Quoted on BankRate about Roth IRAs and emergency funds
April 30, 2010 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
When you’re juggling creating an emergency fund and saving for retirement, it’s important to be aware of your options. BankRate.com reporter Teri Cettina recently interviewed me about using a Roth IRA as a back-up to your primary emergency fund. A Roth IRA should not be your primary emergency fund, but it can provide a useful supplement that can help you work toward both retirement and emergency fund goals simultaneously. You need to understand the pros and cons of the strategy and make sure it really makes sense for you. Also be aware that Roth contributions are not treated the same as funds converted to a Roth. You can see Teri’s full article on BankRate.com.
July 2009 Newsletter
July 1, 2009 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
The July 2009 newsletter is now available online. It reviews some blog information on FDIC insurance limits, establishing an emergency fund, and down market estate planning opportunities. It also covers new information on whether or not you should refinance your mortgage and considerations in diversifying your investments. Click here to read it.
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!
Emergency Fund
November 2, 2008 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
In times of crisis, you don’t want to be shaking pennies out of a piggy bank. Having a financial safety net in place can ensure that you’re protected when a financial emergency arises. One way to accomplish this is by setting up a cash reserve, a pool of readily available funds that can help you meet emergency or highly urgent short-term needs.
How much is enough?
You need to have three to six months’ worth of living expenses in your cash reserve. The actual amount, however, should be based on your particular circumstances. Do you have a mortgage? Do you have short-term and long-term disability protection? Are you paying for your child’s orthodontics? Are you making car payments? Other factors you need to consider include your job security, health, and income. The bottom line: Without an emergency fund, a period of crisis (e.g., unemployment, disability) could be financially devastating.
Building your cash reserve
If you haven’t established a cash reserve, or if the one you have is inadequate, you can take several steps to eliminate the shortfall:
- Save aggressively: If available, use payroll deduction at work; budget your savings as part of regular household expenses
- Reduce your discretionary spending (e.g., eating out, movies, lottery tickets)
- Use current or liquid assets (those that are cash or are convertible to cash within a year, such as a short-term certificate of deposit)
- Use earnings from other investments (e.g.,stocks, bonds, or mutual funds)
A final note: Your credit line can be a secondary source of funds in a time of crisis. Borrowed money, however, has to be paid back (often at high interest rates). As a result, you shouldn’t consider lenders as a primary source for your cash reserve.
Where to keep your cash reserve
You’ll want to make sure that your cash reserve is readily available when you need it. However, an FDIC-insured, low-interest savings account isn’t your only option. There are several excellent alternatives, each with unique advantages. For example, money market accounts and short-term CDs typically offer higher interest rates than savings accounts, with little (if any) increased risk.
Don’t confuse a money market mutual fund with a money market deposit account. An investment in a money market mutual fund is not insured or guaranteed by the FDIC. Although the mutual fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the fund. However, as of September 29, 2008, a money market fund may have backing from the U.S. Treasury if it has chosen to participate in the Treasury’s temporary guarantee program. For a participating fund, the Treasury will guarantee the $1 per share value of a fund if its net asset value (NAV) drops below a certain level. You can contact your fund to find out whether it has the Treasury guarantee. Also, a fund may have arranged for private insurance, though that protection may be subject to the claims-paying ability of the insurer.
Note: When considering a money market mutual fund, be sure to obtain and read the fund’s prospectus, which is available from the fund or your financial advisor, and outlines the fund’s investment objectives, risks, fees, expenses. Carefully consider those factors before investing.
It’s important to note that certain fixed-term investment vehicles (i.e., those that pledge to return your principal plus interest on a given date), such as CDs, impose a significant penalty for early withdrawals. So, if you’re going to use fixed-term investments as part of your cash reserve, you’ll want to be sure to ladder (stagger) their maturity dates over a short period of time (e.g., two to five months). This will ensure the availability of funds, without penalty, to meet sudden financial needs.
Review your cash reserve periodically
Your personal and financial circumstances change often–a new child comes along, an aging parent becomes more dependent, or a larger home brings increased expenses. Because your cash reserve is the first line of protection against financial devastation, you should review it annually to make sure that it fits your current needs.