A couple of days ago, the Sow a Dime & Reap a Dollar household encountered a situation that reinforced the importance of having a financial Plan B. Thankfully, we had a backup plan ready and deployed it quickly; however, I wondered what could have happened had we not had Plan B on standby. First, let me provide some context about how we got into Plan A—our primary spending routine—in the first place.
Our daily spending currently flows through three different accounts:
- Fidelity VISA – We put as much spending as possible on this card. It’s a rewards credit card that gives a flat 2% of all spending back to us with no restrictions or blackout dates. We use the reward points to purchase gift cards to offset future spending. The card balance is paid in full every month with cash from our checking account.
- Amazon VISA – We put all Amazon.com spending on this card because it gives 5% back. And as a family, we do quite a bit of spending on Amazon.com! The card balance is paid in full every month with cash from our checking account.
- Checking account – The remainder of household spending goes through this account. We’ve pared back the amount of spending that flows through the checking account over the years to only what cannot be put on a credit card—mostly things like the mortgage payment, utility bills, certain insurance payments, etc. We intentionally keep the balance in our checking account as low as possible so we’re able to put the excess cash into interest-bearing accounts or other investments to earn better returns.
So—why did we recently have to deploy Plan B? Well, our primary credit card was compromised, meaning the card facilitating 80% of normal spending was no longer in commission. Now what?! The good news is we had a Plan B—a backup mode to spend without impacting normal cash flow. After I called the issuer of our primary credit card and deactivated the card, we simply pivoted our spending onto our “backup” credit card (#2 in the list above). This meant we didn’t have to dip into our checking account or any of our savings or retirement accounts to fund the temporary excursion from normal spending. What a blessing!
While it required some additional administrative time calling the primary credit card issuer, logging a fraud case, confirming recent, legitimate transactions, closing the existing credit card, and requesting another set of cards be mailed to our home, my mind couldn’t help but wander—what would have happened had we not put Plan B into place?
And from the recesses of my memory, this situation brought me back to when I first became a homeowner at the age of 23. In those days, I was young and immature when it came to personal finance; I didn’t know much about it and didn’t care to learn much about it either! While I already had a car payment that was more than I could afford given my salary, I decided that buying a house was the best choice. After closing on the home loan, I misunderstood the draft date of the first mortgage payment. Unfortunately, it fell on the 1st of the month, not the 15th as I’d previously understood from the mortgage company. When that happened, my car payment, which was due on the 5th, was withdrawn after the first mortgage payment but before the next paycheck was to be deposited on the 15th. As you might have guessed, this overdrew my checking account. Although that’s never a good thing, it became more complicated because I was out of town for a few weeks traveling with my job. I didn’t stumble across my negative bank balance until several days after it occurred because I didn’t check my accounts daily back then—shame on me! After groveling with the bank via phone, they ultimately waived the overdraft fees and agreed to cover the shortfall as I’d had a clean cash flow history. In all honesty, I deserved to pay the overdraft fee, as well as live with the consequences of a negative checking account balance, but it taught me a lesson I never forgot—even to this day.
That experience happened over twelve years ago, and I still remember it like it was yesterday, right down to the moment when I opened my online banking and saw the negative checking account balance while I was in Waukesha, Wisconsin (many miles from home).
Now—flash forward to the present. If our household not been proactive enough to put Plan B in the works, we would have likely over-drafted our checking account, paid the expensive overdraft fee, put ourselves in a potentially precarious financial situation, and had to solve our way out of it.
But please don’t misunderstand—this isn’t applicable only to routine spending—it’s applicable to anything in your personal finances. If there’s a risk, you should put a Plan B in place, just in case Plan A goes haywire. There may not be a high probability the event that triggers Plan B will happen, but if it does, you will certainly be thankful you had the foresight to plan ahead.
As with most things in your personal financial landscape, plan ahead instead of planning behind. Allow time to think through what could go wrong instead of hoping it won’t. This could make the difference between sinking and swimming! In the words of Sun Tzu, writer, philosopher, Chinese military general and strategist, an excerpt from The Art of War: “The wise warrior avoids the battle.” Thus, avoid the battle of being reactive instead of proactive—it will reward you in ways you can’t imagine!