Monday, February 11, 2019

Countdown to Financial Fitness: Plan for Contingencies

Countdown to Financial Fitness: Plan for Contingencies: Going without an expected paycheck is a hardship for most people. I've seen statistics claiming that one in three Americans is one payc...

Plan for Contingencies

Going without an expected paycheck is a hardship for most people. I've seen statistics claiming that one in three Americans is one paycheck away from homelessness. After the recent government shutdown, and watching footage of furloughed government employees lined up at soup kitchens, I suspect those numbers might not be far off.

And many jobs in corporate America are not as secure as a position with the federal government. My husband and I both worked in the airline industry during the eighties, nineties, and early two thousands, when carrier after carrier went bankrupt and/or laid off thousands of employees, and those remaining took huge pay cuts and lost benefits.

As I point out in my new book, Live Well, Grow Wealth, it's important to have an emergency fund.

What is an emergency fund? At least three to six months' living expenses stashed in a low-risk, liquid investment such as a savings account or money market fund. And it's money you don't touch unless there's an emergency: a large, unanticipated, unavoidable expense. Like losing your income.

Having an emergency fund saves you from diving deeply into debt, raiding your retirement savings and thus losing irreplaceable time value you've built up, or liquidating investments at an inopportune time, forcing you to lock in losses or incur unplanned capital gains.

If you don't have an emergency fund, now is the time to start building one. Setting aside a few dollars a week shouldn't be too daunting. Round up your change. Forgo a few treats or vices. The account won't look like much at first, but leave it alone and keep adding more; pretty soon, it will grow.

A great way to kickstart an emergency fund is with a lump sum. Maybe that tax refund you're hoping for? Or if you work for the federal government, maybe you'll receive a big check for back pay. Put what you don't need to cover unpaid obligations into your emergency fund.

What if you don't have time to save? You're living paycheck to paycheck, with nothing left over. Another shutdown is looming.

If you survived the last furlough, you hopefully developed some frugal habits out of necessity, some of which could be made permanent. Analyze your expenses and divide them into Essential and Discretionary. Drop subscriptions and memberships you're not using. Defer appointments for haircuts, manicures, professional cleaning, classes that have not been prepaid. Cook at home more, and build menus around what is on sale at the grocery store. Combine errands to use less gasoline. Don't shop for new clothes, electronics, toys, etc. Consider doing some things yourself that you normally pay someone to do for you, such as yard work, house cleaning.

Keep your credit record spotless or improve your score by always paying your bills on time. Leave plenty of available credit on your accounts and keep your debt ratio low. That way, if you do have to borrow money, you'll qualify for a decent rate and won't have to resort to usurious payday loans.

In my opinion, funding the government and paying its staff shouldn't be tied to other legislation, and politicians shouldn't jeopardize workers' livelihoods when they can't agree. But I'm not in charge. You have to be prepared for anything, by reducing your expenses so you're living within your means and building an emergency fund.

Monday, January 14, 2019

Countdown to Financial Fitness: Enough Money

Countdown to Financial Fitness: Enough Money: "If only I made $80,000 a year!" one of my carpool colleagues once told me. "I'd never care what anything costs." A...

Enough Money

"If only I made $80,000 a year!" one of my carpool colleagues once told me. "I'd never care what anything costs." At the time, we were each earning around $50,000 annually so it seemed like an $80,000 salary would put someone on Easy Street.

I didn't agree. I don't think I'll ever get to a point where I don't consider how much things cost. No matter how many millions I have socked away. Why would I pay more than I have to for anything?

Pay more for better quality, certainly, or perhaps the convenience of obtaining something quicker. Who doesn't like to be pampered, especially if you can afford it? But even billionaires look for deals and freebies. Wealthy people don't pay more than they have to; that's how they stay wealthy.

And conversely, that's how lottery winners and others who suddenly come into a fortune end up losing it all. They indulge every fantasy, and they stop caring how much things cost.

Big purchases bring along big expenditures. Beyond the $200,000 price tag for that new sports car are increased costs for insurance and maintenance. And you'll have to feed it premium gasoline instead of regular. Multiple luxury homes incur multiple tax bills, and they have to be furnished and maintained. You need to hire people to take care of them. And the more square footage, the higher the utility bills.

That's why wealthy families who inherit castles and historic mansions turn them over to foundations and open them to the public, for an entrance fee. The upkeep costs would otherwise drain their estates.

Money can make you comfortable. It can make life easier. It's possible to reach a point where your money earns enough to fund your lifestyle so that you don't have to work for a paycheck. But money is still a finite resource.

My frugal attitude came from being raised by parents who lived through the Great Depression. They remembered what it was like to struggle to make ends meet, and they taught me never to waste anything—especially money.

And it makes sense. Unless a higher price tag adds value, why pay more than you have to for anything?

Wednesday, January 2, 2019

Countdown to Financial Fitness: Financial New Year's Resolutions

Countdown to Financial Fitness: Financial New Year's Resolutions: Improving one's financial situation is a popular New Year's resolution. But if you're too vague about what you mean by that, ho...

Financial New Year's Resolutions

Improving one's financial situation is a popular New Year's resolution. But if you're too vague about what you mean by that, how will you ever know when you accomplish it?

Here are some more specific, actionable pledges that might help you achieve the results you’re hoping for. You can customize and quantify them into S.M.A.R.T. (specific, measurable, attainable, realistic, time-limited) goals to meet your needs.

1.      Reduce debt. Stop using credit cards for incidentals (groceries, gasoline, dining out, utilities, etc.) if you're carrying a balance. When you carry a balance, interest accrues as soon as each new purchase is posted, making everything you buy needlessly more expensive. Try to make more than the minimum payment each month on at least one card so you can whittle away at your debt. As soon as possible, zero out at least one card and then keep it current, i.e., pay the entire balance in full, on time, every month.

2.      Increase retirement savings. If you work for a company that has a 401k or similar plan and you're not contributing, start now. If you didn't max out your contributions last year, increase them for 2019. If you have eligible income but no workplace retirement plan, or you're already contributing the maximum, start or contribute to an IRA (Individual Retirement Arrangement). Also, it's not too late to fund an IRA for 2018; you have until April 15.

3.      Establish an emergency fund. Too many Americans are one paycheck away from homelessness. To keep from sinking into debt or wiping out your retirement savings if you're hit with a large, unexpected expense, start building an emergency fund. An emergency fund should hold at least six month's living expenses in a low-risk, liquid investment. Did you get some cash for Christmas? Instead of blowing it on toys, put it into a savings account or money market fund. Budget a little each pay period—even if you can only manage five or ten dollars—to build your emergency fund. Did you vow to give up or cut down on a vice like smoking, drinking, hitting the vending machine every afternoon? Put the savings realized from modifying those habits into your emergency fund.

4.      Review investments. It's a good idea to take inventory of your holdings periodically to ensure you're still on track. If you work with a financial planner, make an appointment to discuss whether any changes are necessary to keep your asset allocation in line with your goals and tolerance for risk. Open your statements promptly and read them. Ask questions if you don't understand something.

5.      Focus savings goals. The beginning of a new year is a good time to evaluate why you're saving money in the first place. A new home? College? Retirement? A trip around the world? How close are you to reaching those goals, and what do you need to change if you're falling short? 

      What financial goals have you set for 2019? I'd love to hear your comments.

Monday, December 10, 2018