A single mom’s car breaks down and the repair is going to cost her $500 dollars. If she doesn’t have the money in an emergency fund then what choice does she have but to borrow the $500, as she can’t get to work without her car? Maybe she has good enough credit where she can get a loan from the bank at a fairly reasonable rate. Maybe she has a credit card with a high enough limit that she can get the cash off of the card (again, with a fairly reasonable rate). What if neither of these are an option though? What if a payday loan is her last and only option?

Finding yourself in an emergency situation requiring hundreds (or thousands) of dollars is never good. It’s made all the worse when you don’t have any money set aside for emergencies. If you don’t yet have an emergency fund then I have to ask… Why not?

A while back I read that saving the first $500 is the hardest. It’s absolutely true, but definitely possible. It doesn’t matter who you are and what your situation is there is no reason that you can’t start saving up for an emergency fund. Cut expenses somewhere, anywhere, if you have to. Better yet, earn more money than you make now.

Easier said than done, absolutely. It’s not impossible though. If you’re not saving an emergency fund already then stop making excuses and just do it.

I’d love to hear your successes, failures, stories, etc with regard to emergencies and emergency funds. Please leave your comments below.

I’ll end this with a bit of humor. Here’s a quote from the show 30 Rock (somehow I ran across this while doing research):

You wanna party? It’s $500 for kissing and $10,000 for snuggling; end of list. – Liz Lemon

I’ve got to ask Liz, with $500 kissing and $10,000 snuggling who exactly is your target audience?

Unless you’ve been living under a rock somewhere you’ve surely heard about the protests going on all around the United States and even other parts of the world. It started as Occupy Wall Street and has grown into protests going on in basically every major city in the U.S. Here in my hometown of Phoenix Arizona the protestors have been hanging out downtown protesting everything from politicians to corporate greed. In fact, I was reading an article when I saw this little snippet from an interview, which gave me a bit of a chuckle.

What Phoenix’s occupiers are mad about varies, depending on whom you ask.
According to Darren Lansing, who was interviewed while shirtless and blowing bubbles, his gripe’s with politicians.
“[We've got to] get the money out of the hands of the politicians and back to the public,” he tells New Times.
When asked how he plans to do it, Lansing says, “We’re doing it right now, man.”
Apparently, blowing bubbles is the key to redistributing wealth. Who knew?

No offense meant to any of the protestors, but there has got to be a better way to protest. The act of protesting alone will not likely solve anything. His bubble blowing form of protest certainly isn’t getting the money “out of the hands of the politicians.”

I’m lucky. I’ve got a job and so does my wife. We make pretty decent money between both of our jobs and we are wise with our money. We’ve saved an emergency fund, starting saving for retirement and have even started to set aside money for a new car, house upgrades and vacations. We’re frugal on the things we don’t care much about but are happy to spend our money on things that we enjoy.

We aren’t out of a job like a lot of the protestors. I get that.

I wish there were more jobs to go around for everyone who wants one. There just aren’t right now. A lot of things that have happened are out of a lot of peoples control — home values dropping in half, high unemployment, high rents. Life’s tough for a lot of people. Like I said, I get that. What I don’t get is why so many people today feel like they don’t have the ability to take their destiny into their own hands.

Instead of ‘Occupying Wall Street’ all day, every day, why don’t more people start a small business, or get training for a new job? Yes, jobs are scarce, but they aren’t nonexistent – not to those with skills.

One really awesome suggestion I found:

If you really want to do something radical, help start a new community bank. The number of banks has shrunk over the past few years.

Create more funding institutions to help decentralize financial power. If you don’t have the expertise, see who you could bring together in your community to create a new lender.

Banks are a huge part of this protest. People are mad about excessive fees, bailouts and just about everything else. If you want to take power out of the banks hands, then start a community bank (or credit union). I can’t think of a better way to take power out of the hands of the bankers and the politicians.

It may be cold and much too white outside for spring to be just around the corner (unless you’re lucky enough to live in Phoenix) but that does not give you an excuse to neglect your finances. To makes things easier for you I’ve decided to begin a monthly money review series to give you tips on what you can do to improve your finances. We’ll take it one step at a time, month by month, and with any luck we’ll all be much better off because of it.

If you’re owed a refund, file your taxes

Let’s face it, everyone likes to get money sent to them. If you haven’t already filed your taxes then get started. If the IRS owes you money then you might as well file now so you can get your money back sooner than later.

Contribute to an IRA

You can decrease your taxable income, and therefore increase your tax refund, by contributing to a traditional IRA before April 15th. Of course you’ll want to see a tax advisor for the specifics. Just keep in mind that if you have cash sitting around that you’re saving for retirement if it isn’t already in an IRA then it probably should be.

Review your savings plan

Do you have an emergency fund? This should be 6 months worth of living expenses stashed away into a savings account or money market fund. If you don’t already have an emergency fund then start one now. Set aside a certain percentage of every paycheck to go into this emergency fund and do not stop until you have at least 6 months worth of living expenses. You’ll feel a million times better by having cash in the bank.

The United States economy shed about 2 million jobs in 2008. Some people have been fortunate enough to keep their jobs but have had to accept salary cuts. The point is that millions of people have had serious reductions in salary. Are you one of these people?

While browsing through financial reporting sites such as CNN and Yahoo I’ve come across several articles which share readers experience with adjusting to much lower salaries. Naturally all of the readers were forced to cut back on expenses. While some were able to cut unnecessary expenses (such as cable) others were forced to downsize to such extremes as losing their home to foreclosure and moving into a rental property.

I’m extremely grateful that my wife and I have not had to do any downsizing, but I’m naturally concerned about the future. I’ve realized while reading all of these stories that topics that I preach on this personal finance blog such as establishing an emergency fund and avoiding debt, are more relevant now than they’ve ever been.

While those who have already had to make major lifestyle changes probably won’t have much of an opportunity to build an emergency fund or cut back on expenses there are still us lucky few who have our jobs and continue to earn our normal salaries. With that being said I want to emphasize the three lessons I learned while reading these articles and thinking about this blog post. They’re not earth shattering, and I’ve gone over this again and again… but they’re so important.

Live Within Your Means

Don’t Take On Too Much Debt

Establish an Emergency Fund (6 – 12 months of living expenses)

Please share your stories with us here at Debit versus Credit. If you’ve had to adjust due to a layoff or otherwise tell us what you’ve done to adjust. If you’re just starting an emergency fund so you can be prepared for the future share your story with us! We’d love to cheer you on!

I’ve had many people ask me over the past several weeks what the secret is to building wealth.  Today I am going to share the answer with you.  Before I do though, I want to tell you what it’s not.  It’s not a great investing tip.  It’s not a can’t-lose business idea.  It’s not even related to how much money you bring in or how you can bring in more.  It’s simply the idea that wealth building is a state of mind and cannot coexist with poor financial choices, especially those related to debt.

Let me explain.

Many of you may be aware that I currently work in banking.  I help anywhere from 10 – 50 people in any given day and quite often they are in some sort of financial distress.  Whether their situation is as extreme as the inability to make their loan payments or as simple as not having enough cash to pay for gas for their car, they all have one thing in common.  They don’t have any cash set aside for emergencies. The fact that they haven’t put any cash into an emergency fund tells me something else about them.  They aren’t building wealth. Quite the opposite in fact.  They’re living paycheck to paycheck always saying that next time they’ll save a little, but next time never comes.

It’s a sad situation really.  It’s a never ending cycle of all talk and no action.  Just as I said earlier, it’s a state of mind.

Let me throw out a blanket statement here (which as anything might have some rare exceptions).  If you can not manage your money well enough to save six months worth of expenses in an emergency fund and keep it there, you will never be wealthy.  The emergency fund is critical in any wealth building program because it accomplishes two important goals.

1. Building an emergency fund will help keep you out of debt.
2. Building an emergency fund will get you into the habit of saving.

A Credit Card Is Not An Emergency Fund

Many people use credit cards as an extension of their paycheck.  Do not do this.  If you can not afford to live with only your paycheck then you need to cut back on expenses.  Likewise do not think of a credit card as an emergency fund.  This type of thinking will get you into debt and take away from your financial well-being every single time.  Start building an emergency fund now so you don’t have to resort to using your credit card if something goes wrong.

Start Saving Now So You Can Save Your Future

The sooner you begin on building an emergency fund the sooner you will become financially independent.  All it takes are a few good habits and some emergency reserves to avoid unnecessary debt and you will be well on your way to riches.  Don’t talk yourself out of it with excuse after excuse.  Start small if you have to, but start saving right now.  If you don’t you’ll never reach your goals and you’ll never get to go on those vacations or buy those toys that you’ve always wanted.  By setting aside money today you’ll get yourself into the habit of saving and once you’ve built up your emergency funds then the real wealth building can begin.

For some further reading on wealth building check out My 33% Savings Plan and Starting On The Road To Wealth.

It’s midway through the year.  How have you done with the financial goals you set for yourself in January?  If you never set any that’s ok.  It’s never too late to start.  It’s a good time to check your finances and make any necessary adjustments to keep yourself on the right track to financial independence.  For a great starting point check out the following list.

Emergency Funds: Here’s a pop quiz for you.  How many months worth of expenses have I managed to save up so far in my emergency fund?  If you answered “3 months” then pat yourself on the back.  You deserve a cookie.  Enough with the cliches.  A well prepared personal finance portfolio should have AT LEAST three months worth of expenses.  Most financial advisers recommend six months worth, as do I.

Net Worth: A net worth that’s holding steady or rising is a good sign and you’re doing well.  To calculate your net worth add up your assets and subtract your debts.  Pretty simple right?  You should calculate this number on at least a semi-annual basis to make sure that your Net Worth is increasing.  If it’s not you need to change your financial habits.

Insurance Policies: In this day and age insurance is as much a necessity to a healthy financial policy as is a 401(k) or emergency savings.  You don’t want to pay for more coverage than you need, but even more so you don’t want to be underinsured in case of a catastrophe.  Another thing you want to review is your deductibles.  If you have a substantial amount of cash on hand to cover a high deductible you might consider increasing your deductibles in order to lower your annual insurance premiums.  Assuming nothing goes wrong this should pay for itself within a few years (or less).

Retirement Planning: Are you ignoring free money?  Does your employer offer a 401(k) or similar retirement plan?  If the answer is yes then are you contributing to it?  If you answered no, then start now.  Most employers that offer a 401(k) retirement plan also offer matching contributions up to certain amount.  These can range anywhere from 1-10% of your contributions.  If you’re lucky enough to get a matching contribution on the upper range then it’s even more reason why you need to be contributing to such a plan.  For more information check out a previous post of mine: Are You Ignoring Free Money?

Investment Portfolio: It’s always a good idea to review your investment portfolio on at least a quarterly basis.  If you are not comfortable with self-managing your portfolio then call your financial advisor to review it for you.  If a large portion of your investments are in bonds or other fixed-income investments you might consider putting more into stocks, especially considering they are down sharply this year.  This should lead to a higher return over the long run.  On a side note, if you are in your twenties or even thirties and you have more than 5-10% of your investment portfolio in bonds then get them out.  Bonds – as my friend Ramit from iwillteachyoutoberich says – are not for young people.

Now that I’m finally back in the swing of things here at Debit versus Credit I’m ready to bring back a popular feature (and one which I enjoyed very much): Friday Book Club. I began Friday Book Club in November of 2007 with three goals.  First, to be able to share what I’m learning with all of you.  Secondly, to absorb the material that I’m reading more efficiently by reviewing it and summing it up in a matter of just a few paragraphs.  Then finally, to be able to apply what we’re learning to our personal financial lives and share with each other experiences that relate to the lessons and topics at hand.  These are my goals and I hope that you will share these common interests with me.  Now then, where were we?

Today’s Friday Book Club will feature chapter 5 of The Automatic Millionaire which was written by David Bach, the New York Times Bestselling Author of Smart Couples Finish Rich and Smart Women Finish Rich.  Chapter 5 is entitled Automate for a Rainy Day and is all about creating an emergency fund, or a rainy day fund, for protection.  I’m a big believer in this.  In fact, my wife and I are already well on our way to having a six-month emergency fund saved up.  We’re about halfway there right now and it has been one of the easiest things that we’ve ever done.  You see when we got married we decided that we didn’t want to be like some of our friends who got into financial troubles (even little ones sometimes) and didn’t have any way to cover these “emergencies.”  So we decided that before we did anything else with our money that we’d establish an automatic savings plan which would begin an emergency fund for us.  It’s paid off quite well for us and we have peace of mind now if anything bad were to happen.  On to David’s advice then…

The “Sleep Well at Night Factor”

“How can you provide yourself with some financial security today?” is the question that David asks within the first few paragraphs of this chapter.  Are you prepared if something were to happen?  Could you pay your bills if you lost your job and were unemployed for two months?  Things happen and as he says, “circumstances change.”  So what can you do to provide yourself with some insurance against this chance of risk?  Of course the answer is quite simple.  By setting aside cash as an emergency fund you can help protect yourself and your family from any financially devastating changes.  How well are you prepared to weather any storms that life might throw at you?  David asks just a few simple questions where you can easily figure out the answer to this question.  I’ll ask them as well.

• My monthly expenses currently total: $_______________
• I currently have $_______________ saved in a money market or checking account
• This equals _______ months’ worth of expenses

How’d you come out?  I’ll do it with you.  My monthly expenses currently total (roughly) $1,162 dollars.  This includes some items which I could drop if needed (such as the internet and my phone).  I currently have $3,299 dollars saved in an emergency money market.  This equals 2.84 months worth of expenses.  Not the six months that my wife and I are shooting for, but like I said it’s a good start.

Let’s Make A Goal: Build An Emergency Fund

Let’s decide together – right now – to not let ourselves get caught in a bad situation made worse by not having any cash on hand to weather catastrophes.  It might sound like a difficult thing to do, but as long as you make it automatic every single month you’ll never even notice the money is missing.  It will not happen overnight but over time you’ll notice that you have a month, two months… four months and finally six months worth of expenses saved up.  So back to the book then.  At this point David lays out three rules of emergency money.

1. Decide how big a cushion you need.
2. Don’t touch it.
3. Put it in the right place.

Decide The Cushion Amount

When it comes to deciding an amount you’d like to have as a cushion it’s mostly a personal choice based on your personal situation.  Finance is not and should never be thought of as a one size fits all type of thing.  Since we call it personal finance, we ought to make sure it’s personal right?  Anyway back on track now.  I recommend personally at least a six month cushion, just to prepare for the worst.  Maybe it’s my old boy scout genes talking, I don’t know… but I think one ought to be prepared.  Of course if you’d feel comfortable saving more then please do.  Or on the other hand if you think three months is more than enough than fine… it’s all a matter of preference.

Don’t Touch It

Here’s where most people start to have trouble with these emergency funds: they use them for non-emergencies.  There’s a sale at the shoe store and you don’t have any cash?  Don’t take it out of your emergency fund.  Saw the latest and greatest gadget while browsing the lanes at Best Buy?  Don’t take it out of your emergency fund.  Lose your job and don’t find a new one for a month or two?  In this situation, you might consider using your emergency fund.

Put It In The Right Place

As David mentions in his book you should not be letting banks get rich off of your savings.  Don’t put your emergency fund in a savings account at your bank or credit union if you’ll only be getting .50% percent or even 2% interest on the balance.  Shop around.  See what rates you can find on savings and money market accounts at your bank, your credit union and even brokerages.  There are a billion places that are offering rates much more suited to your needs.  Give Vanguard a try, or ING or Edward Jones.  Look at Bankrate.com to see what rates are being offered in your hometown.  The point here is that if you’re going to have money you might as well have it work for you.  If you plop your money in the first 1% savings account you find it’ll take your money 72 years to double, but if you can find yourself a rate at something even like 2.5% you’ll cut that amount of time down to 28.8 years – and even less the higher the rate you can find.

That’s All For Now

Chapter 5 wasn’t very long and wasn’t even very meaty – but it’s a ridiculously important concept that is far too often looked over by consumers and financial advisers alike.  To recap:

• Bad things happen and to be prepared for these bad things you should start an emergency fund
• Decide how much of a cushion you think you need
• Don’t touch – unless it’s a TRUE emergency
• Make sure you don’t just plop your emergency funds in a low-interest savings account
• Make it Automatic: set your paycheck up to direct deposit a predetermined amount into your emergency fund every month

If you’re interested in checking out my previous recaps of The Automatic Millionaire then check out the links below.  I highly recommend doing so.

The Automatic Millionaire: Chapter One
The Automatic Millionaire: Chapter Two
The Automatic Millionaire: Chapters Three & Four