After digging and pouring the footer for our house, it’s time to set our foundation.  Our financial foundation needs to be solid, stable, and able to support the weight of our financial house.

Three components of a solid financial foundation -

Insurance

At present, my wife and I have health insurance, term life insurance, disability insurance, automobile insurance, dental insurance, and renter’s insurance.  We also have an umbrella policy that protects us from events not covered by our renter’s or automobile insurance.  In the future, we plan to purchase long-term care insurance.

Ever few years, I review my policies with a qualified professional.  My wife and I believe in several ounces of prevention.

Debt Reduction

My wife and I really enjoy living debt free.  (It rocks!)  Our hope is that we can live the rest of our lives without borrowing money.  (We might make an exception for the purchase of a house.  At present, we live in a house provided by my employer as part of my compensation.  If I were to change jobs and we were to move, we would either rent or take on a mortgage, depending on what was right for our family at the time.  For the sake of this article, I’ll be speaking of non-mortgage debt.)

If you have high-interest debt, it’s time to get angry and do something about it!  Making minimum payments and dealing with credit card companies isn’t any fun.  Make a plan, eliminate your debt, and then move on to the really important things in life.

Emergency Fund

My wife an I have an emergency fund (roughly) equal to six months worth of expenses.  We built this emergency fund immediately after paying off our last debt.  The peace-of-mind it provides is priceless.  (While we were paying off our debt, maintained a smaller emergency fund between $800 and $2000.)  The amount in an emergency fund will vary, depending of family size, location, employment situation, and comfort level.  We sleep better at night, knowing that we have an emergency fund in place.

Pouring and setting a solid foundation can be back-breaking work.  Dealing with a financial foundation can be extremely taxing – mentally and emotionally.  I know, for me, it was overwhelming when we first began the process of getting out of debt.  I was embarrassed by many of the financial decisions I had made in my past and I felt somewhat lost as to where to begin.  Thankfully, I was able to connect with some good friends who had good advice and, little-by-little, I was able to make some very positive changes.

Go slow.  Understand what you are doing.  Keep things simple.  Move forward.

Start with a good, solid foundation – and the rest of the building will (almost) build itself.

Image by barron

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Our Financial House – The Foundation

From a recent email from “Rick” -

If you had to begin your debt reduction journey today, would you immediately begin to attack your debts or would you first take the time to build up my cash reserves?

This is a great question, and one I’ve been asked several times.  First, for the sake of this article, I’ll refer to my cash reserves as my emergency fund.  Second, I’ll simply share my thoughts on the subject, and leave the financial advice to a qualified professional.

If I Were In Debt Today…

1. I would create and begin to use a zero-based budget to manage our household finances.
2. I would list each of my creditors and develop a debt reduction strategy.
3. Before making any extra payments to my creditors, I would fund a small emergency fund, equal to $500 per person in our home.  For our family, that would be $2500.  (Four years ago, our youngest daughter had yet to be born, so our figure then was $2000.)

Just two weeks after we began our debt reduction journey, our son was hospitalized.  It was during this time that my wife and I learned the value of the emergency fund.  While insurance covered the cost of the hospitalization, there were a few associated expenses for which we were directly responsible.  These were, obviously, unexpected expenses, so we used money from our emergency fund to pay for them.  If we had not funded this small emergency fund, we would have been forced to use our credit cards, thus digging ourselves deeper into debt.

Please note, while we did stop making extra payments to our creditors, we continued to make minimum payments.  It is crucial to make all minimum payments, in full, and on time, throughout the debt reduction process.  If you are late with payments or you pay less than your minimums, you will be paying late fees and added interest.  We hate fees.

There are several ways to calculate how much money one should have in an emergency fund, especially the beginning, smaller emergency fund.  I arrived at the $500 per person amount by adding our automobile insurance per accident deductible to our family-wide health insurance deductible.  I figured, optimistically or pessimistically, depending on your perspective, that we would have one health-related crisis and one automobile-related crisis during our debt reduction journey.  In the end, we had two health-related inconveniences (neither really reached the level of a crisis) and nothing really went wrong with out automobiles.  For our family, I calculated that a single crisis, whether it be health-related or automobile-related, would cost roughly $2000, so that’s the amount with which I went.

Throughout our debt reduction process, our small emergency fund balance fluctuated between $1000 and $2000.  We had to tap into it on three different occasions, and while this slowed our debt reduction progress, just a bit, we also managed to avoid using our credit cards.

If I Had Just Paid Off My Debt Today…

1. I would celebrate!
2. I would continue to live on a budget.
3. I would redirect the money which had been going towards debt reduction and use it to build my permanent emergency fund.

As soon as I made my last debt reduction payment, I began to build my permanent emergency fund.  To the $2000 already in the small emergency fund, I quickly added an additional $18,000.  For my family, $20,000 represents roughly six months’ worth of expenses.  This money is untouchable, and is to be used only in the case of extreme, actual, real, I-cannot-believe-this-is-happening, emergencies.

If you just spend some time in the archives, you will see that I refer to my emergency fund by another name: non-retirement savings.  I do this, simply to differentiate this money from any money that is held inside a retirement account.  Not to split hairs, but there is a slight difference between non-retirement savings and the emergency fund, in that the former can be used for any expense (budgeted or non-budgeted) and the latter is to be used specifically for emergencies.

Again, the $20,000 amount is specific to my family and our current situation.  For some families, this number might be $10,000.  For others, it might be $50,000.  In fact, I actually have a poll open, asking readers the question – How Much Is 6 Months Worth Of Expenses? If you haven’t done so, click over and vote.  As of today, more than 1100 votes have been cast, and the most popular amount is somewhere between $12,000 and $20,000.

To summarize -

Before and during debt reduction, I would maintain a small emergency fund, based on the size of my family.

After debt reduction, I would increase my emergency fund to six (or more) months’ worth of expenses, again tailored to my family size.

The debt that I am referring to in this article is non-mortgage debt.

Finally, if I had children with special needs or a family member with certain fixed medical expenses, I would consider a larger emergency fund, both during and after debt reduction.

These are my thoughts.  What would you say to “Rick” about debt reduction and the emergency fund?

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Debt Reduction And The Emergency Fund

I just logged in to my Orange Savings Account and noticed that my 2009 tax forms are now available for download.

From the ING Direct website:

You’ll receive a 1099 if you are…

The primary account holder of one or more deposit account(s) that earned in total $10 or more in interest in 2008. A deposit account is an Orange Savings Account, Orange CD or Electric Orange Checking. If you took a distribution from an IRA Savings or IRA CD in 2008, you’ll get a 1099-R.

You’ll receive a 1098 if you are…

The primary account holder of an Orange Mortgage or Orange Home Equity on which you paid interest during 2008.

I printed a copy of my 1099-INT and saved a copy to my hard drive.  I love the convenience of digital forms.

You can view your tax forms by logging into your account and clicking TAX FORMS.

I’m a big fan of ING Direct’s Orange Savings and Electric Orange accounts.  While there are other banks that offer slightly higher rates, I haven’t found one that could beat ING Direct’s customer service.  When away from the computer, I can call them, and within just a minute or two, a real-live-human will pick up the phone!  In this day and age, that attention to detail means a lot.

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ING Direct Tax Forms Now Available

This is a guest post by Paul Williams from Crackerjack Greenback.  You can visit his site and follow along his journey as he goes from being laid off to finding his next job.  After reading, consider subscribing to Paul’s RSS Feed.

A couple of days ago, I was laid off.

Am I concerned?  Yes.

Am I worried?  Only slightly.

Am I panicking?  Not at all!

How can I be so calm at a time like this?  Because I have six months of my expenses saved up in an emergency fund at ING Direct.  While it hasn’t been as effective as prayer, keeping this fact in mind has kept me free from stress and panic and allowed me to focus on what I can control.  I can’t go back in time and get un-laid off.

But I can make sure I’m focused on what I need to do to find my next job.

Without an emergency fund, I would be in a very dangerous situation right now.  First, I would have to figure out how I’m going to pay my bills once I run out of cash in my checking account or wallet.  Second, I’d have to take the first job I could get just to keep up.  (And once you start any old job, it may be difficult to continue searching for a higher paying job in your field.)  Finally, it would be much harder to stay calm and relaxed even though I know God is in control.

Even though I’ll be getting unemployment compensation, my emergency fund is still an important piece of my financial situation.  The emergency fund can more than cover my expenses until the unemployment benefits start.  And those unemployment benefits won’t last forever. If I were to exhaust my unemployment benefits, I’d still have my emergency fund to carry me for at least another six months.

I can live on my unemployment benefits because I’ve kept my expenses so low.  Frugality is powerful in good times, but absolutely necessary in bad times.  Being frugal while you’re gainfully employed allows you to easily make the transition to living on less if you lose your job.

But what if you can’t get your expenses low enough so that you can live on just your unemployment benefits?  In that case, you’ll be glad you have an emergency fund!  Those extra savings will keep you from going into debt at one of the most vulnerable times in your life.  If you don’t think you could live on unemployment benefits alone, you better start or increase your emergency fund now!

All that’s fine if you’re actually eligible for unemployment compensation.  But there are tons of people who aren’t covered at all.

Do you fall into any of these categories?

worker for a church or another religious organization
trainee at a public or non-profit organization
work-study jobholder at a college or university
consultant who works independently (independent contractors)
real estate broker or insurance agent who works on commission only
employee of a foreign government
elected official or certain other government employees
certain other excluded jobs

If so, you better have a super-sized emergency fund!  Unemployment compensation helps a lot when you lose your job, but if you don’t qualify you’re out of luck.

If you’re not covered, I recommend you build up your emergency fund to 6-12 months worth of your living expenses to protect yourself against job loss and other unplanned events.  I know NCN has a ton of great articles about emergency funds, all of which you can find here.

I hope this article helps you see why an emergency fund is so vital and provides you with one more example of a real-life situation where you’d need one.  If you don’t have an emergency fund at all, I strongly encourage you to start one now even if you can only save $10 a month.

If you already have one, take a little time to determine if it’s large enough for your needs and figure out how you can increase it if necessary.  And for good measure, let’s all pray that no one else gets laid off.  It ain’t fun!

I’d like to thank NCN for giving me the opportunity to post as a guest author on his blog.  When he heard I was laid off, he offered me the chance to guest post as a way to encourage me and help me out.  NCN rocks!  I strongly encourage you to support him and his blogs.

If you’d like to follow along my journey as I deal with my layoff and find my next job, you can check out my Laid Off Series here and subscribe to my RSS feed here.

I want to thank Paul for sharing his story and emphasizing the importance of the emergency fund.  Like Paul, I keep my emergency fund with ING Direct, and if you are ready to get started, you can open an account with them and get a $25 bonus!  I hope you’ll visit Paul’s site, Crackerjack Greenback, and let him know that you enjoyed this post.  I know that I’m going to be following Paul’s story and cheering him on.

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The Emergency Fund To The Rescue!

According to this article over at Yahoo Finance -

Morgan Stanley told thousands of clients this week that they will not be allowed to withdraw money on their home-equity credit lines…

When things get tight, many people tap into their home-equity credit lines for a bit of extra cash.  But, what happens when the bank refuses to let them borrow any more money?  It looks like some Morgan Stanley customers are going to find out.

Personally, I don’t rely on credit.  Instead, I have cash set aside, in my emergency fund.  When life throws me a curve-ball, I’m ready for it.

Those of us who choose to keep a portion of our net worth tied up in cash are often criticised.  The critics ask, “Why don’t you put that money to work, instead of just letting it sit there?”.  I let it sit there because it provides security for my family.  I can get to it whenever I need it.  And, I don’t have to rely on a lender to bail me out of trouble.

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Uh Oh. It Might Be Time For A Real Emergency Fund

A month ago, I asked my readers to share their ideas about emergency funds, how much money it takes to cover 6 months worth of expenses, and the best place to stash emergency fund cash.  I’ve been amazed by the response to the poll.  More than 1000 readers have voted – and almost 50 left detailed answers in the comments section!

Here is a quick summary of the poll results, as of July 22, 2008.

For most folks, six months worth of expenses is somewhere between $8,000 and $25,000.  But, for many, their goal is more than $30,000!  That’s pretty interesting.

As for where to keep the emergecny fund, most opt for an online savings account, a few use a regular savings account, and still others use money market accounts from their local banks.

Because of the poll’s popularity, I’ve decided to keep it up for another month.  So, if you haven’t already, head over, cast your vote, and leave a comment.

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Reader Poll Results – 6 Months Worth Of Expenses And The Emergency Fund

Many popular personal finance ‘gurus’ suggest maintaining an emergency fund with enough money to cover 6 months worth of expenses. I thought it might be interesting to see what my readers thought about this advice. If you are reading this post in a feed-reader, you will need to click through in order to leave a comment and vote in the poll.

Now that you’ve voted, a few questions -

Question 1: Where do you keep you emergency fund? In a savings account, money market, checking account, or under the mattress?

Question 2: What about six months worth of expenses? Is this too much… or too little?

Question 3: Would you sacrifice a fully-funded emergency fund in order to fully-fund a Roth IRA (or other retirement / education savings account)?

Question 4: What is the smallest emergency fund with which you wold be comfortable?

Thank you for your participation. Your answers will help me write a future post. If you are a blogger and you write a post about this subject, click the contact button at the top of this page and let me know about it. I’ll be more than happy to link to your post.

Related Posts -
Building An Emergency Fund – Where Do I Keep It?
Reader Poll – Short Term Savings
Updating My Non-Retirement Savings Chart

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Reader Poll – Just How Much Is 6 Months Worth Of Expenses?

One of my goals for 2008 is to rebuild my non-retirement savings. In 2007, we purchased a new-to-us minivan and in early 2008, we had a new baby (and purchased several baby-related items). These expenses worked together to dramatically reduce our non-retirement savings and I’ve been working diligently to rebuild them.

I just made a transfer from my primary checking account to my ING DIRECT Savings Account. My current balance now rests at $5,000. My goal for 2008 is $16,000. Bright readers who can quickly do math in their heads will have already calculated that $16,000 divided by 12 months is $1,333.33. So, after 5 months, I’m a little behind. O.K. I’m a lot behind. In fact, I’m $1,666.6 behind. But, alas, I have a plan!

In just a few weeks, I should receive my economic stimulus rebate check. The amount on the check will read $1,800. I’ll deposit the check and – abracadabra – I’ll be right back on track.

Click here to see my current savings chart over at the No Credit Needed Network – NCNSavings2008.

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Updating My Non-Retirement Savings Chart

My wife is an educator. She recently gave birth to our third child, a baby girl. Mommy and baby are doing great. Our older kids are adjusting and they are having so much fun, learning to feed and hold the new baby.

The timing of the birth worked out great. My wife will be home until school lets out in May – and she’ll be able to stay at home during the summer. Altogether, she’ll get more than 4 months with baby, before school starts back, next fall.

As you might imagine, due to the fact that she’ll miss the last few weeks of school, her paychecks over the next four months will be reduced. The actual amount of the reduction will be based on the number of sick days and personal leave days she had remaining, prior to the delivery, and the number of days she actually misses. Suffice to say, things will be a little ‘tight’ around the old NCN household, but we are prepared!

Why? Because, we have an emergency fund! With six months worth of expenses, set aside in our Orange Savings Account, we should be just fine.

Four years ago, when our son was born, we used credit cards to cover the gap between actual and expected income. But, not now. No, now we will use the funds in our savings account, to make up for the lost income. In fact, so far, we are doing just fine, living off of my income alone. But, should we need it, the money is there.

It’s amazing how much better we feel about our current situation, knowing that we have our emergency fund, and that it’s there if we need it. Plus, instead of worrying about paying back our creditors, we can focus on enjoying the new baby!

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Real Life Example Of Why You Need An Emergency Fund

As I mentioned in my recent post about what to do after getting out of debt, I like the idea of having an emergency fund.  After  a series of super-secret mathematical calculations – I pulled a number from a hat – and decided that $16,000 would be a good amount to have in ours.

Where do I keep our emergency fund?

Online Savings Account – $14,000

Online Interest Bearing Checking Account – $1,500

Cash In My Pocket – $500

(Currently, our online savings account is with ING DIRECT.  Open your account online today. No fees and no minimums!)

I like the idea of having some cash on me, at all times.  I also like to keep some money in a checking account, readily accessible for unexpected expenses.  The bulk of the money, in my online savings account, is for major, unforeseen life-events.  Should I need to withdraw the money, a transfer takes about two days.

(As a side note – I also have just about $2,000 in a brokerage account, invested in an index fund.  The money has been sitting in the account for more than two years and I never really do anything with it.  Eventually, after I fully-fund my ‘emergency fund’ and all retirement accounts, I’ll turn my attention to this brokerage account.  For now, I don’t include this amount in any of my calculations – and I consider it my super-secret, things-have-fallen-apart, emergency stash.)

Observant readers will remember that I’m not afraid to dip into my emergency fund.  In fact, if you are going to live ‘no credit needed’ (without borrowing money), then you’ll need an above-average cash reserve.  And, when it’s time to buy big-ticket items, you’ll have to use the money that you have ‘on hand’.

Last year, the transmission in our van almost died – and the cost to replace it would have been more than the entire value of the van, itself.  So, we traded the van and purchased a newer one, with cash from our ‘emergency fund’.  I also dipped into my emergency fund so that I could fully-fund a Roth IRA for my wife (before the April 15th deadline).

Sticklers, no doubt, will question whether or not these ‘dips’ in the ‘emergency fund’ were, in fact,  emergencies.  I’ve debated these moves myself.  But, instead of debating ’shoulda/coulda’ – I’m simply working hard to rebuild the fund.

By the way, you can click here to see how I’m doing as I rebuild my ‘emergency fund’ (non-retirement savings) – and here to see a chart of my progress, over at my other site, the No Credit Needed Network.

I would be interested to hear whether or not you have / want an ‘emergency fund’.  How much are you planing to save?  Is it invested in mutual funds / stocks or is it just sitting in an online account?

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Building An Emergency Fund – Where Do I Keep It?