While discussing how I maxed out my Roth IRA last month, I revealed that I took a chunk out of our savings account in order to do so. We borrowed from ourselves with the intention of paying the amount back as soon as possible.
The last few months have been tight for us because we have been drowning in my husband’s union initiation payments every two weeks. It is seven months worth of bills if we do it this way and it’s amazing how much of a dent it can make to our cash flow. As it stands, ten percent of my husband’s paycheck goes to his agent, another ten to our church and now roughly five percent to an ongoing payment. This is twenty-five percent of our take home pay gone before we touch it and that’s not even including taxes! That being said, we still went on a vacation and paid if off in full a few days after returning (we put a lot of it on a credit card for points), so we are making it work.
The point is, it is very tempting to take a couple grand out of savings and pay this extra expense down in one lump sum. In fact, we’ve discussed doing just that but with one of my paychecks rather than from savings. Is this the best approach? I don’t know and that’s why I’m still on the fence about it. On the one hand, I think slowly paying it off is wise because it means being tighter than usual with our money for the time being. We can do that, we’ve been doing that. But it’s not fun. On the other hand, making the payment disappear so we aren’t having to live this way through July is extremely tempting. What I do know is that if we took the amount out of savings, we’d be making a mistake.
So, how do you know when it is okay to pull from savings? I think this answer is different for everyone, but I know for us, there are very few things that we agree are okay. It’s good to ask yourself some questions when considering whether or not to take the plunge. Is this a necessity? Am I being impulsive? Can I pay this amount back in a reasonable amount of time?
If you have an emergency fund, any last minute surprises or expensive car fixes, emergency room visits, etc would ideally come out of there only if your checking account can’t cover it. All the advice I’ve read about emergency funds say that you (and your spouse if you have one) should decide what the list of reasons you can pull from it are and do not stray from that. It should be no different here. And honestly, if you have a savings goal in mind for the account, the reasons should be extremely limited.
With our major savings, there have only been two reasons we have ever pulled from it and hopefully those will remain the only two. The first being the aforementioned retirement contribution, which to me was a no brainer. Anyone will tell you that the compound interest I will earn off of that $5500 will be so much greater than the meager interest my savings pays in the few months the money is missing from the account. I’ve already set up a system so that I do not borrow from ourselves like that again next year, so in the future we are looking at one, yes one reason left to do so.
For my husband’s job he has to fly to Nashville four times a year and his company pays for the flight, hotel, rental car, etc. When he first scored the new job, we were on the East Coast and had to leave our family vacation early in order for him to make it to a retreat in LA. The company paid for us to change our flight and even had a fancy town car pick us up at the airport with one of those guys who holds a sign up. He actually escorted us to the car and then was gone forever and we had a DIFFERENT person drive us. Two guys were hired to ensure we got picked up okay? “Is this real life? Let me just sip my fancy water and read a magazine while Jacques takes me home!” It was pretty cool. But, reality soon set in and that’s not exactly how it has gone since. Now we have to front the money for his flight unless he flies American Airlines. There’s certainly nothing wrong with AA, but we frequent a different airline, so we choose to book with them instead. And because we don’t want to feel this hit in our checking, we take it out of our savings and put it back when we get the reimbursement. It’s borrowing, but it’s earning us free points in the long run and affords us much of the traveling we are able to do.
The only other reason I could conceive we may borrow from ourselves in the future is if we move. That is the ongoing discussion in our life at the moment. We live in a beautiful apartment that has served us well, but when we expand our household, it may be nice to live in a neighborhood that is a little quieter and has more space. Rent is not cheap in LA, so that could mean double rent payments for the transition month and a sizable deposit on a new spot.
We all have different standards for what is okay in borrowing from yourself and what isn’t. I certainly wouldn’t begrudge someone who takes out of savings for different reasons that I do, but I insist that it’s wise to be very thoughtful and strategic about. I also think its important to refer to it as a loan and be diligent about putting the amount back. Otherwise, you’re not really saving, you’re just dwindling the account down to less than you started with. What are your rules for pulling from savings? Do you take out more than you put in? How can you begin to change that today?