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?

I had the student ID in a second wallet where I put cards, memberships, etc. that I use infrequently, so I don’t clog up my ultra-slim wallet. This back-up wallet is stored in my backpack.

As I look at my own wallet, I have a number of cards that I use very infrequently that just take up space. I could have a second, “backup wallet”, that I could leave in my car, or a bag when I travel. Not only would this free up space in my primary wallet, I could keep an alternate form of photo id in the second wallet to use in case my primary was stolen.

Tim: Great Tip!

Here is a link to Tim’s blog: The Four Hour Work Week. I really enjoyed The Four Hour Work Week, and recommend it. A lot if his ideas are a little “out there”, but the book will change your mindset about how you work. You will find yourself cutting things out of your workday that do not add benefit in proportion to the time they take.

Originally posted on pfhacks.com: Keep a Backup Wallet

According to the article, they are not doing this because of a newfound realization of the benefits of a frugal lifestyle, instead, it is because they have no other alternatives.

From credit cards, to home equity, many Americans are completely tapped out – beyond tapped out.

The national savings rate has went from 10% in the mid-eighties to slightly negative currently.

It gets worse. Check out this quote from the article:

For the 34 million households who took money out of their homes over the last four years by refinancing or borrowing against their equity — roughly one-third of the nation — the savings rate was running at a negative 13 percent in the middle of 2006, according to Moody’s Economy.com. That means they were borrowing heavily against their assets to finance their day-to-day lives.

Negative 13%! That is simply astounding to me. I can’t fathom the thinking that would go into funding your lifestyle with home equity borrowing, but apparently 34 million people thought this was an acceptable idea.

Originally posted on pfhacks.com: Americans Embracing Frugality . . . Because They Have To

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

Introduction

The primary purpose of an emergency fund is to replace lost income should a member of your household lose a job.

Secondarily, you can use it for large, unexpected, expenses such as a car repair. An emergency fund allows you to face a traumatic event, knowing that you don’t have to take on debt. If you finance an emergency with debt, you are compounding your problems.

Keep your emergency fund in an account that you can access quickly, without early withdrawal penalties. A savings or money market account is ideal.

How much should you keep in your emergency fund?

When establishing your fund, a general rule of thumb is to keep 3 – 6 months of expenses. Expenses, in this case, would include mortgage and other loan payments, utilities, insurance, and groceries.

Here are some factors you should consider when determining whether you want to save more than the 3 month minimum:

• How many “bread winners” do you have in your household? If only one person is responsible for most of your household income, you may want to increase your emergency fund.
• How many people are in your household? If you are single, or have no children, you may feel safe with only 3 months of savings. If you have children, you need to think carefully about increasing your emergency fund.
• Where do you earn your income? If you, or your spouse’s job is in a cyclical industry, you should increase your emergency savings

Saving your Emergency Fund

I would suggest defining the amount you want to save, divide that amount by the number of months you think it will take you to save, then have that amount automatically transfered from your paycheck into your emergency account.

If you don’t have enough room in your budget right now, start by saving a small amount, say 5% from each check, then increase the savings as your income increases.

Ideally you should strive to have a fully funded emergency account within 24 – 36 months.

When to use your Emergency Fund

Remember, the emergency fund is for large, unexpected expenses. Vacations, or a home remodeling project, are not emergencies. These are medium term savings goals, and should be saved for in a separate account.

If you are forced to use a portion of your emergency fund, you should immediately stop all other savings plans until you have replenished your account.

Emergency Funds and Debt

While I advocate everyone have an emergency fund sufficient to get them through tough financial times, I also think it is a very good idea to be completely free of consumer debt. By consumer debt, I am primarily referring to credit card debt, but also other non-mortgage debt such as automobile loans. It doesn’t make a lot of sense to build up an emergency fund, while sending money out the door every month in interest payments.

Consider saving a partial emergency fund ($2-$3 thousand), then pursue an aggressive debt reduction plan. If an emergency should occur during this time, you will have at least made room on your existing credit lines.

Originally posted on pfhacks.com: Planning Your Emergency Fund

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