"Any society that would give up a little liberty to gain a little security will deserve neither and lose both." ~ Benjamin Franklin

I'm Not Sure the "Expert" was Really Such an Expert

>> Thursday, March 26, 2009

You may remember that I took the expert from Family Circle's Financial Planner: Expert Money Advice to task the other day for doling out bad credit card advice.

It seems I should have pulled apart the entire article because, with the exception of the first piece of advice (yes, keep contributing to your 401k) I don't agree with much else that was shared.

Let's move on to the next question:

Q. How much should I have in savings?

A. At least six months of living expenses. The general rule of thumb has always been that dual-income families should have three to six months of living expenses accessible in a savings account earning at least 2.5 percent. But fewer than 40 percent of adults have enough savings to tide them over for even three months, according to Bankrate.com. And now that the economy is so uncertain, experts are leaning toward six months. "If someone loses his job, it's anybody's guess how long it will take to become employed again," says Donald E. Whalen, a certified financial planner in Alpharetta, Georgia. But don't get overwhelmed by the thought of having to save so much money -- "living expenses" doesn't mean cash for leisure activities. It's the money needed to cover bare essentials, like mortgage, food, and health insurance.

To beef up your emergency fund:

A. Set up a weekly automatic debit from your checking account into a high-interest savings account, and increase the amount when you can.

B. Raise the deductibles on your home and auto insurance, or shop around for a better deal, then stow the difference in a savings account.

C. When you finish paying off a credit card, keep making payments -- to your emergency fund.

D. Try bundling expenses (like getting phone, Internet, and cable from one company) then stash the savings.


I am going to disagree right away. If you have any consumer debt the most you should have in savings is $1000. That is enough to cover *most* emergencies. Now, if you have no debt then, yes, 6 months of living expenses is what you need. Now, on to the tips to beef up your savings...
  • A) Sure, deduct a weekly amount into your emergency fund until you reach $1000. BUT a high interest savings account is still much less than the interest on your credit card debt. Work on a snowball to pay off that debt (trust me, it works! We've paid off over $17,000 since last summer using this method)
  • B) Yes, increase those deductibles! The savings can be significant. In fact, you should review your policies annually with your insurance agent to make sure you have the proper coverage. But use the savings to pay down debt!
  • C) When you pay off a credit card roll that payment into the next item on your snowball. It will disappear faster and give you more money to toss at the next bill... And the next... And the next... Until they are gone!
  • D) Sure, go ahead an bundle your expenses. But if you really want to save money get rid of those expenses all together! We got rid of our home phone and cable- a savings of $100 per month! And we don't miss them! (You can watch many shows online for free!) Throw the money at your snowball!
  • How we got our emergency fund & started our snowball:
  1. I had a huge garage sale. Everything that was stored in our basement & attic, clothes that we didn't wear, toys the girls had outgrown or just didn't play with, CDs we didn't listen to, DVDs we didn't watch, books we didn't read anymore... I sold a ton of stuff! Books, CDs & DVDs can also be listed on Half.com (I've made a nice amount on there), items on eBay (the nicer stuff) or Craig's List, kids clothes can be taken to a consignment shop where you can get store credit ('cuz your kids are gonna be needing clothes) or cash, or donated to Goodwill (where you get a tax credit). Sell it- it's just "stuff". You can get more when you're not broke!
  2. We got rid of cable TV, our home phone, eating out & any unnecessary expenses. I started using cash only (sign up to win an envelope system here)
  3. We let the land we owned in Missouri go back to the man we bought it from. Sure, we were out thousands of dollars but what good is land that you spend $400 a month on and never use?
OK, on to the fourth question in the article:

Q. Is it okay to ignore my bills if I can't afford the payments?

A. No way. Ignoring your bills will result in late fees, negative credit, and higher interest rates -- to the tune of as much as 32 percent on your credit cards, according to a study by advocacy group Consumer Action. Foresee a problem making a payment to your credit card or your mortgage company? Pick up the phone. "If you proactively call and explain the situation, you'll probably get better treatment," says Ken Robinson, a financial adviser in Cleveland. You may be able to work out a different payment plan or lower your interest rate. The same goes for taxes: File your return on time, then contact the IRS to talk about an installment plan, if need be.

I almost think this contradicts what she just said in question 3. This is why it is more important to pay off those bills instead of building a huge emergency fund. The bills will continue to come - even if you don't have any money! And, as was stated in the previous answer, your emergency fund is for bare essentials- not debt!

And now, "advice" on what to do if job loss is imminent (I'm going to hit these one by one):
Before I Lose My Job

It seems like the headlines are announcing new layoffs every day -- more than half a million jobs were lost in December 2008 alone. Luckily, even in this shaky economic environment there are a few things you can do to prepare.

Apply for a home equity line of credit. If you're unemployed, you'll have a hard time persuading a bank that you can repay this loan, so now is a great time to secure a line of credit in case you need it. You pay interest only if you have to tap into it. The bad news: It's harder to get a HELOC than it used to be. Aim for a bank that will waive all application fees and charge an annual fee (once approved) instead. "I'd rather do that than pay $150 up front and then find out they're not going to give me the loan," says certified financial planner Constance Stone.

Do NOT go get a line of credit "just in case"! You don't want to build up more debt- especially when you don't have an income to pay the bills when they come due. And paying an annual fee to borrow money, on top of the interest rate? Do people really do this? Oh, and if you can't pay? You can lose your house! Bad, bad, bad advice!
Get a physical. Encourage your husband to get one too, and take the kids to the pediatrician and dentist. You don't know what kind of health coverage you'll have in the future or how much it will cost, so get care while you're still on your employer's dime.
OK, this one is not so dumb. Healthy people spend less on medical costs.

Downgrade your health coverage. When open enrollment comes around, try a less expensive health insurance plan for the upcoming year, if you can. That way, if you end up having to pay COBRA (your current health plan at full cost), you will pay less.

I'm not really sure about this one... What worked for us was to switch to an HSA. We pay less per month on our premium + our deposit to cover medical expenses than we were on our full coverage insurance (and by less I mean a few hundred dollars). But we are self employed; no employer covers our health insurance. I would say look into this option with your employer, or if you believe a lay-off or firing is imminent.

Adjust your withholding. Reduce federal and state withholding to get more cash in your paycheck -- then don't spend it. Sock away the extra money in a high-interest savings account. If you remain employed, you can use the money to pay your taxes. But if you or your husband gets laid off, the money will be readily accessible so you can pay your bills.

Again with the high interest savings account... Use the money to pay off debt. When you are ready to build your emergency fund talk to your bank about easy to access money market accounts- they have higher interest than savings accounts and you can usually get your money in a day or two; some even have checks.

Check your credit report. Potential future employers will likely be checking your credit. Everyone should get a free report from annualcreditreport.com and fix any errors -- now.

You should get your credit report annually (it's free) and check it thoroughly. Identity theft is rising. We subscribe to LifeLock. They watch over our credit and let us know if something fishy arises (I've been very impressed). Sure, you can do what they do- but it is very time consuming and annoying (I've tried, it's worth the cost to me for someone else to handle it).



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The items highlighted in green were Originally published in the April 1, 2009, issue of Family Circle magazine.

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