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
Here are some articles of note.
12 Step Program: Shopping Addiction? MLR (My Life ROI) offers an overview of a twelve-step program for overcoming an addition to shopping. What I really like about this post are the twelve ways to spot a shopping addict. People are notoriously inept when it comes to self-evaluation; perhaps someone you love is a shopping addict. Is it time to plan an intervention?
Spending Cash Is the Same As Borrowing If You Have Debts. The best point in this article by Four Pillars is that all cash should be treated the same. In his example, if you’re in “debt repayment mode,” as much of your cash should be put towards that goal as possible rather than setting aside a portion for fun — the fun you already had that landed you in debt.
Unfortunately, not all debt is a result of fun. And I certainly don’t agree that you should sacrifice a complete emergency fund to pay off debt — if an emergency arises, your only choice would be to go deeper into debt. But as an example of the first point I mentioned, in the past I tried to separate the income from my day job from income from my side activities. This worked well but only to a point. When I realized I had enough income to maximize my 401(k) contributions, I was doing so with a significant percentage of my salary. This resulted in having no choice but to pay for some living expenses from the side income.
What the Heck is a Money Quantum? On Tuesday, Consumerism Commentary will be launching a new community-focused website, in the style of social networking, for people whose life involves money. Mighty Bargain Hunter had an early look at the site, Money Quantum, and shared his thoughts in this article. I’m really excited about this new project. I’ll be sharing more details shortly, and will soon be letting readers know how they can obtain an invite during the “private beta” phase of the launch.
While a budget in one form or another is a must-have financial tool, it’d quickly become big and ugly if you tried to anticipate and include every expense you might run in to. You’d quickly lose interest and wouldn’t stick with your budget, right?
A budget is a basic recorder of recurring expenses, and trying to cover a purchase you didn’t foresee is like fit a round peg into a square hole. Unplanned expenses happen to everyone though, so what we can do about them?
Anticipate the expense
This sounds counter-intuitive to the rest of this post, but you don’t need a magic 8-ball to do it. If you’re aware of the next time your car is going to need an oil change, you can set aside that money in your budget to cover it. That way you don’t step up to the counter to pay for it while wondering where that money is going to come from.
Setting aside $30 or $50 each month for unplanned expenses will help you cover those little repairs or fees you might run into. and you’ll have even more on hand if you don’t use it during the month.
Lock down your emergency fund
This is extremely important. You are the only person who can determine what you consider an emergency, but don’t run for cover the first time you run into a problem. Your emergency fund shouldn’t be the first place you go when you find yourself short a couple of bucks, it should be the last.
Cut back In other areas of your budget
Did you plan for three tanks of gas this month but ended up using only two? Don’t spend that money on just anything, move it over to cover an unexpected expense. If you’re living within your budget, you’ll probably find that you’ll be able to do this quite often. When you have months where everything runs smoothly, you’ll be able to save that cash!
Make extra money
If you’ve got the time and the desire you could earn a couple extra bucks to meet your needs for that month. Are you going to babysit for your neighbor, or have a garage sale? That extra income can help you when you don’t have another way to pay for something.
Find another way
Can you borrow the item you need? If you can get someone to loan you the item you’re considering purchasing, you can keep from incurring another expense. Taking a bit of time to consider your options and see if there’s another way to solve your problem may help you save money.
Unexpected expenses are a major factor of what I call “the month-to-month monster,” living paycheck to paycheck. If you can work to reduce the impact of these purchases on your budget, you’ll be able to strengthen your financial foundation and get to the point where you can begin to establish real wealth.
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
My goal was never to have all the money I could get my hands on.
On the other hand, I’ve never solidified my financial goals. Up to now, it’s mostly been about what I don’t want, rather than what I do:
- I don’t want more rooms in my house than I can use
- I don’t want to have to hire a security firm
- I don’t want to go to fundraising dinners for politicians
- I don’t want people around me who only like me for the luxury I share with them
- I never want to do any “shmoozing”
It’s things like that which I’ve long associated with wealthy people. Maybe these are stereotypes that only happen in fiction, I couldn’t say. More realistically, I’ve only had one (not)goal for many years: I don’t want to be in danger of being homeless. That’s not a productive goal. I think it’s time I change my thinking.
Flexo has written about different types of goal-setting in the past, which helped me start germinating ideas subconsciously over the past few months. Here’s what I’ve got so far for my long-term goals:
- I want moderate luxury: a perfect example of this is our living room TV. I bought a used HD projector ($900) and a cheap 92” screen for $75. I hung the screen myself for less than $10, and we’ve had an enormous gorgeous high-def TV for years. I don’t need a separate media room or surround sound. What we’ve got is great.
- I want to eat breakfast outside: I want enough time in the morning to be able to make myself some eggs and bacon, coffee or tea, and take it to the backyard to enjoy. Usually this is only possible on vacation. I think in order to do this every day, I’d need to work from home.
- I want my evenings and weekends to myself: I know too many people who think about, and perform, work during non-work hours. I’ve always felt this is indicative of a management flaw. The people at my current business tell me I work faster than anybody else, so that may also have something to do with it.
- I want lots of open space: I’ve always lived in metropolitan areas, so I probably don’t have it in me to switch instantly to farming, but I like to think that by the time work slows down for us, we’ll at least have a kind of subsistence farm situation.
For many months, excluding one huge setback last fall, my only goal has been “get rid of the credit card debt”. I’m still going to do this, but a recent salary cut decided for me that my plan of paying off $1,000 a month won’t work anymore. After adjusting our budget, instead of $532 leftover per pay period, I have about $228. So, new plan: save the leftover salary money. It’ll either grow in a bank account, or go toward home improvements (including my wife’s increasingly impressive garden), or upcoming vacations. You know, things that improve the quality of life. Things that I’ve been ignoring for far too long.
And I’ll take half of whatever I earn from my freelance work to gradually pay down the pesky credit card. It’ll go a lot more slowly, but hopefully that will encourage me to do more, better work in my spare time. That will hopefully lead to a situation where I can work from home, in a place with lots of open space, and a backyard I can eat breakfast in.
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.
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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