MiB Smarter Money » Emergency fund

What Does It Mean When The Federal Reserve Cuts Interest Rates?

hank — Sun, 03 Feb 2008 08:01:39 +0000

Photo by: gerrietWe hear all this talk about how the “Feds are lowing rates again today” on the news a lot recently, and that we’re falling into a recession. But what does all that mean? How does that help me in the situation I’m in? What do I do now as far as investing?Well, to put it simply, when the feds lower federal fund rate, it reduces what it costs banks to borrow money from them. When the banks costs go down, banks typically trim rates for consumers and business borrowers. That encourages businesses to expand and households to spend. Homeowners with adjustable mortgages and consumers with credit cards linked to the prime rate often see their rates move down, which is good.

Why is The Fed pushing rates down hard and fast?

Because the government is seeing a danger that troubles them. The housing market could create a downward spiral that would do widespread damage to consumers and businesses. The main problem comes from several things that get started when home prices start the fall. When home prices fall, it inherently fosters large numbers of foreclosures. That throws a bigger supply of houses onto the market, which in turn push prices down further.

Another problem happens when falling home prices force banks and other lenders to take losses on housing-related investments. They certainly don’t want that because it takes a bite out of their capital and reduces the amount of money they have to lend. That in turn makes it harder for home buyers to borrow, and lending banks to lend. If this housing problem continued for an extended period of time, the damage to banks and consumers could become so profound that the economy plunges into a recession the likes of which we don’t want to see.

How is the government planning on fixing this?

Well, they’ve hacked the interest rate 1.25% over the last 11 days. With this drop in interest rates, combined with a stimulus package from Congress, the hope is that they can stave off the looming recession, which isn’t fun. The goal of doing this isn’t pretty in the short term, but it can significantly limit the damage and keep things from falling into the ocean.

So do I want the Feds to cut interest rates or not?

Well, if you are a homeowners with an adjustable-rate mortgages, you like it. If you have an adjustable rate home equity loans, you like it. If you are a homeowners with a good credit rating and can refinance at lower rates, you like it. If you are a business with a loan tied to the prime Fed rate, you like it. However, if you are investing in CD tied to the prime rate, you DON’T like it. If you have a money market account, which is likely tied to that rate at which banks can borrow, you DON’T like it. If you have a savings account at a bank, you DON’T like it.

Overall there are a lot of pieces to the pie, and a lot of people complain about the setup and what the government is doing, but that is what people do, they disagree a lot. You don’t have a lot of choice in the matter so make the best of it and take advantage of the lower priced stocks, and mutual funds you find when the economy is slow.

What Do I Do During a Bear Market? What Do I Invest In?

hank — Wed, 30 Jan 2008 08:19:09 +0000

Photo by: artct45If you’re between 20-40 years old, don’t do anything. Stay where you’re at, markets fluxuate. That is their nature and that should have been something you learned before you got it. If this is your first time hearing about it, don’t worry and more importantly, don’t run. Let the traders panic. That is their job. They’re pounding down 15 cups a coffee per day and enjoy the stress. Let them deal with it. You’re paying a person that the traders are relaying information to in your mutual funds. You’re 3rd tier on that – sit back and enjoy the cheap stocks you’re getting into.If you haven’t sold, you haven’t lost. Stick to your guns and don’t get scared out of the market, recessions happen. But they always come back. As long as you still have a job, you shouldn’t be worrying. If you HAVE lost your job, you should probably not be reading this blog, try this one.

Buy technology stocks and fund. They’ve done really well this year, and think about it. We’re in the technology era; people WANT technology and are willing to pay for it still. As long as you’ve got a good time horizon for investing (10+ years left till retirement) I think you’ve got a good shot to get in at the bottom floor during the recession.

There are special recession ETFs geared towards recession. Look at medical, people always need to go to the doctor. Look at Claymore Securities.

Ultimately, my recommendation is to keep your money headed towards your investments as long as you’ve got a job. Keep your portfolio on track, this is the time when many people are getting out of the game, and as long as you’ve got time on your side, a perfect time for you to capitalize on the low prices being tossed around.

Do you have any secrets you’d like to share? Anything you’ve done in the past? Advice for the future?

Keep Your Investments Separate For Different Goals

hank — Wed, 16 Jan 2008 15:30:14 +0000

How many of you use your 401k for your everything bucket? I’ve overheard friends and family talk about their 401k like their “all for one long term savings account” saying things like, “I’m going to use my 401k for my kids education” or “my 401k is used for both me and my wifes retirements” or the worst to date, “I really need to get a car, I’ll probably borrow against my 401k”. The last one is clearly the worst because a car is a depreciating investment. You’ll never get that one back.

I can see the other 2 MAYBE working; but when you start to dabble the same investment for other pieces you often times lose site of what it is there for. A 401k is there for YOUR retirement; a ROTH IRA is for YOUR retirement. Unless you’re dumping TWICE as much in your 401k, it shouldn’t be set for yourself and your wife. Keep it for you and start something ELSE up for her.

Using it for your kids college education isn’t a HORRIBLE idea either, but take into account that you’re going to likely retire AFTER they go to college. So if you’re double-timing your 401k to education AND retirement, it’s going to look awfully small after the kids take it to school. By that time, it might be too late to know where you want to get with it. I offer the same advice for the person wanting to use the 401k for both he and his wife, make sure you’re dumping a lot into it then.

Just the visual aspect of seeing my kids 529 plans, my 401k, and my ROTH IRA are enough to keep me in line. I know what the investments are for, and what money is going where, and more importantly, why. Simplifying the process can often times remove that “investing blur” that you may have when it comes to saving for your future.

If that isn’t enough to convince you to keep them separate, think of how life is always changing; you have another kid, you have an accident at work forcing you to retire early, big medical bills come up. If you plan on your ROTH covering you in retirement (after 59 1/2) and you have to retire early, is there anything set up for that aspect? Might not be a bad idea to have that emergency fund fired up in that case.

Over time, your investments will change, your mindset will change, your timeframes will change. For those reasons you shouldn’t keep all your (investment) eggs in one basket. Spread them around to different baskets for different goals. If nothing else, it trains you on another aspect of investing when you jump to another ship and increases your financial education significantly.

Photo by: Daquella manera

How Do I Plan To Reach My Investing Goals For Retirement?

hank — Sun, 23 Dec 2007 13:00:50 +0000

Photo by: emdot

Only 0 days 5 hours 2 minutes left until Hanks Holiday Handout drawing!

To make my goal of having my net worth be $1,000,000USD by 2020 I need to have a plan laid out. Yes it will change through the years, My wife and I will get raises; we won’t get the return we’re shooting for with investments in some of the years, but as a base goal if we take our current principal of $75,000 and continue to invest $21,500 per year for the next 13 and that will put us just over the 1MIL mark. That first MIL is the hardest, Pinyo lays it out here.

Where do I find $21,500 per year to invest? We’re currently contributing 10% of each our salaries for about $16,000 per year to our 401k plans, then add in $4,000 each for our ROTH IRA accounts and we’re well over the limit there. We’re planning on bumps in the road, so that’s why I’m giving the $21,500 number. There are a lot of calculations that need to taken into account, but that is the same with any investment plan. At 10% return with those calculations we’re looking at just under 840k, and at 12% that puts us over the 1MIL mark.

We could have a year where we can’t pay contributions to either our 401k or ROTH, but on the same note, there could be years where we’d contribute MORE to those accounts, For instance, we’re planning on trying to bump the 401k contributions up to 15% in 2008 and that would be $24,000 in itself; add in the ROTH IRA contributions and we’re looking at $32,000 invested per year and in 13 years, that will be worth 1.33MIL.

Numbers are numbers – sticking to the path of just getting money in is the key. In 13 years I’ll still be nowhere near retirement, but the first million is always the hardest to make, after that, it is quite ridiculous how fast it grows. In 35 years on this same $21,500 per year at 10% return we’re looking at 8.5MIL. Which is dreaming, and a lot can happen in 35 years, but there is no time like the present to start planning on it!

Time, as usual, is the key piece of this financial pie; variables are always tossed in to make it interesting. As long as we’re putting in the $21,500 we’ll be on a good pace. I’m sure there will be other investment opportunities, more job promotions, more raises, maybe more kids, but staying on this basic path is the key to our specific financial goal. What’s your path?

What Is The Difference Between A Savings Account And An MMA (Money Market Account)?

hank — Sat, 15 Dec 2007 16:23:35 +0000

Only 8 days 3 hours 35 minutes left until Hanks Holiday Handout drawing!

Sorry I’m behind on a few of the readers requests, it has been a busy month for sure! But this was a fairly straight forward answer to Ben.

Hi Hank – You have posted a few times about the high yield savings and Money Market Accounts – sorry to sound like a noobie, but what is the difference between a Money Market Account (MMA) and a savings account? – Ben from Iowa

Hey Ben – Money Market Accounts (MMA) and a savings accounts are both just products that a bank offers, like a store offers carrots and peas. The accounts are deposit accounts held with a financial institution. FDIC or NCUSIF insured deposits are backed by the full faith and credit of the United States government.

The difference between the two types of accounts is that withdrawals from a Money Market Account may be limited to “x” per month. Check with your MMA issuer for this exact number, but it usually falls at 6 per month. Whereas, on the other hand, savings accounts typically do not limit the number of withdrawals. That’s the only difference – The next thing would be to check the APY of the account you’d be opening.

My Monthly Expenses Are High; How Can I Cut Down My Monthly Expenses?

hank — Tue, 06 Nov 2007 01:12:22 +0000

So I decided to try out Flexo’s monthly expense template, and it isn’t looking too promising for me this month. I’m doling out more than I am taking in this month. Off the top, that sounds like it is bad, but really it isn’t TOO bad. I figured my cash allowance was high this past month, so I had some room to spare since I have $6,000 in cash. I’ll pay off the $4,300 on the credit card so as not to get a ridiculous fee charged for interest on it, but then I don’t get billed for anything for another 2 weeks. So I’m alright there.

My expenses can certainly get a trimming though. This is eye-opening to say the least though, as I KNOW that I’ve been right at breaking even for the past few months, especially after the trip to Australia that pretty much drained the rest of what I had from the sale of my house last year. That’s ok though because my wife took home less because we bumped her 401k allocations to 10% matching mine, and I’m still contributing to my ROTH IRA at $200/month. This pretty much smashed the urge to get the new car though – It’s certainly helpful to see everything out on paper to further the need to back away. That’s maybe the allure piece grabbing me.

I’m probably going to start a new car fund though shortly because my 2001 burb isn’t going to cut it going forward. I took it in last week to check out a “clunk” it was making and they quoted me at almost $1,900; 95% of that money was for upkeep, 60k lube and maintenance, a few leaky pipes, but ultimately I got out of it and fixed the clunking noise for $108.

So here is the first installment of my monthly expenses (click to expand):

Obviously I can cut down the Retail Store Purchases and Dining Out, and if everything goes as planned, I’m in the market for a raise in a few weeks; I’ll be certain to keep the post up on that one. It’s pretty ridiculous what the ol’ government takes out each month, but it’s nice to actually see it out on [electronic] paper. Daycare is a killer, but we get that back when we can write it off at the end of the year, but that takes a good monthly chunk, and we’ve got a GOOD rate!

My wife wants to have another in the next year and good grief that Daycare budget is only going to rise in time; add another kid and it is starting to get ridiculous…

Laying this information out has really been a beneficial exercise and I can get this info from my credit card each month. I’m going to start doing this monthly from now on to get a better grasp on it so I can realize what we’re spending/saving. I highly recommend doing this for anyone curious as to what they’re spending $ on. Do you have a budget worksheet you can work off?

My wife has about $80 in Starbucks that I didn’t account for on here that I’m sure we can trim also! Anyway, goal for next year is to get these numbers and stick to a budget more strictly going forward. We’re making money off our investments, but we’re not getting the best bang for our buck because we’re leaking money in other areas when we could be putting it to better use.

How Did I Get INTO Debt/ How Do I Get Out?

hank — Sat, 27 Oct 2007 00:35:04 +0000

Climbing out of debt can be hard, but it is certainly possible. I initially started searching Personal Fianance Blogs a year ago to find a way to climb out of debt myself. RedCouch hosts a blog and isn’t so sure about them, but they’re thriving and helping now! There were not as many as there are now; which is nice because it gives people more view and choices on how to do it, but all the info is VERY spread out. I figured it would be helpful to put all the info in one place to best help folks climb out! This is my attempt at helping those folks that have been in my shoes, and SaveLeighAnn‘s shoes also who climbed out in just 1 year!

So almost 4 years ago on my climb, I moved into my first house, needed to buy first furniture, had a first kid (with one on the way), needed to get a first new car , first car seats, first diapers, the “FIRST” works! But kept my head about it all and this year started to blog a bit about it and prove that it CAN be done! It takes some frugality (which is NOT a dirty word) and planning, but CAN happen if you keep your priorities in order! The blogs out there now are prime examples of people trying to claw their way back into the black. I dug and looked through several in the past year and a few of my favorites were:
MyDebtBlog
OutOfDebt
DebtFree
DebtFreeRenee
BloggingAwayDebt
NullBalance
BryansDebt
EliminateMyDebt
FightDebt
DroppingDebt

Several of the Personal Finance Blog folks have posted about the issue as well and I have gained a good chunk of knowledge from them. Free Money Finance, Get Rich Slowly, and JeffLindsay were a few I gandered at regularly, and the posts they offer are EXTREMELY helpful in digging through all the crap that people keep trying to stick you with when you are that low. It almost seems like companies TRY to kick you when you’re down (in debt) more often than when you climb out because they KNOW you’re trying to find a way out! That’s actually something I thought about also when I was that far in debt; people/companies will prey on you because they know your mentality.

I was watching ol’ Suze Orman last week (not advertising for her, but she does have some things I agree with, but some that I don’t), and someone called her up on her “Can I Afford It” section of her show. There was a guy on it that was asking if he could afford a $3,000 lawnmower. He was $88,000 dollars in debt and I thought to myself, “Is he SERIOUS????, There is NO WAY he could afford that! What would lead him to believe he can???”
Well his rational was that he was already $88,000 in debt and $3,000 more would just put him at $91,000 in debt which woul ONLY be a 3% increase on his debt, and if he was paying off that much anyway, that it would just be a “drop in the bucket”.

Well, as much as I didn’t agree with him, I guess I DID understand where he was coming from. As bad and wobbly of a point as it was, he still believed it. I think that is the mindset of someone in debt. It is like climbing a hill that you can’t even see the top yet. Tacking on another 300 yards at the top, you’re not even going to notice. It’s a bad mindset to be in, but I like to look at both sides of the coin, and yes, I can SEE that side of it, but I certainly don’t agree with it.

My mindset, on the otherhand, I scrimped on EVERYTHING when I was climbing out of debt, I would save $0.88 chili for the next day to only spend $0.44 a day on lunch. Without going into the details of everything I scrimped on, I was very cheap because I KNEW I had to pay off the debt first. Getting-Out-Of-Debt has some good info on saving and getting by cheaply. My path worked with frugality, and a properly goal in mind. Now I don’t have the debt, and pay my credit card off each month to avoid late payments, make all my others on time, because I KNOW I have to stay on top of the debt to stay out of its ugly path! Once the collection agencies start calling you, it is obvious you’re in some trouble. Some info about debt collection can be found @ CaliforniaDebt.

Furthermore, the person that was 88k in debt and didn’t see a reason NOT to go to 91k in debt couldn’t see it like some can. When I think about buying something costing $3,000, I think I’ll be $3,000 in debt, and from 0, that is a 3,000% increase in debt vs. the 3% increase for “lawnmower man”. I imagine that is how he was looking at it, but needed to clear the debt blockade first to realize it was a bad decision. Key point: DIG OUT OF DEBT FIRST!!! You’re most certainly paying the credit card companies to produce MORE credit cards to dig America FURTHER in debt! Stop the insanity!!! Here’s a debt consolidation calculator to help from DebtNation.

Everyone seems to be searching for “tips for getting out of debt”, and thankfully, there are debt-free folks that are out there and WILLING to help! DebtConsolidationStrategy, TheFinancialBlogger, MillionDollarJourney, TheMoneyBlog, DebtLowdown, ZenHabits, Blankenship, and TimeToBudget, all have very good posts that are willing and showing people the best strategies to take. Read them carefully and most importantly you need to THINK before you make that next big purchase because it is NOT the amount you’ll be in debt, but amount FURTHER you’ll be in debt if you don’t pay it off first! After that, it is an easy decision of just finding places to stash your money in your OWN pocket and building wealth!

Good luck!

In What Order Do You Invest Your Money?

hank — Sat, 20 Oct 2007 00:36:04 +0000

So one of the biggest steps after deciding that you want to save money is deciding WHERE to put the money? There are so many options out there, and so many different people suggesting places to put it. I’ve actually lurked on dozens of sites that have their own choices on where they put their money. My favorites links to those blog instances are, in no specific order:

Bargaineering
GenXFinance
Everybody Loves Your Money
Fivecentnickel
Living Almost Large
My Money Blog
My Retirement Blog
Beach Girl Blog

And here is what I came up with the months of research in the order I choose to put MY money:

0. While writing this post about paying off credit, I figured this deserved to be first BEFORE you start investing, pay off your debt because you’re just building the CREDIT CARD COMPANIES net worth, NOT your own. First and foremost is to pay these cards off!

1. Build Emergency fund – in the WORST case scenario my wife and I lose our jobs or lose our arms or something, we should have at 2-6 months of expenses ready to be paid for – this should be put in a money market account or high yield savings account, many of which are paying in the low 5% right now –

2. 401k/403b – If your company will match your investment, you’re silly not to at least hit the match. This is basically FREE $ from your company, and IMMEDIATE 100%return on your investment. Try to find that anywhere else.

3. ROTH IRA – You can’t beat the benefits of a ROTH IRA either – You contribute up to $4000 in 2007 ($5000 if over 50) and it is already taxed as you’re putting it in after you get paid, so Uncle Sam has already taken his whack at it. One of the biggest benefits here is that you only pay the tax that Uncle Sam originally hits you with. It is tax deferred when you take it out. One thing I can almost guarantee is that taxes are going to go up in the future, they always do. If you don’t think they will, maybe a Traditional ROTH is more your style. The one downside I can see is that there are phase out periods of the ROTH starting at a combined MAGI of $150,000 in combined household income; and not contribution after $160,000.

4. External funds (Index Funds, ETFs, REITs, Mutual Funds, and likely in that order for me) – As of now, I only have 1 fund that my mother bought in 1993 for $400 and it was mine when I turned 18 as it was a UTMA account – It is FGRWX and is worth almost $1900 today. I haven’t put any more in this – but I do like that it is a large cap growth fund with only a 1.07% expense ratio, so I think I’ll hold on to it. (It has a front load of 4.75, but I haven’t put anything in it, so that piece was taken out by Mom when she bought it.

5. Investing for college – There are several different options for this these days and there are a few questions to ask when chosing one of them:
How much can I contribute to the plan?

a. What are the plan’s investment options?
b. What are the taxes?
c. Who controls the money?
d. Can the money in the plan be used for anything other than education?

What are a few types of education savings are there now?
Education IRA -
Section 529 plan –
State Prepaid Education plans
I have opened two 529 plans for my 2 and 3 year old with Pacific Funds and will try to contribute more as the years go on, but honestly, I think a big part of learning to manage money is having some debt. Getting out of college and having a few bills to pay is good for building character and a financial education. I can guarantee my kids will have some debt out of college, but I’m willing to help now as I can –

6. Individual stocks – risky, but worth a look if you’ve mastered 1-5.

7. Other investment vehicles – real-estate, business models, investing in other peoples ideas.

8. Start your own business – after you’ve covered all these previous bases, and have some spare $, it’s a good idea – furthermore, it’s beneficial tax-wise to be able to write things off to create more liquid $ you can allocate to your other investments (1-7). As is stated in my disclaimer, this is not advice on HOW to invest, this is how I invest. How do you? Do I need an order change?

Is It a Good Idea To Use Your ROTH IRA as Your Emergency Fund?

hank — Thu, 18 Oct 2007 04:45:30 +0000

I just got done reading a post from MyMoneyBlog that asked if you could really withdrawl from your ROTH. My first reaction was, sure, good idea! It’s a good investment vehicle that can draw good returns on good investments. Why not! But then I got to thinking I could invest that money elsewhere, after-tax in generally the same funds in the same way.

People seemed to morph the conversation into using the ROTH as an Emergency fund vehicle and skipping that step in the all important 10-step program of where you want to put your funds; primarily #1 for some folks (including me) which is to fund 2-6 months of immediate liquid funds in a high yield savings or MMA. MUCH better idea I think.

Your ROTH IRA should be specifically for that. Retirement. Taking funds out prematurely may be possible tax-wise, but retirement-wise it could be the dagger in your portfolio! Taking $ out of there is going to kill the gains you’re making on that money over the life of your investment. I highly recommend keeping both entities separate. Keep a E-fund AND a ROTH IRA. You’ll thank me when you turn 59 1/2…

Is Investing In Life Insurance Really “Investing”?

hank — Tue, 09 Oct 2007 01:04:54 +0000

I have a $500,000 whole life insurance policy with Hartford Mutual that I pay $200/month to keep up. $8.50 goes to the administrative fee, $100 for the actual coverage itself and the remaining $90.00 goes into the mutual fund. I’ve had it for about 4 years now and I have almost $8,000 in the mutual fund ITHAX which, by my recent inquiry wasn’t directly based on that number, but didn’t have an exact number as to how that $ was being divided; another one of the reasons I’m starting to follow up on my investments!

But based on my first payment to them in 2004, I have paid $7380 to them and the balance is at $8103 today meaning I have made $723 from them in the 4 years there, a measly $181 per year!

I wanted to get into saving when I was younger and it sounds like I may have been roped into the Whole Life insurance that I don’t need. 80% of that $ goes to the Advisor that sells it to you in the first year and maybe 2 years. So really I have only been making money the last 2 years. The expense ratio is 1.18% so that knocks it down even more – Dear God, what have I done!

But I HAVE read that it isn’t a bad investment if you get into it young – I have $100,000 policies out for my 2 kids and that only costs me $25/month. The pros are that the premium is never going to change, so the kids will have those policies forever and they’ll do nothing but grow (unless the world ends) – similarly, my $200/month policy won’t change either, and it is approaching 500k. In 30 years, I imagine it’s going to be around a million+ – so IS it really a bad investment? I’ve stumbled through the first 4 years (which are supposed to be the “bad” years of the Whole Life Insurance phase, so what now? Is it worth it?

I’ve read pros and cons to the situation all over, mostly cons unfortunately. One of the best cases are from CNN Money which says on: http://money.cnn.com/magazines/moneymag/money101/lesson20 plenty on it – and how to shop for what you need. I highly recommend anyone take a look at it -

So the next question is what do I do about my policy now? Do I stick with it? It IS making me $ on my investment, which is good, but people say that I can put it elsewhere. It costs me money to cancel the policy and I can bet my bottom dollar that I’m going to take a chunk off that amount if I cancel the policy. Is that worth it?

I can afford the insurance at $200, and it will never go up on me, but my policy DOES increase in value. I orignally bought a 450k policy on it, and it is pushing 500k. What’s a guy to do?

Another interesting article is: http://www.jsonline.com/story/index.aspx?id=354597, which says:

“In sales presentations you tend to put everything in the best light,” Zickert said. “The idea of buying life insurance to gain wealth can work very well, but you have to make sure (the money for the premiums) is excess money you don’t really need.”

and that makes sense as well – where does that leave a person? Does anyone reading this invest in any life insurance, any ideas/suggestions?