30-Second Financial Gut Check
August 26, 2009 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
If you’re like many Americans right now, you’re worried about your finances. Even if nothing has particularly changed for you in the past year – perhaps you still have the same job, same mortgage payment, same retirement accounts – you likely now have a gnawing sense of insecurity about what the future holds. And if something has changed for you – like loss of a job, a pay-cut, increased credit card interest rates, or a looming foreclosure – your worry level may be magnified by a factor 10 or more. Even though we’ve had a nice run in the stock market over the past 5 months and there is some encouraging economic data in the news, that sense of confidence that many felt just a year ago is nowhere to be found.
So, is your worry justified? I’m going to give you 5 quick questions to answer. It’s the 30-second financial gut check. If the gut check reveals that you have reason to worry, you can take the anxiety and use it to motivate yourself to take action. On the other hand, if it shows that you’re really doing ok, then you can use this gut check to start getting your confidence back.
- Are you spending less than you earn?
- Do you have an emergency fund equal to at least 3 months’ fixed expenses (6 months if you’re a highly compensated employee or in a volatile industry)?
- Do you regularly save for retirement or any other goals at the levels needed to fund them?
- Do you have zero debt or is your debt level going down?
- Have you taken steps to manage financial risks – either by avoiding the risk, saving the funds to cover the cost of potential losses, or purchasing insurance?
If you can answer yes to all of these 5 questions, you have great reason to start feeling more confident. You are taking the basic steps necessary to create a solid financial future. Great job! Now it’s time to focus on the next steps which are making sure your investments are working hard for you, that you’re not paying too much for products and services, that you’re optimizing tax-efficiency, and that your estate plan is in order.
If you can answer yes to 3 or 4 of them, you still have good reason to feel confident. Depending on the severity of the 1 or 2 issues that you said no to, you may be really close to mastering the financial basics. The key for you is to address the 1 or 2 issues as soon as possible.
If you answered no to 3 or more of the questions, it may be time to let your sense of anxiety be a motivator for you. There are some life transitions – for example, when you’re starting a new business, in career transition, or adjusting to the loss of a family member – that you may answer no to every single question. If the situation is temporary, especially if you’ve prepared the financial reserves to weather it, there’s no cause for concern. It’s when these situations extend themselves over years and become accepted as the status quo that alarm bells need to go off.
If you answered no to 3 or more questions and your situation is not temporary or prepared for, you have multiple warning signals that your financial situation is precarious. It’s time to take immediate steps to increase your income levels and/or reduce your expenses. You need to develop a plan to bring your financial life into balance. Many financially successful people have been in this situation and through creativity and hard work gotten themselves on the right track. It is attainable by coming up with a plan, making tough choices, and then working your plan. Good luck!
10 Tools to Build an Emergency Fund
June 22, 2009 by Jean Keener, CFP, CRPC, CFDS · 4 Comments
So, you know you need an emergency fund. You’ve been trying to build one, but just can’t seem to get there.
The percentage of people living paycheck to paycheck ranges depending on who’s surveying from 47% (Careerbuilder 2008 survey) to 71% (American Payroll Association 2008 survey). This issue isn’t unique to any particular income level — the Careerbuilder survey also shows 21% of Americans with $100K+ incomes living paycheck to paycheck. Whatever the actual percentage is, if you’re one of the people in the paycheck-to-paycheck boat, you know how challenging it can feel to change the situation.
If you’re determined to make this change, you have to do more than nickel and dime your emergency fund. More than the popular “save the change” program on your credit card (nothing wrong with this, it’s just not enough). The small things do add up, but it’s very slow and doesn’t really give you that sense of accomplishment most of us need to continue.
First, set a goal.
Ideally, you’d have 6 months’ of living expenses in an emergency fund. But for a true paycheck-to-paychecker, thinking about the ideal makes you laugh. So start with $1,000. Then when you get that, you can change your goal to one month’s expenses. Then three, etc.
Second, set a timetable.
Don’t give yourself a lot of time to save $1,000. You want a sense of urgency to achieve your first milestone. I’m not going to get specific here because depending on your income level, it might be reasonable to do it in one month or three months. But I wouldn’t suggest more than six months for anyone.
Third, pick 3 things on this list that you can do today.
1. Set up an automatic transfer from checking to savings on payday. Enough to be a little painful initially, but not so much that you can’t stick with it.
2. Take a one-month spending vacation. Don’t starve yourself or skip doctor’s appointments if you’re sick, but don’t buy anything that’s not absolutely necessary. Put everything you have left over in your emergency fund.
3. Have a garage sale (or sell your stuff on Craigslist, eBay, etc.). Some people can generate the $1,000 from this alone.
4. Use 3 paycheck or 5 paycheck months. If you get paid every other week, then there are 2 months a year when you have a 3rd paycheck. If you get paid every week, you have 1 month every 3 months with a 5th paycheck. Most people just kind of absorb this extra paycheck into their spending. Instead, make sure you’re living strictly on your regular number of paychecks each month, identify the months where you’ll receive an extra one, and put that money directly into your emergency fund on payday.
5. If you get a bonus, over-time, or extra commission, put it in your emergency fund.
6. If you get a raise, calculate how much extra you get on your first check after the raise, and increase your automatic transfer to your emergency fund by that amount. Don’t increase your spending.
7. Get a part-time job or start a small business (one without a lot of overhead) and save everything you earn from it.
8. Write down all of your expenses for an entire month. Pick at least two to eliminate or reduce.
9. If you’re part of the 21% of people earning more than $100K living paycheck to paycheck, when you max out on social security ($106,800 limit this year) and your paycheck goes up, put the extra money in the bank instead of spending it.
10. If the above aren’t enough to get you there, consider big changes like a less expensive car or place to live.
Fourth, write it down and show it to someone.
I will save $_______ by ______ (this date) by doing items 1)______________, 2)__________, and 3)____________. Your chances of success increase exponentially when you write your goals down and share them. Good luck!
April 2009 Newsletter
April 6, 2009 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
The April 2009 newsletter is now available online. It includes an update on market conditions, plus information on the Cobra subsidy, writing off worthless securities on your taxes, an estate planning pitfall to avoid, a conversation for parents about saving for retirement vs. college, and a how-to on budgeting. Click here to read the newsletter.