25 June 2012

More about Emergency Savings

We've all been through some tough times lately, or know well someone who has. Emergency savings seem to be more of a luxury than ever, but in reality, they are more of a necessity than ever.

We talked about getting your first emergency savings account started last year: Your Karma $1,000

Recap: 1) Saving $1,000 makes you less vulnerable to small attacks on your income. 2) More savings leads to mo' bettah Karma 3) Make saving the money as transparent as possible...if you never see it in your checking account you won't miss it as much.

According to this article published by CNNMoney, 28% of American households have no emergency savings at all. Zilch, bupkis, nada, niente. More Emergency Savings Needed!

Nobody is telling us that saving money is easy. It's not. It can be made less painless, though. The easiest way to do this is to have a portion of your paycheck directly deposited into a savings account. Talk to your HR department and have them set this up for you. It's their job, you are not asking for any favors.

Another helpful exercise is to ask yourself what would happen if you had an emergency expense happen right now. Let's not even get so severe as to talk about a job loss. What would happen if you had to replace a major home appliance right now? Try to find a refrigerator that meets your aesthetic and functional requirements for less than $1,200. If you put that on a credit card with a 24% interest rate and paid it off over a year, that's about $115 extra out of your budget per month.

What would happen if you had to replace a car? Insurance helps, but most reasonably priced policies only cover the replacement value of your car. And after the trauma of an accident, don't you deserve a little shiny and some more safety features?

OK, we do need to address job loss. This is America and we're in a recession. Most planners recommend at least three months worth of living expenses as an emergency savings fund. It may help to keep in mind that "living expenses" and "salary replacement" are two separate things. If you are not earning a salary, you're not paying taxes or making retirement fund deposits, which should make you feel a little better, no? However, if you are not earning a salary, then you are not having things like health insurance paid for, so that needs to be taken into account. When calculating living expenses, keep the following in mind:

  • Rent or house payment
  • Debt obligations such as student loan and car loan payments
  • Credit card minimum payments
  • Utilities and transportation costs
  • Insurance payments - home/renters, auto, health
  • Groceries and eating out. You don't have to totally hibernate while you're unemployed.
How many months' of expenses do you really need? As with all financial planning questions, the answer is "It Depends." Are you planning for just one person or for a multi-income household? Do you have other sources of income that you can tap into during hard times? Is your pay dependent on commissions or other irregular cash flows? Have there been layoffs in your industry or at your company? How long do you think it will take you to find another job? Take all of these factors into account, but don't go overboard. You don't want to neglect saving for retirement so that you can have a year's worth of living expenses in a low-interest rate savings account. Keep a balanced perspective here. 

It's a scary topic for scary times. Although it isn't much fun to anticipate hard times, it is better to talk about building an emergency fund now, before you need it, rather than to wait until the need is imminent. 

19 January 2012

Changing Jobs? Save that 401(k)!!

Okay, we've got a new year, lots of cool topics are starting to crop up, so maybe it's time to start blogging again.


Often when workers change jobs, they find themselves with a decision to make: What do I do with this little old retirement account? It could be a 401(k) or a SIMPLE IRA. Depending on how long you've been working there, the balance probably isn't all that much in terms of retirement planning. It might even look like a tasty morsel chunk of change for managing the change to a new job, or to pay off a smidgen of debt...and get stuck with some taxes.

But wait! You can save your savings and put them back to work for you! As tempting as it may be to cash out of a smallish 401(k), there is a way that you can hang onto it. The first possible alternative is to keep the account in your soon-to-be former employer's plan. This is a perfectly workable solution, but not always attractive if you are otherwise moving on emotionally. Also, the plan manager may charge former employees different fees, which nearly always means more expensive ones.

The other solution is to roll that 401(k) into a Rollover IRA at a brokerage or a mutual fund company. This will allow for emotional separation from your previous employer and potentially give you more control over your account. However, as this article from Smart Money cautions us, this can be an expensive solution. There is absolutely no reason to pay high fees on a small account. The implicit message to you from your service provider is "You are not our core business and we don't really want to be bothered with you, so we'll charge you ridiculous fees until you leave." That's okay, there are plenty of financial service providers who are interested in your business.

What would be my advice for someone with a small account who wants to roll it over? Hie thee to a reputable no-load mutual fund company and roll your account into a low-cost index fund or a balanced fund that meets your long-term investment needs. The accompanying article gives some excellent companies to consider for your account.

And if your account balance is still low enough to be charged fees? Another advantage of moving your account from the previous employer's plan is that you can always add to it. Any of the companies listed in this article will allow you to contribute to your existing account. Of course, you will want to check for income eligibility and contribution limits, but even if your new employer offers a 401(k) you don't have to let your old account lie fallow. It may just take a couple of years of channeling a few bucks a month into the rolled account to get you where you need to be.

Don't let an excellent opportunity for long-term savings pass you by just because you are getting a new job. Roll that 401(k) and keep it growing. In a few years you will be delighted that you did!