Emergency savings

Hi,
Many financial experts recommend that one sets aside an emergency savings in the range of 3 to 6 months of living expenses. Some recommend 12 months if you have more unsteady income sources.

I agree with this. The only thing is that I think you need to pay down the majority of your debt (consumer debt) first. I was the type that I set it up as a goal, but it took a looooooooooong time to actually start building up this kind of emergency fund. My target is 6 months of living exepenses. I mange these funds in two ways:

a) Half the money I have for emergency funds, I put into "I" Bond savings bonds. I bought paper bonds so that it makes it very difficult to cash out (vs. an on-line transaction). You can still order paper bonds at your local bank (I did through Wells Fargo). Or, you can do it online but it makes it too easy to sell :-). This also enables me to defer taxes on these bonds.

b) The other half of my emergency savings, I use to buy "play" stocks. I am killing two birds with one stone here. For the majority of my investments, I am highly diversified in low-cost mutual funds (60% stocks, 40% bonds, across multiple asset groups and styles). However, like many people, I still get the "itch" to buy small amounts of stock for crazy ideas. I set aside a brokerage account the only has "emergency savings". I use these funds to buy a little bit of a few different stocks. I do not pursue *highly* speculative stocks for the majority of these.

This approach can help you meet multiple objectives. To have a financial fortress, you need an emergency fund to see you through tough spots and times that you just don't expect. However, rather than letting all the money be idle, I think it is fine to invest part of it (I use it to get this playing out of my system and not distrub my overall investment strategy).

Autodeposits with your paycheck...

I just found something cool. I can easily manage where my paycheck money is deposited. My company uses one of the largest payroll processing providers. As a result, there is a website where I can log-in and manage my deductions and deposit accounts.

I used to have my paycheck come in as a lump amount. Then, I would send off a bunch of recurring transfers from my bank (to fund my savings goal accounts). I do this with the idea that, "out of sight, out of mind". Allocate your savings goals and literally transfer money out of your checking account.

However, it was a pain because sometimes I might be running on low funds in my checking. That means my transfers had to be timed perfectly with the paycheck. Now, I don't worry about it. I can set up multiple deposits from my paycheck to fund things like a Tax savings account, holiday account, emergency funds and vacation savings.

This is easier than firing off and timing a bunch of tranfers. Plus. My savings accounts are free from my bank and act as temporary holding bins as I periodically sweep these funds into a Money Market and then track the money with savings goal accounts.

This works for me and helps me ensure I always am paying myself first and saving for my objectives.

An Easy Tool to Start Saving With Quicken: Savings Goal Accounts

Saving can be made easy. I use a concept Quicken calls Savings Goals accounts.

Basically, these are "virtual accounts" that are not real bank accounts. However, you can save money into these accounts and it makes it look like the money is not really in your bank account any more. In Quicken, check out a feature called a "Savings Goal Account". (go to the "Planning" menu and look for the entry "Savings Goals").

Savings goals are virtual accounts that let you track specific goals, without having to have multiple accounts. I use lots of savings goal accounts. The nice thing is that it creates virtual transfers in your checking account (so your balance looks lower to reflect the money you moved to the savings goal account). However, if you ever want, you can easily have Quicken show you the real balance in the account. To withdraw the money, you simply to a virtual transfer back to the fund. A Savings goal account can also hold funds from multiple real accounts (e.g., from bank accounts, money market accounts, etc.).

Here are the savings goals accounts I have:
(I number and label these so they are ordered and easy to ID)
"2Goal-EmergencyFund"
"3Goal-MiscBigExpense"
"4Goal-PropertyTax"
"5Goal-VacationFund"
"6Goal-ChristmasFund"
"7Goal-NewCar"

Then, I transfer money into these through the year. This lets me "smooth" my spending as I talked about in earlier posts. For example, if I want to spend $1,200 on Christmas (including gifts, travel, holiday treats, dinners etc.), then I know I had better saving $100 a month through the year. If I don't save $100 a month through the year, then I am going to have a credit-card shock come January. Unfortunately, too many people get into this loop. This is about getting ahead of the curve.

Let's look at two people: Spendy Sam and Thrifty Tom. Spendy Sam, who neglected to plan for the holiday spends freely over the month of December. Sam figures, "I will just buy everything on my card and pay it off by next year". He has a blast and spends the holiday season having fun and having a ball shopping, going to dinners with his friends and going on a special holiday skiing trip. January rolls around. The toys are broken, food is eaten, parties are over. Sam doesn't have much to show for last December except for a lot of good memories, and a $1,102 credit card bill. Nevertheless, he vows to pay it off by December. Let's say that his interest rate on the card is 16%. Sam is going to need to send $100 to the credit card company every month. He does so, and at the end of the next December, his balance is back to zero. However, he had to pay interest every month to the card company. In the end, he spent a $97.85 in interest payments. Tom had to pay $1200 over the year but only got $1,102 worth of value for that money. Furthermore, it is the holiday again and Sam doesn't have any money saved as he was spending all his extra cash paying off last year's credit card bill. "The holidays only come around once a year and I have to live life!", Sam says, pulling out his credit card again the next year to treat his friends to holiday gifts from Macys.

Now, let's look at Thrifty Tom. Tom knows in January that next holiday season will be here soon. He starts saving $100 a month in the local money market account. He is getting an interest rate of 4.5%. At the end of the year, when it is time for the holidays, Tom has $1,225.06 in his account from interest payments. He goes into the holiday knowing exactly how much he can spend. Unlike Spendy Sam, Tom knows he has to allocate a certain amount to gifts, then dinners out and special occasions. For Spendy Sam, "The Sky's the Limit" as he has a credit card and will always "be able to pay it off later.".

Both Thrifty Tom and Spendy Sam spend the same amount paying their holiday bills ($1,200 over the course of a year).

Spendy Sam:
Amount Spent Paying off Card: $1,200
Amount of "value" received, spent during the holiday: $1,102

Thrifty Tom:
Amount spent saving during the year: $1,200
Amount of "value" received spent during the holiday: $1,225

Thrifty Tom had a budget that was 11% higher than Sam's for holiday spending. 11%!!!!!!! How many of you would love to get an 11% raise? Of course, everyone would. Well, the truth is that you can give yourself the raise if you start spending wisely and saving for goals rather than living in a world of instant gratification and "pay if off later". I have found that Savings Goals accounts go a long way to enabling this reality. The key is to break the cycle and get ahead of spending. Both Spendy Sam and Thrifty Tom enjoy the holidays. They don't hold back and they are not penny-pinchers. Thrift Tom just happens to send $100 to his bank account every month while Spendy Sam happens to send the same $100 amount to his credit card company every month. Thrifty Tom is far ahead.

Get ahead of the curve and get control of your life. It really isn't too hard to do this once you put the right automation tools in place and you have the right discipline. Also, when you start doing this, you learn how to do it in many other areas in your life. Saving for your goals will enable you to build wealth quickly and will help you avoid debt and build financial discipline.

Start saving sooner...

The key to saving money it to start now! Everyone says that they have too many bills to pay and that it is impossible. Then, they feel like the amount they might be able to save isn't significant so it doesn't warrant trying. This is incorrect!!!

The key is to make it a habit to save. Some of the best advice out there is to, "Pay yourself first". This is really well illustrated in the book, The Richest Man in Babylon. The idea is that too many people make paying others a priority. Pay the credit card company, pay the bills, pay for groceries, then at the end of the day, there isn't anything left over. The way to get around this is to pay yourself first; put some amount of money away before you hit the bills and spend the rest.

You will be surprised at how quickly it grows. You will also be surprised in that you probably wont miss the money. Set up anything, $25/month, $50/month or $100/month or more. You wont miss it and it will be the beginning of something that you can grow.

I was once advising a person who had just started their career. They were telling me that contributing to a 401k was too much money out of their take-home pay. I got them to try just 1%. They came back later and told me they didn't even notice the change. Over the months, they slowly grew this amount. This is why I advise you to just start small and grow into saving larger amounts of money.

Saving money is a key element in building your financial fortress. Start exercising this saving muscle now so that you can continue to grow it in the future.

Generating income: sell your junk!

I made a New Year's resolution to decrease clutter in my life. As part of following through on this, I am selling through eBay. eBay is great way to sell. Shipping can sometimes be the part that takes a bit. Here is my tip to you. Focus first on selling things that you can send via priority mail.
a) the post-office provides free mailing envelopes for priority mailing (saves a lot of packaging and it is very easy to just use these)
b) Paypal lets you print postage from home.

This makes it VERY easy to sell materials that fit in the standard sizes of packages you get from the post office.

So, focus on selling your clutter and investing the money in your financial future.