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January 2008


In an world of overly simplified platitudes and one-size-fits-all “advice,” there is little repeated more in personal finance than the importance of the emergency fund. Typical popular financial advice prescribes a high-yield savings account in which one can store three to six months’ worth of expenses. Suze Orman suggests aiming for eight months’ expenses in a savings account. David Bach believes four months is a good starting point for an emergency fund.

Advice for a fat emergency fund sounds good when high-yield savings accounts are actually providing high yields. When interest rates are low, it can be financially detrimental to leave so much cash uninvested. It may be worthwhile to diversify. Rather than having just an “Emergency Fund,” like a “subaccount” at ING Direct with its own name, this can be only one component of a larger scheme. To encompass all that could be included, perhaps “Emergency Plan” is a better term than “Emergency Fund.”

I am not talking about a box that you keep in the trunk of your car that contains a gas mask, a gallon of water, a hand-crank radio, and a can opener, like one of my coworkers. While that might be helpful for the Y2K bug when airplanes fall out of the sky in midflight, this “Emergency Plan” refers to finances only. There are five components.

1. Mattress cash stash. Obviously not hidden beneath your mattress, having some cash in the house — hidden in a weird place that a burglar would not think to look — gives you access to fast cash if you need to leave right away without any time to stop at a cash machine. Also, if the ATM network is down for some reason, you won’t have any trouble trying to access some money. It would be impossible to predict how much you would need before you could access the banking system in a catastrophic event, so I think the guideline here is just to be reasonable. Maybe keep a couple hundred dollars in cash around the house.

Of course, in the worst situation imaginable, money itself would lose all value and society would be reduced to a system of bartering for what you need. Even gold, which some people claim has intrinsic value that paper money does not (it doesn’t), could be worthless. Don’t bother keeping bars of gold around. The idea is to prepare within reason. Keep this amount as low as possible; money sitting around loses value relative to the things you would need to trade it for thanks to inflation of the money supply.

liquid2. Liquid account. Unless the banking system fails, you should be able to access your next level of emergency fund within 24 hours. With interest rates decreasing every week, it might make sense to seek out better paying liquid investments like money market funds. All of the cash I have earmarked for emergencies, about $10,000 right now, is held at ING Direct, currently one of the lowest of the “high-yield” savings accounts.

It wouldn’t hurt to add layers to this level. This year, I will change my Emergency Plan to leave cash in the amount of expenses for one month or less at ING Direct while increasing my savings at a money market fund that beats inflation like the Vanguard Prime Money Market Fund, currently earning a 4.55% yield. Between my mattress stash and liquid accounts, I want to be able to cover three months’ worth of my current expenses. That’s a little lower than what’s recommended by the gurus, but I chose this amount because the chance of losing both of my sources of income at the same time is low and I believe I could find a new job quickly if necessary.

Bankrate discusses using certificates of deposit or bond funds for this portion of liquid savings, but they are not liquid enough. The interest premium offered over high-yield savings accounts and money market funds, usually small, won’t outweigh the chance of paying an interest penalty for early withdrawal before maturity.

3. Investments. With investments, we’re starting to get into the territory of the money you’d be better of not touching, even in an emergency. The Roth IRA is the first stop if you need to tap your investments in an emergency. You can withdraw your contributions (not your earnings) without penalty, taxes, or fees (depending on your broker). Once the emergency condition has subsided, you can still contribute the money you withdrew back into your Roth IRA.

If you don’t have a Roth IRA, you may have to turn to taxable investments. This isn’t a great option, but still better than the next. If you have to sell when you’re investments are down, you’re not doing yourself a favor down the road. You may get some tax benefits in this case, but you’ll have to determine whether it’s worthwhile. If you sell your investments while they’re higher than they were when purchased, you will owe taxes, which could be just as troubling in the short term if you’re still in an emergency condition. Either way, you’ll also contend with transaction fees.

Stay away from granting yourself a loan from your 401(k). If you lose your job during this emergency, your 401(k) loan will become due immediately. That’s an unaccessible level of risk, at least for me.

cheerful credit4. Credit. This is a slippery slope. Some recommend using a home equity line of credit as an emergency fund but having a HELOC in the first place means having an interest expense every month. The purpose of a HELOC goes beyond emergency funds, and therefore shouldn’t be the only part of an Emergency Plan.

Credit cards should be avoided in most cases. They could be used most effectively when you know that the emergency condition will subside before your credit bill comes due. Interest charged for credit card accounts is usually way too high for effective emergency use. If you have a special promotion with your credit card, like 0% APR on purchases or cash advances, then taking advantage of these deals could pay off. It requires extra special attention to make sure you don’t fall into any of the credit card traps. If you end up owing back interest due to a late payment, even in an emergency situation, you could be paying for this emergency longer than you would otherwise.

5. Friends and family. While I originally thought this fifth component is outside of one’s control, if you’ve done a good job of taking care of the universe around you, the universe will return the favor when you’re in need. If you’ve made a habit of helping those in need when you were able, when you’re in need, perhaps someone will be there to look out for you. Perhaps this will be in the form of your roommate or friend lending money to you at a very low rate or a gift from your parents. Either way, it’s best not to rely on help from the universe, as there are no guarantees. When you save cash in a money market fund, it’s guaranteed to be there when you need it. Friends and family can provide powerful assistance, but if you don’t need it, don’t take it.

Here’s a secret. There are actually six components.

6. Reduce your expenses. One thing you can do to make your Emergency Fund last longer, or save more for next time, is reduce your expenses temporarily. Make some sacrifices, like the Expensive Coffee-Relate Drink, cable television, or weekly dining engagements. Desperate times call for desperate measures. Feel free to indulge again once you find a new job or otherwise increase your cash flow to normal conditions.

What is your Emergency Plan? Do you consider yourself covered with cash in a savings account, or do you take a more complete approach?

Image credits: tanakawho, ChicagoEye

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This article is for tax year 2008. For 2009 and beyond, see our roundup of 8 (or more) Ways to Benefit from the American Recovery and Reinvestment Act of 2009 (AKA Stimulus Plan).

Updated March 18, 2008 with an estimated schedule of payments.

President Bush has signed into law a $165 billion economic stimulus package providing rebate checks to taxpayers. You might receive a check for $300, $600, $1,200, or even more depending on your conditions.

Originally, PBS Newshour provided a calculator to help taxpayers to determine the amount of the rebate, but that calculator has been proven to be faulty. With the help of Consumerism Commentary reader cdg, I’m now including a new calculator, revised several times over the past few days to increase clarity and accuracy. This calculator properly takes into account the information from the bill passed by Congress and signed into law by the President (H.R.5140) and has been verified by CPAs and tax accountants. However, any information presented should not be considered tax advice.

The validity of the result depends on the accuracy of the information you enter. Before entering the data or asking any questions, please scroll the calculator down to read the definitions and read all the comments at the bottom of this post.


TurboTax is Easy, Free Edition, Fast Refund

Since this “rebate” is an advance for a new credit which will be included on the 2008 1040 income tax form, it will not affect your 2007 taxes. In April 2008 (this year for 2007′s tax settlement), you will receive what you are owed or you will have to pay what you owe as if the rebate never occurred.

This summer you will receive the rebate for the 2008 credit as calculated above.

In April 2009 or thereabouts, when you file your taxes for 2008, the IRS will run the calculation for the stimulus rebate credit again. If the results show that you would have received more (due to an additional child, for instance), you will be sent the difference. If your results show that you would have received a smaller rebate, then you get to keep the difference. This is an additional credit. You do not have to pay back to the IRS what you will receive this summer. Receiving this advance will not reduce next year’s refund nor will you owe more federal tax.

March 18 Update: The IRS has released a schedule estimating when you will receive your rebate.

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As January comes to a close, it might be a good idea to take a look at the year-long goals I created for myself at the beginning of the year and my progress so far.

Goal 1: $100,000 in additional income. As of today, I am right on track for earning $100,000 outside of my day job. Anything can happen this year, however. I have to consider the possibility that this income will be reduced to almost nothing with a slight change in Google’s algorithms, for example. I will also be voluntarily reducing certain portions of my income next month in the hopes of retaining consistent income growth in other areas. (Text link ads will be phased out on Consumerism Commentary and a number of other websites.)

Goal 2: Contribute $15,500 to my 401(k) and the maximum to my SEP IRA. In January, I contributed $861 to my 401(k), not including my employer’s matching contribution. In order to meet this goal, I will need to increase my contributions. I’ll add a few more percentage points during the next open trading window which will likely occur around the time I receive my raise and bonus (if I do receive anything). The timing of the next 401(k) increase will depend on some other job-related factors.

When I finalize my taxes, I will have an idea of how much I will be able to contribute to my SEP IRA.

Goal 3: Eliminate $13,000 of student loan debt. I’ve started by increasing my monthly payment from $127 to $250. That’s obviously not enough to get me there by the end of the year. After tax season, I’ll have an idea of how quickly I’ll be able to pay off the remainder. With the interest rate massacre occurring among the high-yield savings accounts, I am anxious to use some savings to pay off the loan (while keeping in the mind I’d like to keep enough lying around in savings to cover a down payment at some point).

Goal 4: Accumulate $40,000 in savings for a down payment. I added to savings this month, but not by much. My “Relocation Fund” is approaching $5,000, but once I pay my taxes, I’ll have a better idea of how I can redistribute the savings towards various goals.

Goal 5: Choose two or three charitable organizations, grant $5,000, and contribute $10,000 to the charitable fund. In my 2008 budget, I set aside $5,000 in both June and December for charitable contributions. I haven’t decided on any organizations yet, but I am thinking about contributing to the group I used to work with despite last year’s decision to disassociate myself.

Goal 6: Increase net worth to $210,000. Thanks to the stock market, my net worth has made no progress in the first month of 2008. My non-invested assets have increased this month, but everything else is down. Almost all of these investments are allocated in equities to last until retirement, so this “fluctuation” isn’t bothering me right now. If poor stock market performance continues this year, I will have a tough time making this goal.

All in all, it’s “too early to tell” whether my progress so far this year will help me approach my final goals for the year. How about you? Are you on track for meeting your goals and resolutions?

This article is part of the MoneyBlogNetwork’s monthly group writing project.

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Thanks to Ross who wrote in yesterday about FNBO Direct’s latest interest rate drop. With this information, and with a reader emailed suggestion of tracking the rates over time, I redesigned the list of high-yield savings and checking accounts. Additionally, I’m also including accounts not insured by the FDIC, like money market funds, though I am still gathering information on those.

The new table is a Google spreadsheet that is embeddable in web pages. So if you’d like to embed the spreadsheet on your own web site, let me know, and I’ll send you the code to do so. View the list of high interest accounts here.

Now, here are some interesting articles from around the web. Read the full article →

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Economic Stimulus Package Has Not Been Finalized

by Luke Landes

I’m glad everyone is excited about receiving checks from the government in June or July, but there seems to be a misunderstanding amongst people I talk to. While President Bush and a contingent of the legistlative branch have agreed on the propsed details, the bill still has to pass the House and the Senate. None ... Continue reading this article…

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Still Believe Real Estate Values Never Go Down?

by Luke Landes

For some reason, I will never get out of my mind someone once told me shortly he purchased a house he couldn’t afford (and knew he couldn’t afford) with a risky mortgage. He said, “I’m not worrying. Real estate prices never go down.” I wasn’t about to get into an argument; he was a former ... Continue reading this article…

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Unexpected Call From Commerce Bank

by Luke Landes

Last weekend, I decided to open up a checking account at Commerce Bank. My girlfriend has been a customer for a few months, and she is very happy with their service. You can’t beat their hours, either. The branch a couple of blocks from my apartment open late tonight and all Thursdays — to 8:00 ... Continue reading this article…

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Put Your Savings in Hyperdrive: 6 Ways to Accelerate Your Interest

by Luke Landes

Over the last week or so, I’ve written a little about small changes you can make to your savings habits to speed up your interest earnings. This is a task that is getting more difficult with the economy possible heading for a recession and with the Fed lowering interest rates. With lower yields even in ... Continue reading this article…

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Put Your Savings in Hyperdrive, Part 6: Make Your Raise Invisible

by Luke Landes

This is the last installment of the series in which I offer a few suggestions for picking up the pace of your savings. For those not familiar with the concept of “hyperdrive,” the word refers to traveling faster than the speed of light, common in science fiction. This is the speed I would like my ... Continue reading this article…

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Economic Stimulus (and Blog Roundup)

by Luke Landes

President Bush is suggesting a $145 billion rebate to taxpayers in order to stimulate the economy and avoid economic recession in 2008. About $100 billion is reserved for individual tax payers and the rest is for businesses. This could come to the masses in the form of a $800 tax rebate check for each individual ... Continue reading this article…

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Put Your Savings in Hyperdrive, Part 5: Hide Your Savings From Yourself

by Luke Landes

Over the past week, I’ve been sharing some ideas for taking your savings to the next level. Try to take advantage of high-yield savings accounts while you sill can. With the economy in bad condition, it’s likely the Federal Reserve is going to lower the target interest rate, which will mean lower interest rates for ... Continue reading this article…

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Helping Mom Retire, Part 1: Conquering the Stack

by Sasha

My mother and I have recently started the journey to retirement together. By together, I mean that she’s starting to consider retiring in the next few years, while I’m realizing just how much help she’s going to need in order to get there. I’m up to the challenge, but it’s going to be a lot ... Continue reading this article…

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Hedging Bets on Blu-Ray But Still Disappointed (and Blog Roundup)

by Luke Landes

Last year, I decided to become a “late early adopter” by taking the jump to high-definition entertainment. I upgraded my equipment, including a Toshiba HD DVD player. While cognizant of the HD format wars, I went ahead with HD DVD because the equipment was better priced for the mass market. I thought thought that due ... Continue reading this article…

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Put Your Savings in Hyperdrive, Part 4: The Expensive Coffee-Related Drink Factor

by Luke Landes

I’m on a quest to determine a number of financial moves that will accelerate savings beyond the typical snail’s pace. I’ve written so far about opening a high-yield account, keeping your change creatively, and automatic your savings. These are all basic concepts that can be applied in interesting ways with a little bit of attention. ... Continue reading this article…

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Put Your Savings in Hyperdrive, Part 3: Automate Your Savings

by Luke Landes

If you’ve ever run from one point to another, you’re probably aware that there is a limit to your speed. With “analog” equipment like the bones, muscles, joints and tendons in your legs and feet, there are physical limitations that prevent you from going too fast. Don’t worry. Thanks to recent inventions, it’s quite easy ... Continue reading this article…

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My 2007 401(k) Performance and Blog Roundup

by Luke Landes

Yesterday, I received my final 2007 401(k) statement in the mail. According to their records, my account’s performance in the fourth quarter last year was down 3.50 percent while my performance for the entire year was up 7.09 percent. That’s a bit of a let-down from 2006, when my 401(k) performance was a strong positive 16.25 percent. It ... Continue reading this article…

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Put Your Savings in Hyperdrive, Part 2: Keep Your Change

by Luke Landes

Whether you’re trying to establish an emergency fund or putting money away to take your dream vacation, you can reach your goal faster by putting your savings in hyperdrive. Unfortunately, scientists have not yet perfected time travel. When they do, saving for retirement might only entail traveling back to the 18th century to deposit $1,000 ... Continue reading this article…

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Flexo’s Budget for 2008

by Luke Landes

I decided this year that a rudimentary budget would help me further analyze my spending beyond my monthly income and expense reports. Since moving to my new apartment last July, my discretionary expenses have been increasing. Perhaps designing a spending plan and evaluating my real expenses against the budget each month will help me rein ... Continue reading this article…

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Put Your Savings in Hyperdrive, Part 1: Open a High-Yield Account

by Luke Landes

Hyperdrive, also known as warp speed or a number of other terms in science fiction, refers to traveling faster than light. While theoretically impossible for objects due to the special theory of relativity, moving at this incredible pace is possible for your money. While you have a savings account earning continuous interest, you are becoming ... Continue reading this article…

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Case Study: Retire a Multi-Millionaire With a $11 per Hour Job

by Luke Landes

When it comes to getting rich slowly, I’m generally a skeptic. The typical path to getting rich slowly prescribes investing $1,000 a month for thirty years into the stock market, earning 8 percent each year. At the end of thirty years in this example, you will find yourself with $1.5 million, but there are major assumptions ... Continue reading this article…

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