What do you mean you don’t have an emergency fund?!?

It’s understandable. Chances are that no body ever told you you need one. Remember when your grandparents always said those weird things like having money put away “for a rainy day”?  It’s not literal as so many of us thought when we were kids. Now that you’re older, have you ever stopped to actually think about what it means? No…..Thought so.

Saving money sucks I know. Why save it when you can die tomorrow? I want to play (awesome new$60.00 game) now dammit! Lets take a look at recent events for an all too real example.

Lets say you happened to live in Japan this week. Earthquake, tsunami, nuclear radiation and yeah snow too. Lets assume you weren’t totally screwed and your house was not washed out to sea but rather was damaged a bit and some of your stuff got wrecked. Were you expecting that? No. Now take a second and think about how much money you have in the bank. Liquid only, no credit, no assets, just cold hard cash. Not much right?

Lets add that the company you work for goes under…. literally…gone. You are now jobless and have a few extra expenses piled up on your front lawn. How are you going to pay the mortgage? How about car insurance, medical costs, Insurance premiums…how are you going to eat?

Extreme circumstance I know but how many people were caught unprepared and are suffering now because of it. Even in more run of the mill times, you can be kinda screwed by simple problems.

Let’s get back to your life. You’re doing ok, living paycheck to paycheck. Your bills are being paid on time and your credit cards aren’t all that bad, maybe even empty. Ask yourself this question now, What would it take to ruin me? A broken leg, a car accident, downsizing at work, there are dozens of things that happen every day and eventually one of them, big or small IS going to happen to you. I’m not saying this to be negative but rather to give you the chance to prepare and save your own ass before you lose it.

How to make an emergency fund:

Take that spread sheet we worked on a while ago and check some numbers out. Most important here is how much money it takes you to survive every month.

Now figure out how many months you are going to need to survive in case something changes your current circumstances. Most people are comfortable with 6 months, but it’s really a personal decision for you to make.

So if it costs you $2.000 a month to get by, you need a cushion of $12,000. A lot of money I know, but you can do it easier than you think. If you have the willpower to set aside $50.00 a paycheck and go deposit it then do it. If you feel like you won’t do it or won’t keep up after awhile, use some earlier tactics I taught you and use direct deposit. Change your deposits to automatically add That money for you so you can’t get off track.

“But I can’t afford that”

I call shenanigans on that my friend. Think of all the things you spend money on everyday. A pack of smokes, a latte, movies or even the little skull shaped air valve caps on your tires(creepy). You absolutely can find a few bucks here and there and if you can’t then your in over head and need to seek financial councilors.

Once you have the dollar amount figured out, you need to put the money somewhere. The key to an emergency fund is that you need to be able to access it in a pinch. With that said, I will type this next part in caps so you understand the importance of my words. DO NOT INVEST THE MONEY IN ANY WAY SHAPE OR FORM. I know it seems counter- intuitive to save money and not invest it in something, but trust me the whole point of an emergency fund is having LIQUID monies at your disposal. Investment vehicles add risk to your funds, tie them up for different lengths of time and defeat the purpose of the emergency fund.

Where to keep it:

Again this can be up for debate. Personally I say it should be kept in a Savings account. Don’t put it in checking because there are too many ways you can access the funds in a time of weakness. Best bet is savings because you can set it up so you can only get the money out by going to a teller and withdrawing in person. It also gives a better interest rate, though it’s still not much it’s better than nothing.

What ever you choose it needs to be accessible in a bind but pain in the butt enough that you won’t spend it on shoes or X box games.  Now im tired, so good luck with all that.

-Jared

What is a CD and why do I want one?

The easiest way to explain what a CD is is to copy directly, someone else’s explanation:

“A certificate of deposit or CD is a time deposit, a financial product commonly offered to consumers by banks, thrift institutions, and credit unions. CDs are similar to savings accounts in that they are insured and thus virtually risk-free; they are “money in the bank” (CDs are insured by the FDIC for banks or by the NCUA for credit unions). They are different from savings accounts in that the CD has a specific, fixed term (often three months, six months, or one to five years), and, usually, a fixed interest rate. It is intended that the CD be held until maturity, at which time the money may be withdrawn together with the accrued interest.”

Thank you Wikipedia.

So how do CD’s work? You go to your local bank or credit union and speak to a personal banker, the guys and gals at the desks. To open a CD account, there is generally a minimum balance required of $500 or more depending on the terms. The terms are laid out at the time of opening the account, the most common terms are 3 month,6 month,9 month, 12 month, 3 year and 5 year. The interest rates are generally higher than that of a savings account with some exceptions.

Why do you want one? Security. CD accounts are just as safe as savings accounts and are insured all the same. There is no risk of losing your money unless our financial systems collapse and at that point money won’t have a value anyway so it’ll be the least of your concerns.
Secondly, the rates normally beat inflation by a healthy amount. What many people don’t realize is that having your money in a savings account can actually make you LOSE money. I’m not talking about fees here. A typical bank offers you an interest rate as low as 0.01%, while inflation sits at a much higher 3% on average, making your oney worth less by the year. How does it make sense to be saving money and lose 2.9% of it’s value every year?

That’s why I suggest CD’s to anyone who is just starting to build up their money reserve. My suggestion is to keep an emergency fund in savings so it may be accessed immediately, but put the rest of your money is short term CD’s until you have an alternate idea for it. I’ll be laddering my funds in 3 separate 3 month CD’s, opened n consecutive months. This way I will never be more than 30 days away from money being available to me.

Online banking is awesome

   But Jared, what makes online banking so great? I’m glad you asked. Let me explain by telling you what I use my banks’ online services for.

   After my paycheck is direct deposited into my savings and checking accounts, I can view my balances right here on my computer. No going to the bank, no phone calls to bankers who want to sell me things I don’t need and no trying to find an ATM to pay a fee to check my balances for me. I have all my money on my screen in seconds. I’m also never a more than few clicks away from knowing where my money has gone, what checks have cleared, what checks I have received and what I still need to pay. It’s basically my personal accountant. I don’t keep bank statements, old checks or any paperwork and get this; I have never once in my life used a register book. Never. I have never had to balance a checkbook. Why should I have to balance ANYTHING? I’m not a trained seal, I’m a guy, and not even a trained one at that! The bank keeps all those records for me, that’s what I pay them for, that’s what the fees and interest they earn on my money are for.

   I also have them pay my bills for me. For free. I never miss a payment to a credit card, I never get hit with late fees, my phone doesn’t get turned off because I forgot to pay the bill.

   Here’s how it works. You use your banks’ bill pay service to set up payee information. This is usually the name of the company you want to send a payment to which is often referred to as a debtor. Then your account number for that company such as credit card number or customer ID number. Then the payment address of the company, which should be the place you normally send your payments by mail (sometimes a P.O. Box) And finally a phone number they can be reached at. I always give whatever number that I would call for customer service.

   Go to the page to make a payment. Go to the name of the company you wish to send a payment to and enter the amount you owe or wish to pay. Click send. Your bill will now be paid and taken directly from your bank account, normally within 24 hours on a business day.

   You can set up payments to be made automatically on a certain day of the month or you can choose to make them manually when ever you want. Once you set up an account it’s in there for good, so paying takes a few seconds from that point on. I for one have “balanced billing” on my utilities accounts, so I owe the same amount for 11 months out of the year. I have those accounts set to be paid automatically the first of every month so I never have to worry about it. When I had credit card debt, I set up automatic payments for the seventh of every month (due dates are the 18th) for my normal payments plus $20. I went in and paid them manually every moth and canceled the auto-payment, but if I ever forgot, It was paid anyway and there was no chance for a late fee or damage to my credit.

   Every bank has it’s own services and not all banks offer all of them, at least not for free like mine does. Look into you banks’ online features carefully before using them and know what your doing before automating your bills. Most importantly, make sure that if you choose to use these features as I have, that your income and deposits to these accounts outweigh the amount leaving the accounts every month by a healthy margin. Seems like common sense but it can get away from you fast and you’ll get hit with fees like crazy.

   Remember, your finances can be made automated, but NEVER lose grip on them. Check in to your accounts often and always know whats going in and out. In this case knowledge IS the real power.

Next post: Now you control your money, time to tackle your debts!
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The mystery of your credit history

Explaining direct deposit

   So, you have your bank accounts set up. Good work, now for this next exercise, I’ll assume you have a checking account, a savings account and a job. If you don’t have all of these three things, turn off the computer and walk away, I can’t help you. If you do, read on and I’ll explain this whole Direct Deposit thing.

   Simply put, Direct Deposit is the automation of payroll. What that means to you as an employee, is that when you wake up on payday, your check is in the bank already. No going to the bank, no waiting on lines, no standing next to people of questionable hygiene. Your employer takes a check from you(which you void out of your check book) to obtain your account information. They need your banks routing number, otherwise known as an ABA number and your checking account number. They enter this information into thier payroll services and when it comes time to pay you, they send the money , you ready for this?, Directly to your bank account.
   Most banks do not place a hold on Payroll checks either, so that means your money is available for withdrawal right away. So when you wake up on any given payday, your money is already in the bank and waiting for you. Saves you time and gets your money into your account faster, which helps save you from the overdraft fees we spoke about earlier.

   Easy enough for the employee right? So what about employers? Well using a Direct Deposit service can save your business time and money. After the initial setup, you can pay all of your employees in minutes from that point on. All you have to do in most cases is enter how much money you need to send each employee and hit the payment button. You can eliminate mountains of paperwork, and keep track of everything electronically. Why would you NOT do this? Some programs even come with handy worksheets that will figure out the pay for you. When you add an employee you add their rate of pay, tax rate and any deductions for say medical or retirement accounts. When you hit total, it will tell you how much to send the employee, how much to hold for taxes and how much to send to thier 401K or what not.

   In an upcoming post I’ll actually explain in clear terms how to use your direct deposit to help you boost your savings when you create a budget, look forward to the “How to build your first budget” post, coming soon to an RSS reader near you.

Next post: Use online banking or the earth gets it…