How to Build and Manage an Emergency Fund

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Imagine this: you’re driving your only vehicle to get to work, and suddenly one of your tires blows out. While inconvenient, you know you can replace one tire. You take your car to the shop, only to learn you need to replace all the tires. (Oh, and you should probably get your brakes done, too.)

Do you have enough cash set aside for small emergencies like this? Or would you put the cost of repairs on your credit card and struggle to pay off the balance before the end of the month?

This particular example may not resonate with you — but the details aren’t as important as the fact that you need to be covered for unexpected expenses like this. You need to know how to build and manage an emergency fund.

What an Emergency Fund Is — and Isn’t

An emergency fund (or emergency savings, or your rainy day fund) consists of cash you put aside you have to cover unplanned expenses and financial emergencies. You can use it to cover something like a flooded basement or to sustain you through a period of unemployment.

Emergency funds are not backup savings to be spent whenever you’ve exhausted your regular budget.

Setting up an emergency fund is imperative, because it’s designed to keep you functioning when an actual emergency strikes. No one wants to deal with that flooded basement, but it’s even more stressful if you’re worried about how you’re going to pay to clean up the mess.

An emergency fund is peace of mind so that you know you can cover the bills, go to work, and take care of your financial obligations without borrowing money or putting expenses on a line of credit.

How Much to Keep in Your Emergency Fund

Don’t let the idea of an emergency fund make you feel overwhelmed. Everyone needs one and anyone can start taking action (even just baby steps) to build a cash cushion.

When creating an emergency fund from scratch, consider how much money you would need if you lost your income temporarily. Your goal should be to save at least one month’s worth of your net pay (which would cover expenses for a month or possibly more if you’re living within or below your means).

If this seems like an impossible sum, remember you can save money in chunks. Start with a small amount and consistently add to your savings each week. Even $10 every Friday adds up over time — and it’s better to have something rather than nothing.

Once you’ve hit your goal of saving up one month’s worth of net pay, set a new goal. Increase your savings goal to 3 to 6 months’ worth of net pay. This will ensure you’re covered if you do happen to run into a major financial emergency, like an unexpected job loss.

Where to Keep Your Emergency Fund

Once you’ve saved up your cash, you need to know where to put it. While you don’t want to use the fund anytime soon, it is important to make sure you have quick access to your money if you need.

When thinking about where to keep your savings, keep in mind three key factors:

  • Liquidity
  • Accessability
  • Low risk

The best places to keep your savings include cash, savings accounts, money market accounts, and high yield savings accounts. All four of these options are liquid, accessible, and low risk. If you have any specific questions, your financial professional can help direct you to the best location for your savings.

It’s not fun to think about what can go wrong, but it’s financially wise to plan for the worst (while expecting the best). Although you may not know exactly what an emergency in your future might look like, you can prepare right now by building an emergency fund. Doing so will help you make financial disasters and unexpected circumstances a little less stressful if they do crop up.

7 Ways to Financially Prepare for a Baby

Financially Preparing for a Baby

Preparing for a baby takes a lot of work and energy — both spent on practical matters and things just for fun. It’s easy to get lost thinking about what colors to paint the nursery, how you’re going to afford to buy everything your baby might need, and trying to brainstorm the perfect list of names.

And of course, there’s the financial changes that come with a growing family. There’s no avoiding the fact that kids cost money — but that doesn’t have to be something new parents panic over.

Whether you’re expecting right now or planning for the future, you can start financially preparing for children. Use these 7 ideas to get you started.

Establish a Baby Savings Fund

Even though you may have a separate emergency fund established, you should consider saving up extra in light of your new addition.

What if your car were to break down, or your roof were to have a leak — along with unexpected expenses for your child? Your emergency fund could get depleted quickly.

It’s a good idea to save extra once you have someone who depends on you and the care you provide. You don’t want to have to worry about whether or not you can afford to fix, replace, or purchase something you didn’t plan on during a time that’s supposed to be happy and positive for  your household.

Adjust Your Budget

With any major life change, you should rebalance your budget. Adding a new family member to the mix is going to increase your expenses, so you’ll need to account for them.

Diapers, formula, daycare, furniture, and clothing are going to be new expenses for you. Write down a list of what you need and what you’ll likely want and estimate how much these new line items will cost.

It’s important to do this as soon as possible.  You might need to cut back in other areas, and that will be easier to do now before you have your hands full with the new addition to the family.

Figure Out Your Income

Will the amount of money you have coming in change once baby is here? Has one of you decided to become a stay at home parent, or will you be taking additional unpaid time off?

Nail down how much you’ll have coming in during and a few months before your baby is born, and don’t forget to check your projected budget against this number.

Also, it’s extremely important you review your employer’s policy on maternity and paternity leave as they all differ. This can greatly influence how much you’ll need to save up.

Knowing how much you have to live off of goes hand in hand with adjusting your budget. If your salary is decreasing, you’ll need to learn to live on less. Saving becomes even more important.

Review Your Spending

If your income and expenses are changing drastically, and you’re finding that money is tight, you might want to think about cutting back on some luxury expenses. These include things like going out to eat, beauty appointments that occur every month, and buying clothes and accessories.

You can also look at cutting cable, exchanging a pricey gym membership for a cheaper one at a smaller organization, or calling service providers to negotiate cheaper rates.

Put the extra money you “find” in your budget toward your list of baby necessities or savings.

Keep Your Baby Purchases in Check

The “fact” that children will cost $245,000 to raise gets thrown around a lot. Children do cost more money, but the total cost is within your control. Children cost as much as you spend on them.

You don’t have to go overboard when buying things for your kids, especially when they’re newborns.

Focus on getting things second-hand, whether they’re hand-me-downs or from garage sales. Babies grow fast! It’s not worth the money you’ll spend to buy them, say, brand new clothing when they’ll grow out of it in a few months.

Review Your Health Insurance Coverage

You’re going to be incurring a decent amount of medical costs throughout a pregnancy if you’re not covered appropriately under your insurance.

Review your health insurance plan and see what it covers, and what it doesn’t. If your spouse has access to another plan through work, check to see if their coverage is better.

This will be helpful when figuring out how much you need to have in your baby savings fund.

Consider Life Insurance and Estate Planning

Do you and your spouse have adequate life insurance coverage? This is an important factor to consider when bringing a child into the world. Life insurance is a necessity when you have others depending on you.

Something happening to you or your spouse means loss of income and loss of help with childcare. Both are equally important. Life insurance will allow your financial situation to remain stable throughout rough times.

Additionally, consider estate planning — yes, even if you’re younger. This will ensure your children are taken care of according to your wishes should something happen.

Otherwise, it’s up to the courts to determine their fate. Don’t let others decide what kind of future your children will have.

Get to Planning!

Hopefully you have more than enough time to create a plan and see if it works for you before your baby arrives. By following these seven tips, you should be in great financial shape when your child is born. The goal is to enjoy parenthood without any major financial issues getting in the way!

Rethinking Your Wants and Needs

Wants and Needs

We’re constantly bombarded with messages from the media, telling us we need to buy this or that. We start believing those messages, too, because they also warn us that, unless we purchase the latest and greatest — we’re missing out.

And when we look at our social media accounts, we see the lives our friends and family are living. It’s so easy to forget all we have to appreciate when we think, “so-and-so has more fun/money/friends/stuff” and so on.

From advertisements that push us to mass consumption, to financial products like credit cards that allow us to acquire stuff without actually paying for it, our society encourages instant gratification.

It makes sense that people favor convenience over frugality and simplicity. We no longer care to differentiate between wants, necessities, and wishes, because we can just charge everything and think about it at a later date.

It’s easier that way.

But it’s also led us to think common discretionary expenses such as cable, coffee, new cars, and dining out are things we can’t live without. These are 100% wants, not needs.

People are simply too accepting of the fact that everyone else pays for it. It’s easier to think, “why not me too?” than it is to question what truly make up your wants and needs.

Let’s Set the Record Straight on Wants and Needs

True necessities never change. We all need water, food, clothing, and shelter to survive.

Our ancestors didn’t get to live a life of luxury with cable, smartphones, or fast food restaurants. Those are conveniences, and we pay a hefty premium to enjoy them.

In order to cut back on spending, it’s important to remember that. If you were to lose your job tomorrow, would you continue spending on these luxuries? Chances are, you’d cancel your cable subscription before you’d stop shopping for groceries.

It’s obvious that as a society, we need to change our financial priorities. We need to start rethinking wants and needs.

Wants Disguised As Needs That You Can Learn to Live Without

Because of our culture of convenience, we started to believe that some wants are vital to our being. They’re not!

Even though it might seem like living without TV is impossible, we’re confident you could if you had to. Keep this in mind the next time you want to buy something you think is a necessity.

When you want that shiny new car with a $30,000 price tag, ask if something cheaper could do the job. The answer will be yes. You don’t need a top-of-the-line vehicle to get around.

Let’s look at some other wants that are worth rethinking:

Daily Lattes: Yes, it’s an overstated fact that buying your overpriced coffee is a habit that’s expensive. And perhaps this one habit won’t kill your finances for good — but unless a daily latte is the only indulgence on this list, you may want to consider cutting back. You’re looking at over $1,000 spent on expensive coffee each year.

Cable TV: There’s next to no excuse for still having a cable subscription when there are so many alternative streaming services out there. Get Hulu+, Netflix, or Amazon Prime for less than $10 per month, instead of paying $100, $150, or $200 plus for a cable, Internet, and phone package.

Cell Phone: And speaking of phones, you can probably cut back in this area too. Start by not buying a new smartphone every six months to a year. Sure, technology gets outdated fast — but a 2 year old iPhone that was taken care of will still function just fine. Space out your cell phone purchases. Or consider switching to something like Republic Wireless, which offers smartphone plans from $5 to $40 per month.

Beauty Routines: While getting your hair done, going to the spa, getting a massage, or treating yourself to a manicure/pedicure on a weekly basis sounds nice, it’s hurting your wallet. Try cutting down on how often you go to start. Then take a good hard look at what you could do yourself at home for a fraction of the cost (think doing your own nails).

Anti-Aging Solutions: All of these products and surgeries come with a high price tag. Embrace aging, because it’s not going to stop. You might be temporarily delaying things, but sooner or later nature will catch up with you. It’s an invitation to a round of endless spending.

Bottled Water: Did you know they have Brita water bottles now, as well as pitchers? If you fill them up with tap water, they’ll automatically filter out the harmful chemicals. It’s a one-time investment as opposed to constantly buying a $4 or more pack of bottled water. There are also many filtration systems you can get built into your faucet. You don’t need bottled water anymore.

Plus, ditching the bottled water habit is eco-friendly, too! Waste less, save more.

Children’s Parties: The extent to which parents will go to celebrate anything involving their children can be great (and detrimental). We all love our children, but keeping your finances in order will be a better present for them down the road. Show your love and appreciation for them in a way that doesn’t involve pricey gifts or parties.

Gym Memberships: What’s the first thing you do when you commit to getting in shape? For many, it’s to sign-up for the gym. However, there’s no reason you can’t try getting into shape for free before making that commitment. There are plenty of YouTube videos out there that show you how to use bodyweight exercises (no equipment needed), and there’s always yoga, running, or hiking.

Pet Expenses: Pets are great family members, but they come with their own set of costs, too. Between food, grooming, and walking, you could be paying over $100 every few months. Instead, purchase a cheap pair of electric clippers to groom your dog, and make time to walk your furry companion.

Not to mention the pet itself. If you’re thinking of adding a four-legged member of the family, remember to adopt, don’t shop. Purebred pets can cost over $1,000. An animal from the shelter or a rescue group will likely cost about $100 in adoption fees — and you’ll give a loving animal a well-deserved forever home.

Further Items to Strike from the Budget

If none of these apply to your own spending patterns, consider these additional costs that many people classify as “needs” when they’re really just wants:

  • Single-purpose kitchen tools and appliances
  • Most technology (sure, Fitbits are cool. But do you really need to spend $100 or more for a glorified pedometer?)
  • Designer furniture (or even new furniture, if hand-me-downs are available from family and friends)
  • The most expensive version of anything

If you have any of these items or indulge in anything on this list, that’s not necessarily a bad thing. But if you feel like you’re constantly short on money, or complain there’s nothing left over at the end of the month, or can’t make any progress on your goals to save and invest…

It’s time to take a good hard look at your spending and re-evaluate your wants and needs.

So, ask yourself: are there any wants you think you need to reconsider?

Reflect on your values in life and what you’re currently getting out of your expenses. Are they worth the money you’re paying, or would you be better off putting that money to use elsewhere?

Don’t fall for convenience. Always question why you’re spending your money, and you’ll stop automatically accepting that you have to buy things because you “need” them.

Knowing When to Go Pro

Hiring a professional financial planner could possibly be the key that unlocks the door to your financial success.  At the same time, choosing the right advisor to work with is an important decision that can often seem overwhelming.  In today’s show, we discuss the services that planners will and will not provide as well as key things to look for when hiring a pro.

In the March edition of MoneyAdviser, Consumer Reports outlined what typical fee-only planners will and won’t do for their clients:

What they will do:

  • Help you figure your net worth:  Typically, a planner will have the client gather the necessary data and then create a statement to uncover other planning opportunities, such as insurance analysis or estate planning.  (Do-it-yourself tip:  Collect current statements for all assets and liabilities and use an online net worth calculator, such as Mint or Yodlee, to determine your net worth each year.)
  • Advise you on 401(k) investments:  Your planner should be looking at all the pieces of your financial puzzle, including your 401(k) to ensure that your saving and investing goals line up across the board.  (Do-it-yourself tip:  See if your 401(k) plan sponsor offers access to investment guidance or check out the online retirement-planning program, Financial Engines, for additional support.)
  • Help you invest a lump sum:  A planner should be able to offer tax-efficient investment advice to their clients, as this is a core activity of financial planning.  (Do-it-yourself tip:  Use Morningstar software to research mutual funds and stocks for your portfolio.  Also, check out Bo’s Money-Minute about investing in a lump sum vs. dollar cost averaging.)
  • Determine if you’re properly insured:  Your planner should be able to evaluate your insurance needs, as well as refer you to an agent that can provide the coverage.  (Do-it-yourself tip:  Do as much research as possible and shop around for the best rates.)
  • Assess if you’ve got enough to retire:  A planner can determine whether you are on track for retirement or if you need to explore other options, such as working longer or changing your lifestyle.  (Do-it-yourself tip:  Assess your potential income sources, including Social Security, and use an online tool to calculate where you stand.  Consumer Reports recommends T. Rowe Price’s Retirement Income Calculator and Analyze Now’s Free Retirement Planner.)
  • Coordinate your retirement income:  Planners can determine the best method for drawing funds from your various retirement accounts, while considering tax consequences.  (Do-it-yourself tip:  Consumer Reports advises that unless your retirements consists entirely of Social Security and a pension, you might want to consult a professional on this one.)
  • Help you plan for college funding:  A planner can guide you on the best ways to finance your child’s education.  (Do-it-yourself tip:  Visit www.collegeboard.com, www.savingforcollege.com, and www.finaid.com for additional resources.)

What they won’t do:

  • Help you pay down debt:  As a general rule, fee-only financial planners refer such clients to a debt counselor or a bankruptcy attorney.  (Do-it-yourself tip:  Contact the National Foundation for Credit Counseling if you need help with debt.)

The gray area:

  • Help you control your spending:  While many planners recommend following a budget, it’s not cost effective for you or the planner to spend hours together developing a detailed budget.  Most planners are interested in overall cash flow and will recommend cutting back if needed.  (Do-it-yourself tip:  Create a spreadsheet or utilize budgeting software like Quicken, Yodlee, or Mint.)
  • Create an estate plan for you:  Planners can help you decide the structure and tax efficiency of your estate, but an estate-planning attorney will be needed to draw up wills, trusts, and end-of-life documents.  (Do-it-yourself tip:  Contact an attorney to prepare or review your documents.)

If you decide that hiring a financial planning professional would be beneficial for you, the following credentials should stand out to you:

  • Certified Financial Planner (CFP):  holder has passed a 10-hour exam, has at least three years’ financial planning experience, and has completed an approved course of study.
  • Chartered Financial Consultant (ChFC):  requires eight college-level courses in financial planning and 30 hours of continuing education every two years.
  • Certified Public Accountant/Personal Financial Specialist (CPA/PFS):  CPA with specialized training in personal finance.
  • NAPFA – Registered Advisors:  holder meets strict education and professional requirements for membership in the National Association of Personal Financial Advisors, for fee-only planners.
  • Chartered Financial Analyst (CFA):  holder completes a series of three six hour exams and has four years of qualified work experience.

Hopefully this information will be helpful if you are considering hiring a professional to guide your finances.  Check us out on Facebook, YouTube, and please leave any questions or comments below!

 

Links to other things mentioned in today’s show:

Is This the End of Popping Vitamins?
On the Job, Beauty Is More Than Skin-Deep