Month: July 2018

If you do not have an emergency fund, you’ll want to work on getting one set up.  An emergency fund is just that – it is the equivalent of 3 to 6 months of living expenses, set aside in an easily accessible account to be used only when financial emergencies arise.  It allows you to handle unexpected bills without incurring debt and can provide a feeling of financial security.  Let’s take a look into the details of this emergency fund:

Why do you need an emergency fund?

Unexpected expenses are a part of life.  The car will need to be repaired, the water heater will break, jobs will be downsized, etc.  When these things arise, the emergency fund will provide a way for you to pay the bills without using your credit cards or incurring another form of debt.  It really is a key element in a debt-free living plan.  These things do happen in the real world so be ready for them.  It will give you a measure of security to know that you have saved up for the unexpected.

Why set aside 3 to 6 months of living expenses?

This is the current “rule of thumb” for an emergency fund.  For a family with one income earner, something more in the 6 to 8 month range of savings might be more wise.   The whole reason for having an emergency fund is to give yourself a financial cushion.  You’ll need to assess your own financial situation and determine how much of a cushion you want to have.

Where do you keep your emergency fund?

You will want to keep your emergency fund in a savings account or in another similar  manner that is very liquid and easy to get to, but not so easy you are tempted to spend it.

How do you fund it?

Set it up as a monthly bill to yourself.  You might want to make interim goals, such as “I want to have $500 saved in my emergency fund within the next 2 months.”  When you reach an interim goal, then set a goal for the next phase.  Find areas in your current spending where you can spend less, and then use this amount to help build your fund.  Use tax refunds, bonuses, overtime pay, or commissions to help fund your emergency fund.  One important note here: Do not use credit to build your emergency fund.  That is defeating the whole point.

So when have we used our emergency fund?

In the last few years we’ve used our fund to pay for hurricane damages to our home, car repairs to our van, and large medical expenses.  Having our emergency fund in place allowed us to weather these large cash outlays without going into debt.   We paid money back into our emergency fund after each of these events so that the emergency fund is now back to its full amount.

This is a question I have seen mentioned on several personal finance blogs – Should you focus on spending less money or making more money?  Over the years we’ve struggled with this choice as well, and we came to the conclusion that with our circumstances it made more sense for us to focus on spending less money.  We’ve made the decision to focus on spending less because it is something that we have control over right now – We could sit down at any time and make a list of ways to cut spending, which would make our “spending less” goal immediate (once put into action.)

Certainly, earning more is definitely a good goal to have as well.  If you were looking to earn more, you would need to start looking for a method to earn more which might entail getting your resume up to speed, filling out applications and going on interviews, and so the results would not be as immediate.  Certainly, earning more is desireable but if earning more equates to spending more, either because of child care expenses, increased transportation costs, or eating out more often, then the net effect may not be as large as one might have anticipated.

There are many ways to tackle the issue of spending less but for us it amounts to a very simple thought, “how can we ________ for less.”   Now this has meant that some things we would like to purchase are not feasible.  There really is not a way to purchase a brand new SUV for $5000.  However, when confronted with the purchase of something we want, we try to look at the underlying desires to come up with a more inexpensive alternative.

Using the above example of purchasing a brand new SUV, we analyze what it is we are really looking for:

1.  Reliable transportation.
2.  A larger vehicle that will accommodate our family.
3.  A clean and well kept vehicle that has a working air conditioner, heater, radio/CD player.

That is a little more concrete and defined than “we want a new SUV.”  We now have a list of details that are important to us, so we can work on finding an alternate solution which meets our budget goals and meets the specifications.

This method works in every area of spending from eating out to going on vacation.  We enjoy eating Mexican food so I’ve learned how to make a variety of Mexican dishes; Our family enjoys the beach so instead of going for a week, we go for a day.  There are many ways to find suitable substitutes at much more affordable prices.

Spending less is also a way to save money.  In fact, once you begin spending less, you’ll be amazed that you were ever spending more!  The money saved by spending less can be used in a variety of ways; your goal may be to get your emergency fund set up, save for college, or invest for retirement.  By training yourself to spend less, you will find the money to save.

If you happen to turn on CNBC, listen to a radio show about investing, or read any financial newsletter or magazine, it’s not going to be long before you see and advertisement about some company which will show you how you can invest in gold and other precious metals to make a lot of money by doing it. They have really come up with some great advertising, but when taking off the front the realities of investing in precious metals are much less desirable than one might think.

Companies which are hoping to sell you gold as an investment will tell you all kinds of statistics which shows that the US economy is going on a path of self destruction. They will show you the massive trade deficit that the United States has, the massive Budget Deficit that the United States has, and argue that over the next few decades the US economy is going to take a major down turn, and that the US Dollar will be practically worthless and that gold will hold its value. Here are the realities. In all of modern history, we’ve had a budget deficit, a trade deficit, and problems with the government. Our dollars still have value. Yes, the dollar has lost some of its purchasing power because of inflation over long periods of time; however by making good investments, you will stay several percent ahead of inflation.

They will tell you that gold is a great investment which keeps its value unlike the US Dollar which loses money to inflation. This statement is one hundred percent true, but the only thing gold does is keep its value. If you put your money in good mutual funds with long track records, you can easily make 12% on your money. There are many great mutual funds with ten and twenty year track records which have performed close to 15%. Gold has return barely above the rate of inflation coming in at 3% or 4% annually. Even if dollars are less valuable over time, investing in solid investments will give you a lot more purchasing power.

Gold investors will also tell you that during a disaster in which the economy collapses that you will be able to use gold to buy goods and services. Let’s look at the example of Hurricane Katrina. Instead of trading small amounts of gold, people bartered with goods which had use, such as bottled water and firearms, rather than a precious metal which did not do any good at the time.