Have you ever paid off a loan really quickly using all of your savings, only to charge a credit card again to pay for some unexpected expense? Do you feel guilty when you have to dip into your savings?
In this episode, Cash Flow Expert Chris Miles shares some quick nuggets that will help you have greater peace of mind and enable you to pay off your debt safely and effectively.
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The Rubber Band Effect
I’m excited to have you on our show. Reminding you to check out our website at MoneyRipples.com. Check out the blogs, we’ve got podcasts and events coming up. We’ve got all kinds of fun stuff coming. We had an event where we had one of our clients who we’ve had for two years. He said that the last event he came to made him an extra, either through earnings or through savings, an extra $90,000 from the one event he went to. It’s an exciting time. It’s more than we did when we were coaching. That was pretty awesome. Anyways, be sure to check those things out. We’ve got lots of great information on our site there for you.
I want to talk about a subject that often comes up but I haven’t mentioned a lot on the show. I want to mention a concept that I referred to as The Rubber Band Effect. The Rubber Band Effect is this. Have you ever been in a place where you’ve spent a lot of extra money to pay off a loan? You’d probably sacrifice a lot to pay off that loan fast. You use up all your cash to do so, and then something magically unexpected happens, and you don’t have the money to pay for it, so you ended up running a credit card back up again.
You pay off that loan fast, use all your cash only to find out that something unexpected happens, and you’ve got to pay it again. That’s what I mean by The Rubber Band Effect. You pay it off and then you charge it up. You pay it off, you charge it up. Not because you were a spender, it’s nothing like that. Even as a saver, it seems like clockwork. Every time I’ve done this and every time I’ve had clients do this, they try to aggressively pay off a loan and use every single dollar they have to pay off that loan. Something comes up to where they end up having to charge up a credit card again.
That’s something we don’t want to do. We don’t want to put you in a cash crunch. I see that happen all the stinking time more often than you want than you care to admit. This is something we want to avoid. I want to talk about how to avoid that and how to do it in the right order. There’s more abundance and more peace of mind and more freedom that happens as a result of this. The last thing you want is you run up the card and feel guilty about it.
I’ll get people all the time, especially from that saver mindset, they’ll say, “I feel so bad. I was paying this off. I did a good job, then I ran it back up again. I ran that credit card back up a little bit. I’m feeling horrible about my progress. I’m not doing as well as they should be.” First of all, if you’re saying should a lot, it means you have expectations that may or may not be realistic. Secondly, if you’re running into the situation, it’s probably because you were trying to do it too fast. You were trying to run before you could walk, so to speak.
One thing you do to avoid this is you can make sure you’re building up at least half a month to a full month’s worth of cash reserves, not $1,000. Like somebody mentioned with their baby steps, they say, “Have $1,000 then get aggressive and pay off your loans.” That’s not enough. It’s not enough to be able to be aggressively pay off your loans. You need to build up that savings, build it up to at least half a month to a full month of expenses, then start aggressively paying those things off.
For example, if your expenses are $5,000 a month, you would want to have at least $2,500 to $5,000 in your savings, and that’s on top of whatever you would use to pay off those loans. If you do have to run in that situation where there is an emergency or something happens unexpectedly, something breaks down like an appliance or a car or something like that, you want to make sure you still have money there available that you wouldn’t try to have to go and charge up a card for.
It might feel like you’re going slower but in reality, you’re doing it faster. I’ve had a lot of clients that will tell me I’m crazy for telling them to do this. They’ll say, “Chris, I don’t think I want to pay off this credit card.” I’ll say, “No, trust me. Build the savings first. Have a little extra in savings first before you use it all to pay off her loans. Do not use all of your savings account for your loans.”
It’s funny, it might be a few months down the road and they’ll come back and say, “Chris, I now get it. I understand what you’re trying to teach me. We paid off a credit card. Lo and behold, something broke down and we needed that cash. Luckily, the cash was in savings so we didn’t have to panic. We didn’t have to worry.” I said, “That’s the point.”
I had another client, the same thing. She had more than enough money to pay off her credit card but I told her not to. I said, “No, let’s keep this money in savings but let’s take some extra money, the extra money you have every month and use that to start paying it down, but do not pay it off yet.” She thought I was crazy. As time passed and within a few months later, they ended up having a medical emergency that took up all of their deductible and some. It was going to cost them in the ballpark of about $10,000 to $12,000 in medical bills.
What happened is because we kept that $10,000 in savings, she was able to breathe. She and her husband were able to breathe and relax a little bit. They were able to still continue to build savings while they were trying to pay off some of those medical expenses. After the year is up, after they paid all their medical expenses and they got back on their feet again, not only were they able to pay off their credit card, but they also had more in savings than they initially started with.
That’s what we want to try to do. We want to try to avoid creating stress and creating that panic that happens when you try to pay things off too quickly. He paid it off too quickly. When it happens, you’re going to end up needing the money and wishing you had it back. Banks aren’t very nice about giving money back to you, are they? That’s why he ended up having to go and charge up a credit card. We want to avoid that. We want to avoid that at all costs. You make sure that you keep the money that you have because it always comes back to that peace of mind.
I want to come back to that guilt feeling because many people do feel guilty about using savings in case that emergency comes up. Let me talk about emergency savings for a bit. I think it’s funny when people, especially those in the saver mentality, will feel so horrible that they have to use some money in savings. I want to remind you that there’s a true principle here that you need to follow, that money is meant to be used.
I know from a saver perspective, especially when you’ve been taught from scarcity like many people have been, like we all have been. It’s funny that we think that using our emergency savings is a bad thing. Some people believe it’s supposed to sit there in case of a rainy day but they never want it to rain. It’s very possible that it’s going to rain at some point.
A great place to be is when you don't need every person to do business with you. You can stand in power to say, “I've got money to pay my bills, even if just for a couple of weeks.” Click To TweetBe grateful that you have that emergency savings, that buffer that allows you to be able to breathe. It allows you to be able to think straight and not frantically be trying to figure out how to pay for bills and things like that. We want to have that emergency reserve. If you end up having to use it because you have a bad month or a down month for one month, fine, don’t worry about that. That’s okay. That’s what it’s supposed to be used for. Don’t panic. Don’t get scared. It’s part of it. You’re using the purpose of that account.
If you deplete it, we want to make sure we do everything we can to start building it back up, but don’t panic and don’t worry about using that money because it’s there for that very purpose. That gives you that peace of mind. What happens is if you lose that peace of mind, if you don’t have that money there, what I’ve seen happen, and this is especially true of those of you in business. If you don’t have that money there, you start to get desperate. You start to feel like you need the money right away.
What happens is that when you do that, you start to feel frantic. You don’t think straight. You start repelling people. You become too desperate for money, and people feel it whether they know it or not. They feel it. You’ll find yourself working harder for less money. They will be working more hours. You’ll be trying to do everything possible to try and make money, but it’s not going to come to you as easily as it does when you don’t feel like you don’t need the money.
If you think about it this way, we have your cash reserves. It is abundance insurance. It’s protecting your mindset, and keeping yourself in a frame of abundance to know that you don’t need that person’s business in that very moment. You want to help them. You want to be able to do everything possible that way, but you don’t need the money, and that’s a great place to be is when you don’t need every person to do business with you. That one person, you don’t need to do business. When you can stand in power to say, “I’ve got money to pay my bills even if it’s for a couple of weeks,” that’s good. That’s okay. That’s perfect.
Even if that person says no, you can always move to the next person that says yes. When you’re thinking about this, with the whole Rubber Band Effect here is that the cash reserves are very important foundation to have, even more important than paying off your loans. Don’t think that paying off your loans is the key to financial freedom because I would much rather have $100,000 of loans with $100,000 in savings than $0 of loans and $0 of savings. There’s something different.
If you knew that the $100,000 savings you’re paying $1,500 a month on, to say that for example, you could pay $1,500 a month for a long time if you have $100,000 of savings. However, you have no loans and no savings. You still have to pay for expenses on a normal basis. You don’t have that money. If you’re in a tight spot, you’re not going to last as long as someone with savings, with minimum payments on their loans.
That’s the point is that we want to make sure you’re in a place where you’re going to be safe. That you’re going to feel secure. Even if unexpected things come up and they will come up, you know that you’re protected. You know that you’ve got the money there to keep you going, to keep yourself in an abundant frame of mind so you can solve problems more easily and not get emotionally worked up to the point where you end up being desperate. That’s the key. That’s where there’s power and that’s where there’s freedom.
To avoid that Rubber Band Effect, remember to build up that savings to at least 2 weeks to 4 weeks, about a half a month to a full month. Build that up, then the money in addition to that is what you use to go to pay on your loans. Do not use all of your savings to pay off your loans. It’s very risky and can jeopardize your peace of mind and your freedom. That’s your tip for the day. I know it was a short episode, but I want to make sure I give you some good nuggets to feast on.
As I said, be sure to join us in the next episode as we started going some things. In fact, I’m planning to go over what the fastest way to pay off debt, what’s a good system or good way to do that. We’re going to be talking about that in the next episode. Be sure to join us again on the show. Everybody, have a great and prosperous week.