In an effort to attract more new deposits, ING Direct is offering a new savings product with a high interest rate, the “Added Value” certificate of deposit (CD). If you are willing to deposit new money to ING Direct and let the bank hold that money for one year without any withdrawals, ING Direct will pay you a rate of 2.25% APY (as of October 18, 2009). This is the highest rate ING Direct is currently offering; the rate on the “non-Added Value” CD is 2.10% APY.

The interest rate offered on the “Added Value” CD is currently the best rate in the country for 12-month CDs among major national and regional banks. Is this a sign that ING Direct is returning to its roots as the bank that tops the charts for customers who are interested in having their money earn as much as possible while in mostly liquid accounts? I don’t think that’s going to happen; the interest rate on the bank’s flagship Orange Savings Account is currently 1.30%, ranking ING in the middle of the banks who claim to offer “high-yield” savings.

Customers tend to glow about ING Direct’s customer service, which shows that the bottom line is not always the primary, or at least not the only, concern for consumers.

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ING Direct Offers “Added Value” Certificate of Deposit

Mention to your friend that you suddenly received an unexpected $1,000 and I would be willing to bet he could come up with several suggestions for you. Most of those suggestions will likely involve handing the money over to him. My first suggestion is to refrain from telling your friend when you have $1,000 more than you know what to do with. Once that is achieved, it is best to have some ideas in mind just in case this situation presents itself.

Money Magazine has eleven suggestions for people who find they have $1,000 sitting around without a planned destiny.

• Top off your emergency fund. If you don’t have an emergency fund, $1,000 is a great starting point. It is quite easy to open a high-yield online savings account so you can keep your emergency fund close while letting it earn as much as possible.
• Spend five hours with a financial planner. Here Money Magazine assumes you will go to a financial planner who charges $200 per hour. Unless your finances are unusually complicated, skip this suggestion.
• Buy a top-notch stock fund. Here Money Magazine suggest putting your money in actively managed mutual funds. I suggest sticking with low-cost non-managed index mutual funds. Vanguard requires $3,000 to start investing, but the low-cost Schwab Total Stock Market Index Fund (SWTSX) requires only a $100 minimum deposit.
• Upgrade your home appliances. I can see this being a legitimate option if you have problems with your appliances or need to switch to more energy-efficient models.
• Help on a large scale You can use the $1,000 for others’ good. Money Magazine suggestions buying sheep for farmers, offering small business loans through Kiva, and planting trees. Any charitable option is a good choice for an unexpected $1,000.
• Join a gym. If you know you can make your gym membership last, this could be a suggestion that saves money through your improved health. Otherwise, a gym membership could do nothing more than suck your money away.
• Beef up your IRA (if you’re 50 or older). Anyone age 50 or older with the appropriate level of income can invest an additional $1,000 above the standard maximum in a Traditional or Roth IRA.
• Pay down credit card debt. This should probably be towards the top of the list. Paying off expensive credit card debt saves you money in interest fees down the road. $1,000 can go a long way to getting out of debt.
• Update your estate documents. Money Magazine assumes you had your estate documents in order at one point. $1,000 should cover updates to your will, health-care proxy, and power of attorney.
• Start a young investor off right. Money Magazine suggests setting up a diversified portfolio for a child using a combination of Schwab’s low-minimum and low-cost index funds.
• Become a star at work. This is the most unlikely suggestion for spending your own $1,000. Money Magazine suggests taking a class, much like the improv class Smithee is taking, or any other course that might provide you with a competitive edge. Self-development is a good idea for your own money, but I wouldn’t spend $1,000 on an activity that does nothing more than increase my value to a corporation.

What would you do with an unexpected $1,000 right now?

What to do with $1,000 now, Money Magazine, October 12, 2009

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Ten Things to Do With $1,000 Right Now

For most humans, life is much shorter than we would like, and for many of us saving even ten percent of our income will never result in a state of wealth within our lifetime. There are too many forces working against this endeavor: a lack of sufficient opportunity, inflation, and unplanned events to name a few. In addition, most people, at least in the United States, save much less than ten percent. It’s no wonder spending other people’s money and going into debt is so alluring for many.

Even if wealth eventually arises through conscious, compounded saving, by the time we reach a level of net worth that qualifies us to fall into the category we have set as a goal for ourselves, we are too old to enjoy what we have set aside. Putting aside the noble, selfless acts of passing our assets to charitable causes and descendants, the point of accumulating money is not to have a large bank account; the purpose of saving is to do something with the money.

When we save, we are putting aside our desire to do something now for the chance of doing something more later. Those nurturing a superfrugal mindset argue you should always choose the latter. The problem with the future is it never arrives regardless of how long you wait. Even though there is always a place or time or dollar amount where you can draw the line and begin living your life, that line may never come.

I will freely admit that I am not particularly adept at focusing singularly on the future. I likely fall somewhere along the spectrum of forward-thinkers. While I am not overly concerned about the present and I do not need immediate satisfaction, I do have my doubts about the future. I am saving money for retirement, including putting money into accounts that can’t be touched without penalty until several decades pass, but there is a possibility I may not live long enough to reach that goal. I am sacrificing a part of my life — not only the selfish activities in which I’d like to participate but the good, charitable things I could be doing with that money now — for the chance of doing more later.

If I don’t have the opportunity to do more later later, I would have made many needless sacrifices.

There are no certainties, so how can anyone truly offer advice about how much someone should save for the future? Life is short, and it’s important to make the most of it while you have a chance. No one knows what tomorrow will bring, so we guess and we offer suggestions. Save ten percent of your income (a weak but popular rule of thumb), or save as much as possible, but don’t completely sacrifice your life now for your future.

With your finances in control or on the path to being in control, ensure you are making the most of the short time you have on this planet. The slow road to accumulating money is the road that most people will take, so enjoy the scenery. The future may never come, so don’t deny yourself all joys of experiencing life now, however you define these joys, in deference. If your approach is causing you to miss out on aspects of life that you find important and will later regret, you may be saving too much money.

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Is It Possible to Save Too Much Money?

I’m pointing out a recent article featuring advice from Walter Updegrave, a senior editor of Money Magazine. Recently, he was asked to quantify the percentage of income that any individual should save in order for this particular action to be considered “financially responsible.” Normally, the advice I’ve seen suggests a rate somewhere between 10% and 20% of income, so I was expecting Updegrave’s advice to head in that direction.

Rather than providing a hard percentage, Updegrave took a more nuanced approach.

Well, as much as I’d like to be able to tell you to save 10%, 15% or whatever and you’ll be fine, it’s impossible for me to do that without knowing a whole lot more about you. The percentage of income that’s appropriate for you will depend on your income, age, the amount of money you’ve already saved, your employment prospects and, most important, how much you’re willing to forego immediate gratification for current and future financial security.

It is good to see writers admitting that personal finance advice is not one-size-fits-all rather than going for the knowledge-nugget. Knowledge-nuggets are like those chicken nuggets at that fast-food restaurant with the yellow double arch-shaped letter. They’re tasty, but not very healthy, and you get sick of them after about 25.

Every individual is surrounded by a unique situation, and that should be reflected in personal finance advice.

Tips on the other hand can be general enough to apply to a large swath of individuals. Updegrave answers the reader’s question as best as possible without knowing anything about the individual, but then leads into a few savings tips that are applicable to just about everyone: Start building an emergency fund (and here are 50 tips for building one), be serious about investing for retirement, and find additional ways to save such as automating your savings.

If nothing else, saving 10% of your income is a good start if you’re not saving anything, and saving 20% of your income is a good next step if you’re saving 10%.

3 steps to financial security: Save, save, save, Walter Updegrave, Money Magazine, April 30, 2009

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What Percentage of Income Should Be Saved to Be Financially Responsible?

If you have been affected by the recession, perhaps by losing a source of income, you may not want to hear suggestions for turning a bad situation into an opportunity. In fact, the idea of turning challenges around for your own benefit is in line with the annoying soundbites that productivity gurus sell. But I firmly believe that it’s best not to let things happen around you without reacting and adjusting. Here are some ideas to keep you moving while the world is slowing down.

1. Reassess your finances. If your income has changed, you may find yourself increasing debt at a faster rate or worse. I suggest going back to the beginning by following the map set forth in Take Control of Your Finances. This involves reevaluating your goals, your income, your expenses, and organizing your savings and investments.

2. Consider your primary and secondary skills. If you are out of work, and particularly if you have experienced difficulty finding a new place of employment, it is easy to feel your skills are not appreciated. Perhaps this is a good opportunity think creatively about different ways to apply your skills or hone your other talents. In college, did you have a minor in a different area than your major? If you did, chances are you have marketable skills in some other activity. During my first two years of undergraduate studies, I had difficulty choosing my minor, switching from computer science to psychology. If necessary, I would enjoy pursuing either of these paths.

3. Turn your hobby into your own business. I have found that many people are reluctant to take the avocation they enjoy and turn it into a profitable endeavor. I can understand this; I work almost constantly these days between my day job and everything else I do. But if that day job were to disappear, there would be no question that I’d use this as an opportunity to ramp up my projects. I have already turned my hobby — blogging and building communities — into a business. Now my newer hobby is photography. I have tons to learn about this new hobby (and I still have tons to learn about personal finance), but if blogging were my “day job,” I might have take on photography as a more serious hobby, and possibly turn that into a business of its own.

4. Go back to school. Modern educational technology has made it convenient to earn another degree. You can take classes online in the comfort of your own home or you can go on campus and hang out with the young co-educational students. Do not focus on the return on investment (ROI) for the funds you put into additional education. Learning a new skill or studying an interesting topic has intrinsic value that can’t be measured by a financial analyst.

5. Consider frugality. I admit I’m not a big fan of most frugality tips out there. In the past, many frugal tips have required a lot of effort and therefore remained under the domain of people without other timely responsibilities. But online coupon websites and other modern technologies take a lot of work out of frugality, so this now is an option for more people. Frugality means different things to different people, so today’s recession provides an opportunity to explore and decide on where you can intelligently save money.

Check out this extensive list of frugal tips from Being Frugal.

6. Eliminate your credit card debt. Credit card interest is expensive. You don’t have to be frugal to realize that interest is in most cases an unnecessary expense if you spend less than you earn. If you’re out of a job, this can be difficult, particularly if you do not have enough income to cover the minimum payments. Call your credit card companies to see if they can assist you by lowering or forgoing your payments until your income returns. If not, perhaps they will lower your interest rate. It never hurts to ask, and ask a supervisor if the first customer service representative won’t provide satisfaction.

If you do have income, start the debt avalanche, the least expensive, quickest, and most efficient way to get out of debt.

7. Eliminate meat from your diet. I love a perfectly cooked, rare filet mignon. But meat, even steak from the grocery store, is expensive.

If you drop red meat, poultry and fish from your diet, you’ll find plant proteins cheaper than the equivalent amount of animal protein. The cheapest cuts of beef, such as ground round, average $3 per pound in U.S. cities (lean and extra lean); boneless chicken breasts cost $3.40 a pound; and canned tuna is about $2 per pound. Contrast that with dried beans and lentils at less than $1 a pound and rice well below $1 per pound… Even tofu, the chicken of the vegetarian world, is usually well under $2 a pound. Go Vegetarian to Save Money, MSN Money

Healthy diets help you save money later in life with fewer visits to the doctor.

8. Sell your extra stuff. The great thing about eBay is its enormous reach, bringing people from anywhere interested in owning anything closer together. There’s a market for practically anything transferable on the auction website. Sell your clothes, your furniture, your electronics, your art, your classic video games, and your baseball card collection gathering dust in the attic. Don’t expect to consistently make a lot of money selling your old items on eBay unless you own something truly rare. One drawback of the aforementioned reach is that lots of people are selling the same things you are.

But if you can create something original and use eBay to sell that product, you may be in a good position to earn a consistent income.

What would you add? How are you surviving this economic recession?

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Eight Tips for Living Through a Recession

Being prepared for financial emergencies is a primary step on the path to creating and maintaining solid footing, but as with other good things, too much of a positive can be negative. Every individual’s or family’s situation is unique, so it’s difficult to prescribe a hard and fast rule about the right size of an emergency fund that applies to everyone. Having three to six months’ worth of expensive in accessible cash is a good start, but many people will find that this will be too much or not enough.

I’ve suggested taking a holistic view by breaking your emergency fund into five (six) levels including cash on hand, a high-yield savings account, sellable investments, available credit, friends and family, and possibly readiness to reduce expenses. These options range from stagnant to flexible in terms of what they allow you to do with your money. For example, if you keep a small amount of cash ready under your mattress to use if you can’t access your bank accounts, that money loses purchasing power due to inflation the longer it stays outside the financial system. High-yield savings account may match or exceed inflation and investments may beat inflation over time. Access to credit allows you to invest more while still providing an option to help during an emergency, and friends and family can occasionally be tapped if necessary without risking your credit (just your reputation).

As we travel further down the list, more of your money is freed to work for you, invested for the future. If you are comfortable with the latter options, and if you are experienced with credit and not in danger of falling into debt, it’s better to tilt your emergency plan in that direction. I wouldn’t recommend keeping more than one year’s worth of expenses in a savings account narrowly beating inflation if at all, and the more other options are available, like credit and other somewhat liquid investments, a tiered approach will allow you to have your assets work for you.

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Can an Emergency Fund Be Too Big?

This is timely information consider I wrote this morning about establishing a small emergency fund before taking on the task of accelerating debt payoff. Last week, Liz Pulliam Weston from MSN Money provided details from a summary of different savings studies over the past few years. I discovered this article today.

According to the survey results, having just $500 in the bank corresponded to a large difference in stress, quality of sleep, quality of health, and productivity. The study also shows that income level has nothing to do with this. In both low and moderate income households, the average income for households who have saved at least $500 were about the same as the income for those who had not.

Better health and greater productivity save money in the long run. Even if it doesn’t sound like a good idea to start an emergency fund before directing all of your excess income towards paying off debt on the surface thanks to evaporating savings interest rates, there are many ways a small cash cushion can pay off in the long run.

Want to sleep better? Save $500, Liz Pulliam Weston, MSN Money, March 12, 2009.
Understanding the Emergency Savings Needs of Low and Moderate Income Households [pdf], Stephen Brobeck, Consumerism Federation of America, November 2008.

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New Study Outlines Importance of an Emergency Fund

In 2008, millions of people received checks or direct deposits from the government in an effort to stimulate the economy. The extra cash certainly helped many families and individuals, who, like the banks that received TARP funds later in the year, cushioned their bank accounts and paid off debt. Some used the found money to contribute directly to the economy, but not enough people purchased products and services to prevent the global economy from collapsing. It’s usually argued that one of the strongest aspects of distributing checks of this type to the public is to boost confidence in both the market and those in power.

The economy is now worse than it was when the 2008 economic stimulus payments were sent out. The American Recovery and Reinvestment Act of 2009 was recently created to continue the attempts to boost the economy. This time, however, there will be no stimulus checks. Instead there is a new tax credit, the “Making Work Pay” credit, which will allow employees to keep more of the money they receive in each paycheck.

Starting in April, employers will adjust withholding automatically for qualified workers. This will result in $44 additional take-home pay after taxes for individuals, and $89 additional for those who selected “married” on the W-4 employee withholding form. Economists believe this small increase in pay will stimulate the economy more effectively than the equivalent lump sum payment of $400 ($800 for married couples). A lump sum payment is more likely to be saved, used to pay off debt, or spent all in the same place, while a little extra in each paycheck will help families incorporate the money into regular spending, like dining out in restaurants or buying groceries. This helps taxpayers circulate the money in the community rather than hoarding it in a bank account.

But lump sum payments are often better for the individual, even if they don’t stimulate the broader economy as effectively. So here are eight ways you can create your own stimulus check by turning the small weekly or biweekly increase into a larger benefit or by finding other income or savings that can be effectively used to boost your finances.

1. Save the Making Work Pay credit. If you receive a paycheck biweekly, you will be taking home $20 or $39 extra each time. Set up direct deposit to automatically transfer that amount into a high-yield savings account like FNBO Direct. With the interest you earn, by the end of the year you’ll have more than the $400 (single) or $800 (married).

2. Work extra hours. If your boss allows you (mine doesn’t) and if you get paid extra for doing so (I wouldn’t), spend an extra hour a day in the office. Assuming a salary of $40,000 or $20 per hour, and a benefit of time-and-a-half for working beyond 40 hours a week, you could earn an extra $7,500 by working one extra hour a day for one year.

3. Turn your hobby into a business. If you like creating and assembling furniture, building computers, knitting, or making jewelery, consider getting serious about selling your products. These could be things you don’t need to make yourself, as well. A coworker of mine recently started hosting jewelery parties, where she enlists her friends to host their own jewelery parties. I believe it’s some kind of multilevel marketing scheme, but it works for her. With this kind of side job, she doesn’t have to make her own jewelery; she just receives a percentage of what is sold as well as free jewelery.

4. Become a tutor. You can leverage your knowledge by offering to share it with others, perhaps middle school or high school students, for a fee. You only need a few students a week to earn a couple hundred dollars a month. Science and mathematics are always in demand, but you can do well if you have skill with musical instruments, test taking, or a foreign languages.

5. Get your bar tending license. A former coworker found that my company wasn’t providing her with enough income, so she started working in a friendly neighborhood bar on the weekend and one day during the week. With tips, she was able to earn several hundred dollars a night.

6. Sell your stuff. You must have unnecessary items around the house. eBay and the Amazon.com Marketplace come in handy here. Thanks to the websites’ reach, you can find buyers for almost everything. Old books, DVDs, electronics equipment, and games are all items you may no longer want but might be in demand.

7. Cut back your spending. Yes, this is typical financial advice you can find anywhere, good for any economic condition. But if you’re financially struggling right now, it’s time to take this idea seriously. I don’t have to tell you many of the easy ways to quickly reduce your spending, such as reducing your ECRD Factor, cutting back your cable bill, switching to compact fluorescent light bulbs, and reducing your energy consumption.

8. Request your cash back rewards. It’s getting much more difficult to take advantage of credit card offers. Credit card companies are dropping rewards programs, raising interest rates, and lowering credit limits. But if you do use a cash back credit card, claim your rewards. I request a check about once a year for a few hundred dollars from one card, while the business card automatically credits my account once a year. These payments provide me with a “stimulus” that I don’t take into account until I realize it’s time to receive the reward.

What else can you do to find extra money to stimulate your own personal economy?

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8 Ways to Create Your Own Stimulus Check

If you’ve been paying attention lately, you might have heard that throughout the economic recession, Americans have been saving more of their income. Some economists worry that saving, while good for the individual, can be harmful to the economy as a whole. This is commonly called, “the paradox of thrift,” a theory developed by John Maynard Keynes, a popular economist who in the early 20th century saw spending as the basis of an economy.

Keynes looks at a recession as a vicious cycle, illustrated here:

1. Less money is being spent by consumers.
2. Demand for products and services decreases.
3. Businesses reduce production and eliminate jobs to meet demand.
4. Unemployment increases, resulting in less income for saving or spending.
5. Rinse and repeat.

In this model, it is theorized that saving more money can eventually result in having less money to save on an aggregate level. The only thing that can break this cycle is something external. In our case, it is the government. The first treatment was “stimulus,” payments given to taxpayers (from current or future tax receipts) to help “stimulate” the economy.

The reaction, when this didn’t work, was that this wasn’t enough to break the cycle, and more stimulus was needed to noticeably affect the economy. The government decided to go directly to businesses, providing them with the capital needed to finance shovel-ready projects, hire more employees, and keep aggregate income up so consumers would feel that their money is better spent spent.

The easiest argument against the validity of the paradox of thrift is that, for the most part, there is no such thing as saving money. Money is either spent now or it is spent later. Another possibility is that it is invested now and transferred to a business, and the business either spends it now or spends it later. When you decide to spend money later, in almost all cases, you put the money into a bank account, which provides the bank with more funds with which to provide loans to businesses now.

As long as banks to continue to loan out money, the economy doesn’t decline. But as we see now, thanks to the “credit crunch” (which we haven’t been hearing about as much recently), that’s not happening.

In short, it’s not consumer spending or saving, but the financial industry’s refusal to lend money to credit-worthy businesses that is keeping us amidst the recession.

The paradox of thrift, the idea that saving more money was bad for the economy, was invented when personal rates of saving were much higher and consumer credit was all but nonexistent. At this time in American history, “saving money” meant keeping cash under a mattress outside of the banking system. Perhaps the paradox of thrift was a reality at that time, but despite its popularity in the news recently, it probably no longer applies to America’s modern economy. Many economists now agree that this aspect of Keynesian economics has seen better days.

Does the government need to step in to break the cycle, like Keynes suggested? Probably, but it needs to take the right actions. Helping tax payers with $400 over two years is not enough because it doesn’t have a large enough effect for the majority of Americans in order to restore consumer confidence.

The economy is broken at the lending level, and that’s where the government should focus. Banks need to lend money to credit-worthy customers. If they refuse, the government can step in, and they have a number of options, with approaches ranging from near-socialism to capitalism, including:

• buying the banks, nationalizing the industry, and changing the way banks do business
• buying controlling shares in the banks and making management decisions to lend (responsibly)
• investing in the banks with the requirement that the money be used to increase lending
• providing tax incentives for institutions that decide to increase responsible lending
• creating a federal bank that accepts deposits and lends its funds to compete directly with private banks

Continue to save money and spend less than you earn. It’s not a patriotic duty to spend it on products and services you don’t need, despite what you might hear. There is no need to sacrifice your future financial well-being for the sake of the greater good. It wouldn’t work, anyway. The economy will be sorted out with or without the house you buy now rather than a year from now.

Some interesting reading on the paradox of thrift: Paradox of thrift on Wikipedia, Frugal living is bad for the economy from Associated Press, Consumers Don’t Cause Recessions from the Mises Institute, and The Paradox of Thrift: RIP from Cato Journal.

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The Paradox of The Paradox of Thrift

Having an emergency fund, money set in an easily accessible location like a savings account earmarked for certain situations, is one of the first steps to being financially secure. This is common advice, particularly among financial advisers. Ideally, one wouldn’t tap the emergency fund at all. That sacrifices some earning power because even high-yield savings accounts lose ground to inflation. In return for that sacrifice comes some stability. With an emergency fund in savings rather than the stock market, you don’t have to worry about a potential loss if you need the money in a down market.

If you can plan in advance and protect yourself, you can help reduce the sting of an emergency.

There is, however, a difference in opinion about which circumstances qualify as emergencies. The biggest emergencies would arise with any event that eliminates an income source for an extended period of time.

Legitimate emergencies

Sudden job loss. For many people, the primary source of income, and thus the ability to pay for expenses, is a job. Most people in the United States trade their time and effort for a paycheck, relying on a company, small or large, to accept that time and effort and provide remuneration. When job loss is sudden, the primary source of income could disappear just as quickly. Very few of us are “entitled” to a severance bonus, providing a cushion to ease the fall for a period of time, so we must plan accordingly.

It’s dangerous to place your ability to earn income in a sole decision maker focused on a company’s bottom line. As an individual, we each must take our income into our own hands as much as possible, and that includes always being prepared for job loss. Part of that preparation involves having an emergency fund available, keeping a current resume, networking with colleagues, seeking recommendations, and studying the industry.

Even with preparation, the loss of a job can be damaging to your finances, and the effect can last long after you find your next job.

Death or medical emergency of a family member. While life insurance can help deal financially with death, it doesn’t cover everything. There is an entire industry designed around planning for death, but an emergency fund will always be necessary. As relatives age or gradually experience a decline in health, you have time to develop expectations and prepare financially, but unfortunately, death is not always this graceful. Emergency funds can be used to help pay for these hopefully infrequent events, from flights to visit distant family members to final arrangements.

Acts of nature. In New Orleans prior to Hurricane Katrina, residents wary about hurricane damage to their homes were encouraged to buy insurance policies covering wind and rain damage. Many insurance policies provided no relief following Katrina because the damage done to homes was determined to be due to flooding. According to USA Today, only one-third of homes carried federal insurance which included protection from flood damage. Many residence thought they were covered in the event of a hurricane, but the insurance companies disagreed.

A typical emergency fund with three to six months’ worth of expenses may not have solved all problems in this situation, but it could have helped. Natural disasters are not always as damaging as Hurricane Katrina, and planning for total destruction will in most cases be excessive, but when designing an emergency fund, it’s helpful to factor in what is likely for your location.

Car accidents. Auto insurance is generally helpful when it comes to covering for damage due to car accidents, whether caused by you or another party. Often, insurance won’t cover everything you need. Your emergency fund may need to at least cover your deductibles, but also fill in any gaps left after payments arrive. The fund can help pay for a new car if needed.

Surprise tax bills. While review and planning should prevent this occurring, occasionally the IRS finds something overlooked. It happens to even the most diligent. The IRS will usually allow a payment plan to extend repayments over time for an additional fee, but an emergency fund can help cover the liability.

Delay in income. I used to work for a non-profit which, before I had started working there, had a nasty reputation of not keeping enough funds in their payroll account to cover the paychecks for the ten or so on staff. I’ve had friends working for start-up internet-based companies who were asked to forgo paychecks for a time period for the good of the company in its initial building stages. With an emergency fund with three to six months’ expenses, you won’t be in danger of failing to cover your bills. Once the paychecks catch up, you will be able to re-establish the emergency fund.

If delays in income extend longer than six months — personally, I would only accept this from an employer for a month at most, if at all — it is time to find a new job, if possible.

Sudden relocation. Usually, if your employer determines that your job should move from New York City to Ogden, Utah, they will compensate you for your relocation. That isn’t always the case, and your option may be to forgo opportunities within your company and business by quitting your job or accepting the relocation and the accompanying expenses. The decision is personal, but it’s better to be prepared to face the consequences.

What does not qualify as an emergency?

I’ve heard of people using emergency funds for expenses that are clearly not emergencies. While everyone’s definition of an emergency is different, if you want to make the best use of your money, I would suggest not tapping money earmarked for emergencies for these expenses. That said, you can save separately for these expenses.

Vacation. It’s great to get away from your daily responsibilities for a time, but even if your therapist recommends an immediate vacation, you shouldn’t dip into the money set aside to cover emergencies.

A buying “opportunity” in the stock market or real estate. If you’re interested in timing the market or want to buy a house for the fun of it, save separately for the occasion. Most people overestimate their ability to time the market and could find themselves on the losing end of an investment at the moment they need the cash for a true emergency.

Out-of-town visitors. You just heard your friend from college would be in town for a weekend, and she’s suggested getting together for an evening out. If you don’t have extra cash flow at the moment, you might want to suggest a frugal option. Don’t feel you have to impress her by going to the fanciest restaurants and clubs, particularly if you have only your emergency fund available.

Mid-life crises. Recently divorced and quickly aging? It’s time to buy a convertible sports car. That seems to be the accepted path, but it can be a dangerous road to travel, particularly if your ex-wife has half or more of your money. Don’t dip into your emergency fund to buy a new sports car just because you want to feel young again. It may, however, be time to get together with an old college friend for an evening out.

Keeping up with the Joneses. The Joneses buy what they buy because they have no problem with debt. If you’re conscious about spending, you’ll never keep up with the Joneses in the accumulation marathon, nor should you feel the need. They’ve added a sun room and an in-ground swimming pool, but for all you know, they could be paying for it for years. Resist the temptation to match or exceed appearances, whether with debt or by tapping the emergency fund.

What do you think?

I’m sure there are many emergencies and an infinite number of non-emergencies I’ve neglected to mention. I will also bet the total of my emergency fund that some readers will disagree with some of my classifications. (Gambling: not an emergency; Paying your bookie: possibly an emergency.) Please share your thoughts.

Photo credits: au_tiger01, daveynin, and rayced

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Your Emergency Fund: What Qualifies as an Emergency?

Earlier today, I asked via Twitter how much everyone has in their emergency fund in relation to their monthly expenses. Here are some of the responses. (I assumed if the message wasn’t sent privately and if the twitter account wasn’t protected that I could re-post the source of the responses.)

• nodebtplan: 3 months of expenses in our emergency fund
• takingcharge: currently only enough to get me through a month or less, but working on saving enough for 3-6 months
• taliaishere: 3 months in the emergency fund, but am working towards 6 months-that would be much more comfortable
• Gblogger: Depends on what I count — we stopped segregating specific emergency funds a while back. But at least 6-10 mos.
• dreamscostmoney: 3-5. It used to be 3, but then I decreased my monthly expenses, so it’s probably closer to 4 or 5.
• BurgBarbL: I have about 1.5 months’ worth of expenses in my emergency fund.
• Private: In my emergency fund? One. Not great, I know. But with my new salary, I’m on a plan to make that three.
• SunFinancial: I don’t have a dedicated emergency fund. All are accumulated in one savings account.
• bargainr: 9 months

Among these responses, the average (while taking the low end of anyone who responded with a range) is about 3.5 months. Not bad! I have about 3 months’ worth of expenses in my account called “Emergency Fund,” but I have about an additional four times that amount across a variety of savings accounts.

If you’re interested in participated in occasional polls, follow me on Twitter. For those who don’t know, Twitter is a “social media” tool that allows you to broadcast and receive quick and short text updates. I promise not to send spam or to bombard you with “new post” updates. Mighty Bargain Hunter has a list of 118 personal finance bloggers who use Twitter, but many only provide automated “new post” notifications, duplicating an RSS feed.

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Twitter Poll: How Much Do You Have in Your Emergency Fund?

One of the most popular pieces of financial advice is the importance of establishing an emergency fund, money that can be accessed to assist with life unexpected problems, like medical emergencies or the loss of a job. Financial advisers like Suze Orman suggest that most people have ready three to six months’ worth of expenses in “liquid” savings — easily accessed — ready to go to help cover a rainy day.

I’ve suggested breaking your emergency fund into five components, but it’s the first two components that relate directly to the nearly universal definition of the emergency fund. Having cash on hand and in liquid bank accounts will help you deal with a sudden loss of income or a significant financial need, but money kept in this manner loses value over time due to inflation. Any money kept in the emergency fund is not maximizing earning potential as other investments could be. The goal is to find the right balance between allowing your savings to earn money though compound interest or appreciation and forgoing performance for accessibility.

How do you determine how much to keep accessible? As I mentioned, many experts suggest having three to six months’ worth of expenses ready to go. That’s a wide range and not very helpful. For example, for me, that could be anywhere from $12,000 to $24,000. Here are some questions to help you determine a more personalized amount.

Start with your monthly expenses. If you already track your income and expenses somewhat accurately with software like Quicken then you have your starting point. Keep in mind that your monthly expenses for this purpose include your spending plus your debt payments. Include your electric bill, even if you pay by credit card. If you have outstanding debt, include your monthly payments for your credit card, mortgage, student loans, or any other service that applies.

Look at the stability of your income. What would you do if you lost your job? Are your skills in high demand? If so, you may find a replacement for your income quite quickly. If this is the case, you have an argument for keeping the balance of your emergency fund on the shallow end. While your personality will determine how much risk you’re willing to take, and you are taking more risk by keeping a small emergency fund. Even though you may perceive your ability to find a new job earning the same amount will allow you to find you a new job within one month, it would be beneficial to assume that forces possibly beyond your control will prevent you from doing so.

Keep in mind that job markets cycle, so you may need to reevaluate your situation from time to time. Labor demand and supply change. If you established the “rules” for your emergency fund in 1999 when high tech jobs were in high demand, if you had lost your job in 2002 you may had been out of work for longer than you expected.

How far are you willing to go? If you might have difficulty finding a job to replace your income, are you willing to consider alternatives? Some people are willing to do whatever it takes to make ends meet, even if it means taking a job for which they are overqualified. If your industry suddenly becomes unfavorable, will you work as a waiter for minimum wage while determining the next course of action? If you need to devote all your waking hours to find a new job, then you’ll need a larger stash than if you can split your time between the job hunt and a temporary job.

How much would it cost to move? I would say that an unexpected necessary move would be a strong use for an emergency fund. If your job is requiring you to move to a new town and they are willing to pay for your expenses, you do not need to worry about this, but there are many other reasons why you might need to find residence in a new town. For example, perhaps a family member could become ill and you need to move closer to provide care and support. Consider your variable moving expenses as well as any expenses you might have while you settle in your new location. These should be covered by your emergency fund. If moving requires a new job, add more to your emergency fund to cover your expenses.

Are you willing to reduce your expenses? Desperate times call for acts of desperation. Chances are you have expenses you can eliminate if you are out of work. If you’re willing to say goodbye to high-definition cable television, the wine of the month club membership, and the gardener, feel free to leave these expenses out of your calculations when determining your ultimate emergency fund goal. But only do so if you’re truly willing to give up these luxuries.

It is rare to hear someone say, “I had just the right amount in my emergency fund.” Almost always you will have too much or too little, but those who have too little drive the most popular stories. It’s next to impossible to foresee all possible situations and plan your emergency fund perfectly. It’s best to err on the side of caution even if that means you’ll have less available for investing. Accept the fact you won’t get it exactly right and do the best you can.

The savings account I label “Emergency Fund” has about two months’ worth of expenses, but it’s held at ING Direct. If I needed this money in cash, the quickest way to get the money would be to to transfer the amount to a local bank account and withdraw the funds. This process would take a several days, so I have in place a multi-level emergency plan which consists of cash on hand, money in ING Direct’s account, more money in several high-yield savings accounts, and, if necessary, I could sell investments (and draw a tax bill) or use available credit (and risk the need to pay interest expenses).

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The Right Size for Your Emergency Fund

One of the first steps to cleaning up one’s financial situation before embarking on the journey to become financially independent is the establishment of an emergency fund. An emergency fund, in its most basic form, is an accessible savings account where you keep cash for true emergencies, like the loss of a job or a medical emergency. Financial advisers and writers often suggest that emergency funds should contain enough cash to cover all expenses in a three to six month period.

Beyond the basics, I suggest at least five separate components to an complete emergency plan. Getting to that point presents challenges for many people. When one is starting out, it can be difficult to assemble the basis for eventual financial freedom.

Here are 50 tips for the beginner who may be pressed for money.

1. Open a high-yield online savings account with as little as one dollar.
2. Sign up for direct deposit.
3. Empty your pocket change into a jar every night.
4. Bring your coin jar to the bank every month.
5. Add to your jar every time you swear.
6. Have a garage sale.
7. Whenever you purchase groceries with a coupon, deposit your savings into the bank.
8. Downgrade your telephone service.
9. Bring your own lunch to the office.
10. Ask for a raise (with substantiation).
11. Drink soda rather than alcohol when you’re dining out.
12. Drink water rather than soda when you’re dining out.
13. Switch to store-brand food items.
14. Switch to generic medication.
15. Cut back or eliminate your addiction to smoking.
16. Be aware of your ECRD Factor.
17. Create an automate deposit to your savings account.
18. Divert your raise into the bank
19. Don’t consider your emergency fund part of your spending money and keep it hidden.
20. Celebrate America Saves Week every week
21. Tutor a young student in a subject you know.
22. Get a part-time job at your favorite book store or coffee shop.
23. Use a cash back rewards credit card and deposit your rebates directly into your emergency fund.
24. Call the cable company and cancel your service (or agree to a better deal).
25. Save gas by not driving faster than 65 miles per hour.
26. Stop using credit cards if you pay interest.
27. Cancel your Netflix subscription.
28. Fire your gardener and do the work yourself.
29. Visit the library rather than your local bookstore.
30. Stock up on non-perishable groceries when they are on sale.
31. Consolidate your student loans.
32. Cancel magazine subscriptions.
33. Reuse any items you can rather than buying new, and pocket the difference in your emergency fund.
34. Delay vacations until your emergency fund is complete.
35. Sign up for online bill payment if your bank offers the service for free.
36. Shop around to ensure all your your financial accounts do not charge you extraneous fees.
37. Always know how much you have in the bank so your accounts will never be overdrawn.
38. Consider switching your land line phone service to an internet (voice over IP/VOIP) service.
39. Use public transportation rather than driving when possible.
40. Work a few extra hours at your day job.
41. Call your insurance provider and ask for an updated quote.
42. Shop around for a new insurance provider.
43. Troll the web for abandoned and unclaimed property owed to you.
44. Negotiate in any retail environment. The more you try, the less you’ll spend (and the more you can save for emergencies).
45. If you travel, join AAA; the discounts will often pay for the membership fee.
46. Don’t be an early adopter of new technology.
47. Cancel your gym membership.
48. Check your three free credit reports each year from annualcreditreport.com, the official website, for accuracy.
49. Consider adopting a frugal philosophy, at least until the emergency fund is in place.
50. While paying attention to small, repetitive expenses, don’t ignore larger decisions like your car, house, and wedding. With smart choices on big-ticket items, you could fully fund an emergency account with the savings.

With a goal to be financially independent, the first step is securing a cash cushion, accessible in emergencies. During this funding phase, it may be beneficial to make sacrifices that in other situations you would not make. A slight decrease in quality of life in the short term will likely outweigh long-term financial devastation when a future emergency arises.

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50 Tips to Help Establish Your Emergency Fund

A few weeks ago, I previewed the SmartyPig savings account, an interesting way to collaboratively save money for goals while earning interest on that money. I like the ease of sharing goals with friends and family and allowing them to contribute, but the redemption options were limited.

By design, SmaryPig prefers that once you reach your goal, you redeem your principal plus interest in the form of a pre-paid debit card or a gift card for a participating retailer. If you want to redeem your funds in a more traditional, less consumable manner, you’d have to call customer service and pay a $25 fee.

SmartyPig announced today that they are eliminating the $25 fee immediately, and soon, those withdrawing their funds after reaching their goals will also have the option of an ACH transfer. I applaud SmartyPig for listening to its customers. Here’s the full email:

I had a very interesting conversation last week. It was with a young lady saving for a down payment on her first home with her fiancée. They want every penny they can scrape together funding that goal – especially the presents she is anticipating receiving when she finishes up graduate school later this spring.

They thought they had found the perfect way to reach this goal faster when they stumbled upon SmartyPig, she told me. They were really excited about the public contribution piece and the social nature of SmartyPig. They thought the widget would draw attention and letting friends and family members know about their goal would keep them focused. Just one problem, she told me: they couldn’t use the SmartyPig debit card to make that down payment.

I was told we were alienating a huge group of people – people with bigger goals – by not offering a free way to get your savings and interest back where it came from. When I suggested that SmartyPig was created more for smaller, short-term goals she basically told me it should be for everyone who wants to share in their experience of saving. The next day, when my business partner, Mike Ferrari, and I spoke to a mother who is using SmartyPig to not only teach her 10- and 12-year-old sons how to save “in a cool way,” but is using SmartyPig to help them save up for their cars when they turn 16 and made mention that we shouldn’t punish people for having bigger goals, we hung up the phone and decided she was right: for everything else there isn’t always MasterCard.

These were not isolated incidents of “push back” regarding our process, mind you, but they were enough to get The SmartyPig Team around the table to make the quick decision that from here on out there would be no $25 fee for not selecting one of our two redemption options. In fact the fee will disappear entirely – effective immediately.

In the very near future this process will be fully automated. For now, customers who want to close a goal and receive their savings plus interest in the form of a check simply must call customer service when they have reached their goal – just like now, only no fee.

When our site update is complete, the customer will have a third option when he or she has reached their goal: an ACH transaction back to their checking or saving account. Checks will no longer be available. For our customers’ security, funds will not be available for transfer until 10 business days after their initial deposit has cleared, as long as there are no other pending transactions (such as a gift heading your way). After this initial hold has expired, funds that have been on deposit may be withdrawn 5 business days after the most recent transaction has cleared.

We want our customers to know that we can adapt quickly when it is important to them that we do so, like we did when we changed our policy regarding public contributions. SmartyPig remains all about having a goal, funding that goal, having friends and family help, and, in the end, getting more money for your money. However, we learned that in some cases a customer’s goal doesn’t always fit in our model. Well, we want to be the place for anyone who wants to sensibly save for a goal, so we had to tweak the model.

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SmartyPig Smartly Drops $25 Redemption Fee

Jonathan Clements, a columnist for the Wall Street Journal, is leaving journalism. He published his last article on Wednesday, a reflection on fourteen years at the Journal and 26 years writing professionally about money.

In the article, he looks at the essence of saving and investing. Why bother? A number of visitors touched on these points on yesterday’s post on Consumerism Commentary about frugality and compromises. Here’s what Jonathan Clements has to offer for his final word to readers.

If you have money, you don’t have to worry about it. You don’t have to worry about it, but many people do. Growing your money requires paying attention to your finances, and when you’re aware of problems, you’re more likely to worry about it. But if you’re earning enough from your pay check or investments to cover your expenses, save, and invest for the future, then you have the flexibility to turn your attention to other things.

Money can give you the freedom to pursue your passions. This is what inspires me to continue being vigilant about my own finances. There have always been a number of things I’ve passionate about, including music, technology, building communities, and inspiring other people whenever possible. For a long time I was able to combine these passions, but the real world was calling and I needed to stop going deeper into debt. Once I’m financially independent, no longer needing to trade my time to earn a living, I can pursue these activities further.

Money can buy you time with friends and family. For most people, this probably falls under the “passions” category. Jonathan writes about the ability to spend when socializing with people who make you happy, but even those who are struggling financially can find happiness through making time for those who are important. It doesn’t take expensive dinners and traveling to find happiness.

Clements ends his final article with a reminder that a rich life isn’t always about the money.

I’ve cited Jonathan Clements‘ articles a number of times on Consumerism Commentary, and I’ve almost always agreed with his points of view. Thanks for the excellent articles over the years.

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Jonathan Clements Exits: The Essence of Money

Haven’t you heard? This week is America Saves Week. From February 24 through March 2, a coalition of non-profit, corporate, and government groups are pushing a media campaign to encourage savings in various forms, from increasing money deposited into bank accounts to finding bargains and saving money on purchases. It’s a noble goal.

Building wealth starts when you set a goal and make a plan to reach that goal. Whatever goal you choose — whether it’s buying a car, buying a house, or getting out from under your debts — learn about proven savings strategies and get simple tips on the best ways to save.

The organization is targeting certain minorities or special interest groups with special sub-campaigns, too, such as Black America Saves, Hispanic America Saves, Military Saves, and Youth Saves.

For the rest of us, the main America Saves website offers suggestions for increasing savings and decreasing expenses.

Get Out of Debt

The first step in getting out of debt is to stop borrowing. To do that, you have to stop spending more than you earn. So, make a budget and cut out any expenses you can. It may help to cut up your credit cards or lock them away in a safe place… If your debts are too large, you may want to consider bankruptcy. Bankruptcy can give you a fresh start, but it is a serious step that can make it harder to get credit for years after you declare bankruptcy.

Savings and Investments

* Cut spending painlessly by finding small savings that add up to big savings over time, like The ECRD Factor.
* Comparison shop for necessary purchases.
* Restrain spending for birthdays and holidays.
* Automate your savings.
* Put your loose change into a high-yield savings account.
* Take advantage of employer-matching retirement plans if available.
* Build an emergency fund.

My bonus was deposited into my bank account this morning. I plan on celebrating America Saves Week by putting a large portion of the newly-found cash towards paying down my student loan.

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Celebrate “America Saves Week” by Increasing Savings and Decreasing Expenses

The most effective emergency fund, for use in the event of a job loss or unexpected major expense, is actually a combination of several types of investments. You should be prepared with a small amount of physical cash to hold you over until you can get money from a bank, highly liquid investments like a high-yield savings account, a Roth IRA (if you qualify) in which your contributions can be withdrawn penalty-free and tax-free, and possibly credit access.

NZbird wrote to suggest an interesting addition to an emergency food: a stocked pantry. By stocking up on non-perishable food items, you will leave more of your money available for use in the event of an emergency.

Keep your food pantry WELL STOCKED. I mean food is an essential right. And if you have kids you don’t want them stressing out because the basics like food aren’t there. So stock up your pantry real good with all the ingredients for meals. I try to keep around 6 months supply on hand. My husband use to laugh at me when I started doing it, but you know it introduced a discipline into our grocery shopping that wasn’t there before… The kids always knew the ingredients were in the cupboard for lunches, breakfast, and any snacks they wanted to make. I believe it’s that feeling of security and hope for the future that must be maintained for the sake of the children in times of job loss.

At first, the thought of stocking up on food seemed more like preparation for a pandemic, but the main point is that if your income is suddenly grounded, you won’t have to worry about spending your emergency fund for food and will have more available for rent or mortgage payments and electricity bills.

Thanks for the suggestion, NZbird!

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Your Food Pantry: An Essential Part of Your Emergency Fund

Right now, I’m listening to the album, Raising Sand, by Robert Plant and Alison Krauss, released last year. Robert Plant will be 60 years old in August. I imagine he’s not thinking about retirement and we’ll continue to hear new music from him until he finally keels over. Unless you are one of the few who truly love the work they do, by age 55 chances are you’re planning the finer details of your retirement.

If you haven’t started saving money by 55, it’s going to be difficult to prepare for retirement by 65. According to Kiplinger’s calculations, in order to reach $1 million in ten years — and let’s not forget that a full retirement starting in 2018 is likely going to require much more than $1 million — it will take savings of almost $5,500 a month.

The more you have saved at 55, the easier it will be to reach millionaire status. A retirement nest egg of $50,000 reduces your monthly required savings to just under $5,000 for the next ten years. With $100,000 banked, you’ll need to devote only $4,253 each month, and with $200,000 you’ll need to put about $3,000 away.

The article has these suggestions for those 55 right now:

Take advantage of your peak earning years to top off your savings. Add an extra $5,000 in catch-up contributions to your 401(k) savings and an extra $1,000 to your IRA. As you near retirement, reallocate your portfolio to 70% stocks and 30% bonds. Estimate your retirement expenses and your projected income. If you’re coming up short, consider working a few more years.

I imagine most people aren’t going to want to hear that they’ll need to work longer in order to afford a comfortable retirement. If nothing else, young people should look at these figures and realize that it pays off to start thinking about retirement as soon as possible. It’s never too early.

The trick will always be balancing the needs and desires in the present with the potential needs and desires in the future. Saving for retirement implies that one will live long enough to reach a certain age — a goal that is not guaranteed. Saving as much as possible for retirement and delaying enjoyment of your life will be a waste if you die while doing so. Then again, if that happens, you won’t have the chance to dwell on your over-planning for long.

Realize that unless you plan on moving somewhere the cost of living is inexpensive, it’s going to take a heck of a lot of money to retire in a manner you’d like to be accustomed to. $1 million is a nice round number, but even the value of today’s $1 million wouldn’t get current retirees very far. Retire in the future, and $1 million is valued less, thanks to inflation. The younger you are, the higher you’ll need to set your goals.

Image credit: Pet Hawks
How to Make a Million at 55 [Kiplinger's Personal Finance]

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How to Save a Million Dollars at Any Age: 55 Years Old

If you’re 45 years old right now and working, perhaps you’re starting to consider when and how you’d like to retire. Kiplinger’s Personal Finance magazine has some suggestions if retiring with $1 million is art of that game plan. Keep in mind the role inflation plays; $1 million is a good goal, but twenty years from now, it might enough to fund an entire retirement unless you find a way to reduce your expenses. You have to start somewhere, however.

With no savings at 45, you’ll need to accumulate $1,698 in your portfolio every month to meet this goal. If you have $50,000 set aside for retirement, your monthly contribution will be only $1,298. With $100,000, a 45 year old can likely start retirement with $1 million by saving $861 per month.

Obviously, reaching this goal is more difficult the later you start. If anything, this series should be a wake-up call to those with half-a-century until retirement; unfortunately, that’s not the target audience of this particular magazine.

Here are the strategies Kiplinger’s Personal Finance suggests for 35 year old, a category in which I will find myself in just a few short years:

* Contribute up to $15,500 in a 401(k). Thinking back to when I was 25, I was earning under $30,000 at a non-profit organization in New Jersey. Even if a 401(k) had been available, maximizing my contribution to the IRS limit was practically unthinkable. For a 45 year old in the middle of a career, this strategy may be more attainable. At the very least, if your company offers an employer matching contribution, take advantage of that.

A full contribution to a 401(k) requires almost $1,300 per month.

* Adjust your asset allocation to 80% stocks, 20% bonds. For my preferences, I think even at age 45 there should be less emphasis on bonds. With a large amount of time before retirement, and particularly before the end of retirement, it would be worthwhile to keep a riskier portfolio weighted heavier in stocks. Not only do your funds have to last until retirement, they have to last through retirement. While I stock market downturn towards the end of your career could derail your investments, I probably wouldn’t do much to add bonds into a retirement portfolio until there are 10 years or less until retirement.

* Don’t put your kids’ college costs ahead of retirement. I’ve discovered that this is a mantra favored by most financial advisers. While you or your kids can take out loans to help fund their education, you can’t take out loans to fund your retirement. Does more need to be said? Maybe. If the choice is between helping a relative fund an education they wouldn’t be able to receive otherwise and my own personal retirement luxury, I may opt to assist with the education. This will always be a personal decision.

Every time I’ve presented this Kiplinger series so far, with suggestions for 25 year olds and 35 year olds, commenters have pointed out the devastating effects inflation has on funds. I’ve covered this many times. In fact, forget about the official core inflation data presented by the government. The price of the things you’ll need to spend money on as you grow older, such as health care for instance, are going to increase at a much higher rate than 3%. Forget about calculations that tell you the future value of $1,000,000 based on 3% inflation. But don’t stop saving for retirement.

No, if your time horizon for retirement is decades in the future like mine, $1 million will most likely not be enough to support my necessary expenses. Aim higher if you can, but you have to start somewhere.

Image credit: ohsoabnormal
How to Make a Million at 45

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How to Save a Million Dollars at Any Age: 45 Years Old

Ah, hindsight.

Although I’m glad I got a 5.65% CD when I did, of course I wish I’d invested more and for a longer term than 6 months. But it’s not too late to still lock in a CD at an okay rate.

Or so I’d hoped. Recently, it seems the pickings are slim.

Emigrant Direct, whom I already bank with, is offering a whopping 3.50% APY for 6 months up through 10 years, and it’s hard for me to imagine why someone would want to lock that rate in at all, let alone for ten whole years. But a 4-something rate I’d take, for a little while at least. Just long enough to weather some downturn until I figure out my next steps.

Sovereign Bank has a 6-month CD at 4.25%, which I shut my browser window on in disgust before I realized it was one of the best rates out there.

I’m hesitant to go with this because my FNBO Direct savings account is still at 4.30%, though I can’t imagine that will last long in this environment. The best short-term CD rates I could find at Bankrate.com were 4.40% APY from Flagstar Bank for 1 year and 4.90% for 6 months at Countrywide with a $10,000 minimum.

I’ve been happy so far with my other Countrywide CD, so I opened two of their 6-month 4.90% CDs, one for my mother, since her high yield savings account’s rate has recently plummeted, and one for myself. I’m not feeling the lower-rate love so I’m hesitant to commit for longer than that, but 6 months of a decent rate works for me, especially as I watch the savings interest rates continue to decline.

I do plan to use some of the lower rates to my advantage, however. I’ve been keeping close watch over 30-year mortgage rates, and plan to refinance some of my mortgages if they creep low enough.

On my primary residence, I’ve got a 7-1 ARM mortgage with a nice 5.25% rate, but if I’m still living here in 2011, the rate could jump on me as it moves to adjustable. I also have a small 7 year balloon mortgage. I used this strategy to split the total mortgaged amount 80-15 to avoid paying PMI (private mortgage insurance) since at the time I only had 5% to put down.

The balloon mortgage is at 6.99% and even though the monthly payment is positively tiny, it annoys me in principle. I could pay it off in a year’s time, but my financial advisor felt I’d be better off using that money elsewhere. Plus, it’s deductible, so the rate isn’t quite as bad as it looks initially.

I always planned to sell my cute little 750 square foot home before the 7 year point, but am attracted to the idea of locking in a nice 30 year rate so I have the option to stay here as long as I’d like. It’d be nice to get rid of that particular concern.

It’s tricky trying to figure out just how to time these changing rates. Everything I read seems to talk about a long recession underway, but I can’t be sure just how low rates will go. I do feel like in a few more weeks’ time, 4.90% will be a thing of the past.

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Searching for a CD as the Rates Plummet

Kiplinger’s Personal Finance Magazine has some suggestions for saving a million dollars regardless of your age. The only catch is that it’s going to take several decades to get to that point. The passing time has a detrimental effect, however. Inflation will eat away at your purchasing power so $1,000,000 thirty years from now will not be as useful as $1,000,000 now. Regardless, taking these thoughts into account is better than doing nothing.

At Age 35

* Save 15% of your gross income. In addition to whatever short-term savings goals you might have, like a down payment on a house or preparing for children, 15% of your gross income should be saved for your long term retirement goal. Kiplinger’s calculates you’ll need $671 per month invested in the stock market if you’re starting from scratch at this age.

* Shift your assets to 90% stocks and 10% bonds. I think this recommendation could be misleading. I think your assets must be separated into buckets for specific goals, and then the asset allocation must be tied to the time horizon for those goals. For instance, at age 35, it will still be several decades before you can use your retirement funds. I would keep them in 100% stocks (or close to it). Savings intended for a house down payment should be in bonds, CDs, or cash, depending on how soon you’ll need the money. Overall, this could look very different than a 90/10 mix.

* Invest in a 529 college-savings plan. I’m not sure that this piece of advice can be as universal as the magazine suggests. Not everyone has children or other relatives who will be attending college. It’s a good idea for those who are already on a clear path of having a secure retirement and who have family members who can benefit from the tax-free distributions from a 529 plan.

The monthly $671 you’ll need to devote to retirement assumes you have no savings. If you’ve managed to save $50,000 for retirement by age 35, then you’ll only need $304 each month, less than half. But if you can manage the higher amount, I would strive for that.

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How to Make a Million at 35 [Kiplinger's Personal Finance]

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How to Save a Million Dollars at Any Age: 35 Years Old

Kiplinger’s Personal Finance Magazine’s February issue has suggestions for saving a million dollars, whether you’re 25, 35, 45 or 55 years old. The authors assume that you’ve already been saving money every year, but provide a strategy to add $1 million to your net worth over time.

At Age 25

* Contribute enough to your 401(k) to take advantage of the full employer matching contributions. Look at it as free money or an instant 100% return (if your employer matches your contribution dollar for dollar).

* Allocate your entire invested funds into a broad selection of stocks. A long time horizon means you have time to weather the fluctuations and risk of the stock market, but the diversification you would get from a broad-based index mutual fund will make sure you’re not overexposed in a certain stock or industry.

* Pay down credit cards. Better yet, don’t have any credit card debt in the first place. If it’s too late for that, switch to an all-cash spending plan until you’re able to spend less than you earn and divert extra cash to debt to avoid as much interest expense as possible. To get out of debt as efficiently as possible, check out the better snowball method.

* Set up an emergency fund. As I pointed out recently, an emergency fund should be more than just a savings account. However, getting several months’ worth of expenses in a liquid account is the first step. This should be a priority.

According to the Kiplinger article, if you start saving $286 per month at age 25, assuming an 8% average annual return, you will have $1 million by age 65. Having forty years to work with is helpful. The longer you wait, the more difficult it will be to reach the same goal.

When I was 25, I was working at a non-profit organization with a long commute. I was not making enough money to save $286 per month when considering rent, travel, and food expenses. While I liked working there, I was finding myself in worse financial condition each month. It took some shaking up before I was able to get myself on track.

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How to Make a Million at 25 [Kiplinger's Personal Finance]

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How to Save a Million Dollars at Any Age: 25 Years Old

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.

2. 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.

4. 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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The New Emergency Fund: Five Components of an Emergency Plan

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 the highest-paying online savings accounts, bank accounts need as much help as possible. Here’s a summary of the 6 ways I’ve determined to break the light barrier.

1. Open a High-Yield Account. Most banks are counting on your continued comfortability and settlement with interest rates as low as 0.25% APY. You can do much better than that. More »

2. Keep Your Change. Make a habit of dropping your loose change into a jar every day, and deposit the savings monthly. Try rounding all your purchases to the next dollar and transferring the sum of the remainders into the high-yield savings account. The little amounts add up over time and add to your principal. More »

3. Automate Your Savings. Set up direct deposit and automatic transfers so your money moves into savings and grows without your meddling interference and temptation. More »

4. The Expensive Coffee-Related Drink Factor. The Latte Factor® as described by author David Bach is not free of problems. Some of the problems can be conquered if you take the spirit of the concept. Reduce or eliminate a habitual, unnecessary expense and divert the funds to savings instead. More »

5. Hide Your Savings From Yourself. Try putting your savings in a different bank, with statements shipped elsewhere. Hide this account in your money management software so the balance isn’t included in your totals. Out of sight, out of mind. More »

6. Make Your Raise Invisible. Roll any increases in pay from your employer directly into your savings. A 3 percent raise signals a 3 percentage point increase to your savings. If you were saving 10% of your income, start saving 13%. More »

I am confident that in addition to these, there are many other ways to supercharge your savings. If you have any suggestions, feel free to share in the comments.

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

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 savings to accumulate, so I’ve compiled a few tips to help reach that pace.

In my company, there is a scheduled time that all employees receive information on their bonuses and annual pay increases — even if the answer is $0 to both. That time, coinciding with annual reviews, is coming shortly. This yearly event offers a great chance to accelerate savings. It comes down to how you handle the raise and bonus.

6. Make Your Raise Invisible. Your boss has just informed you that you will be receiving a raise of 3% and a bonus of $5,000, both taking effect in the next pay cycle. What is your first inclination? From talking with my coworkers, it seems to be common for the bonus and raise to be spent already. Anticipation of a pay increase seems to inspire spending ahead of time. Thus, it may make sense for many people to use the bonus and raise to pay off debt.

Since this is a series about saving, I am taking the position that no significant debt needs to be paid off. Your raise and bonus would go far to pay down high-interest credit card debt or a home equity loan. But if your goal is to maximize your savings, the raise and bonus can come in handy.

A general guideline is to increase your savings percentage by the percentage increase of your raise. That is, if you receive a 5% raise and you’ve been saving 10% of your income, increase your saving to 15% of your income. This means that your increase will be invisible to you and your budget.

Before-raise salary: $50,000
Before-raise 10% saving: $5,000
Left over: $45,000

After-raise salary: $52,500
After-raise 15% saving: $7,875
Left over: $44,625

This is an interesting number game. With this raise, you are earning $2,500 more than you were previously, but you are savings $2,875 more in the new year. By applying your raise increase percentage to your savings percentage, you’re actually saving a larger portion of your income. You are also reducing your left-over income after savings, but not by much (less than 1% of your new salary).

I’ve taken another approach in the past, focusing on retirement investments rather than straight rainy-day savings. I am not currently maximizing my 401(k) contributions, nor was I when I received my pay increase in prior years. When I received my raise each year, I increased my 401(k) contributions by the same percentage.

Whether you’re putting a larger percentage of your income in a high-yield savings account or a tax-advantaged high-yield fund, you’re making a good decision, but a larger deposit in your savings account will allow you to see your interest grow exponentially with each paycheck.

When it comes to the bonus, this is a no-brainer. As long as you don’t have debt, a lump sum deposit into your savings account can provide a boost towards your savings goal.

It’s quite possible, in an economic downturn or as a result of poor performance, that the raise offered by your employer is invisible itself. That’s a discouraging sign regardless of the reason. I’d suggest increasing savings, anyway, if possible. You’ll also be faces with increased prices. Your raise doesn’t need to match inflation, particularly if your expenses are lower than your income, but the government’s official inflation number is generally used as a benchmark for an “adequate” cost of living increase.

Most employees will receive some sort of increase this year. If you are one, you have the opportunity to get one step closer to hyperdrive by making that raise invisible.

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