Personal Finance

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!

In the hideous biweekly pay environment, no matter how you try to arrange things there will be times when you will find yourself without enough to cover your normal bills. This happens because paydays move around, so that occasionally your second paycheck of the month arrives after your bills are due and after other living expenses have consumed most of your first paycheck.

That’s the case for me this month: automatic payments for all my utilities and two insurance bills are made by the 20th. My Visa bill will be due about then, too (fortunately, it will be small). Normally plenty of money is in the account to cover all these expenses, because normally by the 20th two paychecks have been fed into that account. The first paycheck covers my recurring expenses and a few other living expenses; the second covers the rest of the grocery bills and such costs. But not this month: in April I don’t get paid until the 25th.

On April 20, when the American Express billing cycle closes, I will be $200 in the hole.

The credit union, however, will think I have $300 left in my checking account. The only reason the account will appear to be in the black even after I’ve spent $200 more than I deposited it is that I keep a $500 cushion in that account. I make it a matter of principle never to go below that $500 cushion. So, in my universe a balance of $500 is the same as zero, and a balance of $300 means the account is really $200 in the red.

The only thing between me and two hundred bucks’ worth of bounced transactions is an emergency fund of a few hundred dollars.

As we have seen, I have about $18,000 in an emergency fund, enough to tide me over for six months should I lose my job. Since I started setting money aside in a fund to pay off the low-interest Renovation Loan, I’ve managed to squirrel away another $13,000, which if push came to shove could serve as more emergency cash. Most of this money is kept in conservative mutual funds, where it earns a little interest.

However, I keep $500 of it in my checking account for exactly the kind of short-term emergency I’m experiencing this month.

The April 25 paycheck will replenish the checking account’s emergency cushion and cover the rest of my April bills. But May also will see the second paycheck come in after all my recurring bills are due, and so once again I will need that $500 cushion to keep from overdrawing the account.

A back-up for the checking-account cushion is check-bouncing protection, a line of credit extended by the credit union which, for a fee, will cover overdrafts up to $3,000, about one month’s net pay. As long as no payments are drawn on this line of credit, it costs me nothing. If I bounce a check or EFT, the interest will be around 11%, but if I repay the overdraft immediately, it will cost me just a few dollars—a far cry from a bounced-check penalty and the umbrage of creditors.

So, here’s a sensible approach to managing emergency funds as they accrue:

1. First, build a cushion in your checking account that will cover a short-term overdraft.

Consider this amount to be your “zero” point! When your balance approaches the amount of your cushion, regard it as actually approaching zero. When you start to eat into your cushion, your checking account is in the negative numbers. Behave accordingly: quit spending and find a way to replenish the checking account as fast as you can, even if it means transferring funds from savings.

2. Once the checking-account cushion is in place, continue building your emergency fund, but plan to invest the bulk of the money in an interest-bearing account. When you reach $3,000, for example, you can open a low-expense fund at Vanguard, where a money market fund pays as much as the highest-paying bank savings accounts do and where other relatively safe instruments return around 8% over time.

3. Get overdraft protection with your bank or credit union. If your bank charges you for this service, move your accounts to a bank that restrains itself from gouging you.

Overdraft protection is your emergency fund’s emergency fund. In the event of a minor disaster-a late paycheck, for example-it gives you an extra safety net. Arrange for this while you still have a job, because of course if you are unemployed you’re unlikely to qualify for a line of credit.

categories: personal finance

2 Comments from iWeb site

Mydailydollars

Good advice!I certainly sleep better at night with a small emergency fun, even while I’m paying off my credit card debt.

Tuesday, April 8, 2008 – 08:19 AM

Mrs. Micah

When in college, I had $200 which I considered untouchable. And my account never went below that…but if something had come up, it could have. I also had savings linked to my checking, which helped just in case.

Tuesday, April 8, 2008 – 09:56 AM

At last! The eightieth paper is sent back to its author.

Never again will I take on 80 writing students as a side job! Particularly not online, where collecting their papers takes as much as a minute apiece and sending the things back takes as long.

No joke: I measured it. By the time you’ve gone pointedy-clickety-pointedy-clickety- pointedy-clickety-type type type type-pointedy-clickety-pointedy-clickety-pointedy-clickety to upload and send a paper to a student through BlackBoard (GDU’s online course software), you’ve spent between 40 and 60 mind-numbing seconds. So it takes almost a mind-numbing hour just to return one section’s papers.

If I hadn’t wrenched my leg, I would have had to take this week as vacation time to read the 80 papers that showered down on my head last weekend. It’s taken a good 50 hours to plod through the stuff. So the time off for the injury was a nice (in the classic sense) confluence: my boss feels sorry for me and I use time I would have had to take off anyway to read papers with my foot up. It’s occupied the entire week. I worked until 1:00 a.m. this morning, then carried my computer to the Renovation House to meet a worker and thence to the doctor’s office, and finally home again to finish grading papers, forming 15 carefully crafted groups, entering grades in Excel and online, issuing instructions, writing and posting announcements, figuring out how to make the group discussion boards work for student members, and on and on.

Well, the worst is now over: the rest of the coursework will be turned in as group papers. So, instead of 80 papers at a time, I’ll have 15 to read.

Some of these people are amazing: a Korean kid with a long string of writing awards in Asia and fresh from an internship to die for; a Chinese student who did not learn English until after high school and already writes more intelligibly than certain native speakers of our recent acquaintance; and the usual run of blue-collar kids, men, and women bootstrapping themselves into the middle class. Let’s hope they all make it.

So, here’s the PF question:

When is a side job worth it? How much extra work are you willing to take on to obtain a second stream of income, and how large does that income stream have to be to justify taking on another job?

In my case, the 14 grand GDU is paying for me to teach the equivalent of four writing sections (a full-time courseload) works out to about $860 net a paycheck. Every penny of it is going in to the Renovation Loan savings fund.

But with an adequate (not great) salary coming in from my real job, I wonder if this extra work is worthwhile. I’m setting aside $250 a month out of my regular pay for the Renovation Loan savings fund, and meanwhile I’m snowballing down the principal by about $100 to $160 a month. It certainly does accelerate the goal of accumulating enough liquid cash to pay off the loan in one swell foop, if need be. But I wonder if there’s any hurry. Since the monthly payment is not onerous, what’s the hurry to collect enough cash to pay off that loan? Should I really be beating myself up for this?

If I lost my job and the only income I had were Social Security and the proceeds from investments, I would need the teaching income to live. I can’t make ends meet on much less than I’m earning, and if I collected Social Security now, it would come to less than a third of my present income. But not having lost my job…

What say you? When is working two jobs worth the effort?