Financial Experience #2 – using the budget 

Yesterday I mentioned how we started a budget. That budget detailed all of our expenses for the whole year. Items in red were areas we could take immediate action  to reduce the expense.

Some of the items in red were the following:

• Federal taxes and 401k contributions
• Cellular service
• Gym membership
• Internet service

Of all the changes reducing our 401k contribution was the hardest and had the biggest impact to increasing our cash flow by hundreds of dollars a month. I lowered the contribution level to 5% to capture my employer’s 4% match for both jobs. My thinking was there was little point to racking up debt when we needed the money now. In the past I raided my IRA when I was laid off, and putting money into a tax-deferred account and then withdrawing it with penalties later didn’t seem like a good idea.

The other changes were minor. We cancelled our gym membership. Again, it was bittersweet, we hadn’t used the membership in a few months. That saved us $20 a month. The cellular service we switched to Cricket Wireless. That gave us more data and lowered prices by $25 a month. If you are not a heavy data user there are plans like Freedom Pop or Republic Wireless that provide unlimited phone calls and texts in the USA for a very nominal cost. Lastly, we switched from AT&T to Time Warner for Internet service. Again, we dropped our monthly prices while getting faster speeds. This transaction saved us $30 a month. At least we are on the right track.

While on the subject I wanted to mention Cancellation and Termination fees. I have gotten burned in the past on those. Be very careful to check if your contract has them! If they do take them into consideration before switching. It might be better to wait until the contract ends before switching. Or if paying the fee and switching right away makes sense go that route. It will be an informed decision.

Astute readers might be asking why I didn’t take out a 401k loan to pay off the debt. Certainly the interest rate is lower. There are two reasons. If I ever decide to switch companies the 401k loan becomes payable in 30 days. Then I will have to scramble to pay off the loan. If I don’t the income becomes taxable with penalties. Second, we are just substituting one debt for another. There’s a place in our strategy, we decided this wasn’t what we wanted to do in this case. We needed to get cash flow positive fast.

To recap:

We tackled some items on our Red list. Before canceling a service check for cancellation or termination fees. Look around, there are always deals for Internet and wireless service. In our case lowering our 401k contribution was a quick and easy way to stabilize our situation until we get other items on track. 

Vijay @ Smiling Dad