Emergency Cash Fund - You need one!

Have you recently lost a job due to unforeseen circumstances? No longer able to pay rent or your mortgage and other bills because you lost your revenue stream? Are you tired of getting calls from collectors wanting you to pony up? Worried about providing food for your family? Tonight, I want to help you develop an essential tool in case you lose your job, have a medical emergency or if you lose a significant source of revenue. That tool is an emergency cash fund.

An emergency cash fund or ECF is an essential tool to fight. If you lose your job or have a medical emergency, you will be able to cover all essential expenses until you find a new job or get back on your feet. There are three steps to establishing an ECF. The first step is recognition of a need for an ECF. The second step is getting an ECF started and funding it. And finally, maintaining your ECF for that future emergency.

The company you worked for the past 10 years closed its doors yesterday. You have a mortgage, car payment and other essentials bills you need to cover to keep you family intact and aid you in finding another job. One option is unemployment, but unemployment will only take you so far. Another is tapping into your savings. What?!? You don’t have any savings. As with many situations, the need for something isn’t realized until after the fact. Had you been saving for a rainy day, you wouldn’t need to figure out how to drain your brake fluid.

Well, now we see the need for an ECF. To create your ECF, you have to start saving. But how much, and for how long? Most experts, such as Clark Howard and Dave Ramsey (who are Consumer advice gurus), suggest saving at least 3 to 6 months worth of your total household monthly income (THMI). That is, you should always have 3 to 6 months of your THMI (total household monthly income) on hand. And you will have to save every month until you have 3 to 6 months of your THMI on hand. And that can take 6 months to 10 years, depending on how aggressively you want to save.

To start your ECF, find somewhere to hold all that money and it should be easily accessible. In financial terms, this fund has to remain liquid, i.e. easily convertible from your investment to cold hard cash. Online saving accounts such as ING Direct, can provide you with a good interest rate and the availability to have your money within 3 business days. Next, deposit a starting amount. I would suggest $1000. Whatever amount you are comfortable with is fine. Then, every month deposit a percentage of your THMI (total household monthly income) into the account. You can start with 1 percent or with 10 percent. Again, how aggressive do you want to be?

A quick example is John and Jane Doe, who are married and have one child. The Doe’s THMI is $5000. That means their ECF will need to be between $15,000 and $30,000. They decide to fund their ECF with a $1000 deposit into an ING Direct online savings account. They should deposit anywhere from 5 to 10% of their THMI into their savings account. ING’s current interest rate is 1.4% interest. Holding interest constant for the next 10 years; Initial deposit of $1000 and making a 5% payment to their ECF each month, it will take the Doe’s 5 years and 5 months to save $15,000, the bottom end of their goal. Making a 10% THMI payment each month, it will take 2 years and 7 months to reach the same goal. To reach $30,000 at 5% will take 11 years and 3 months; at 10% it will take 5 years and 4 months.

Once you reach your ECF goal, you can stop contributing to it. If you have to dip into your ECF your first priority, after getting back on your feet, should be bring the fund back up to date. Maintaining your ECF can be tricky. You and your spouse need to ask yourselves several questions like: what constitutes an emergency, how quickly to reestablish the fund after using it and whether or not to keep it in the same account.

JoeT

Oh boy!

Yep, I've been busy. It has been really difficult to find the time to write a post. I have the post ready, but had to wait for some information from our expense report. It is quite interesting to see how fast money flies out instead of into our accounts.

As an update on our debt - we are working harder than ever to conquer the pile of debt that I built up before we were married. Overall we have reduced it, but we only made a dent. If that.

Our emergency cash fund has been created. This was our first step to spend less. After reading Dave Ramsey, this makes perfect sense to start. Part II of the spend less is to reduce debt and budget our monthly income. Dave Ramsey's process is called the debt snowball.

My wife and I have been successful on one front. We have completely stopped using credit cards. We have been successful doing this since September 2008. Everything that we have bought has been paid with cash. Now that is awesome in my opinion.

Happier financial trails are in our future!

JoeT

Save $50 a Day. Not really...

Since the beginning of the current recession you have heard or read how to save $50 dollars a day or cut back on expenses without giving up your lifestyle. Folks, you cannot have your cake and eat it too. Sorry!

A few weeks back Kiplinger.com posted an article on how to “Save $50 a day (and feel no pain)”. You may read the article here. There are several areas that the article addressed that caused me to stop and think because I felt they (the authors) left something out. Those areas are Health and Insurance costs, Utilities costs, Food costs, and Transportation costs.

First, let’s get something clear. Credit Cards are bad. They are really, really bad; even if you pay them off at the end of the month. But why are they bad? Because you will spend more if you use credit cards. There are only two acceptable reasons for having credit cards: immediate emergency funds and for business expenses/travel. Yeah, they have good gimmicks like cash back, reward miles, or hotel points to reel you in. But you are just better off to keep them on water in the freezer.

One caveat: if you travel for personal pleasure. First, pay for all travel expenses in cash. Then when you leave on your trip take two credit cards with you, from different banks or issuers, for emergency use only. Back in September 2008, I started paying for all airline tickets in cash, whether they were for business or personal travel. How did I do it? I used a debit card. I do not have the same guarantees as with a credit card, but I am willing to take a chance.

Now back to the article. One of the first areas the article identified to reduce costs was Health and Insurance costs. The article suggests that you should raise your deductibles for auto and home insurance. I agree that it can save you money, but do you really want to skimp on this important area? How many of you have can cover a $2500 deductible or even a $1000? If “I have a credit card” is your answer, refer to paragraph 3. Most people don’t and whether you are responsible for the auto accident or not, your rates are still going to increase. I would think long and hard before making this determination. If you have the cash to cover the deductible – raise them.

I really enjoyed the Utilities section. For most of the suggestions, you had to spend money in order to save money. Hmm… The savings doesn’t add up. If you have to spend money in order to save money, are you really saving? My grandmother would call this being penny wise and pound foolish.

For example, to save $100 annually they suggested that you ditch the old fridge. The fridge the article recommended to replace the old fridge costs $750. It would take 7.5 years before you recouped your investment. (This is a nifty metric called Payback Period) By that time, they would recommend that you buy another one. The other example the article gives is to buy a new washer. At $1600 (or the lower priced $1450 washer) it would it 32 (29) years to recoup your investment. Let’s hope your high priced washer lasts at least 20 years.

Food was another area. After their first example, the article started going downhill. Listen up; you cannot save money by eating out. Even when you go with cheaper food alternatives, as the article suggests. Instead try this: Stay home and invite friends over. Ask each person or couple to bring their favorite dish, side, drink, or dessert. Then share it with everyone. I bet you will have a more enjoyable experience.

Transportation is the last area. Actually, I don’t have any gripes about this section. I like what they pointed out about buying a new or used car. If you currently have a gas guzzler, then trade it in for something that will give you better fuel economy. But remember, this is only if you need a newer vehicle.

One thing that the article did not point out is if you live close to work (within 15 miles) ride your bike on those really nice days. In some places 15 miles can turn into an hour long commute by car. Instead of sitting in a car, spend that time exercising.

Spending less and save more is not really hard to do. The article provides several good examples on how to limit your spending. The areas I pointed out are the ones that need a disclaimer or buyer beware sign. The article is one of those that should be logged into your internal file cabinet and only referred to when you want to generate creative ideas on how to save. Otherwise, ride your bike. You’ll get more out of it.

Comments and Questions are always welcome.

Please remember I am not a guru or an expert in personal finance. I want to bring you newer ideas to help you achieve your life goals. And remember advice given is the opinion of the creator and owner of the blog. Using this information is at your own risk.

Performance Management and Goals

First we need to discuss personal performance management and how it relates to achieving your goals. Personal performance management can be defined as the process of evaluating progress toward your goals. It requires:

1) the ability to evaluate your performance against established standards
and
2) taking action to improve you performance, if you are not reaching your goals.

What are established standards? Well, that’s your current performance, also known as your baseline, which you will need to figure out. One example of an established standard is my wife and I tracking our monthly expenditures to create a baseline for expenses. After the end of March, we will be able to compare future months to March and determine if we are spending more or spending less.

Another example is riding my bike 30 miles. On future bike rides, I can determine if I did better or worse. Or it could be my goal to bike at least 30 miles every time I ride. If I bike less than 30 miles, then I did not reach 100% of my goal. Instead my performance might be 95 or 90% depending on how far I actually rode.

It is pretty easy to establish a baseline. First, you are already performing at that level. Second, it doesn’t take too much time to figure out your current level of performance if you are unsure. Take notes and pay attention to what you are doing. In a little bit, you will have it figured out.

Are you ready to start outlining your goals? The best way to start is to take a realistic look at what you can actually accomplish. Start small, keep it simple and build yourself up from there. As you create your goals, think about how you will measure or track your performance. Also, ask yourself if there are any long term goals that you want to achieve. If yes, then make sure that your other goals align themselves to achieve those long term goals. The long term goal, or goals, should be strategic in nature. My wife and I have one long term goal – become fiscally responsible. We believe choosing the right goals within each of the three performance areas, financial, personal and work, will achieve our strategic goal of being fiscally responsible.

As you consider your long term goals, remember to keep them simple. Being fiscally responsible is easy to define, to evaluate our performance and to improvement if we are underperforming.
Starting with my next post, I will show you our (my wife and I) roadmap, explain each portion of the roadmap, and talk about the performance measures or metrics we are using to evaluate our performance.

Comments and questions are always welcome.

Please remember I am not a guru or an expert in personal finance. I want to bring you newer ideas to help you achieve your life goals. And remember advice given is the opinion of the creator and owner of the blog. Using this information is at your own risk.

Welcome to the Personal Finance & Performance Management Blog!

We’re glad that you found us. We believe that we can help you better manage your life by using performance management techniques. These techniques are similar to ones that businesses utilize to determine their goals are being met.

This blog has two objectives. The first objective will be developing a set of performance measures or metrics, to help keep your goals well within sight. The other will be providing guidance to live a fiscally responsible life.

The three performance areas that we will focus on are: Financial, Personal, and Work. Below is a description of each of these areas.

• Financial Performance metrics emphasizes fiscal responsibility by focusing on spending, saving and reducing debt. These metrics do not focus on investments. This concept will be covered in more depth in later blog posts.

• Personal Performance metrics focuses on what you want to accomplish in the next year, 5 years, 10 years, or longer. For example, you may want to lose weight, maintain a certain weight, or thru hike the Appalachian Trail from Georgia to Maine.

• Work Performance metrics concentrate on your career, current job, or professional development. These metrics are designed to highlight where work performance can be improved and assist the move into your dream job or position.

Living fiscally responsible can be easy. Fiscally responsible means you are able to pay all debts incurred at one time. We believe to achieve being fiscally responsible you will need to spend less, save more and be prepared.

As the PFPM Blog progresses, we hope to bring you case studies of individuals that are using metrics to improved their performance, achieve their goals, and keep those ideas and future plans in sight. To achieve these tasks we will provide book reviews that emphasize financial, personal and work goals. Excel spreadsheets containing metrics that we currently use with calculations, definitions, and performance calculations will be posted to help you develop your own metrics and track your progress.

Questions and feedback are welcome.

Please remember advice given is the opinion of the creator and owner of the blog. Using this information is at your own risk.