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Personal Finance

Planning for Emergency Expenditures

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Sometimes you feel like you can’t win for losin’. You just get to the point where you think you’ve got the finances under control, you figure you can finally cope, and wham! Another annoying little surprise whaps you upside the head.

Just got my first summer paycheck—about $600 net for the first week of teaching. It’s not much, but it’s one heckuva lot better than nothing.

Some time ago I estimated that I’d net about $3600 from the two sections I’m teaching this summer. Six hundred of that would go to help cover the June through August utility bills, which I expected to soar because I made the conscious decision to set the thermostat at a comfortable level now that a tiny bit of income is flowing in over the 115-degree summer. The rest, about three grand, would be folded back into the mid-term survival fund, putting off the date I’ll have to draw down retirement investments by about three months.

Things look a shade better than planned: if the $600 is for one week, as appears to be the case according to the PeopleSoft statement, then the 2½ more paychecks they’ll owe me this summer should net just about $3,000. However, thanks to the new AC unit, the June utility bill did not exceed my regular monthly budget—although it remains to be seen what will happen when the July bill comes in next month. But even one month of not having to pay astronomical power and water bills preserves some of that $600.

So. I’m thinking, wow! What to do with this vast lucre?

Could I (can you imagine?) actually spend it on something I’d like to have or do? I would so much like to take my dear and constant friends, La Maya and La Bethulia, out for a wonderful dinner on the town. But I can barely take myself out to dinner at Taco Bell, much less treat friends to a gourmet feast at the Barrio Cafe. I still need clothes. The Sanitas clogs I bought a year or so ago and wear constantly are about shot—they really need replacing. Six hundred bucks might allow me to do all three of those things!

Well. No.

Harvey the Hayward Pool Cleaner

Harvey’s still not working. That’ll be another $90 for further repairs, bringing the total cost to get him running to about half the cost of a new Hayward pool cleaner.

And then, to frost the cake, the pool system is sucking air from somewhere during its shut-down time. When it comes on after having rested overnight, great bubbles of air belch out of the inlets.

That, my friends, is what we call “not a good sign.” Very possibly…indeed, the operative term is “probably”…there’s a leak in the plumbing somewhere.

Don’t even ask how much that’s going to cost to fix. Just say good-bye to the $600, and then some.

Yes, I do have an emergency fund. As we know, each month we should put a few bucks aside for these little contingencies, and I have the credit union automatically transfer two hundred bucks a month into said fund; anything left at the end of a month also goes into that emergency account. Problem is, the contingencies have been coming hot and heavy, and every one of them has cost a helluva lot more than $200: the dental bills; the car repair; the shingles shot that wasn’t covered by Medigap or Medicare; the doctor’s visit that wasn’t covered by Medigap or Medicare; and on and on. Each cost ran significantly more than the $200 monthly deposit.

This means the emergency fund has steadily been shrinking. There’s only about $1,700 left in there. It may not be enough to cover the cost of pool repairs, if the problem is what I fear it is. That means yet another big bill will have to be paid from mid-term survival savings. Instead of extending the time I can live on the survival fund as summer pay goes into it, that pot may actually shrink because of this month’s adventures. And the extra income earned from working like an animal all summer won’t help.

{moan} Remember that 20-hour day?

Well, I have a strategy, though a half-baked one.

One of the things that’s given to crapping out when I least need yet another unplanned bill (which is just about any time, come to think of it) is Harvey the Hayward Pool Cleaner.

Leslie’s has a perennial “sale” on those things, which is to say that their regular price is about $75 less than you’d pay if you ordered it online. Tax on the retail price would be about $33, leaving one with a small saving if one bought the critter there.

I’m thinking I should buy a new pool cleaner, using survival savings for the purpose (since I’ll have to rob that fund anyway for the upcoming gouges). Then go ahead and get Harvey fixed, too. This would give me two of these gadgets that function.

So, if one of them dies at a moment when I can’t afford a repair bill, it won’t matter. I can attach the other one and let it run until I can afford to get the invalid fixed.

This would give me a little more control over the surprise bills. Not much, of course, but some.

LOL! By that logic, I could control car repair bills by spending 20 grand on a new car and keeping the Dog Chariot as a back-up vehicle. Must hurry out and buy one.

Seriously: Do you have a strategy to deal with unexpected costs when the costs exceed the amount you can afford to set aside in your emergency fund?

Image: Hyundai Santa Fe. IFCAR. Public Domain.

AMEX Windfall…Disappointing and Not Disappointing

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The annual rebate from Costco’s American Express arrived late last week. It was only $157, the lowest kickback I’ve ever received from that august credit card company. Compare with last year’s refund of $337, and the $210 they sent in 2009. Pretty pathetic.

Of course, what it says is that in 2010 I cut spending way, way back. The only major purchase I made was for M’hijito’s dryer—since he pays for everything in cash, we charged it on my card and he reimbursed me so I could get the kickback. If it hadn’t been for that purchase, the rebate would have been even less.

In one respect the small check is not so disappointing: it means I succeeded in cutting my budget to unheard-of low levels. Of course, that happened because I had to cut back: I had no money.

Like everyone else, evidently. Spending dropped drastically across the country as more and more Americans fell victim to layoffs, forced “retirements,” furloughs, and pay cuts.  Reports tell us we’ve seen a recent  uptick in consumer spending, with an increase of 4.4 percent in fourth-quarter 2010. That’s good for the economy, I guess. One could speculate about pent-up need, though: at some point along the line people simply have replace cars that crap out and household infrastructure items that break—such as M’hijito’s clothes dryer. As experience tells us, all these things are engineered to break at once. Will people keep on buying after they’ve replaced the things they can’t do without?

Oh well. I could’ve used a larger kickback. On the other hand, a couple of other windfalls blew in: the RASL payment and a couple of new jobs from new and old clients. So, what the heck. I’ve learned to limit spending, and don’t expect to increase it for the sheer joy of seeing a few extra pennies in the annual AMEX rebate.

How about you? Now that you’ve tightened your belt, do you intend to loosen spending if and when times get better, or will you continue to cultivate your new frugal habits?

Annual Windfall Arrives

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The state direct-deposited the $4450 it owes me for this year’s installment on my RASL (retiree unpaid sick-leave). Very nice…but what to do with it?

I’d figured to put $2500 of it in the Roth IRA and invest the rest in the brokerage account. This would plump up my retirement savings by another few thousand bucks. On the other hand…

I’m already in retirement. What we have here is a chunk of post-tax money in an era when income from Social Security and teaching doesn’t cover all my expenses. Right now I’m drawing down post-tax savings at the rate of $1093 a month to ensure that ends will be met, come what may. This left me, at the end of February when utility costs were nil, with a surplus of a grandiose $181, after all the bills were paid and transfers made to the savings accounts that hold funds for taxes, insurance, and extravagances like clothing and shoes.

Since I’m already having to draw down de facto savings (just not out of investment accounts—yet), does it make sense to invest this money only to have to start drawing it back out of the investment accounts in another few months? Just now, my projections show I’ll run out of after-tax savings in September, assuming I use my summer-school pay to cover utility bills and then spend the remainder on trash like a new washer and dryer or a new crown to replace the broken one. Videlicet:

Suppose, though, I were to fold the RASL into the survival fund and do the same with the post-utility bill net summer pay? Let’s imagine, too, that a miracle happens and I get another two courses  next summer, netting three grand after the high-season utilities are paid:

This has a sterling advantage: it allows me to live on post-tax savings, minimizing 2011 and 2012 tax bills while my IRAs and brokerage accounts continue to grow (assuming any growth is left after the Libya unrest settles down—a big assumption, for you can be sure whoever takes control will not be our friends). This year, I do need to roll the pre-tax money out of the defunct whole life policy into the brokerage account; so far only post-tax funds have been withdrawn from that. It’s earning all of 1 percent (at best) at Northwestern, and so needs to be transferred to investment accounts, which have been averaging 5 to 7 percent the past few months. That need grows urgent, as inflation is about to spike, big-time. Living on money in savings will reduce my tax liability for that rollover.

The second strategy will require me to defer the dental crown indefinitely, and also to try to fix the ancient washer or to replace the washer only, not the dryer. I will not be able to use summer earnings to cover those needs, nor could I start stashing summer pay to save toward a new car, which I’ll be needing one of these days. Soon.

Of course, there’s no guarantee that I’ll get two sections to teach in the summer of 2012. But even if that doesn’t happen, I could in theory hang on until the end of July without having to draw down from investment savings.

In theory.

Long-Term Care Insurance: Why You Need It

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Old-age home in Czechoslovakia

One of the features of the new government health-care plan is the option to take out a modest amount of long-term care insurance.  It’s not the greatest of all possible programs, but it’s a heck of a lot better than nothing.

We’re told that almost two-thirds of Americans over 65 will need long-term care. Nor are the young immune to these bankrupting costs: 40 percent of long-term care patients today are aged 18 to 64.

The government program, called CLASS (the Community Living Assistance Services and Supports program) probably will pay about $50 a day. Compared to the cost of a nursing home, that’s a tiny drop in the bucket. In 2010, according to a survey by Metlife, the average cost of a semiprivate room in a nursing home was $205 a day.

That’s with some poor soul moaning in the bed beside you, not a desirable thing. When my mother was dying, one of the wretches in the nursing home was in such pain she believed she was on fire. She kept screaming for her husband Orville, who never showed up. She screamed and screamed and screamed. If that’s not what you’d like keeping you awake 24/7, you’ll pony up $229 a day to have a room to yourself.

The costs shown in the link above are just averages; real costs vary widely by region (as does quality of care). In New York State, for example, the median price of a private room in a nursing home was $359 a day. Here in Arizona, it’s a mere $245 a day. Texans pay $181 a day, Nebraskans $207, Californians $269.

If you’re ambulatory but no longer able to keep up a house or apartment, you’ll pay $122 a day to reside in an assisted-living community. Think you’ll try to stay in your home? A home health aide gets paid $21 an hour to come in and care for you: that would be $168 for an eight-hour day, and many elders need to have someone with them through the night. Having someone come in to clean your house: $19 an hour. The cost of adult day care, where you’re carted off to spend your waking hours in an institution and then hauled home to sleep in your own bed: $67 a day.

Before you can qualify for Medicaid, you have to spend down all your assets on health and nursing care. This may include having to sell your home and your car. If you’re married, it means your surviving spouse will be pauperized. To rescue his mother from this fate while his father was dying of Parkinson’s, SDXB had to arrange to divorce them, a painful end to a 50-year marriage between two faithful Catholics.

If you’re in your 50s, now is the time to buy long-term care insurance, which ain’t cheap itself but is a lot less ruinous than those costs. The longer you wait, the higher your premiums will be. Unfortunately, providers are beginning to reconsider the wisdom of these policies, and so it’s not so easy to find a good one. Metlife, which was one of the better providers, got out of the long-term care business last November. Policies that survive will have higher premiums; my policy, which started with TIAA-CREF but was sold to Metlife, hasn’t gone up yet, but I’m sure it will. I’m not looking forward to a stiff increase in the $75 a month I’m already paying out.

The options are not very good. For those of us who are less than wildly affluent, the projected $100 to $200 per month premiums for the government plan—assuming it survives the Republican onslaught—are way too much for way too little. I can’t afford to pay that for something that will not come close to covering my needs, especially on top of my existing plan, which also probably will not cover all my costs. Besides, if you’re already retired, you may not qualify: you have to work for three years to get the benefits. Alternatives include life insurance policies that allow you to tap the death benefit, which might help you to pay for some old-age or health-care costs, annuities that pay out either a lump sum or an income stream, or limited-pay policies in which the premium is paid once or over a period of just a few years.

Nevertheless, if you don’t already have a policy, now may be the time to look into getting one. Despite having ceased selling new policies and planning to jack up premiums through the stratosphere, Metlife at least is still servicing those policies it does have. You may want to lock in a policy with another insurer while some are still available.

Be careful, though. Like all insurance products, long-term care insurance is a field full of potholes. Learn everything you can about long-term care insurance before buying. Pitfalls include policies that won’t cover you if you move out of state; assuming the payout will cover all your costs (it probably won’t); limited coverage periods; recurring deductibles; and an array of other little surprises. Call your State Health Insurance Counseling and Assistance Program, which will provide you with unbiased information. The American Association of Retired Persons offers some in-a-nutshell consumer education, but you should be aware that AARP sells long-term care insurance and so is not a disinterested party.

Consider how much you’ll really need. If you’re not living in your home, most of your monthly expenses will go away. Thus about 90 percent of your Social Security and pension or savings income can go toward maintaining you institutionally. For me, that would come to about $78 a day. Here in Arizona I would need $245 a day to put myself up in a nursing home; thus the insurance would have to cover only(!) $168 a day.

Nursing home costs go up every year, and so you should look for a policy that offers you a chance to opt for increased coverage to adjust for inflation.

That’s about the best you can do to protect yourself. Otherwise…pray for a quick end. 😉

Image: Rest Home for the Elderly in Czechoslovakia. Darwinek. Creative Commons Attribution-Share Alike 3.0 Unported license.

What I Learned During the Year of Penury

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Well, assuming all goes as planned (big assumption, I know!), according to my budgeting software this year I should see a combined earned and passive income of about $52,000. That’s only $13,000 short of my late, great full-time editorial salary, and $8,500 more than I earned teaching full-time. And it’s a far cry from what crossed my bank account’s threshold last year, about $28,000.

I learned a lot of things by trying to live on 43 percent of my pre-layoff salary, very valuable things:

• If you’re not in debt, you can live on a lot less than you think you need.
• If you are in debt, you’d better have a good stash of emergency savings to cover payments.
• You can live frugally and still be reasonably comfortable, most of the time.
• No matter what anyone says about the alleged tax advantages of carrying a mortgage, when you’re unemployed a paid-off roof over your head is your second-greatest asset.
• Your third-greatest asset is a paid-off car.
• Your greatest asset is good health, should you be so lucky to have it and keep it.
• Beans, rice, and pasta are splendid things to eat.
• Chard growing in the garden goes a long way toward putting a nice meal on your table.
• A stand of lettuce helps, too.
• With careful planning, it’s possible to stay out of stores for surprisingly long periods.
• Raising the deductible on your homeowner’s insurance comes under the heading of penny-wise and pound-foolish.
• When budgeting for irregular income, it may be good to create longer budgeting periods than a month. At times, two- or three-month budgets may work more effectively.
• When money is tight, that is when every unplanned expense in creation crashes down on your head.

Despite fears to the contrary, I managed to stay in my home and live without too much deprivation by budgeting carefully, stockpiling food, conserving energy, and putting less money in savings.

It’s surprising how little it takes to get by when you’re not working. I would have done OK on even less, had I been inclined to shop in thrift stores and low-end grocery stores. It’s also clear that I could have cut living expenses still further by moving out of my present home, which has relatively high operating costs, and going to Sun City, where taxes and insurance premiums are significantly less.

What kept me in my home was not having a mortgage. Some years ago I decided to defy conventional wisdom by paying off the mortgage I had on my last house. It occurred to me that each monthly mortgage payment I did not have to pay represented a return on investment of exactly that much. I owed about $70,000 on the house and was paying about $860 a month, which, when the alimony ran out, was more than half my monthly take-home pay. Less than $200 of the PITI comprised tax and insurance. My investments earn about 7 percent; 7 percent of 70 grand is $408. So despite the protestations of two investment advisers, it seemed to me that little would be lost by investing a chunk of savings plus an inheritance in residential real estate.

Over a ten-year period, the house’s value more than doubled, allowing me to buy my present house, a somewhat nicer place in a quieter part of the neighborhood, and pay for it in cash.

If I hadn’t owned the house outright, I can’t imagine what I would have done last year. Although the house has dropped $35,000 in value since I bought it, you don’t realize a loss until you sell, and because I didn’t owe anything, I wasn’t forced to sell or default. There’s simply no way I could have paid $10,320 out of a $22,000 net income and survived. It was extremely lucky that I made that choice all those years ago, and that I’d managed to accrue enough savings to pull it off at the time.

So, I learned that a smart decision can pay off a long time after you make it. And I learned that it is not a bad idea to pay off a residential mortgage.

Having a lot of savings rescued me from the potential disaster posed by the mortgage on the downtown house. I used the tax-free portion of a whole life insurance policy to pay my share of the monthly payments in 2010. Because we managed to get a temporary loan modification, a couple thousand dollars of that remain to help defray the 2011 PITI.

There were some difficult moments. The cost entailed in falling and hurting myself was a bit startling. It would have been even more startling had I consented to surgery that would have caused the loss of an entire semester’s pay. Living through the summer with the thermostat turned up so high that my friends wouldn’t come inside the house was uncomfortable, and I’ll be happy not to have to swelter like that come next July.

When I would run out of cash, not spending a dime for a week or ten days at a time was a challenge. And the summer months, during which income did not cover base expenses, were nightmarish. Even though I’d saved enough from teaching income, theoretically, to squeak through May, June, July, and August on Social Security, by the time fall semester started I was running out of money. Classes started sometime after mid-month, we didn’t get paid until the last of the month, and that was only a partial paycheck. The summer stipend didn’t help much, because most of it wasn’t disbursed until long after I needed it. Being paid for only two classes during the first eight weeks of the semester didn’t help things much, either.

By December, the money pile had not recovered from the effort to get through three and a half months with less income than outgo. Fortunately, though, the stock market had recovered. The strategy of delaying a drawdown from savings had worked, and my IRA and brokerage accounts had returned to something close to their pre-Crash levels. At that point, my financial adviser and I decided it was safe to start a 3 percent drawdown, which, until inflation kicks in, will guarantee enough in the checking account to pay the bills, exclusive of earned income.

In retrospect, I learned that I would have been better off if I’d put all my summer survival savings into my regular cash flow account at the end of spring semester, rather than setting the money aside in a savings account and doling it out to myself in monthly “paychecks.”

Instead, I should have treated the summer as one three-month budget cycle. This cycle should have contained three months’ worth of expense budget: three months’ worth utilities, insurance, etc., plus three months’ worth of spending money. On the credit side, it would have included all my spring-semester survival savings plus projected Social Security. Subtracting debits from the summer-long total, not from one month’s worth at a time, would have allowed me to see at a glance how much remained to get by on until salary started again. This would have relieved a great deal of worry engendered by fretting about how to get by from month to month. I still would have been in the red at the end of the summer…but I probably would have stressed about it only once, instead of three or four times.

It really would have helped not to have had a $165 palm tree trimming bill in June, a $30 copay to the Mayo in July, a $105 electrician’s bill in August, and a $120 plumbing bill in September. I suppose that when you foresee a financially tight time coming, you should add about $150 to your regularly budgeted expenses to cover Murphy’s Law.

The economy is improving. Eventually most of us will get jobs again, although probably not at what we used to earn. The Fall of the Bush Economy is not the last recession we’ll see. There’ll be more, and they may be worse. By way of preparing for those, I think, the take-away messages are as follows:

• Live within your means, even in good times.
• Within your means, live frugally, even in the best of times.
• Build savings. Don’t limit savings to your IRA or 401(k).
• Distribute savings wisely between cash and investment accounts.
• Pay off debt. That includes mortgage debt.
• Avoid accruing new debt. Use savings to help pay for big-ticket items in cash.
• Take care of your health.
• Expect the unexpected.

Tax Break Comin’ Your Way! What Will You Do with It?

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Last week President Obama signed a bill that will lower your 2011 Social Security taxes from 6.2% to 4.2%, for next year only. This tax holiday, which, bizarrely enough, will cost the federal government $120 billion at a time when the government is facing astronomical deficits and we’re being told Social Security is headed for Hell on a skateboard, could save you as much as $2,136 next year. If you’re a couple both of whom earn over $106,800, you’ll see a $4,272 tax break.

The theory behind it is that the increase people will see in their monthly or biweekly paychecks will be small enough to look like gravy and so they’ll diddle it away on stuff and services, thereby supposedly stimulating the economy.

Could be. Could be voodoo works to cure warts, too.

I must say, if someone handed me $2,136 it would go straight to savings—even if I were wealthy enough for that amount to apply. O’course, that’s not what you’re going to see in your paycheck; it’ll be dribbled out to you in $178/month increments, or $89 per paycheck if you’re paid twice monthly. Considerably less, actually, unless you earn a top-tier paycheck. In my case, this vast new lucre will amount, over the entire year, to $288.

But let’s say you earn enough to matter. In theory, if you’re earning that much, you ought to be able to afford to spend two, three, four thousand bucks on anything your heart pleases. Two percent of my former, relatively modest salary, for example, would have put an extra $1,300 in my pocket—but in the palmy days when I earned a salary, that was less than I budgeted for the American Express card each month.

Several options present themselves:

1. Diddle it away. We’re told this will improve the economy, making us all richer and happier sometime in the gilded future.

2. Pay down debt, if you still have any after the past few years of our national frenzy to get out of debt. It would make sense, if this is your choice, to figure out how much the windfall will add to your paycheck and set your online bank account to automatically pay it to the creditor that holds your largest or your highest-interest debt.

3. Set it aside to buy a big-ticket item, thereby keeping yourself out of future debt. A couple thousand bucks would buy you a nice refrigerator or—yes! a MacBook! Here, too, the smart strategy would be to arrange an automatic transfer of the temporary raise from checking to savings.

4. Donate it to charity. With the de jure unemployment rate still hovering near 10 percent, the de facto rate around 20 percent, and thousands more Americans poised to be dispossessed of their homes in 2011, the civil thing to do would be to put the money where it can help someone else.

5. Save it for retirement. This is just a taste of what we can expect when the Republicans get back into office, which is likely to happen at the end of Obama’s present term. Continued raids on Social Security will kill it fast. If you’re under 65, you’re going to need this money when you find yourself too old to work.

Just now,  my investments are earning between 5 and 7 percent; let’s say that averages 6 percent. And let’s say you’re 35 and you earn enough to qualify for the full $2,136: by the time you’re 65, this year’s windfall will be worth $12,268. If you’re a couple both of whom earn six-figure salaries, you’ll have an extra $24,536 in the community property, assuming you’re still married after 30 years. Ah, the miracle of compounding interest!

If it were me, I’d figure charity begins at home. At the rate we’re going, a person in her 20s or 30s can expect never to see a nickel from Social Security. If you have a Roth IRA, this will be an easy way to fund it. Simply have your bank send the extra income straight to the Roth. Second-best: if you’re not maxing out your 401(k) or 403(b), have your employer increase your contribution from your paycheck. Otherwise, invest it in a brokerage account, also by automatic deposit.