Monthly Archives: May 2016

The important of emergency fund

On the excitement meter, a “rainy day” fund might barely move the needle, particularly when compared with other financial goals such as saving for college, a retirement account, or a down payment on a new home. Yet investors who fail to include an emergency fund in their planning, do so at their peril.

Being unprepared for an emergency—anything from a flood to losing your job—can force you into a financial hole. The unexpected can happen to anyone, regardless of age or income level, and it can take years to recover if you are not financially prepared.

A study published by the National Bureau of Economic Research and the Brookings Institution found that 50% of Americans—and nearly 15% of households earning $150,000 or more a year—couldn’t come up with $2,000 in cash to cover an unexpected auto emergency, medical bill, or home repair.

This is why creating an emergency fund should be considered a priority. Maybe you’re just starting a career and are inclined to take your chances. Or maybe you think your net worth has grown enough to make an emergency fund unnecessary. The problem is, you may be wrong. Having a cash reserve can help protect you against unexpected financial difficulties that can have lasting consequences, even if you feel you are in good shape today.

How much do you need?

A.D. Financial Planning recommends the following emergency fund:

  • Single person: save and set aside 3 months of expenses
  • Two income family with stable jobs: save and set aside 3-6 months of expenses
  • Single income family or two income with unstable jobs: save and set aside 6-9 months of expenses
  • Self-employed family: save and set aside 9-12 months of expenses

This guidance may not fit everyone. You will need to take into account your expenses, liabilities, and other individual circumstances in order to get a dollar figure that suits your needs.If you’re single and on your own but have family backup, you might be comfortable with three months of savings. However, if you have a spouse, kids, and a mortgage to support, you might sleep better with six months or even 12 months of funding in reserve.

Remember to consider the full list of potential emergencies you could encounter, which might range from a disability or illness to a major housing repair or loss of employment. Make sure you check your disability insurance—either at work or as an individual—so that you know both how long your policy requires you to be disabled before benefits begin and how long they’ll last.

And when you are calculating your living expenses, keep in mind that if you lose your job, you’ll also lose your health insurance coverage. This means you’ll need additional emergency fund money to cover the cost of your health care coverage through COBRA.

Coming up with the cash

Once you’ve decided how much in emergency savings you’ll need, you’ll have to find the dollars to fund your cash reserve. A windfall such as an inheritance or a gift from a parent or grandparent is a great source of cash for starting a rainy day fund. Most people, however, will likely find that the process of building an emergency fund takes place while juggling other saving and spending priorities.

The 10 Steps to Financial Freedom recommended by A.D. Financial Planning gives you clear steps on your financial road for when to start and when to expand emergency fund. In order to build your emergency fund it must be part of your monthly budget. When you reach the target number for your emergency fund, you can start working toward saving for a down payment on a home, increasing your retirement savings in your 401(k) or 403(b) plan, IRA, or other tax-advantaged plan then saving for your child’s education.

Possible pitfalls

Some people view their 401(k) plan as a source of emergency cash, because you can borrow money from a 401(k) if your plan allows. This approach, however, comes with some real perils. If you leave your employer for any reason, you will likely have to pay the loan back within a maximum of 90 days. Moreover, if you fail to pay the loan back in that time, you’ll be subject to both income tax and a 10% early withdrawal penalty.

Others view their credit card as an emergency plan. Credit card balances that are not paid of monthly are fraught with fees, penalties and high interest rates. Using a credit card to bail yourself out of a financial hole is the equivalent of using a shovel to dig yourself out of a hole – you are only going to get deeper!

Wedding planning for affordable one

I’m in the middle of wedding planning right now, and it has opened my eyes to just how incredibly expensive this whole thing can be!

I’m a frugal person at heart so the idea of spending a ton of money on one day seems a little silly to me. But it’s hard not to get caught up in all of it, and I’m finding that the costs are adding up quickly.

So, how do you have a wedding you love without spending more than you can afford? I’ve been thinking about this as I plan my own wedding. I’m fortunate that my parents have been very generous, and here are a few things I’ve learned along the way.

Plan Ahead

Yeah, I know. Big surprise that the financial planner is encouraging you to plan ahead. But there are two reasons why it’s helpful to make a plan before making any final decisions.

First, it’s amazing how quickly even the little costs add up. There are so many different pieces to a wedding that you can make a lot of seemingly reasonable choices and still end up with a big total bill. By planning ahead, you can see that happen before you’ve actually committed to anything and make decisions accordingly.

Second, it’s easier to get good deals when you’re on top of things early. Venues get booked, DJs aren’t available, and prices go up. The longer you wait, the less likely it is you’ll get your first choice and the more likely it is you’ll have to pay extra.

The Knot has a fantastic wedding budget calculator that can help you allocate funds across all wedding expense categories.

Get Creative

Your wedding doesn’t have to be like every other wedding. It can not only be cheaper to do things your way, but it can make for a fun and unique experience.

A friend of mine had a fall wedding and served pies instead of a wedding cake. This option was delicious and at least half as expensive; with pie at $2 per slice and wedding cake at $4 or more. Another one enlisted the help of her friends to make their own floral arrangements. I’m making small ornaments for wedding favors, out of paper (not expensive) and supplies I already had on hand.

Music, in particular a live band, is another expense that can be reduced, involve friends who have musical talents or crowd source a playlist from all your guests. There are an infinite number of ways you can get creative, save money, and make the wedding yours in the process.

Consider Your Guests’ Budgets Too

Your friends and family want to come celebrate with you, but for many of them it’s a big financial commitment. Doing what you can to make it easier for them will be much appreciated.

I have a friend who had a camping option, as one of the accommodations for her wedding. Not only was the price right, but it was a memorable experience. Suggesting accommodation options to guests with a range of prices is always appreciated.

For our wedding, we’re trying to make sure that people know how to enjoy themselves during the weekend without having to spend a ton of extra money, so we’re giving them a map of our favorite hiking trails in the area. Little things like that won’t make all the costs go away, but every little bit helps.

Estimated Your Tax Payments

Did you know it is possible to schedule your estimated tax payments online?  This is a very handy service for people who have to make Form 1040-ES estimated tax payments in April, June, September and January each year.  To make your payments, use the Electronic Federal Tax Payment System (EFTPS®).  The EFTPS® enables individuals and businesses to send their tax payments to the IRS by electronic transfer rather than writing a check and mailing it, or sending an expensive wire.

With the Electronic Federal Tax Payment System (EFTPS®), a free service of the U.S. Department of the Treasury, you schedule payments whenever you want, 24 hours a day, 7 days a week. You can enter payment instructions up to 365 days in advance.  This way when your tax preparer completes your taxes and calculates next year’s estimated payments, you can login online and schedule those payments.  Then you’re done.  The nuisance of mailing in those payments by check every few months has been removed.

Reasons to use the service include:

  • It’s fast. You can make a tax payment in minutes.
  • It’s accurate. You review your information before it is sent.
  • It’s convenient. You can make a payment from anywhere there’s an Internet or phone connection 24 hours a day, 7 days a week.
  • It’s easy to use. A step-by-step process guides you through scheduling payments.
  • It’s secure. Online payments require three unique pieces of information for authentication: an employer identification number (EIN) or social security number (SSN); a personal identification number (PIN); and an Internet password. Phone payments require your PIN as well as your EIN/SSN.

One thing to be aware of is that you can’t wait until the due date to make your first payment!  Payments must be scheduled at least one calendar day before the tax due date by 8 p.m. ET to reach the Internal Revenue Service (IRS) on time.  On the date you select, the funds will be moved to Treasury from your banking account, and your records will be updated at the IRS.

There are a couple of other items to consider.  Obviously it is important you have the funds in the checking account you are transferring from.  The first time you use the system, you will have to enroll.  Also remember that the EFTPS® is a tax payment service.  You’ll need to already know the amount, tax form, and date when you schedule a payment.  This system doesn’t help you calculate your tax due.  If you want to cancel a payment, you must do so by 8 p.m. local time two business days before the scheduled date.

For those of you that make estimated payments each year, I urge you to consider using this service.  It will make your life a little easier.