Free Money Finance

Numbers for 2009

Money magazine lists the following "numbers to know" in its January issue:

• $16,500 -- 401(k) contribution limit (50 and older: put in an extra $5,500)
• $5,950 -- Family HSA contribution limit
• $106,800 -- Maximum amount of earnings subject to Social Security taxes
• $5,000 -- IRA contribution (50 and older put in an extra $1,000)

Here's how we stand on each of these:

1. Yep, we'll fully fund our 401(k) in 2009 -- just like we have been for years and years now.

2. Yep, we'll put the max in our HSA.

3. Ouch! I just hope I get SOMETHING back from SS for the boatloads of money I (and my employers) have put in.

4. We also contribute $5,000 for each of us to IRAs (non-deductible).

How about you? Where do you stand on these numbers for 2009?

Do You Store Cash at Home?

Anyone store cash at home? If so, where? And how much? And why?

Personally, I keep about $300 around at all times, but that's not really a significant amount. If we wanted to, I guess we could keep some in our safe, but not sure why I'd want to do that.

One thought -- we all could use the toilet storage method discussed in the link above -- maybe that's why dollar coins were invented. :-)

Anyway, what do you do regarding storing money at home?

Some Good Economic News

Here's some good economic news from US News:

According to a just-released study from Principal Financial Group, 56 percent of workers and 69 percent of retirees have an emergency fund. Nearly a third of those workers say their rainy-day stash could cover more than six months of living expenses, should they get laid off or hit with a big, unexpected expense.

These numbers are waaaaaaay higher than I would have guessed, so maybe we are all better savers that I thought. Then again, maybe the study was faulty. ;-)

Are You a Saver?

Here's a piece from MSN Money that lists what they think it takes for a person to be called a saver. They say that you are a saver if you:

• Save more than 20% of your earned income each year.

• Spend and give away less than 3% of your total net worth each year.

• Increase your net worth by more than 5% from year to year.

Here's where I fall on all of these:

1. Yes, we save more than 20% of our earned income each year.

2. Not exactly sure what they're talking about here. Our net worth is always increasing (unless the market tanks like this year), so we don't lose anything (much less 3%) -- if that's what they are suggesting (which I think it is). I find it hard to believe that they mean you spend/give an amount that's equal to less than 3% of your net worth (for instance, if your net worth is $1 million, then you'd have $30,000 to spend/give.) This seems overly restrictive and not very likely. So I'm going with the first option (and thus we meet the criteria.)

3. Over the past 12 years or so (how long we've been tracking our net worth), we've seen average annual gains in the 16% range. That will drop big-time when this year's numbers are factored in, but it will still be way above 5%.

Given these responses, we would be classified as savers. How about you?

Are You Saving More?

This piece from CNN Money says that Americans are saving more (as well as paying off debt) because of the poor economy. Is this what you're doing as well?

I'm not. My debt is already paid off and I have a good-sized emergency fund. I'm keeping up my 401k contributions as well as my regular investing, but I'm not stockpiling cash. That said, it's not a bad idea to increase your emergency fund in these uncertain times (from the "standard" three to six months of living expenses to maybe six to nine months of living expenses.) In addition, paying off debt is a guaranteed return on your money, so that's not a bad idea anytime -- whether or not the economy is in the tank.

So, what about you? Are you putting more in cash and/or paying off debt more aggressively due to the current state of the economy?

My Trip to the Movie Almost Netted Me a 7% Interest Checking Account

I finally went to see Batman a couple weeks ago. I can't stand huge crowds at theaters (I don't like the talking, limited seat options, etc.), so I waited a few weeks for the response to die down, went to a 5 pm show (saved $2 on the price of the ticket by going before 6 pm!), and saw it in a theater with six other people.

As usual, I had a coupon for a free regular popcorn (normal price of $3-$4). I got this one at a community event in a nearby park -- they were attached to free samples of popcorn. Anyway, the bags offer free refills, so one regular-sized bag is great -- eat until it's gone, re-fill, repeat the process until it's full. And my theater offers do-it-yourself "butter" topping and seasoned salt so you can make it however you like it. I know, it's about the most unhealthy thing you can eat, but since I don't do it that often, it's not going to kill me.

I got to the movie about 20 minutes early and had two full bags of popcorn before the movie started. As I was munching down, an ad popped on the screen for a "7% interest checking account" at a local credit union. The ad was up for about 10 seconds, but I saw "7% interest" and thought "wow, I'd like to get some of that!"

I didn't catch the name of the credit union and they didn't show the ad again, so I searched for the offer online a few days later. Sure enough, I found a local credit union offering 7% interest checking. But, as I suspected, there were several catches. For example, here are the guidelines to get the 7% deal that I can see from the website:

• It's only good on balances up to $2000.00.
• You have to sign up for direct deposit to get the deal (and have at least $200 direct deposited each month).
• You must "actively use your CWCU debit card". Not sure what this means since they don't say. Instead they suggest you call or stop by for details.

What a waste of an offer. I currently have a boatload of cash earning barely anything as I wait to buy a new home. I would LOVE for it to earn 7% (or anywhere close to this), so I was initially very excited about this potential deal. But the fact that it's only good up to $2k makes it not worth the effort. I might be willing to jump through the other hoops if they let me put a ton more into the program, but for the amount I'd make, it would not be worth my time, changing around my accounts, etc. How disappointing!

Anyone else seen offers like this out there? Anyone using one of them?

The Reason You Need an Emergency Fund

This story pains me -- but serves as a good example of why we all need emergency funds. (For background, see this post.)

I hope they get it fixed and it doesn't cost them an arm and a leg.

Unusual Saving Method Nets $12k

Check this out:

Three years ago, I made a decision that changed my relationship with money: I stopped spending, and started saving, every five-dollar bill that passed through my hands. Squirreling away each and every $5 received as change from a cash transaction didn't require any complicated savings strategy, but it has paid off, to the tune of $12,000.

Anyone else out there have some sort of unusual way to save money that's worked for you?

Do You Save More than 10% of Your Salary?

Do you save more than 10% of your salary? If so, you're in the minority. Here's a fast fact I found in the June issue of Money magazine:

Less than one in three Americans puts away at least 10% of income according to the American Savings Education Council.

Between my 401k (not counting the employer match), 529 savings, Coverdell accounts, SEP IRA, and taxable accounts, we save about 20% of our income each year.

How about you? How much do you save of your income?

Help a Reader: Where to Save Cash

Here's an email question I received recently:

I feel very knowledgeble about long term investments.  I feel I manage my retriement savings very well and this has been a top priority.   Over the past 5 years, I've cotributed all additional income to long term savings.  I have:

1) Maxed out ROTH IRAs for myself and my wife
2) Maxed out my 401k
3) Maxed out a HSA and I pay all expenses out of pocket so my HSA grows at the best rate

Now I just got a raise that will result in about $10,000 in after tax money available by the end of the year.   I wand to move in approximately the summer of 2012.   My current home is worth about $180k and I may likely move into a home valued around $400k.  I want to have my current home paid off by then.   Now, paid off could mean literally no balance or having the equivalent savings.

My mortgage is at 4.875% for 15 years.   So, its not very valuable to just pay toward that.   What investments would you suggest for the $10k for a time frame of 4.5 years?   

What would you suggest for him?

Help a Reader: What to Do with Extra Money

Here's an email I received from a reader recently:

I have a question for you that I've been rolling around in my head for a while, wondering if I can get your opinion …

• I am 23, earning $47K a year

• I have $13K in a MMSA (money market savings account -- currently earning 3.5%) and am contributing (after the company match) 12% in my 403(b)

• My only debt is $13K in student loans and 13 years left to pay them. $10K of this is at 2.6% and the other $3K is at 4.5%

• I have been paying just the minimum on the student loans, but am considering taking $3K to pay off the higher-interest one in one lump sum

• Aside from $5K as my emergency fund, all of my savings is there for a "someday" house and/or a "someday" wedding.  The soonest either of these would happen is in 2 years, but I am aiming for that ideal 20% down payment, which in my area, takes a LONG time to save for.

What do you think?  Pay off the smaller loan, or keep the cash in savings?  Either way, I will continue to save about 35% of my take-home pay in the MMSA.

So, what advice would you give her?

10 Commandments of Personal Finance, Commandment #1: Thou Shalt Create a Savings Plan

Bankrate offers a list of the 10 commandments of personal finance that I'll be sharing with all of you as well as providing my thoughts on their selections. The commandment for today:

I. Thou shalt create a savings plan

He recommends you create a savings plan with 20 percent of your income. In fact, he helps his clients create a 24 percent solution. That means, they save 20 percent of their income and only spend 4 percent of their invested assets.

She suggests that a three- to six-month emergency fund should be established.

Hard to go wrong with these suggestions, though saving 20% of your income is a bit high for most people. I'm fine with 10% and hope for 15%, but 20% may be pushing it.

As for the emergency fund, I'm a big believer in having one. That way, when an emergency arises (and you know that one will -- you just don't know what it's going to be), you won't have to make a charge on your credit card that you'll need to pay off over several months (while incurring heavy interest charges.)

For related thoughts on this topic from Free Money Finance, see these posts:

• How Much You Should Be Saving

• Idea for Saving: Put Your Change in "Savings" Every Night

• Secrets of Successful Savers

Click here to read part 2 of this series.

Simple Trick to Help You Save Money

Here's a useful tip left as a comment on my post titled Idea for Saving: Put Your Change in "Savings" Every Night:

If you keep close tabs on your expenditures in a tool like Quicken, there is a way that you can simulate a loose-change piggybank. First, create a rolling transaction in your checking account dated a month in the future and with a category of "Loose change". Every time you enter a transaction, determine how much change would be required to take you to the next dollar. For example, if your grocery bill is $92.73, your "change" is $0.27. Add $0.27 to your rolling "Change" transaction to set it aside for investment and make sure it won't be spent. Then, once a month, take all the money you've set aside as "Change" and move it to your savings account or some other investment vehicle. I haven't tried this yet but it's pretty tempting and I might do it at some point.

I'm not big on "tricks" like this to make me save (I don't have any trouble saving on my own), but I do understand that many people need/could use something like this to help them accumulate a good amount of money during the course of a year.

Idea for Saving: Put Your Change in "Savings" Every Night

If you're like me, you have loose change laying all over the place -- in my desk drawer, in the kitchen area where I keep my briefcase, in the pantry (our "official" change collection site), on my bedroom dresser, in my car's ash tray, etc. It's not a lot, probably $30 or so at most, but this it can add up if you save it purposefully. And that's what one Indiana man did. He saved up his change -- enough to buy three cars over 36 years. Here's the story:

Brant began saving all his change when he started his own family. For 23 years he emptied his pockets into containers around his house. Then, he decided it was time to spend it.

"I wanted a new truck, and when I realized how much I had saved, I went ahead and decided to buy a car for my wife, too," he said.

He had saved approximately $36,000 in change. But Brant wasn't surprised. "As long as you don't put your hands back in the till, it really adds up," he said.

It was 1994 when Brant purchased a Dodge pickup truck and a Dodge Neon with his savings. He had all of the quarters rolled, drove them to the dealership and paid for his new vehicles.

He did it again on Friday, 13 years later.

I must admit, this is a very "creative" way to save. But I'm not sure it's for me. For one thing, what about the interest he missed out on? Yeah, it's not a ton, but it would have certainly added up given the fact that the time period was so long. And for another thing, I don't have that much change anyway. I pay mostly by credit card or check -- cash is probably my least-used method of payment.

How about you? Anyone out there use the "change" method of saving money?

Secrets of Successful Savers

The following article is courtesy of ARA Content.

If you’re unsure what you can do to successfully grow your savings account, you’re not alone. Just like committing to a regular workout routine and eating healthier, getting out of the starting blocks is half the battle. Beginning a savings program is no different and according to a recent national survey, the majority of Americans are not following the three simple steps that are key to a successful savings plan.

The survey, conducted by Harris Interactive on behalf of Countrywide Bank, FSB, the nation’s third largest federal savings bank, shows that the majority of Americans who have both savings and checking accounts keep them at the same bank; they have never thought of having the accounts at separate banks, and have no automatic savings plan in place.

“Consumers are potentially leaving money on the table,” says Pierre P. Habis, managing director for deposits and investment services at Countrywide Bank. “Serious savers view their savings accounts as ‘one way’ only, meaning they make more deposits than withdrawals. They succeed at this by keeping their transactional banking relationship at one bank and savings at another.”

“We’ve found that if consumers’ checking and savings are under the same roof, it’s too easy to draw from that nest egg, and that’s when savings stagnate,” he adds.

So what are the three secrets of successful savers? Habis offers the following advice:

1. Separate

In the Harris survey, 71 percent of respondents said they keep their savings and checking accounts in the same bank. And 67 percent have never even considered separating their accounts. This, Habis says, can be a serious mistake.

Keep your primary savings and checking accounts at different financial institutions. This strategy may help you get the best rates, and will make it more difficult to dip into your savings – one of the worst saving mistakes people commit. Shop around for institutions that offer the best possible terms. It is possible that the institution that best meets your checking needs might not be suited for providing market-leading savings rates.

2. Automate

Sixty one percent of the respondents in the Harris poll do not automatically transfer or deposit a set amount into their savings on a regular basis. Paying yourself first is one of the hallmarks of a basic savings plan. Habis recommends that consumers establish a savings plan, whereby a percentage of your income, or a set dollar amount, is automatically deposited into your savings account on a regular basis. “Start out by trying to allocate a small amount, perhaps even $20 per week to start, towards a high-yielding account,” says Habis.

3. Shop for the Best Rate

If you’re not sure what the annual percentage yield (APY) is on your savings account, how do you know if your money is working hard for you? According to the survey, 32 percent of adults with savings accounts don’t know what the yield and corresponding interest rate is, and 45 percent know that it is less than 5 percent. To find the best rate, survey several banks and compare the APY on your savings accounts, money market accounts or certificates of deposit.

Avoid leaving money on the table by ensuring that your account has market-leading savings rates. Web sites such as www.bankrate.com help consumers identify the highest rates available in their market.

“As with any financial decision, consumers should carefully evaluate their options and fully understand the advantages and disadvantages before making a change,” Habis says. “Consumers can maximize their returns if they separate, automate and always seek the best rate.”

Help a Reader: A Problem We'd All Like to Have

Here's an email I received recently from a reader:

I’m in a great quandary and need some help.  Here’s my situation:

• Newly married, so I have 20+ years until the college bills start.
• Already maxed out 401k for 2007 and don’t qualify for Roth IRA.
• No debt aside from mortgage (30 year fixed mortgage @ 6.5%)

I just found out I’ve maxed out my 401k this year and I have 3 pools of money to invest:

• $60,000 cash
• $1,200/month (my 401k contribution)
• $30,000 in bonuses coming between now and the new year.

What do I do?

• 529s/college savings?
• Pay down my mortgage?
• Mutual funds or other taxable investments?

What would you do if you were me?

Isn't this a problem we'd all like to have? :-)

I faced a similar situation several years ago, but certainly not at the young (I assume) age of this reader.

Ok, so he's maxed out his 401k. Where would you advise him to put the rest of his money?

Where Do You keep Your Short-Term Cash?

Here's a reminder from Bankrate that you should keep any money you'll need in the next couple of years in a very liquid account like a money market. The details:

I'm with you and agree that you should be investing conservatively when you have an investment horizon of two years or less. CDs, money market accounts (MMAs) and money market mutual funds (MMMFs) are all good choices. CDs typically aren't as liquid as the other choices with penalties for early withdrawal.

We keep our short-term money in a Vanguard money market. It earns competitive rates and makes it easy to buy Vanguard funds if I decide I want to move some money from short-term savings to long-term investments.

How do you manage your short-term cash? Where do you keep it?

Americans Giving Up Earnings on Cash

Here's an interesting statistic I found in the August issue of Money magazine:

More Americans use a piggy bank (42%) or change jar (65%) than a money-market account (35%) according to Capital One.

A few thoughts on this:

1. As a commenter recently pointed out, statistics can be manipulated to say almost anything, so it's hard to read exactly what's going on here.

2. That said, it appears that many Americans are using techniques to save money that aren't optimal. For instance, a money-market account pays about 5% or so per year -- a change jar's return is significantly below that. ;-)

3. Maybe this isn't a big deal. It could be that while a greater percentage of people use non-optimal savings methods, a greater percentage of the dollars saved are still in accounts like money-markets. We just don't know from what we're given.

4. So what's the action point? I think if you're saving a few dollars in a change jar, that's fine. We do it (to pay the kids now and then) and I don't think we're losing a fortune as a result. On the other hand, if you've got a few thousand dollars in coins and bills lying around, you'd be much better off putting them into an account where your money is working for you.

How to Save Money: Hide It from Your Spouse

Here's an interesting comment left on my post titled The Richest Man in Babylon: Seven Cures for a Lean Purse Part 7, Increase Thy Ability to Earn:

We are a family of five and we had a difficulty in saving because my wife is presently unemployed. I started putting 10% of my salary in a (secret) savings account without my wife's knowledge. After a few deposits I decided to tell her how we can save money and showed her how I have been saving. She was amazed. She asked me to continue with the idea which will ultimately lead to bigger investments. This is an excellent book for any one who wants to know about financial freedom. I am very happy to have read this book.

Now I don't generally recommend hiding things from your spouse as a regular financial planning technique (and I don't use it myself), but I could see where it would have merits in certain circumstances.

Anyone else use this method? What's worked with it? What hasn't worked?

Reap the Benefits of Direct Deposit -- Without Direct Deposit

The following is a guest post from Cheap Like Me -- where economy and ecology meet:

In just about any advice you read about saving money, you'll come across a line like this: "Pay yourself first. Have a portion of your paycheck automatically deposited into a savings account …"

Great advice. Just one problem: Millions of Americans are self-employed or earn mostly cash pay (from writers to artists to waiters to other tip-oriented professions) and have no paycheck, and therefore no direct deposit.

But the automatic savings advice is doable for independent contractors and the self-employed -- with a bit of extra planning.

• Plan for taxes. If you are self-employed, you probably pay quarterly estimated income taxes. Job One is to be sure you set aside funds to pay the IRS. Figure out your estimated tax bill (a worksheet is available here). Save for this bill in a business savings account or a separate personal account. Set aside 1/12 of the bill every month, or a percentage of every check -- whatever works for you.

• Bill yourself. To pay yourself first for taxes or any savings goal, set up savings as a bill that simply must be paid. If you wouldn't let down your mortgage company, don't let yourself down, either. Add the amount to your budget. If you use Quicken or other money management software, add savings as a "scheduled transaction" -- a bill that reminds you to pay it each month, along with the phone and insurance. (I have several of these "bills" set up for tuition, my daughter's summer camp, investment savings, etc.)

• Be old-fashioned. If you deposit your checks or cash in person or by mail with a deposit slip, be your own direct deposit. Ask the teller to put a specified portion of your deposit immediately into savings, just the way Grandma used to do with her passbook savings account. You'll reap the benefit of never seeing a pre-savings figure in your checking account.

• Get to know online banking. Find a bank or credit union with free online banking. Make a note on your calendar to transfer your designated amount to savings as soon as the money comes in. On that date, go online and make the transfer - no changing your mind, no extra spending.

• Go automatic. Almost as good as direct deposit is automatic savings. With an online savings account, you can schedule an automatic transfer from your checking account to your savings account on the same day of each month. This too will help you see the transfer as another bill.

• What if you're offline? Even if you pay bills in cash and use a bank seldom or never, you can still pay yourself first by using the envelope system. Budget a savings amount and put it in a specific location. Be cautious as the cash adds up -- you're not only at risk of losing it (through theft or the urge for a sudden splurge), you're also missing out on the benefits of interest income.

• Hands off. Keep track of your savings, but make them difficult to access. If you sometimes hit bottom on your checking account, which in turn pulls from your savings to make up the difference, you can erode your savings without even noticing. An online account is a great way to keep your stash out of sight, out of mind.

With patience and commitment (you're paying this bill to help yourself, after all!) you will see your savings grow. Best of all, anyone can do it.

Do you have other ideas about how to save when you work outside the mainstream? Please chime in.

Help a Reader: What to Do with $42k in Cash?

Here's an email I received recently:

I have been reading your site for a while now and wanted your opinion. I have about 42k in cash, I have been putting it away for a while. I have calculated until Dec 2009, with the same savings rate and interest payments from HSBC to amass about 102k. My 5 year ARM will adjust in Jan 2010 from the current 4.75%. I was thinking of dumping all the cash into my mortgage to basically pay it off. I know you’re an index fund advocate, so would the 2.5 years be a long enough time to keep a portion of the cash, say 35k, in a couple Vanguard funds, VFINX and VDMIX?

Other info: I’m 30 and single with no dependents. I have been fully funding a Roth IRA since 2004. I put 20% of my pay into 401k, not quite meeting the federal limit, but my company only allows 20% max. My company matches 5% dollar-for-dollar.

I told him 1) 2.5 years was not long enough to put money in a stock fund and 2) that I'd post this and let you all comment on it. Have at it -- give him your best advice.

How Much You Should Be Saving

Here's some advice on how much each of us should be socking away in savings from the book The Net Worth Workout: A Powerful Program for a Lifetime of Financial Fitness (see my rating for details):

Generally speaking, I think that a good goal is to be saving 10 percent of your gross income by the time you're thirty years old. If you're a woman, I'd suggest you shoot for 12 percent, because women tend to earn less, live longer, and pay more for products and services like haircuts and drycleaning.

Incidentally, when I say 10 percent (or 12 percent), I'm not including whatever your company may match for your 401(k) plan. Because the company match is "free money" from an outside source, it's not really coming from you. It's best to use the company's match as part of your total savings cushion.

My thoughts on this:

1. As a GENERAL rule, I'm ok with 10% of gross (not net) income. However, I prefer people go to the trouble to estimate the actual expenses of what they are saving for (retirement, college, etc.) and then save accordingly. This may put them at 6%, 9% 12% or 15%. That's ok to me -- it's a better estimate of what they'll actually need.

2. I think it's ok to count 401k money as long as it's yours (in other words, as long as you're vested for the amount in your plan.) What's it matter what the source is, it's still your money isn't it?

3. I've been at the 15-20% level of savings for several years now -- and 10-15% before that. It takes a lot of money to save for something like retirement (as I found out when I set my retirement number) so even while I'm saving a high percentage, I need to.

For more on saving for retirement (the biggest savings expense most of us will have) see these posts:

• How to Maximize Your Retirement Savings

• Save a Little Bit a Day and Become Rich

• Saving Ten Percent of Your Salary for Retirement is Not Enough

• Facts on Retiring Early

This is Why We Have an Emergency Fund: The Sump Pump Breaks Down

In Michigan, we're still in the transition from winter to spring. Yes, the rest of the world has been enjoying the new season for a month now, but since we live in the tundra, we're a bit behind the times.

A couple weeks ago, we had a HUGE rain which melted almost all of the last remnants of snow (some spots remained in big parking lots where they had piled it high.) Well, when it rained, we got an unexpected surprise. And it seems our emergency fund will be used soon to help out the matter.

We were eating dinner when our neighbor knocked on the door and told us we had water running down the side of our house starting where our sump pump emptied. This is never news you want to hear -- but it's even worse when you've just sat down to start a nice steak off the grill. Anyway, I bundled up and went outside. Sure enough, there was a stream that went along the wall of the house and ended in a small lake under our deck in the back yard. The problem? The drain that was collecting water expelled from our sump pump was clogged (I could feel the clog with a stick about 2 feet down -- but it twisted, so I couldn't get my arm in there to unclog it.)

So the sump pump was pumping water out of the basement, the water was hitting the drain, and since the water had no place to go, it ran under the deck. The water then, in turn, was collected by our system that drains water from our house, run into the sump pump again, and the process repeated -- about every two minutes the pump ran trying to keep up with itself.

So I called the plumber and he came out the next day. Seems like a clogged drain is common (leaves, dirt, etc.). What's not common is a cheap way to fix it. He suggested we wait a bit to see if the drain wasn't just frozen and would unclog itself. Otherwise, we'll need to dig it up and put a new one in. He wouldn't give me an estimate (that will come later) which leads me to believe that it will be a decent amount of money. Yep, that's what an emergency fund is for.

He put a temporary drainage hose on the pump's external tube and the water now empties into our woods (which is working pretty good, though it looks like crap since it's above ground.) By we're safe from a flood for the time being. That is until a chipmunk decides to make his home in our new tube. ;-)

Help a Reader: What Should He Save for First?

Here's a question I received last week from a reader:

I'm a college student (22) who will be graduating in a few months, and I'm just starting to get my finances set up properly. I have a few questions.

You talk a lot about retirement accounts (ROTH IRAs and 401ks), but I was wondering about other things you'll need money for long before retirement. Weddings, cars, houses, etc. I've traditionally heard that you should save 10% of your income (though I think you suggest 20-30%).

What portion of that should go to retirement and what should go to short term savings for cars and houses? Because you can't put short term savings into retirement accounts, where do you suggest it be put (high interest online savings accounts, CDs, non retirement investment accounts). Is it a good idea to get that money tied up in stocks, which may or may not be at a good price to withdraw at when you need it?

I told him I'd open up the questions for all of you to answer since you all are smarter than I am. ;-)

Let him know what you think in the comments below.

How to Create an Emergency Fund

Your son has just backed the car into the garage – literally!  Your company is downsizing and giving you an unpaid sabbatical.  You painfully remember why Dad told you to hire out roof repair.  Unfortunately, financial emergencies are a fact of life.  And they’re the reason most financial planners recommend establishing an emergency fund to cover unexpected expenses or loss of income. 

An emergency fund is enough savings to cover three to six months of living expenses such as rent, food, car, and utilities.  The money should be kept where it can earn decent interest (not a bank savings account or under the mattress) and where you can access it quickly without loss or penalty (not a CD or IRA).  Money-market funds, mutual funds made up of safe, income-producing assets, meet both these criteria and are the best choice for most savers.  Visit Bankrate.com for a comparison of money-market funds.  Finally, experts suggest you annually re-evaluate your emergency savings needs and adjust accordingly if your income, debts, and expenses change.

Perhaps you want an emergency fund but just don’t have the resources available at this time.  Don’t despair.  You can create it over time.  Here are some tips you can use to build your emergency fund:

• Aim for a lower savings goal initially, like a month’s worth of expenses. As your income rises, invest more.

• If you have credit card debt, consolidate it at the lowest possible interest rate, stop using the card, and make the minimum monthly payment.  Use your available cash to save one month’s living expenses, then pay off the debt.  Once the debt is gone, add to your emergency fund.

• Use “bonus” money such as gifts and tax refunds to build up your fund.

• Consider an extra job.  It doesn’t need to be a long-term or regular commitment, but any extra income can go straight to your fund, helping establish it very quickly.

• If you hate the idea of another “regular” job, put your talents to work.  Do you enjoy cooking?  Working on cars?  Making crafts?  Tutoring?  Sell homemade goods, offer private lessons, or teach a class to earn income.

• Turn spare change into an investment.  Empty pocket change into a container each night, then at week’s end deposit the funds.  A couple contributing $1 each daily will collect $730 annually. 

• Sell extra items.  Most people have stuff stored throughout their house that will never be used.  Create cash by selling those things at a garage sale.  Or visit your local consignment store to turn “trash” into cash. 

• Have extra space or are you an empty nester?  Why not rent an unused room to a college student or single person?  Or, if you dislike the thought of sharing your home, rent to others who need storage space.

Follow these simple steps to start building your fund today.  While you can’t stop the surprise financial challenges we all face, your emergency fund can help prevent a bad circumstance from becoming a disaster.

49% of People Don't Have an Emergency Fund

Here's one for the "yikes!" file from Money magazine:

49% of respondents in a recent survey conducted by Quicken said they had no emergency fund stashed away.

Holy cow! Are you kidding?

Having an emergency fund is one of the basic building blocks of good money management. If almost half of the population is missing it on something so simple and basic, imagine how many are in trouble on the more complicated issues related to financial planning!

For more thoughts on getting/having an emergency fund, see these links:

• Get an Emergency Fund Now!

• Financial Emergency Kit

• Where to Save Emergency Cash

How to Save $500 for an Emergency Fund

Here's a piece from Money Central on how everyone needs to have at least $500 in an emergency fund. It includes some very disturbing information on what percentage of various age groups have less than $500 in the bank including:

• Under 35 -- 34.5%
• 35-44 -- 25.1%
• 45-54 -- 22.1%
• 55-64 -- 19.0%
• 65-74 -- 18.8%
• 75+ -- 14.9%

It's unclear to me whether this data is actually "in the bank" literally or if it means "has $500 saved." If it's the former, it's not as bad as many people may not have $500 in an actual bank but may have thousands in a money market or similar savings account. However, if it's truly "these people have less than $500 saved in total," then these are numbers that make me say "yikes!" Especially the numbers at the bottom -- as people get older. We have just under 20% of the people older than 54 who have less than $500 saved. If this is true, it certainly is disturbing.

Fortunately, the piece goes on to list a few ideas on how you can get $500 including:

• Use your tax refund.
• Try a "buy nothing" month.
• Sell stuff.
• Save your change.
• Review your bills.
• Make it automatic.

Some decent ideas. #1 alone is a $2,200 idea (on average), so it should get many people to $500 -- if only they can find the discipline to save that amount.

In addition to these, you may want to think about some of my ideas listed as part of my quest to raise an additional $10k this year in income -- extra income outside my regular job. Here are some suggestions:

• Turn a Hobby into an Income

• Make Money with Credit Cards

• Sell Stuff You Own

How to Pay Yourself First

Here's a great comment left on my post titled How to Find Money to Invest. The reader shares some good (and simple) steps we all can take to automate our savings/investment plans. His thoughts:

Good list! I think the easiest way to accomplish this is simply by doing number 1 and pay yourself first. I know it has almost become a cliche, but it really is true. This is exactly how I am able to scrape together money for investing also.

If you have direct deposit of your paycheck, then there is no excuse for not paying yourself first. All you need to do is set up a separate account at your bank, checking or savings, whatever is free and doesn't have weird minimum or withdrawal limitations. Then change your direct deposit to put a little money into this account as well. Maybe it is $10 per pay, maybe it is $20, or even $100. Whatever you decide to do, make sure that the account isn't linked to your debit/atm card so it is hard to get access to.

Next, just link up your brokerage account to this bank account and you are all set. As you build up the account you can easily make investment purchases from that separate account. You can even go one step further as most mutual funds allow for systematic purchases as low as $25. So you can then setup a systematic buy that coincides with your deposits and then everything is automatic. Not only are you paying yourself first, but you've created an automatic process towards building wealth.

This is what I do, though my process is slightly different. My steps:

1. My entire paycheck is placed into my checking account (after money has been deducted for my 401k, of course.)

2. I have a set amount that gets transferred to Vanguard automatically each month.

3. The Vanguard money is then automatically invested in a handful of funds according to my investment objectives.

It's simple, easy, and once it's set up, it's all on auto-pilot. I'm saving/investing without even doing anything!

How Much You Need in an Emergency Fund

Here's another item on Money magazine's list of 25 rules to grow rich by. Today's tip gives some thoughts on how much you need to have saved in an emergency fund:

Keep three months' worth of living expenses in a bank savings account or a high-yield money-market fund for emergencies. If you have kids or rely on one income, make it six months'.

I think this is good advice. Personally, we follow it -- keeping six months of living expenses in a money market account.

If you're looking for ways to build your emergency, consider cutting expenses or taking steps to make more money.

How Much of Your Salary You Need to Save

Here's another item on Money magazine's list of 25 rules to grow rich by. Today's tip gives some thoughts on how much of your salary you need to save:

If you're not saving 10% of your salary, you aren't saving enough.

The earlier you start saving, the less you'll need to set aside every year to meet your goals. That's because you allow your money more time to grow -- the gains on your invested savings will build on the prior year's gains. That's the power of compounding, and it's the best way to accumulate wealth.

Saving at least 10% of your annual salary for retirement is recommended, but the older you start saving, the more you'll need to save. If you start at 50, you may need to put away 30% a year and still postpone retirement by a few years.

Personally, I'm a big fan of the "save more earlier" strategy. That's what I've done -- tried to put as much away as possible as early in my life as possible so then the power of compounding do it's magic. It's just starting to kick in for me in a big way -- my investments are just now starting to deliver substantial increases from year to year by themselves (even if I didn't keep contributing to them.)

So, how have I managed to save this much? It starts with spending less than you earn. If you do this through the years, you can become quite well off. (By the way, if you're having trouble spending less than you earn, you may want to check out my past posts on how to save money and how to make more money.)

I then take the money I've saved and invest in my 401k (where I get free money from my employer in the form of a match) as well as in taxable accounts. My preferred investment vehicle is index funds.

Simply do these simple steps over and over again for years, and you're bound to get rich.

All About Emergency Funds

Here's a piece from Money magazine on emergency funds. It answers the three key questions most people have about emergency funds as follows:

What's it for? Your reserve fund is for the curve balls that life is bound to throw at you: a leaking roof, a blown transmission, a hot water heater gone cold. It's also for unexpected life changes, like the loss of a job, a divorce, or a major illness.

How much should you have? The equivalent of three to six months' worth of living expenses is a good guideline, but take your own situation into account when deciding. If you're part of a two-income household, you might be able to get by on the other income if you lose your job, for example. If you're self-employed and have an irregular income, you might need more to see you through the lean times.

Where should you keep it? Since you'll be tapping these funds in an emergency, it's essential to be able to get the money quickly and conveniently. A savings account, a money market account or a money market mutual fund will all keep your money highly liquid, while paying you a bit of interest. Shop around for the account that will give you the best rate with no monthly fees.

Here's what we do:

1. Of course we have an emergency fund. All of you reading this would grill me if I'd been dishing out finance stories for over a year and didn't have this simple financial step covered.

2. We are on the conservative side, so we save six months of living expenses. Besides, we are a one-income family, so we should be a bit conservative.

3. We keep our fund in a Vanguard money market account. It doesn't earn quite as much as some other options, but it makes shifting money back and forth among our various Vanguard accounts very easy.

If you don't have an emergency fund, you should start taking some steps to get one. Cut some expenses or follow some of my suggestions for making more money and you should have a good-sized emergency fund set up in no time.

How to Develop a Great Emergency Fund

Here are some thoughts on developing a great emergency fund from financial expert David Bach. He lists four steps to doing this. They are:

1. Make your rainy day fund automatic.

2. Get your emergency money out of your checking account.

3. Put it in the right place.

4. Decide how big a cushion you need.

He then suggests places to look to get the highest interest rates possible including:

• Look online. (ING Direct and EmigrantDirect)
• Go to your bank.
• Invest automatically with government savings bond.

A few thoughts here:

1. We keep our emergency fund money in a Vanguard money market fund. It earns a bit less than ING and ED, but means we have to manage one less account and it's easy to get money into and out of (and dollar cost average with Vanguard mutual funds).

2. We have six months worth of living expenses saved. I prefer to be conservative -- so I go for six versus three months.

3. Our emergency fund is fully funded now, so we don't have to make it automatic. But it was automatic when while we were accumulating it.

4. You must, must, must have an emergency fund. If you don't, then any financial emergency (and these will pop up for all of us) will force you into debt. Start saving today -- even if it's just $20 a month. Start small and work up if you have to. If you keep with it, you'll have a good amount saved in a very short amount of time.

Which Should You Do First: Establish an Emergency Fund or Pay Off Debt?

Lots of reader comments on my post asking which should be done first -- establish an emergency fund or pay off debt. And, as you might imagine, they didn't agree with each other (or with me). ;-)

First, here's what I suggested as a complete way to handle this issue:

1. Spend less than you earn. This alone is THE key to getting rich. Said another way, save a portion of all you make.

To spend less than you earn, you may need to earn more or spend less.

2. Contribute to your 401k to get the full employer match.

3. Pay off your credit card debt.

4. Establish an emergency fund.

5. Pay off all other debt.

6. Invest your savings regularly in good, solid investments. I like index funds.

7. Do this for a long time, letting the power of time and compounding work for you.

Here's what the first commenter had to say:

Although you shouldn't sacrifice building up your emergency fund, there is an additional factor to consider. As you pay off debts, your monthly minimum expenses go down. One of the most important measures of your emergency fund is how long you can live off of it. Emergencies can change that. If your car is totaled, you may find yourself buying another car before you expected to. I went through that two years ago.

The choice isn't clear-cut. Money used to pay off debt isn't available in savings. However, money in savings goes farther when you have fewer debts to cover.

Good point about monthly expenses going down as you pay off debt.

Here's a bit of a different perspective:

I do love Dave Ramsey's method: Build up a $1,000 emergency fund first, then kill off the cards with a vengeance. After that, finish building an emergency fund.

It keeps people from going back to the one thing that got them in trouble - small charges to credit card. Granted a big problem may happen, but most of the issues people have are $1000 or less, such as getting the car fixed or calling a plumber.

I also like Dale G's point. Once those cards are paid off, your emergency fund will last that much longer. I calculate my minimum burn rate every month to get an idea of how much money I'll need to live on.

Finally, here's a vote from the "save first" crowd:

Step one in getting out of debt is deciding not to get in any more debt. By paying off debt without any emergency fund, the first emergency that comes along, you are going to add to the debt.

Get a small emergency fund to cushion you from life. Then payoff the debt.

I've been there, and knowing that we had 1000 dollars just in case made a huge difference - and the emergencies did come. And we did not get in more debt.

It's kind of a chicken-and-the-egg sort of question to me. What do you think -- and which do you do/are you working on? Should paying off debt come first or building up an emergency fund?

What to Do with a Financial Windfall

Here's a piece from Money that gives their advice on what to do with a financial windfall. It's an answer to a question about what to do with $3,500 a reader came into. Here's the bottomline of what Money says to do -- the main choices being between investing in a Roth IRA and paying down credit card debt:

From a purely financial point of view, the decision comes down to this: Do you think you would earn more on your investments in the Roth account than what you pay in interest on your credit card debt? After all, by using the money to pay off your credit card balance, you would save money in interest payments, and that would effectively be the "return" on your $3,500.

Yep. This is exactly the way I'd think about it. And Money details my next thoughts exactly:

You don't say what you're paying on your plastic, but according to the credit card section of Bankrate.com, interest rates have been recently averaging anywhere from 10.1 to 14.3 percent, depending on the type of card you carry. It's possible, I suppose, if you were an extremely skillful (or lucky) investor, that you could average that sort of return over several years. But I doubt it. So that would seem to make paying down the credit card the better choice.

I'm with them 100%.

Then they make a u-turn on me:

But you know what? I don't think that would necessarily be the smart thing to do. In fact, I think there's a strong argument for opening the Roth anyway, if not with the entire $3,500, then at least a good portion of it.

Here's my thinking. One of the biggest problems we face in America is that we just don't save enough for retirement. You can find any number of reasons for this - it's easier to spend than save, we're too into immediate gratification, etc. - but one way or another it ultimately comes down to the fact that we don't stick enough money into savings accounts, including Roth IRAs.

Now, I'm a big of saving early and often for retirement. In fact, I know that doing this can make you rich. However, I disagree with this advice. I'd go with paying off the credit card first -- locking in the guaranteed rate of return -- then saving for retirement with the money I had been paying to the credit card company. Of course, this assumes that the person doesn't go out and re-charge his card up to the hilt. Otherwise, the Roth is probably the better choice. At least the money is semi-safe from his free-spending ways.

And the piece doesn't mention this option, but if the guy had a 401k at work and wasn't contributing enough to get the full employer match, I'd rate that over paying off the credit card. Why? Better return. Much better return in fact as it would mean 50% to 100% back on your money most likely (based on your specific plan).

By the way, this is a similar question as what should you do with a tax refund or a raise. As such, I give a similar answer. ;-)

Pay Debt versus Establish an Emergency Fund versus Saving -- Which to do First?; Free Money Finance Guide to Saving, Investing, and Paying Off Debt

There's an on-going debate around what you should do if you're in debt: pay off your debt first or establish an emergency fund, then pay off the debt. My basic philosophy was detailed in Comments: Over One-Quarter of the Population on the Brink of Financial Disaster, Need Discipline where I stated:

I recommend paying off the debt first because: 1. it's costing you money (a lot) that's digging you deeper into debt and 2. if you pay it off, it's not like that money's gone. You can charge again if you HAVE to (if you get into trouble financially) This has the same effect as saving money for future expenses. However, if you save first, you're paying interest on the debt the entire time you're saving. Doesn't seem like a smart move to me.

To add a few more specifics to this, here's what I'd recommend as the order:

1. Pay off high-interest, credit card debt.

2. Establish an emergency fund.

3. Pay off other debt.

To add to the debate, here's a piece from USA Today that throws another element into the mix -- saving (in particular, for retirement). They give some thoughts on paying off debt versus establishing an emergency fund versus saving for retirement. But first, they tackle the debt versus emergency fund issue. Their thoughts:

The return on paying off debt is roughly equal to the interest rate you pay. Many credit cards charge 18% or more: You'd be hard-pressed to find another investment earning 18%. "It's like giving yourself a risk-free 18% return," says Don Lutomski, a financial planner in Birmingham, Ala.

Consider a couple with $10,000 in credit card debt. They paid 18% interest. The credit card company requires them to pay at least 4% of their balance each month, or $35, whichever is larger. If they paid just the minimum, they'd be paying for more than 10 years. Total interest: $5,575.

But if they paid $100 more than the minimum each month, the couple would end up repaying the entire balance in 50 months, a bit more than four years, saving $2,285 in interest. Best of all, they would have wiped out their debt, boosting their cash flow by $265 a month.

By contrast, the returns from a savings account seem paltry. Had you stashed your $100 a month into a bank savings account paying 5% for 50 months, you'd have about $5,424 in your account at the end of the period. You would have earned just $425 in interest.

This is the same rationale that I use when recommending that people pay off credit cards first. Financially, it's just the better option of the two.

But USA Today isn't making this a firm recommendation. They hedge their bets a bit here, noting later in the article that emergency savings are important too (which I agree with), especially when you lose your job. As such, here's their recommendation:

Your best strategy: Build up your savings at the same time that