Even to Save Cash, Don’t Try This Stuff at Home

Originally posted on pfhacks.com: Sometimes Do It Yourself Is Not The Answer

Many financial experts, including Dave Ramsey recommend that you set aside money in an easily accessible account of, at least, three to six months of expenses.  You should probably increase this amount if your income may be irregular (i.e.  You earn a large percentage of your income from commissions, or you, or your spouse, is self-employed).

That’s very sound advice, that I think everyone should follow.  But, if you have steady employment and believe you can set aside your emergency funds at a slow, but steady pace, there’s something else you need to consider:  Does your employer have an emergency fund?

The items I am going to list below will vary greatly by the size and industry of your employer, but I think they are all very important in making sure you have a strong personal finance plan. 

Here are some questions to consider:

1. Is your employer highly leveraged?  By leveraged, we mean is the company dependent on borrowed funds to operate.  In an economic slowdown, like we are currently experiencing, banks tend to tighten their lending standards.  If you business is dependent on that source of cash to operate, it may have to drastically scale back, or cease, operations should the bank refuse to continue lending.
2. Is your company in a "consumer discretionary" business?  For instance, during hard economic times, consumers will cut back on non-essential purchases such as dining out, or purchasing jewelry.
3. Is your company facing up to International competition?  Virtually all manufacturing businesses in the US are facing tough competition from other parts of the world with lower labor costs and less regulation.  If you are in one of these industries, has your employer made the necessary adjustments needed to compete?  If not, they will eventually need to, or go out of business.
4. Does a large percentage of your company’s profits come from a single customer?  If so, your company could find itself in dire financial straights should their number one customer cut back on its spending.

If you answered yes to any one of these questions, you need to find out – in a non-pushy way – whether management has set aside an "emergency fund" for the company.  You can consider a company to be similar to a person in that cash comes in, and goes out, every month.  You know that when times are good, it’s easy to spend the windfalls, but being prudent you set aside a portion of your income for the times aren’t so good.  Similarly, a prudent management would realize that good economic climates should be used to stockpile some capital in order to survive, or even thrive, in economic downturns.

If your company’s management is spending like business will never have bad periods, you should consider cutting back on non-essential spending in order to aggressively build your emergency fund.   As Warren Buffett says: "The time to build Arks is before it starts raining."

In summary, building an emergency fund is an essential piece of any smart personal finance plan.  If you are employed by a company, it is essential for to understand where it stands financially, in order for you to have confidence that you are prepared regardless of which way the economic winds are blowing.

Originally posted on pfhacks.com: Does Your Employer Have An Emergency Fund?

Photo: jenn jenn

Terri Cullen, writing in The Wall Street Journal, shares a good technique for avoiding common money arguments: The ‘$500 Rule’.

Here’s how it works: she and her husband have a standing agreement that if she needs to spend over $500, she will check with him first.  Vice versa, her husband will check with her before he spends over $1,000 (he is more thrifty, hence the higher limit).

These pre-existing spending limits allow them to avoid arguments caused by one or the other splurging on a big ticket item.

Terri summarizes the article:

This system gives both of us a sense of control over what we earn, yet forces us to set savings goals and make big-money decisions together. Because our accounts are separate, Gerry and I don’t regularly monitor each other’s day-to-day spending habits. But because of our spending rules, we don’t need to — setting limits on big items reminds us that we’re responsible to each other for the financial decisions we make, both large and small.

Originally posted on pfhacks.com: Using Spending Limits To Avoid Money Arguments

The reasoning is that it helps you avoid impulse spending. Let’s say that you are in Best Buy one day and see a beautiful flat screen HDTV. If you have a few thousand dollars sitting in an account anonymously called “savings” you may be tempted to pull the trigger and bring that puppy home. If, on the other hand, that money has a “name”, like house down payment fund, you will think differently. In fact, you will probably start a new HDTV fund when you get home.

How do you set this up? I suggest keeping a list or a spreadsheet that tracks the value for each item. For instance you may have $3,200 in a savings account separate from your emergency fund broken down as follows:

New Car Fund $2,000
HDTV Fund $500
Christmas Fund $700

Remember the point of all of this is control. Retail stores are designed to get you to impulse shop. If you already know where your money is going, it will be much easier to resist.

Originally posted on pfhacks.com: Avoiding Impulse Spending By Naming Your Money

Here is a simple hack that will have a big impact on your peace of mind.

Unless you are super compulsive about tracking all of your financial transactions, you have probably had those moments where you say to yourself, “Did I pay my credit card bill this month?”. Then, it’s a frantic search through a statement, or logging in to your bank to see if you did, in fact, pay the credit card payment.

I had a few of those moments myself, so I came up with a simple checklist for my recurring bills which I check off whenever the payment is made. I used to keep it in an excel spreadsheet, but I have recently migrated it over to Google spreadsheets.

Here’s how it works (you can see a screenshot at the top of this post):

The spreadsheet has thirteen columns.

• The first column contains my recurring bills, the remaining columns contain each month, January through December. In parenthesis I note the day of the month on which the bill is normally due, and automatic payment method, if applicable. For example: Time Warner Cable (ACH 2), means that my cable bill is normally due on the 2nd day of the month, and it comes out of our account automatically by ACH.
• When I pay a bill, I place an X in the cell corresponding to the payee, and the month. If I do not have to pay the bill that month, I place an NA in the cell.
• Finally, I also highlight the months where I will be having a non-monthly bill, so I know to look out for it, and to budget accordingly.

Keep it on your computer where you pay your bills, or print it out and keep it with your checkbook.

You can also download a sample bill checklist in Excel.

Originally posted on pfhacks.com: The Bill Checklist

The reasoning is that it helps you avoid impulse spending. Let’s say that you are in Best Buy one day and see a beautiful flat screen HDTV. If you have a few thousand dollars sitting in an account anonymously called “savings” you may be tempted to pull the trigger and bring that puppy home. If, on the other hand, that money has a “name”, like house down payment fund, you will think differently. In fact, you will probably start a new HDTV fund when you get home.

How do you set this up? I suggest keeping a list or a spreadsheet that tracks the value for each item. For instance you may have $3,200 in a savings account separate from your emergency fund broken down as follows:

New Car Fund $2,000
HDTV Fund $500
Christmas Fund $700

Remember the point of all of this is control. Retail stores are designed to get you to impulse buy. If you already know where your money is going, it will be much easier to resist.

Originally posted on pfhacks.com: Avoiding Impulse Spending By Naming Your Money