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Personal Finance

w00t! 18 grand materializes from the air!

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Lordie! Here I’ve been thinking I’d lost about $23,000 in the stock market…. Comes a statement from GDU’s Fidelity retirement plan-the first I’ve seen in a year. It turns out the balance the Fidelity rep gave me over the phone a few weeks ago was wrong. He only gave me the amount in the 401(a) plan. The fund also includes a 403(b) plan, which contains $18,465 more than the amount he said I had.

That means I’ve “only” lost about $4,535 to the bear.

Wow! I’ve never been so pleased with a loss in my life.

3 Comments left on iWeb site:

Mrs. Accountability

That’s wonderful!! Funny how the situation could cause such a paradigm shift

Friday, July 18, 2008 – 09:35 AM

Zhu

Wow, that is so cool!

I’m too chicken for stock market… I saved up a bit but I don’t like the idea of potentially losing money. I mean, I wouldn’t mind your kind of loss though

Friday, July 18, 2008 – 07:00 PM

Funny about Money

In fact, you lose money in the market and you gain it. Over time, you should make more than you lose, if you’ve diversified and invested carefully.

With mutual funds where you’re simply rolling all gains back into the fund by automatically purchasing new shares with gains or buying new shares each month with savings from your paycheck, when the market goes down you stand to earn MORE money, because you buy shares at deflated prices. As the market comes back up, your existing shares plus the shares you bought in the bargain basement make money.

This is most obvious in your 401(k) or 403(b), where you and your employer are plowing money into the funds every payday. It’s hair-raising to get a statement that shows the plan has lost more than you and your employer combined put into it over the quarter…until you realize the contributions are buying lots of shares at reduced prices. When the market comes back to normal, you feel mighty flush.

If next payday doesn’t come…

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Oh, but of COURSE our esteemed elected representatives will pass the state budget before the whole joint has to be shut down, right?

Right. Well, come July 3rd, we shall see.

While we wait, let’s consider an important question: Are you prepared if your employer can’t pay your next check? Are you prepared for a lay-off? Are you prepared to be canned outright? Not to harp on this issue (well, yes, to harp): emergency fund, emergency fund, EMERGENCY FUND!

There are only two ways to prepare yourself financially for hard times: one is to get out of debt as fast as you can, and the other, IMHO the most important, is to lay in enough money to tide you over a spell of unemployment or disability. I say building an emergency fund is more important than getting out of debt because you have to eat. If you quit paying credit card and student loan bills, all that will happen is your credit will tank and you’ll have nuisance bill collectors nagging you. If you quit paying on your car, it’ll be repossessed, but there’s always the bus, a bike, or Shank’s mare. If you quit paying your rent or mortgage, eventually you’ll be evicted, but it takes a long time to evict someone. But if you can’t buy food, you’ll starve before the landlord or the bank can toss you into the street.

In good times, the strategy should be to build the emergency fund and pay down principal, dividing snowflakes and snowballs between the two goals until you have at least six months’ worth of living expenses stashed in the bank. As the economic clouds roll in, focus on the emergency fund. Make your regular debt payments; quit charging on the cards, so as to avoid running up any more debt; but put all of your spare cash or sidestream income into accumulating enough cash to keep you going through a really bad stretch.

How much should you set aside for the proposed rainy day?

Opinions vary, from three months to a year or more. Personally, I think an emergency fund should cover at least six months of net pay. If you’re out of work, your income tax will drop to zilch, and so you ought not to need six months’ worth of gross pay.

That said, my emergency fund actually represents a year’s net income. In the first place, at my age I don’t have a snowball’s chance of getting a job comparable to the one I’m in. And in the second, it won’t be that long before I can collect full Social Security. I’m eligible for less-than-full SS right now, so if push came to shove, I could start collecting early. In effect, at age 62 Social Security itself becomes a kind of emergency fund for those of us who persist in doddering in to the office. For you younger pups, remember this rule of thumb: a laid-off executive can expect to spend a month searching for a new job for every year of job experience she or he has.

Alternative Emergency Funds

If saving extra cash is difficult or you don’t think you can stash enough before you’re likely to be laid off, here’s a secondary strategy: get check-bouncing protection from your bank or credit union. This is actually a line of credit. If you overdraw your account, the institution lends you the amount of the overdraft, protecting you from bounced check charges. The interest isn’t cheap. However, it’s less than a credit card costs and it could save you in a pinch. I have overdraft protection in the amount of one month’s net income.

Another strategy is to start developing other income streams now, while you’re still employed. If you have a hobby that can be monetized, start monetizing. If you have a skill you can ply as a side job, start finding customers now. If you’re thinking of starting a service business, consider whether you can begin offering the service in a small way, on a moonlight basis. While this income may not support you, it certainly will help, and often such work can be expanded to full-time equivalent when you can devote 40 or 60 hours a week to build it.

If you’re fairly confident you’re going to be laid off, then in addition to starting the job search right now, here are some things you can do to prepare:

  • Apply for credit now, since no one will lend you a dime while you’re unemployed. Get a line of credit at the bank; get another credit card. Don’t use either of these instruments, but have them at the ready in case they’re needed.
  • Pare back your spending. Streamline your budget so that you’re living much as you would if you were out of work. Put the savings into the emergency fund.
  • If you have a freezer, fill it with food.
  • If you don’t have a freezer, lay in extra nonperishable items such as beans, rice, flour, and canned goods. (Remember that whole-wheat flour must be refrigerated — it will go rancid if left for a long period at room temperature.) Clean out your refrigerator’s freezer and organize its contents so you can max out the space. Buy meat and frozen products to fill it up.
  • Plant a garden. Squash and tomatoes grow handsomely and cheaply in the summertime. If you live in a temperate climate, you can grow lettuce, kale, carrots, and beets during the summer. Least expensive strategy: grow from seeds. Learn how to can, preserve, or freeze vegetables and fruits.
  • Keep your gas tank full. At four or five bucks a gallon, it’s a lot better to buy gas while you’re earning than after you’re laid off.
  • Consider how you will get around with minimal use of your car. Know the bus routes, and if your area is safe for bicyclists, get a bike at a yard sale, thrift shop, or sheriff’s sale and fix it up so you can bicycle to nearby destinations.
  • On paper or on disk, prioritize your spending obligations. Write down the things you will need to spend on, in descending order from the most to the least important. Consider how you will cover these expenditures with the emergency funds or side income you already have in place.
  • Find out how to apply for unemployment benefits and food stamps, and see if you will be eligible for other forms of public assistance. Don’t get “proud” about this: you’ve paid for it with your taxes, and you get to use it when you need it.

None of us is ever fully prepared for an unplanned job loss. Expect to be psychologically stressed and possibly depressed, no matter how carefully you’ve laid plans and stashed emergency money. Knowing how you will feel (it doesn’t take much imagination), think in advance about morale-building activities to fill your suddenly free time. Scheduling a block of time for exercise will help your outlook a great deal, as will volunteering a few hours a week for a charitable cause. Also plan to attend meetings of trade groups or professional groups-join now, especially if you can get your employer to pay the dues. Regular exercise such as walking, running, or work-outs will protect your physical and psychological health, and activities that bring you into contact with people will raise your spirits and build business and job-searching contacts.

1 Comment left on iWeb site:

Anand Dhillon

Keeping an emergency fund is always a good idea. I also advise that people have multiple streams of income so that ifthey do lose their job, it’s not totally the end of the world.They take a lot of work to setup but extra streams can provide much needed financial security.

Thursday, July 3, 2008 – 10:27 AM

The value of reconciling your check accounts

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Saved from my own stupidity! Whew…

The credit union still sends paper statements, and so I still reconcile my accounts against the monthly statements. This is a function of mental laziness: I’ve never worked up enough energy to figure out how to reconcile against the online records.

But I do keep an eye on my accounts online, and this month I wondered why the CU’s bottom line was SO radically out of whack from Quicken’s. Alarmingly out of whack, one might even say.

Come to find out, I had failed to shred an $840 check I thought I’d voided, but instead had blithely sent it along to Vanguard…and then wrote and sent an identical check to replace it. Oops!

Meanwhile, believing the first check had been atomized, when my next extra-large paycheck arrived I wrote a third check to Vanguard in the same amount. Each of these payments was to transfer money from a second income stream into savings. So, where I thought I’d written checks for $1,680, I actually had arranged to transfer $2,520. This error would plunge my checking account to the bottom of a puddle of red ink the depth of Lake Tahoe!

Luckily, I had not yet mailed the last check. (And luckily, I had not taken Vanguard up on the opportunity to make electronic transfers from my checking account directly into mutual funds.) So, voiding and shredding the third check recovered the error.

If I hadn’t been in the habit of reconciling my bank accounts regularly, I wouldn’t have tumbled to that Senior Moment until it was too late to avert an overdraft.

Catching your own errors is just one good reason to reconcile your accounts at regular intervals. We all make mistakes-and even the bank sometimes enters errors in customers’ accounts (Johnson Bank once credited me for $10,000 deposited for someone else!). It also will allow you to catch fraudulent transactions. Personal finance software such as Quicken or MS Money hugely simplifies this chore, or in the case of the arithmetically challenged (such as moi), makes it possible.

If you don’t use a program to keep track of your funds, you should reconcile your checkbook each month. The steps are as follows:

  • Compare your check register with the statement. In your check register, subtract any charges (checks, ATM withdrawals, automatic payments, bank fees) appearing on the statement that you haven’t already deducted from your balance. Write this figure down.
  • Still in your check register, add any new inflows, such as deposits, automatic paycheck deposits, and interest or dividends. Add these to the amount you got in step 1.
  • Now enter any deposits made after the statement’s ending date. Add these to the total you obtained in step 2. Write this total down.
  • Next, in your register, check off each check that the statement shows as as having cleared the bank. On a separate piece of paper, list the check numbers and check amounts. When your list is complete, add the check amounts to obtain a total.
  • Subtract the total you got in step 4 from the figure you got in step 3. The result should equal your check register balance.

If it doesn’t, the first thing you should do is check all your arithmetic. If that doesn’t reveal the error, then you get to compare each figure in the statement and the check register, very very carefully. Over and over and over again.

Programs like Quicken, as you can see, circumvent a great deal of agony, first by doing the math for you and second by making it relatively easy to spot errors. If you’re reading this blog, you probably already use financial software. But lest you wonder why your mom or your weird cousin Bob has never reconciled a checkbook, ever, and figures the account is out of money when the checks run out, it may be that she or he is math-challenged. There is simply no way I could reconcile my bank accounts manually — it’s flat out of the question. I’ve tried. After I finished tearing out all my hair, I just gave up. If SDXB hadn’t insisted that I try Quicken, I would have no idea what is going on with any of my accounts.

What a mitzvah! The cheapest PCs out there will run Quicken, Money, or downloaded freeware. It’s well worth encouraging the arithmetically puzzled and the computer-bamboozled to learn how to use such a program, even if they never do anything else with a computer.

1 Comment left on iWeb site

Mrs. Accountability

Clicked through from the 156th Carnival of Personal Finance to read about your expensive doggies – hubby and I have one that we love so much, hope nothing expensive ever happens, we’ll go in the poorhouse for him.I agree with your reconciling checking accounts post – I read on a blog not too long ago that the person never did reconciliations, and why they didn’t think it was necessary to do so.I would be a bundle of nerves!The blog writer said they watch their account online regularly, so felt comfortable to not reconcile.I have reconciled my accounts for over 25 years with both paper statements and online statements, and have found enough errors that I would not be comfortable giving up this monthly chore.I read your “Life’s a Killer” story, awesome how you handled your stress situation.I also participated in the 156th CoPF (my 3rd entry) with my free Gas Calculator (MS Excel format).I really like your writing style, adding you to my reader.Nice to meet you!

Monday, June 9, 2008 – 07:01 AM

Targeting your emergency savings

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J.D. at Get Rich Slowly discusses author Mary Hunt’s idea for the freedom account: an emergency fund in which you subdivide out amounts for specific intermittent expenses, such as car repair, wedding gifts, or expensive clothing purchases like shoes. The way J.D. describes it, you keep the money in a single checking account; then estimate your irregular, intermittent costs and keep a little log showing how much is dedicated to which purpose.

The basic idea is a good one. Trying to keep track of a bunch of different purposes for money accruing in a single account, though, strikes me as a giant pain in the tuchus. Also, even an ING checking account doesn’t earn enough to make it a good place to store money for long-term expenses.

Here’s a slightly different approach to the same goal of targeting your emergency savings:

Establish the categories in which you have intermittent expenses and identify the time intervals in which they occur: totally irregular, yearly, biannual, over several years. Then open separate accounts for these purposes. The length of the interval determines the kind of account you use.

For example, I look to the irregular little surprises that can happen at any time (plumbing or car repairs, vet bills, etc.), annual expenses (car and homeowner’s insurance, property tax, income tax), and long-term expenses (purchase of a new car, about once every ten years; major repairs or renovations on the house, which I hope don’t happen more often than about once every eight or ten years).

For the constant extra gouges, I have a money market account at the credit union. Into it I put $87 per paycheck–down from $200 a month since GDU’s shift to biweekly pay, because of the drop in net income that caused. When I have to cover an expense, I simply transfer the needed amount back to my checking account.

To pay my annual automobile and homeowner’s insurance bill, the annual cost of registering my car, and my annual property tax, I put $300 a month into a separate money market account, also at the credit union. I keep these funds physically separate from the day-to-day emergency funds because I can’t afford to have that money disappear: if I don’t pay my property tax, the house will be confiscated; if I don’t register or insure the car, the state will forbid me to drive it.

For long-term expenses, I use Vanguard funds: the Prime Money Market fund for major house expenses (reroofing, for example) and the Short-term Investment Grade Investment Corporate Bond fund for savings toward my next car. I plan to keep a car for ten years, so if I put even only a thousand bucks a year into that fund, what’s in there after a decade should be enough, combined with the clunk’s trade-in value, to buy another car in cash. Although neither of these is FDIC-insured, they’re both very safe (neither was exposed to subprime mortgage instruments) and they each earn more than I can make in a checking account. AND you can write checks on either of these funds. So it’s easily accessible when I need it.

When savings for specific purposes are collected in separate accounts, to tell how much you have for a given need, all you have to do is look at the bottom line. To my mind that’s a lot easier than trying to keep track of a bunch of separate theoretical subtotals in a spreadsheet.

2 Comments left at iWeb site

hatuman

Some good thoughts.Thanks.It wouldn’t hurt to have more accounts open to help keep track of things.

Monday, May 19, 2008 – 07:22 AM

Cordelya

I have a similar thing going on as far as emergency money goes. I have a savings account at ING, and I also have several cash CDs there. I have one CD ($500 for 5 years) to stand as my auto insurance deductible. If I need to pay the deductible, there it is. If I don’t, it earns good interest and I have an incentive to not touch it (early withdrawl loses me 6 months of interest). I have a similar CD that is labeled “New Washing Machine” – our existing machine is rather old and I’d prefer to have money standing by to replace it. I’ll have to get some more CDs set up for car purchases – that’s a perfect candidate for laddering.

By the by, I choose cash CDs over money market specifically because of the withdrawl penalties – it’s that extra incentive I need to keep me out of them!

Monday, May 19, 2008 – 08:18 AM

Should college students have to study personal finance?

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One of the groups in my Writing for the Professions classes is proposing, as their semester project, that the university offer a course in personal finance and require it for all incoming freshmen.

No, they don’t know about this blog.

It’s an interesting idea, made more interesting by the fact that so far the students haven’t shown they know how deep the problem really is. They’ve given no indication, for example, that they know the average student loan indebtedness of a typical young college graduate, or that they know how much credit card debt the average undergraduate student racks up. Apparently they just feel a general angst about the whole issue.

Frankly, I think a required two-semester course in personal finance would benefit students a lot more than the commonly required freshman composition.

I say that as one who would be put out of work by the absence of required writing courses.

A person who has not learned how to express himself adequately in his native language after 13 years of schooling is not going to learn it in two reluctant semesters. Such a person is not interested in writing, can not and does not read or write, and is not even faintly interested in doing so. Freshman comp, by and large, is a waste of time. It’s a waste of time for the students who can’t write, and it’s a waste of time for those who can. Neither category of student profits by sitting in a class that reiterates material that should have been learned years before. Freshman composition as a required course should be abolished.

But a personal finance course would benefit almost every student who took it. And it would benefit the society at large: widespread formal training in personal finance skills would reduce indebtedness and improve savings rates. If, over the past two decades, college students in general had been taught the basic facts about mortgage lending, for example, we might not have the real estate crisis to deal with, or at least not to the extent we see-more people would have been savvy enough to avoid wacky mortgage instruments.

I can envision a two-semester course: in the first semester, the principles of budgeting, credit, mortgage lending, and how banks work; in the second, a wide-ranging view of saving, investing, and real estate.

It would be a lot more useful than freshman comp. Bet most of the students would keep their textbooks, rather than selling them back to the bookstore for a few pennies.

That alone would tell you something.

Comments from iWeb site:

squawkfox

I WISH college taught applied personal finance skills. It’s unbelievable to me how we can go though life studying calculus and physics and yet never study how to buy a house or how to invest for retirement. Perhaps start earlier in school? Studying personal finance in high school is an even better idea!

Thursday, April 17, 2008 – 09:24 AM

vh

Back in the Dark Ages, the California school system required that girls take three semesters of home economics and boys take three semesters of shop to graduate from high school. You had to take a year of the stuff in junior high and then a semester in high school.

It was obnoxious because it assumed that girls were bred up to be good little wives and boys would make themselves useful by changing oil in the car and doing light carpentry around the house. The home ec courses mostly were about sewing and cooking foodoids that came out of boxes. But the high-school semester had units on smart consumer buying, how to find out about products, how to compare prices and quality, and household budgeting.

Nevertheless, I knew absolutely nothing about mortgage lending when, thirty years later, I bought my first house as a single woman. When I was a kid, it was assumed the man would deal with deal with those matters, so there was no reason to trouble a girl’s pretty little head.

Really, there’s no good reason a grown woman–or a grown man–should go into a complicated transaction that will leave her or him indebted for thirty years without some knowledge of what it all means. A high school kid is capable of understanding this stuff. Yeah: it ought to be introduced to them.

Net Worth Update: Better than expected

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One good thing about being a pessimist: you’re never unpleasantly surprised. What surprises come your way are always pleasant.

Despite the market roller coaster, my investments are doing better than expected. The Vanguard mutual finds are holding their own, and the broad array of securities managed by the amazing Dick Stern and John Reimer actually earned $1,500 last month.

I ran a net worth calculation last night: over nine hundred grand. Looks like I should turn in my notice this very morning, right?

Well, there’s a problem: besides the fact that it’s all on paper, I’m house-poor. Those figures include the $300,000 value of my own paid-off dwelling plus my share of the Investment House, which M’hijito is occupying while we wait for its value to grow. My liquid holdings are worth only a little over half my net worth. Combined with the piddling Social Security I would get if I quit now (or, for that matter, that I will get if I manage to hang on to my job for another three years, until I’m 66), it will not generate enough for me to live on.

I use almost all of my net salary to support the house, the yard, the dog, the car, a small savings project, and myself. Because I telecommute several days a week, never eat lunch out, and wear Costco jeans to work, the fact of the matter is that quitting my job will not result in any day-to-day savings. To gross an income equivalent to my present net income would take 6 percent of my cash holdings. That’s about 2 percent too much.

My share of the Investment House mortgage is $1,000 a month, which comes out of the proceeds on my investments. We will save $200 or $300 a month with the refinance on the Investment House. But that notwithstanding, my savings plus Social Security will not generate enough to support me in my present home.

I figure I need to work until I’m 70-almost seven more years!-if I’m to stay in this house for the rest of my life.

Since GDU is millions of dollars in the hole and my own college just had its budget slashed by $2.8 million, a nonessential job with a year-to-year contract such as mine is not bloody likely to last another seven years.

If I lose my job within the next four or five years, my plan is to sell the house and move out to Sun City, where acceptable housing is cheaper and the cost of living is amazingly low. Taxes are a third of what I’m paying here and auto and homeowner’s insurance are half the gouge in my present Zip code. Utility bills are lower, because the houses are smaller and they all have (hideous!) gravel landscaping. Grocery stores are much closer and can be accessed in a golf cart, and other routine shopping destinations, such as Home Depot and Costco, are also far closer than they are to my present “centrally located” house. So, gasoline costs would be lower even if I kept the Dog Chariot.

Trouble is, I don’t want to live in Sun City. It’s safer and quieter (as in “the quiet of the mausoleum”), but it’s a ghetto for old folks. I don’t want to live where everyone looks like me, and I don’t want to move away from my friends and what’s left of my family.

But if I lose my job, I won’t have a choice.

If I manage to stay here, when I die my son will inherit a paid-off house. If he’s still living in the Investment House-which he could be…at my age my mother had one year left-he also will inherit enough to pay off the mortgage on that place. He covets my house, which would be an excellent home for a young man or…oh, say, a young man, a wife, and a kid or two? He could either sell the Investment House and put the proceeds in the stock market or rent it for a nice stream of secondary income. Or he could sell both houses and move into a much nicer place.

Any of those would be good.

In the meantime, the fact that I’m worth damn near a million dollars and cannot retire absolutely blows me away. My father thought he would have it made when he reached his savings goal of $100,000. And at the time he did quit his job, that was enough to support him and my mother in what they regarded as comfort. Then came the inflation of the 1970s. By the end of his lifetime he barely had enough to keep a roof over his head. And my father was the Emperor of Tightwads.

Even if I had a million dollars in cash, the return combined with Social Security would not replace my income. I probably could live on it…now. But in ten years? twenty years? If I escape the family disease, I easily could live into my 90s. That’s another thirty years! Wow.

Save, young pups. Save, save, save!