What do you do when you have a large, but known upcoming expense that is out of the ordinary? The simple answer. Save, save, save! The longer answer? Here’s what we’ve been working on…

We’ve been working hard over the last few months to save what we need to cover our insurance deductible for this year. We have a high deductible insurance plan and the medical bills for pre-natal, labor, delivery, and post-partum care for me and Baby #3 will bring us to our family deductible for this year.

As soon as we knew that Baby #3 was coming, we set a goal: Save $4,000 in cash before the medical bills start coming in. We didn’t want to go further into debt to pay for the baby and we had months and months to plan for this known expense. Yes, this was a known expense. It’s NOT an emergency expense. It was unexpected in some senses but the expense was known far in advance of it’s due date. It had an approximate dollar amount and a date in the future when it would need to be paid. So, as soon as we knew about the expense, we had to start planning for it.

We put a hold on paying down debt and started funneling all extra money, quarterly bonuses, and my freelance income into savings. And we did it! It took about 5 months, but we saved what we expect to have to pay out for baby expenses about 2.5 to 3 months before our goal date! Even better is that we had the cash on hand that we needed to pay for things like blood work and ultrasounds that are billed along the way rather than after labor and delivery.

Here’s what seems to be the key for us in setting financial goals: Set a very specific goal with a dollar amount and a date. When you have such a specific goal, it’s so much easier to focus and find ways to meet that goal.

What’s your current goal on your road to debt-freedom? Share it in the comments!

We use a wonderful program called You Need a Budget to manage our budget and finances. It’s nicknamed YNAB for short. YNAB doesn’t handle credit cards very well for one reason – you can’t really use credit cards for budgeting.

Eeek! I’m sure I’ve ruffled some feathers. You see, budgeting comes back to this little thing called “cash“. It’s about spending what you make and not borrowing money. Using credit cards is paying with money that isn’t yours.

“But we pay off our credit card at the end of each month.”

We used to say this too. We don’t pay interest. What about the points, miles, or whatever perks my card offers?

Blah, blah, blah. Listen to this…

Avoid the Credit Card Float

I love this recent post from the YNAB blog because of this quote:

People who pay the credit card balance in full often can’t cover the current month’s spending.  So what do they do?  They charge all the spending on the card and pay it next month. Do you see the cycle? It perpetuates itself.  You’re trapped a month behind.

Ouch. That’s where we were when we used a credit card. We were always looking at our finances a month behind. We weren’t telling our money what to do and making it work for us. We were letting last month’s spending dictate how to spend this month’s income. And we certainly didn’t have the saved cash flow to pay for the current month’s bills in addition to paying off the credit card bill for what we’d already spent. Double ouch.

In order to get anywhere significant on the road to debt-freedom, cash is the answer. Eventually, the goal is to pay for this month’s expenses with the income that came in last month. Then you’re no longer living paycheck to paycheck. Using the credit cards seems so harmless, but I’m telling you that there’s such a peace and sense of freedom using cash and debit cards. Each time you make a purchase or payment you know that the money is in the bank and those charges won’t come back to haunt you on a credit card statement at the end of the month.

Avoid credit card float. Stop the cycle!

Original Photo Credit: Whoops… collateral damage by SqueakyMarmot (CC BY)

I’m excited to report that we’re now at the 3/4 mark in our quest to pay for Baby #3 in cash. Giving birth is expensive when you have a high deductible insurance plan, but I’m still thankful that we have health insurance and don’t have to pay everything out of pocket.

When Murphy Visits

As we’re trying to pinch pennies, pay for baby, and get to our debt-freedom, every little thing can count – for us or against us. Murphy’s Law comes along and punches you in the gut. You’ve been there, right?

Thankfully when Murphy does come knocking, we have a secret weapon – an emergency fund. But, we also have a second weapon: a DIY spirit. Some of you are probably laughing and thinking that DIY usually ends up costing you more in the long run but stick with me.

A couple weeks ago, our washer started eating things. By that, I mean really chewing things up and leaving holes. Thankfully we caught it on diaper cloths before it moved on to clothes. I was nervous that we were headed towards a costly repair or a new washing machine.

Josh started pulling the washer apart. With little internet research and some videos, he had the agitator out and was ready to replace the whole thing at the cost of about $70. A little most research brought him to the point of getting the agitator apart to find that the real culprit were these tiny little things called agitator dogs. The cost to replace those little “dogs”? Less than $5 for the part.

Of course this all happen over a weekend. Thanks Murphy. But, come Monday, Josh picked up the part from a local repair shop and had the washer back together in just a few minutes.

My point? If you’re on the road to debt-freedom, every penny counts. I recommend that you do the following:

• Have an emergency fund. It scares Murphy.
• Before jumping on costly repairs or replacements, do your research.
• Try DIY. If you don’t have the skills you probably have a friend who does and would trade services with you.

Get creative. Don’t let Murphy take you down or eat your clothes.

Got a “Murphy” story from your road to debt-freedom? Share it in the comments!

It’s been a wild and crazy year at The Pelsers. If you haven’t been following along, we’ve been able to accomplish the following on our road to debt-freedom in 2012:

• Pay off Josh’s student loan.
• Put $4,000 towards our HELOC.

Our current financial goal is to save enough money to pay for all of the medical expenses for our new baby coming in April. The downside of a high deductible insurance plan is needing to come up with so much money out of pocket when you need medical care. We need $4,000 before the baby comes. I’m excited to report that we are now half way to our goal!

I don’t share our road to debt-freedom and our goals to make you feel bad or to boast about what we’ve done. This story isn’t about what we’ve done. It’s all about what God has done this year. We’ve just listened and tried to be faithful. We’ve immediately allocated any extra money towards our financial goals. Anything that came in outside of Josh’s regular paychecks – like bonuses and my freelance income have all been put straight towards our debt-freedom goals. And the thanks goes straight to God for providing these extra income streams!

Want to get on the road to debt-freedom in 2013? Here are some tools that we recommend to get you started. Yes, they will cost you some time and money, but you have to make a personal investment in becoming debt-free in order to get on the road and stay on the road.

• Dave Ramsey’s Financial Peace (several package options; we did the online version) – This will help you get your priorities in line.
• YNAB Budgeting Software - This will help you get a hold of the day to day and budget well. I wrote more about how we use YNAB in my technology series this past summer.

We’re praying for an anticipating for even more exciting things to happen in 2013! What are your financial goals for 2013?