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Weekly Bible Verse – Wise People Save

January 25, 2010 · Filed Under Weekly Bible Verse · 1 Comment 

In the house of the wise are stores of choice food and oil, but a foolish man devours all he has. Proverbs 21:20 (NIV)

Once again we see how extremely practical the Bible turns out to be in its wisdom and advice.  Why should we save some of our income and resources each month?  Is this something we really need to worry about?  Of course, most people would probably say it’s a good idea to save (though saying it and doing it appear to be two very different things in our society nowadays!).  Now we see that this is much more than just simple common sense, rather it is Biblical wisdom!

Depending on the circles that you run in, you might have heard it said that you should not “presume” upon God (that usually means you shouldn’t go into more and more debt assuming that God will bail you out of whatever money problems you bring upon yourself).  Maybe you know it as the story of Joseph shielding Egypt from seven years of famine.  Quite possibly images of Dave Ramsey railing about the importance of an emergency fund run through your head.  Maybe thoughts of your Grandmother’s advice to save up for a rainy day come to mind.  Or you might have read it to your kids as the fable of the ant and the grasshopper.  However you heard it, it means the same thing and it comes from the Bible – wise people do not “devour” all they have, instead they save up for their future needs (to keep Murphy from moving in your spare bedroom as Ramsey might say).

God bless and have a great week…

Where should you keep your Emergency Fund?

October 15, 2008 · Filed Under Finances · 6 Comments 

Well, I’m not sure whether this is a good day to write this article or a week or so too late.  At the very least, it will be easy for me to find an example and will probably make my argument easier.  I have had this post on my list for almost two months – I now wish I would have posted it sooner.

I was having a conversation with a friend a while back and (as most of my conversations seem to do) it turned towards financial topics.  He asked me if I thought it was really necessary to keep your emergency fund in a liquid account – like a savings account.  He told me that he didn’t see any reason to keep it all in a savings account.  Instead, he liked to keep most of his money in the stock market.  He reasoned that he can withdraw the money from his account at any time and have access to that money within a week.

Conventional wisdom says keep your emergency fund in a safe account

Most of the time you will hear conservative financial personalities (like Dave Ramsey) tell us that an emergency fund should be in a simple savings account.  In fact, Ramsey goes so far as to say that the money should be absolutely safe and absolutely easy to withdraw.  Earning interest, he says, is not the point of that money; it must be there if and when you need it.  But is the conventional wisdom correct in this case?

Personally, I agree with the conventional wisdom

In discussing this with my friend, the scenario I described to him was as follows: Imagine that the economy is not doing so good.  Say that the stock market just decreased by 20%.  And since the economy is not doing well, you lose your job.  So, you’ve just lost your job and now your emergency fund is 20% smaller at the exact moment you need it.  That was my "worst case scenario" as I described it to him.  Unfortunately, reality is even even more grim at this point in time with many jobs being lost due to our struggling economy (have you noticed how most of the current problems with the economy are related to debt in one way or another?) and the US stock markets are down 40% from a year ago.  So, if you’ve lost your job recently and your emergency fund is now only a bit more than one-half of what it was last year, you are hurting!

But what about the opportunity costs?

My friend countered that he could tolerate the 20% loss because he would have made 40% in the market during the good times.  He felt like leaving the money to sit basically idle in a savings account would cost more money in the long term.  This argument is reasonable but, to me, is a bit risky.  Certainly, I do not advocate putting all of your money in a savings account.  I am definitely in favor of investing most of your resources for the long-term.  I just think that the emergency fund portion of it should be safe and readily available.

This argument is just semantics

Remember that the typical range bandied about for an emergency fund is 3 to 6 or even 8 months of your expenses.  That is a huge range!  So I think this argument comes down to how risky you want to be with your money.  If you are saying you want to put most of your emergency fund in the stock market, I would say that money is not really part of your emergency fund.  You are actually preserving a very small emergency fund and taking on a bit more risk than someone with a full 8 or 12 months of expenses in a savings account.

Like a lot of things, it comes down to risk

Maintaining a small liquid emergency fund while putting more of your money in the stock market introduces a higher risk than having a larger emergency fund.  If you are comfortable with that risk, then that is a fine decision for you.  For a single parent, it is probably not prudent to take on a lot of risk if it is possible to avoid it.  I work full-time (and I blog, of course) and my wife works part-time, so having a smaller emergency fund is not as risky for us.

I would just caution you to be honest and realistic about your need and your tolerance for risk.  Warren Buffet has said that if you aren’t comfortable with possibly losing half of your money, then you shouldn’t be invested in the stock market.  This is even more critical for an emergency fund where you could need the money at any time as opposed to a retirement account that is decades away from being tapped.  Markets do go up but remember that they also go down sometimes (and as we saw last week, they can go down frighteningly fast).

Keep it safe

My advice would be to decide how much you are really comfortable having for an emergency fund and keeping that in a safe, ordinary, boring (but FDIC insured) savings account.  Personally, I use two online savings accounts – EmigrantDirect (currently 3%) and ETrade (3.3%).  (Update: Etrade currently has a deal where you can get $25 for a referral sign up – if you’re interested, drop me your email address and I’ll send you an invite).  You won’t make any money on it (although I’ve made a lot more money this year in my savings account than my mutual fund accounts) but that’s not really the point.  Remember, it’s an "emergency" fund, not a "making lots of money" fund.  Putting it in the stock market is not going to make you rich but if it’s not available if you need it, that decision might just make you poor.

Photo Credits: G & A Sattler and Nieve44/La Luz

How I Use My Bank Accounts: A Three-Tiered Approach

September 22, 2008 · Filed Under My Finances · 3 Comments 
Photo by Odalaigh

Previously, I discussed my current method for following through with a budget . In that post, I mentioned that automating as much of my finances as possible is the most effective thing I do to keep on track financially. I’d like to expound on that by detailing our current set of bank accounts and the purpose of each account. In general terms, we use three separate accounts to handle the bulk of our bill paying and saving, a checking account, a large-purchase account, and an emergency fund.

Checking Account

Our checking account is the primary account of this system. It is the gateway for all of our finances. Almost all of our incoming money is dropped into this account and almost all of our outflows are pulled from it. It is an account at a brick and mortar bank with a local branch so that I can withdraw cash, cash checks, and deposit money easily. Both my and my wife’s paychecks get direct deposited into this account. We use the free bill pay feature to pay as many bills as possible (I LOVE not having to mail all those bills out!). We even arrange most of our charitable contributions through bill pay as scheduled payments that are sent out by the bank each month (it’s not quite like using the "automated tithing machine," but it’s close I guess). Our mortgage payment and some others are automatically debited from this account as well. Again, the overriding principle is to automate as much of our inflows and outflows as possible.

Large-purchase Money Market Account

We also have a money market account hosted at same bank as checking account for convenience and same day transfers back to the checking account. This money market account is not the emergency fund (and contains a lot less money than the emergency fund). Rather, it acts as the buffer between the checking account and the emergency fund. The main goal of this fund is to be available when a large purchase is made or a big bill comes in that the checking account can not absorb. In that case, I transfer some money from this account back to the checking account. This allows me to maintain less money in the very low-interest checking account while not using the emergency fund for expenses that are not strictly "emergencies." I then replenish this account back to its targeted level.

Emergency Fund & Subaccounts

Even though the large purchase fund earns more interest than the checking account, it still earns much less than the emergency fund I have at EmigrantDirect.com . The Emigrant account is currently earning 3% which is about what the other popular online accounts are earning. Though I think INGDirect is more popular among personal finance blogs (maybe at least partially because of their generous affiliate program?) (Emigrant has an affiliate program but they won’t let me in it for some reason), I’m very happy with my emigrant account. It offers free transfers to and from the account, a pretty good interest rate, good email and phone support (the affiliate program emails notwithstanding), and a really useful sub-accounts feature.

I have setup a number of sub-accounts for short-term savings goals:

  • Emergency fund – This is our cash reserve we use to try to help weather significant financial storms
  • Vacation fund – This used to be our student loan payoff fund, and we very intentionally changed it to our vacation fund after paying off the last student loan .
  • Yearly expense fund – We put money into this fund for bills like life insurance, household employee taxes, etc that are fairly large and only paid once (or a few times) a year.
  • Home purchases fund – The money in this fund is earmarked furniture purchases, home improvement projects, etc.
  • Charity fund – Though my income is very consistent, I do get bonuses from time to time. To ensure that we give the decided-upon percentage of our income, whenever we receive extra income, I transfer the appropriate percentage into this fund. I feel this is a very easy way to keep track of the money and save it up for big donations as needed.

Again, as I said, I automate as much of this as possible. So, I schedule monthly transfers from my checking account to each of these sub-account funds.

So why so many accounts?

I use these multiple accounts to provide protection now and to plan for the future. The three main accounts of the checking account, large purchase fund, and emergency fund provide a layered system to (hopefully) avoid having to go into debt for major purchase and/or emergencies. And the automated transfers to the other funds help me to plan for the future to be able to pay our big bills and simultaneously enable us to do things like vacations and home improvements, again, without going into debt.

Having all the funds seems a little onerous, but it’s not that bad. Of course, you have to remember that my philosophy is to do everything as simply as possible. That means that I find it very worthwhile to take extra time to set something up if it means that the ongoing maintenance of it will be very simple as a result of the upfront work.

Photo Credits: Odalaigh

Personal Finance Basics Part 1 – The Basics of the Basics

August 11, 2008 · Filed Under PF Basics · 2 Comments 
Personal Finance Basics

Today I am starting a series on personal financial planning basics. In this series, I’m going to go over some of the main topics of personal finance – this will be a high level introduction to the topics that most people should consider when they first get started thinking about personal finances.

Today’s post will go over the very basic necessities – these are the things that you must think about for any basic financial plan. This is the bare minimum you should consider if you want to properly take care of yourself and your family. In part 2 of this series, I will go over some “optimizations” to the plan (hey, I’m an engineer, this is just how I talk)(no, not the kind that drives trains). These first two posts are to serve as the introduction to the topic. In future posts, I will get into more detail on each topic.

So, this is my list of the basic items needed for a financial plan: Click here to continue reading…

Am I Stupid to Pay Off Our Student Loan?

August 5, 2008 · Filed Under Paying off Debt · 10 Comments 
Question mark

First, I have to apologize – we are not allowed to use the word "stupid" in my house. It just slipped out – honest. 🙂 Anyway, what I really meant to ask is "am I silly to pay off our remaining student loan?"

We have one student loan left

When we moved from the southwest back to the east coast, we had just completed paying off all of my student loans. That left us with (from highest to lowest balance) my wife’s student loans, a mortgage, and two car loans. As seen on my story page and the first checkpoint post , that was the point in time where I started to get really obsessed with paying off all of our loans and getting rid of everything except the mortgage. Click here to continue reading…

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