that we can allocate from each paycheck toward debt reduction (X).
3) Apply that amount to the smallest, highest interest, or most urgent debt, from every paycheck (agreed upon together in advance), until closed.
4) As each debt is closed, roll that account’s M to increase amount for X, and repeat.

What do you think?”
It has now occurred to me that we also need a “vacation/fun” account 🙂
Any suggestions for that?

Dear Anonymous,

Wow. You are doing the most. I am happy to see that you are eager to get your finances together, but if I was on the receiving end of this email, it would be like drinking from a fire hose. If this is the first time you having a serious conversation with your spouse about money, this email could come off as scary and intimidating.

As Dave Ramsey says, personal finance is personal. Even more personal is a marriage. I suggest putting the kids to bed, turning off the TV, and having a face-to-face sit down with your wife to talk about why you want to get your household finances together. Have you identified why you are doing this? Is it your kids? Peace of mind? Travel? In case you are curious, my why is to have the means to take care of my mother when she is no longer able to work. Whatever yours is, you and your spouse have to have a discussion about your why before you talk about your how. When I say “your” I mean you two as a couple. She may have thoughts you need to hear and take consideration in as well. Your plan won’t work until the two of you are on the same page.

One of the benefits of being married is that you can maximize your earnings by combining finances. It sounds like you two are not doing that. If that is a problem, you don’t have a money problem, you have a marriage problem. Trust is lacking. Don’t expect her to jump right in with glee if she isn’t certain about your future together. You may have to start this on your own before she gets on board. Try not to do this resentfully. The number one cause of divorce in America is money fights and money problems. Getting on a financial plan is one of the best things you can do to save your marriage.

Now let’s talk about your how. From your email, it looks like your financial goals are to build savings, fund your retirement, and then pay off debt. There are two problems that I see:

1. You are trying to do all of these simultaneously. If you want to achieve your goals sooner rather than much, much later, you have to focus on one thing at a time. This is why the Dave Ramsey plan worked for me. All of my effort and energy is put towards one single step at a time:

1. Save $1000, that’s it. If $1000 seems too little, do $2000. But no more saving, including retirement!
2. Work your ass off to pay off all of your debts, smallest to largest. Current (non-collections) debts first. Any non-retirement savings above $1000 should go to this immediately. Depending on how fast you want to be out of debt, this may require significant changes such as downgrading vehicles, selling rental properties, taking kids out of private school, etc.
3. Save 3-6 months of living expenses
4. Now you can start contributing 15% of your income to retirement
5. Start saving for kids’ college
6. Pay off your mortgage
7. Give generously

2. Your plan is too complicated. 6+ savings accounts would be unmanageable for me. Unless you are a money master (which I am assuming you aren’t because you submitted a question to my blog) I would just have two savings accounts:

One that you don’t touch unless it is an emergency. For me, I consider an emergency being an unexpected events that there was no way to predict and planned for in my budget. This is where I keep my $1000.
One that is for planned future expenses. This would be your car and home repair fund.
Again, I would not save over $2000. The more in your savings account, the more interest you are paying on your debt. Debt is not working for you, it is working against you. The typical savings account is making less than 1% right now. What are the interest rates on your debt? It is wise to look big picture here. Now let’s talk about that vacation fund…When I was starting my debt-free journey, I had to put every purchase in one of two categories: essential or non-essential. And I proceeded to not purchase anything on the non-essential list. That single-handedly is how I got out of debt so quickly. Yes, of course, people were making fun of me and telling me to “live a little.” But I knew the best things in life were free and that it would only be temporary. Maybe for you and your family, a vacation is essential.

Now let’s talk about that vacation fund…When I was starting my debt-free journey, I had to put every purchase in one of two categories: essential or non-essential. And I proceeded to not purchase anything on the non-essential list. That single-handedly is how I got out of debt so quickly. Yes, of course, people were making fun of me and telling me to “live a little.” But I knew the best things in life were free and that it would only be temporary. Maybe for you and your family, a vacation is essential.

Maybe for you and your family, a vacation is essential (no shade.) Now, are we talking Caribbean resort or campground? How many times a year? Most kids do not remember the trips to Disneyland, but they remember having the undivided attention and love of their parents. That is something you can do for free every night. Just something to think about.

Ok Anonymous, I hope I answered your question. Feel free to email me again if you have more questions.

So what do YOU think? As always, you can always email me at maddycashmoney@gmail.com or tweet @maddymoneycash. I will always respond. Also, signup for my weekly newsletter, where once a week I will send you helpful tips, articles, and insights to help you live your best financial life. I also created a Facebook page, for the non-Twitter readers out there.

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