Monday, June 20, 2016
Countdown to Financial Fitness: Why Do You Need an Emergency Fund?: "I'm putting every spare penny into my retirement fund," a young colleague once told me. "I have a home equity loan and ...
"I'm putting every spare penny into my retirement fund," a young colleague once told me. "I have a home equity loan and high limits on all my credit cards. Why do I need an emergency fund? The interest on a savings account is less than one percent."
There's nothing wrong with saving aggressively for retirement, and having good credit is important. But one major accident, natural disaster, or health crisis can wipe out a family's prosperity. Everyone should also have an emergency fund: three to six months' living expenses socked away in a low-risk, liquid investment, like a savings account or money market fund.
If you suddenly lose your job or are hit with an unexpected large bill, you don't want to have to tap that retirement account. Not only will you lose the time value of your investments, but you may have to pay a 10% tax penalty if you don't meet the age or other criteria for making withdrawals.
Credit cards are great for large purchases—if you can pay them off in full when the bill comes, or at least as quickly as possible. Otherwise, you'll be saddled with a high rate of interest and that large expense will cost you even more. And a home equity loan? Your interest rate will probably be lower than with a credit card, but don't forget: the loan is secured by your home. If the emergency is unemployment, and it takes you months and months to find another job, you could find yourself deep in debt and in danger of losing the roof over your head.
Investment products like stocks, bonds, and mutual funds are good for building wealth, but you want to be able to choose when to sell. If you're forced to liquidate one of these investments to meet an emergency expense, you may lock in losses in a down market, or face a higher tax bill due to capital gains on appreciated assets.
A savings account or a money market fund may seem like a boring investment, but the money will be there, intact, tax-free, in case of an emergency. And you should only touch it if there is an emergency.
And what constitutes an emergency? A vacation is not an emergency. Perhaps an unforeseen trip for a funeral could be considered such.
A new car is not an emergency, unless your old one was totaled in an accident or had a complete breakdown before its time.
Redecorating the house? No. Rendering your house habitable again after a disaster? Certainly.
Large expenditures such as weddings, births, graduation bashes, cruises, college tuition, landscaping, major appliance or vehicle purchases are important, but they should be planned and funded with dedicated savings. An emergency fund is reserved for expenses that arise unexpectedly. And when that happens, you'll be glad it is there.
What are your thoughts about emergency funds? I would love to hear your comments.
Monday, June 13, 2016
Countdown to Financial Fitness: Financial Lessons from my Father: My father is long gone, but the financial lessons he bestowed have never left me. As Fathers Day approaches, I reflect on those principles:...
My father is long gone, but the financial lessons he bestowed have never left me. As Fathers Day approaches, I reflect on those principles:
Get a good education so you can take care of yourself, just in case. When I was growing up, the assumption was that if a girl even went to college, the purpose was to find a good husband to support her. But my father expected me to learn how to do something that would pay me enough money to live on. My father's parents were divorced when he was young, and he watched his own mother struggle to make ends meet. Going to college was out of the question for him, so he joined the Air Force and went later, on the G.I. bill. Both my parents insisted that their children would go to college, and they saved all their married lives to make that happen.
Hang onto your silver dollars. I took up coin collecting as a child, but coins took a backseat to boys when I became a teenager. In my collection, there were 22 silver dollars from the early twentieth century. My father told me these belonged in the bank for safekeeping. Next thing I knew, my silver coins disappeared, and my father deposited $22.00 into my savings account. Soon afterward, he took over the rest of my neglected coin collection. I often ridiculed my father for depositing my silver dollars in the bank, receiving only face value. However, when he died, I inherited my coin collection back from him, and every one of my silver dollars was still there. And by then, they were worth much more than $22.00. I guess he was afraid I was going to spend them, so he hid them away.
No matter how much you have, give something back. Share. There is always someone worse off than you. There are countless charities doing good work with not enough resources. My father was active in Kiwanis and Boy Scouts, especially after retirement. I've always had a soft spot for animals, so I support many animal charities. Now that I'm retired, I devote much of my time to the Fayette Humane Society, where I serve on the all-volunteer Board of Directors. And charitable donations, as well as expenses incurred doing volunteer work for a qualified charity, are tax deductible!
How did your father shape your attitudes toward money? I would love to hear your comments.
Monday, June 6, 2016
Taking a vacation can leave a big hole in your budget if you let it. But it doesn't have to.
Many people look at a vacation as an opportunity to splurge, to take a break from frugality. Nevertheless, most of us are not above searching for the best airfare, hotel, and rental car prices when the vacation is in its planning stages.
But shopping is an important part of travel for many people; a hobby for some. When I look at many of my friends and fellow travelers, I realize why I'm able to travel a lot more on a similar budget: I rarely spend much money shopping—that potential budget buster.
It's not that I don't love strolling through markets and absorbing the local color; I just don't buy. Unless I'm staying somewhere with a kitchen and plan to cook a meal, what do I need with food purchases? Sometimes I will buy spices or packaged candy to take home for presents or personal use.
More interesting to me than the typical tourist shopping venues are the local grocery stores; I enjoy seeing what selections the residents have available, and what they pay. And grocery stores often offer better prices than the usual tourist or "duty-free" shops on popular items like vanilla, spices, coffee, alcohol, etc. I used to bring back olive oil and wine from visits to Mediterranean countries; the TSA ban on liquids over three ounces put an end to that practice. Rather than risk spillage in checked luggage, I now just pay a little more and buy these imports at home, at places like Sam's Club, Costco, or Trader Joe's.
I recently returned from a 16-day cruise, and at one of the ports, we took an excursion to the ancient city of Petra, in Jordan. No tour company can organize an excursion for tourists without the obligatory speed-shopping stop. After a 15-minute restroom break, with barely enough time to browse and figure out the exchange rate, most of my fellow travelers came back to the bus with bags bulging.
Outside the ruins, there were many more shopping opportunities. Every few feet, African vendors displayed the same wares we'd seen in three previous ports: cheap jewelry and made-in-China souvenirs depicting the location. Buyers snapped up the merchandise. I wondered how they would fit it all in their suitcases. And what would they do with it when they got it home? Sure they had kids, grandkids, and co-workers to shop for. But their gifts would probably land in the next garage sale.
I've made a rule when shopping abroad; if it doesn't meet one of these criteria, I don't buy it:
- Is it something I want or need that I can't get at home? (something unique to the location)
- Is it something I want or need that costs less than it would at home?
- Is it something I will use during my trip? (e.g., forgotten sunscreen, local food or beverage that will be consumed en route)
I also consider how easy it will be to schlep the item home, or whether it will have to be shipped, thus reducing any savings. In today's global economy, it's not unusual to find that you can order the same item online for a comparable price, from the convenience of your living room.
If you are contemplating a big-ticket purchase like artwork, furniture, a Turkish rug, or a piece of fine jewelry, do some homework before you leave for your trip. Find out how to determine you're getting the best quality, and approximately how much you should expect to pay. Don't rely on what the local salesperson tells you. If someone is pushing you too hard toward an impulse buy, there may be a good reason to balk.
Taking a vacation should be relaxing and fun. But blowing your budget is stressful.
What do you like to buy when you travel? I would love to hear your comments.