A complete guide to emergency funds – Part 1

Emergency Fund

Update: This post continues to be a very successful post and I have updated it for 2014.

This is a two part post covering the following topics.
Part 1:

  • What is an emergency fund?
  • Why do I need an emergency fund?
  • How much do I need to save?

Part 2:

  • How to get started?
  • How to invest your emergency fund?
  • What are the common pitfalls of emergency fund and how to avoid them?


What is an emergency fund?

An emergency fund is the money you set aside to use when life presents you with unfortunate and unexpected events.

Simply put, emergency fund is the money you save in an easily accessible account so that it can be used to cover up for some expenses which you did not foresee or budget for; like a breakdown of your heating system, major home or car repairs or more unfortunate circumstances like job loss, major medical expenses, disability, accidents, etc.

Why do I need an emergency fund?

While I hope none of these events happens to you but none the less if you do make an emergency fund you will be in a better financial position to handle such an event. Many people seem to underestimate the chance of them having to face such a situation, especially young people, so if you are one of them, think again; Ask yourself, do I have enough saved up to cover for my expenses for some months in case of an emergency?

There are some psychological advantages to know that you have your back covered in unfortunate times, this will really help you live in a better way by relieving some of your stress.

It is very important, considering the critical nature of these funds I would recommended building an emergency fund over any kind of debt (even credit card debt, you heard me right…!).

How much do I need to save?

Unfortunately there is no magic number here but these guidelines should help you come up with your own number.

  1. Calculate your regular expenses. Your regular expenses should include things that you generally spend on, on a regular basis. You could take an elaborate way to fund this out (like the one described here) but a back of the napkin approach works well too. Just add up the following:
    • Your monthly mortgage payments/rent and car loan payments.
    • Your monthly cost of insurance.
    • Monthly cost of essentials (groceries and travel).
    • Monthly miscellaneous expenses, like entertainment, shopping, etc. Your credit card (or debit card) statement should come in handy here.
  2. On average you should save enough to cover up for about three to six months of regular expenses. This should help you in cases like job loss or a temporary disability.
  3. You regular expenses will be higher if you have dependents that you support.
  4. In general you will need more in emergency funds if you have more responsibilities and obligation to take care off. Just be sure to include all such expenses and then add a reasonable buffer on top of that.
  5. Also make a list of expenses that you could quickly get rid off in an event like a layoff, say if you are an iPhone user, you could drop the data plan, or get rid of the extra channels in your cable connection. This might just come in handy. You do not have to write it down; just keep it in your mind. In general the more expenses you can cut down in case of a financial emergency the lesser you will need in emergency funds.

Part 2 here.

 

Top 5 things to buy from a thrift shop

Musty, ill lit, full of old goods and manned by thickly spectacled ageless old men. Those are images of a thrift shop which pop up in our mind. However, a thrift shop offers unimaginable treasures at unheard prices. Whether you are strolling down a street in Manhattan or London, you will chance upon a thrift shop. For a thrift shop, you need patience, time on your hands and an eye to discover unusual attractive pieces. You should know what to buy at a thrift store. It offers you good bargains and if you are lucky, you can further lower the prices.  These quaint shops are covered with second hand knickknacks in eclectic colours. The smell may deter you a bit but gather your courage and ignore it.  Do up your home with an assortment of goods from these shops. You can stumble upon eighteenth century porcelain, classic old records to designer wears at these shops. Good stuff gets sold out fast; regular trips are recommended.

 What to Buy From  A Thrift Store

Outfits on sale: These second hand stores offer clothes to fit different sizes at reasonable prices. Specific thrift shops have celebrity hand me downs on display which are sold with the aim of helping charities. You can be lucky enough to find a classy dress, a suit or an old pair of jeans. Clothes may be outdated and a size big or small; and may require altering. Expect a button missing or a seam torn when you pick up a garment. A wash or dry cleaning will get these clothes ready to be worn. Thrift shops are great places to look for costumes for plays.

Interior designer’s delight: If you are doing up your home on a shoe string budget, visit thrift shops to get a range of stuff. You will find old curtains, upholstery, bed linen, odd pieces of furniture to place around your house. You may discover paintings hidden in junk. A Chinese laughing Buddha or a grandfather’s clock, who knows what you will discover here. If eclectic colours are not your thing you can buy furnishings in similar or neutral colours. A thrift shop will help bring down your cost of hiring or buying furniture.

Books galore: Thrift shops have a collection of books for the book lover; though there is a possibility of missing pages. You can browse and come across forgotten popular classics or recent best sellers. Books by award winning writers or two month old magazines can be bought at special throw away prices. Before you go looking for books in a book store, try a thrift shop instead.

Pick up accessories: Thrift shops offer you used items. You can pick up leather goods- bags, belts and shoes. You may need to polish them and spruce them up with laces. These things may need repair but will still cost you less than a new item.

Bargains at thrift shops: Sales at thrift shops mean a further slash in prices. Thrift shops rid of stuff that has been lying around for a long time. Keep a watch out for sales that will give you another reason to visit the musty old shop.

photo by: Lance McCord

Effects of American Economic Crisis on the Baby Booming Population

The Americans have always had a question is mind; “When is a good time to retire in the US?” With the recent economic situation as flimsy these days, the question fits apt among the American aged citizens today. To a greater extent people in the US are facing the evidence that their financial assets shall end much before their retirement years do. However there are a few who may even prefer to retire early. Here’s how we will try to analyze and answer this never getting old question.


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Effects of decreasing funds over the ever-increasing lifespan

Around three out of every five retired people of the nation who have retired from their employment discover that very little amount is left over with them at the end of their paycheck in their bank accounts after their employment period. One of the reasons behind this syndrome is the spending habits that were made at the time of earning; many people become unable to adjust to their spending habits once the inflow of the income reduces or stops. Decreasing the amount you spend may definitely help, but you cannot take this as a ‘silver bullet’ for your problems; this is due to the increasing facts of the economic crisis all over the nation. It is more like healing a broken leg with a band-aid.

Live Like a King or a Pauper – Make a Choice

Becoming realistic in how you would live up to your retired lifespan will also help you in living a contented lifestyle during your golden years. If you become prior-prepared about the methods of your spending, then it will also help you to plan your living for your future years. Health is another factor to consider; your current health situation shall decide on your health levels during your retirement lifespan. You should give importance to regular exercises to minimize health related medical expenses after retirement. Medical insurance is another favorable option to be considered for a better and healthier future living.

Delaying Retirement for a Better Living

With the baby booming population who enter their retirement period, many of them have started revising their decisions over retiring on their set age; this is due to the current financial situation of most people in the United States today. The shrinking personnel and dire predictions about less than stellar investments and savings along with the nearing age of retirement; more and more people prefer to extend their employment period; that is, work even post retirement age.

The average age of retirement has increased from 59 years to 62 years that is from the year 1991 to 2003 respectively. Click here, to know about the social security retirement ages in the United States of America. The age for becoming eligible for complete benefits of Social Security payments across the nation is 65 years and above; again depending upon the year in which you were born. The advantage of remaining in the workforce helps citizens to avail the company’s medical plans and reduce their overall pocket expenses.

A simple approach to pay down a credit card debt

Credit cards are easy to get, in fact they are so easy to get that there are more credit cards issues than the population of US. So that makes it more than one per person. However not everyone is wise when using a credit card and many of accumulate credit card debt, on multiple credit cards and then struggle to pay it off.


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If you are one of them, you may have tried some approaches like debt avalanche method or debt snowball method or debt roller-coaster method! Just kidding, why make things more complicated than they already are. In this post I will try to outline a simple way to pay down credit card debts that may be the best plan for you to get out of debt.

1. Stop accumulating more debt: It goes without saying that if you are paying down debt, you don’t want to accumulate more. Especially on credit cards you are carrying a balance. Make a switch to debit cards or cash. When you accumulate more debt on credit cards you are already carrying the balance on, you start incurring interest the day the charge gets on your card. When you pay down your balance in full every cycle, you do not have to pay any interest on the transaction that came on in that cycle.

2. Get your APR reduced: Call you credit card companies and ask them to reduce your APR or say you will move to other cards. It should work in most cases, if you get e difficult customer service rep, call and try again. You may have to call three to four times.  This will really help you improve the pace at which you may be able to pay down your balance on the credit card. In simple terms the APR on your credit card is the interest cost you are paying on the card. Credit card companies are known to lower the APR on your card when they fear you may drop the card and take your business elsewhere. Having a good payment history with the credit card also helps in sealing the deal.

3. Get some temporary relief: Look in to balance transfer offers where you may be able to transfer your existing credit card balance from other cards and get 0% APR for some time. Note the APR will go up after the promotional period and there may be a transaction fee to make use of the offer. Evaluate to see if the offer makes sense.

4. Start paying down debt: It is important to lay down the groundwork to pay down the debt in the fastest way possible and that is what you have done till now. Once you have these done, start paying down as fast as you can. It is best to make minimum payments on all your debts first and then pay the remaining on cards you have the highest APR (this is where your most expensive interest costs are coming from).

This plan is simple and is effective. If you have any questions about how you can pay down debt, let us know in the comments.

Launching the eMoneyLog Carnival

Welcome to eMoneyLog Carnival.

I am launching the eMoneyLog carnival to share some of the best personal finance articles published around the web.

I personally spend a lot of time reading other personal finance site and learning through them. The eMoneyLog Carnival will be a way for me to present the best articles to you on a periodic basis. The carnival will try to get the best articles in front of you.

If you want to submit your article to the carnival or host the carnival on your site, please use the contact form.

 

 

How to Beat Procrastination and Start Working Towards Your Financial Goals

If you want to be successful with your personal finances, then it is imperative that you do not allow procrastination to inhabit your life.  Procrastination is putting off of what you can do now until a later date. It is the thought that you have plenty of time to accomplish your goals, so you put it off until the last minute.  The problem with this is that oftentimes when it comes down to the deadline, you simply don’t have enough time to accomplish your goal.

Many people procrastinate when it comes to personal finances.  They put off opening a savings account, never get around to creating a budget, put off paying down debts until next year, leave plenty of debts hanging, wait for opening that IRA retirement account, and so on. What they do not realize until it is too late that procrastination is the devil’s advocate when it comes to attaining financial goals.

Some good news is that it is not difficult to overcome procrastination.  Plenty of people have done so with motivation and a firm commitment towards it.  The first thing is for you to realize that you do procrastinate.  Admit it and then determine to change.  Be a person who says no to procrastination and be super responsible with your finances.  Just a quick change of perspective will help you to beat procrastination and you’ll begin to see your financial picture change.

A great way to beat procrastination is to set some financial goals for yourself and post them in a spot where you can see them on a daily basis. Keep your goals in the forefront of your mind because when you are focusing on growing your savings or cutting your debt, you are more likely to be responsible with your money.  That $4 Starbucks drink might not look as enticing when you are serious about paying off your credit card debt within 6 months.  Be determined.

Another great tool is to create a budget. Sit down and write out all of your expenses and income.  See where you are financially. Own up to laziness or irresponsibility.  Come up with a budget that works for you and stick to that budget.  Really make up your mind to stick to it.

It’s  so easy to just keep doing what you have been doing, but the reality of that is waking up after 30 years, still living paycheck to paycheck with enormous amounts of debt.  Being financially responsible and overcoming procrastination will take work, but you are worth it.  Your financial future is worth it.  Look at the big picture.  Do you want to still be in lack 10 or 20 years down the road?  If not, then do something different.

You can overcome procrastination and build yourself a secure and successful financial future with discipline and hard work.  Take pride in your financial status and get the ball rolling by evaluating where you are and where you’d like to go.  Then take the necessary actions to get you there. You can do it!

How to Achieve Financial Freedom in Four Steps

What does financial freedom mean?

Does it mean that you have no credit card debt? Or does it mean being able to buy what you want when you want it? Does it mean having a mortgage free house? Or does it mean having a million dollars in your bank?

Financial freedom means different things to different people. However, what is common is that everyone desires it. People envision financial freedom in different ways. Some want to be able to take a nice vacation; some just want to get out of debt. Some would like to be able to purchase a nice home, a sports car, quit their corporate job, and work for a non-profit or just simply be able to take care of their family’s needs.

Yes, people certainly do desire financial freedom, but the reality is that most people never experience it at all in their lifetime. Not necessarily because they don’t make enough or that they are living from paycheck to paycheck but because they were never able to break the financial bondages that hold them down. Financial bondage takes many forms- debt being the worst one. However, even without debt, there is always that big expense looming around the corner, whether it is the engagement ring, the big family vacation, school, and college expenses for the kids, etc.

To experience financial freedom, one has to break these bondages. This does not mean one has to turn away from responsibility, in fact quite the opposite.

You have financial freedom if you can pay for all expenses without incurring debt, without stressing out, without making a lifestyle compromise, without letting your dream go. That is Financial freedom!

Simply put – once you make enough money required to meet your expenses without being actively involved in generating that income, you have achieved Financial Freedom!

Financial freedom is possible, but you have to be willing to be honest and make some changes. You must be proactive to attain it.

Step I: Get a grip on your financial situation

Start by clearing out things. If you have debt, make a list of it with minimum payments and interest rate listed against it. Estimate your total monthly expenses (you don’t necessarily need a full blown budget) and get a sense of where your money goes.

Step II: Save money for emergencies and get rid of debt.

Build a cash cushion, a.k.a an Emergency fund. Make a commitment to do what it takes to pay off your debts. Debt is the worst of all the financial bondages. Once you’re debt free, put money aside for Step III.

 Step III: Automate income

Look at ways to generate passive income. In a low interest rate environment, savings account and CDs may not be the most attractive investment but they’re a good starting point. If you are a freelancer, you can look at outsourcing some of your work so that you are free to get more clients. Build a diversified portfolio of dividend stocks. Buy assets that produce income, like a cash flow positive rental property not a gas guzzler pickup truck.

Step IV: Go back to Step I and Step III again.

Don’t stop here, it’s important to go back to Step I and get a handle on it again. Then back to Step III.

I want you to define what financial freedom means to you. And what are you going to do once you achieve it. That should be a good motivator to get started.


Carnival inclusion form the past week

Thanks to all who included my post in the carnival. Really appreciate it.  It is staggering to see the amount of good posts published in just a week’s time.  The fun part is learning and sharing with you.

First up is

Young And Thrifty is hosting The Carnival of Financial Camaraderie #32

Money Talks Coaching is hosting the  Carnival of Personal Finance – The Color Wheel Edition

Balance Junkie is hosting the Totally Money Blog Carnival #65 -Success, Wealth & Happiness Edition

Arbor Investment Planner is hosting the Self Directed Investing For Retirement Carnival – Socialism is Winning Edition

Let me leave you with an interesting quote from Benjamin Franklin

Remember that credit is money.

So exercise the same caution when using credit cards or getting loans as you would have while spending cash.

 

Sell all your old electronics, not just mobile phones for cash

We recently wrote about why you should recycle your mobile phone, now that’s a pretty good idea and a good starting point.  However why stop there. Take a hard look at all the electronics you have lying around in your house and see if you can sell them.

Here are some tips you can use to identify electronic items you can sell.

When was the last time you used it?

Do you have your first generation iPod Touch or a portable DVD player lying around that you think you will you but haven’t used it in the last year, last two years or maybe more. Guess what? You are probably never going to use it. So get rid of it. Go ahead and sell ipad for cash or your VCR for that matter.

When did you buy it?

Did you buy it many years ago and the technology has now taken a leap forward? I am not talking about iPad 2 to iPad 3 ( or like apple calls it, iPad). I am talking about, Tube TV to LED TV. May be its time for an upgrade to catch-up with the world.

Is it still serving your intended purpose?

When you buy new electronics, there is generally a reason, maybe the old one broke, maybe there was a better model available, or maybe you needed to get something done but no longer have a need for the item. A good example here is a 8GB iPod, may be at the time your collection could fit in, but it does not fit on the tiny 8GB anymore. Sell your iPod to get  cash for it.

 

 

Recycle Your Mobile Phones

What happens to your clothes once you’re through with them? Most likely you donate them to some charity. Or give them off to someone who’s needy. And pretty sure you do this for most other things other than clothes too. Like food, household goods etc. But what about your phones? What do you do with your phones when you decide to buy a new one? Does it sit in a drawer forever or do you dump it?

Recycle Your Mobile Phones to save or even make money!

According to studies, an average person gets a new phone every 18 to 24 months. This means that there’s a huge amount of ‘mobile phone’ waste being generated on a daily basis and very few people sell their old mobile phones. Phones contain quite a lot of hazardous materials. According to the U. S Environmental Protection Agency, Americans discard 125 million phones each year. Go figure how much hazardous material that is!

Many people are now aware of the hazards of simply discarding mobile phones. There are a number of environmental implications of discarding electronic waste like old mobile phones instead of recycling them. When you recycle mobile phones, you are not just helping the environment but also people in the emerging countries. Most of the mobile phone recycling companies refurbish these discarded phones and resell them to distributors in poorer countries. This also helps in bridging the gap – the so called digital divide which exists between the ‘not so rich’ and the richer countries.

And to get to the main point: money! When you recycle your old phone  to buy a new phone, you get a discount or a reduction on your new phone. And who doesn’t like reductions? So why not always exchange your old phone for a new one every time you decide to get a new phone? If you have any old phones lying around, sell those ole mobile phones online as well. If you feel that you’re not getting the best deal by an exchange offer, sell your old phone on trading websites like eBay or Amazon. You’ll get a good deal, and have some cash in hand to get your new phone.

So remember to recycle your phone all, it’s a really good idea.  You’re not just helping your own wallet, but also the environment. That’s a double win!

 

 

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