Emergencies and emergency funds

Posted on October 31, 2012October 31, 2012 by Danielle

Hurricane (Photo credit: Chalky Lives)

Are you flying without a net? So many of us believe nothing will ever happen to us, that we’re too young, too lucky, or too far in debt already to put a chunk of cash into an “investment” that makes nothing. At least nowadays it’s hard to make any money at all on easy-access money. For most people, it’s a hard job to save three or six months living expenses and make nothing on it. I want you to re-frame that thinking.

The recent events thanks to Hurricane Sandy provide lots of good examples as to why you might need access to cash in a hurry. I know you have your credit cards, but although they are okay for last ditch emergencies, those emergencies are the kinds of things that begin to dig people into a deep ditch that it’s hard to climb out of. Let’s look at some ways this can happen.

The most horrible way, of course, is that a tree falls on you and kills you. Even if you have great life insurance, it’s going to be a while before that pays off. Will your spouse be able to return to work immediately after such a tragic experience? Think your children might need some help coping? It can take some time to sort out the emotions AND the finances, particularly if the loss is completely unexpected. Cash on hand doesn’t solve the problem, but it sure is great to have one less thing to worry about.

What if something happens that doesn’t actually kill you, but leaves you disabled? Great, you’ve got disability insurance for that, right? (At least you do if you listened to me.) But what about the cost of care? The reduced ability of your spouse to work long hours? The loss of your own hard work around the house? The emergency fund can cover it.

Roof blows off or basement floods? Your homeowner’s insurance will cover that. Except for the deductible, that is. And if you’re meeting the deductible on you house, your wrecked car, and your health insurance all at once, well, the emergency fund is there.

If you don’t have it, what happens? All these things go on your credit card (provided you can even find a repairperson that will take credit cards!) How about if your employer folds or is forced to lay off, or just can’t pay for the days closed? You could have a big bill and much less ability to pay, a double whammy that really digs people into debt.

Most of the people I see in financial trouble haven’t wildly spent themselves into debt by staying at the Ritz or driving a Rolls. Rather, they’ve had some unforeseen disaster for which they had no backstop. Don’t go there. Think of your emergency fund as an insurance fund, and the low return as the (fairly cheap) cost of that insurance and you’ll be much more at peace with the low return.

On a college planning note, those of us touring colleges might consider asking about the college’s disaster emergency plan. It’s something you never think about until your freaked-out child calls you from a disaster area. My daughter’s school, Bryn Mawr, did a fantastic job of coping, keeping everyone safe and getting the power back on (thereby avoiding Revolution and preserving the mental health of teenagers who can’t live without wifi,) and getting enough Public Safety officers in the field to personally yell at all the ninnies who kept calling to ask about what was happening (duh). Send your child off to college with a good flashlight and batteries (they never buy them), a blanket thick enough to live in, a small first aid kit, and some cash which is NOT TO BE SPENT except in, well, an emergency. Just like yours.

College planning–how much should your child contribute?

Posted on August 2, 2012August 2, 2012 by Danielle

(Photo credit: Mikamatto)

It’s that time of year—that time of year when parents of college bound seniors get to sign up for the monthly payment plan. That time when you look at your kid and ask yourself whether it really is worth it to pay someone $56,000 to take them off your hands. Just kidding. But another question does arise—how much, if anything, should Jason or Jennifer be expected to pay?

Easy answer, huh? As much as possible! But what is really possible, in this economy? Herewith I share with you a view from the trenches, highly personal but with applicability to many families in similar straits, um, situations.

My assumption, up until this summer, was that my own little darling would have a summer job, save $1,500-$1,750 (what colleges figure when they do your financial aid budget), and contribute to tuition and books with that. It was not to be. She started looking in late April, and blanketed 3 high rise office buildings, every store in our town and the nearby mall, and registered with three temporary agencies. The kid types 85 wpm, knows Excel, is very web savvy, a great organizer, loves elderly people, and has worked in a nursing home and in retail. What did she find? Nada. A couple of one-day gigs with a temp agency, but otherwise absolutely no bites until this week, when one temp service placed her as a clerical assistant at a property management firm, which looks like it will last until school starts, so maybe she’ll nail down $1,000.

I thought maybe she had a unique experience. Now I hear that none of her friends has been able to land a job either, this summer. Recently I’ve also heard from two UChicago and one Northwestern grad that they were NEVER able to find a summer job during their undergrad years (since 2008). A temp agency used to be a slam-dunk, and is in fact the way I put myself through college and grad school—and it paid more than on-campus work. Now it appears that employers use temp as a way to try out for permanent, and they’re not interested in anyone who actually wants to be temporary.

So that got me thinking, is it still possible to put yourself through college, or even contribute significantly by working–no loans? Sadly, I don’t think so for most kids, and here’s why.

College costs are so far beyond what the average unskilled worker can make, that even covering a significant portion is pretty nigh impossible. Let’s take a look at my own experience. Back when Moses was a pup, I worked about 20 hours a week. I really don’t remember what I made (memory says $10 an hour and if that’s true, kids today aren’t much further ahead than 30 years ago, because my dear one is getting $12). So let’s say I’m getting senile and I actually made $5/hour=$100/week. In 36 weeks of school I’d make $3,600, which, conveniently, was exactly what my tuition was in graduate school. Then, 16 weeks of summer at 35 hours = $2,800, which is about what I lived on—my rent at the time was $150/month. I also worked full time over Christmas and spring breaks, so excess would cover books. Most years I got grants or scholarships, and a few loans—I graduated with $10,000 in debt, which was less than I could expect to earn my first year out. It was a lot of work, and I didn’t spend spring break in Cozumel, but certainly it was doable.

It’s easy to see that this kind of economics no longer works. At $12/hour, dear daughter can’t begin to cover the tuition bill at a private school if she works the same 20 hours/week for 36 weeks ($8,640 is about half State U’s tuition). In fact, to pay the total freight at the Univ. of Illinois, she’d need to come up with $30K. I’m so sick of “college counselors” advocating State U as an affordable alternative and quoting some ridiculous tuition. You need to add on room, board, books and activities fees! Actual cost of attendance is the only meaningful figure. And she couldn’t even rent a room for $150 nowadays.

The only ways I see that kids can work their way through college nowadays are to stretch it out by part-time attendance, choose a junior college for the first two years, live at home, and work their butts off. Yeah, it can be done, but there are so many downsides—no enriching and network-building extra-curriculars, no time to explore ideas, generally a lesser school and lesser academic experience, etc.

Still, I think it’s very, very good for kids to have skin in the game. Having difficulty getting a job teaches 1) start early and 2) value what you get—both good lessons. Once you get a job you learn 1) how hard it is to make a buck (puts a whole new economic spin on that iPod) 2) what you’re worth depends on what skills you have but also what the marketplace has need for—excellent lessons for choosing a major. No kid who’s worked all summer at a real job is going to major in communications or hospitality. And finally, it teaches desperation—nothing made me stay in school like the specter of being a file clerk my whole life.

She’s a great kid and she’ll contribute all she makes toward her college expenses. After working so hard to get a job, then working hard at it, I think she’ll take a much more consumerist view toward her college classes. For example, I suggest she evaluate her classes by figuring out what each costs per term, and considering how long she would have to work to earn that money. Kinda prevents taking classes like bowling. Next, I told her to figure out her cost per each class—when you’re tempted to cut and stay in bed, think about how long you worked essentially to throw that money out the window. And finally, I hope she does what I did in evaluating professors—not choosing ones who will give an easy grade, but ones who worked hard, taught fiercely, and gave me my money’s worth. If I’d had to put money in a meter outside the prof’s classroom each day, would I? She actually did run these number, and it gave her indigestion for the rest of the evening.

I’m not giving her any spending money, not paying for books (which I hope will encourage her to shop around), and right now I’m expecting her to make at least one of our monthly payments out of earnings and savings (she has a little internet biz as well). She’ll end up covering about 1/3 of our costs via earnings and loans. She’s looking for a near-campus job right now. YMMV, but I think that’s reasonable skin in the game.

If a kid didn’t have at least this much hustle, I’d really re-think whether I would consider an investment in tuition a good one. It’s not just off-loading, after all, it’s sinking a lot of capital into someone. Would you give $200,000 to a start-up venture if the entrepreneur didn’t appear to be pretty hard working?

And oh, by the way–anybody need an assistant near Philadelphia?

Pricing luxury–what should you spend on a hobby?

Posted on July 25, 2012August 2, 2012 by Danielle

Singer sewing machine - 31K32 (detail 1)

Singer sewing machine (Photo credit: Wikipedia)

How much should you pay for something that is purely a “want”, not a need? There are formulas for what house you can afford, how much of your budget should go to utilities, etc. but what if it’s something you just plain want?

Recently my sewing machine went kaput. Seventeen years ago it was top of the line, and since I’ve been sewing since I was 10, I figured I’d replace it with whatever was currently tops—I’ve earned it, no? When I was in my chocolate-chip-cookies-Mommy phase, I made all of dear daughter’s clothing for about her first five years of life. It was “free” because I’d inherited a closetful of fabric from my aunt in the nick of time. The machine at the time cost me $3,600, so clothing my daughter cost me about $720/year if I amortize it over those years. And of course I got 12 more years of use out of it, and the joy of having something really, really fine. Totally worth it.

Fast forward to about a month ago. I remember when machines lasted forever, but apparently not so with the new super duper computerized models. Like every other computer I’m forced to wrestle, eventually they have a nervous breakdown and fail spectacularly and totally, throwing all plans and projects into complete disarray. Sound familiar? I’ll just go get another one—computers have gotten far cheaper in the past 17 years.

Whoa, baby. Replacing my machine with an equivalent model is now about $7,500. A top of the line model (a Bernina red job) clocks in at $13,000. For that, I think it ought to drive you to the store to buy more fabric. It’s particularly a shock compared to the cheaper (in real terms) prices of other big ticket items like cars and the aforementioned computers. I wish Wall Street had done as well in the same time period.

So how do you assign a price to what you “should” pay? Well, for $7,500 I could be in head to toe Armani and bag the sewing entirely. For $13,000 I could buy my kid a crappy used car but since she won’t learn to drive I can probably put that one off. Unless you’re Bill Gates, there are always tradeoffs (and he probably doesn’t have time for hobbies anyway. Actually, neither do I.)

Let’s not kid ourselves that our hobbies save money. I know I spend more cooking organic food with fresh herbs than I would eating out every day at Subway. I get an excellent quality garment when I sew, but I’d probably never buy that level of retail—my clothes tend to be Eileen Fisher, not Armani, and you still have to pay for fabric. Whether it’s a boat, or new golf clubs, or a sewing machine, how can you pick a price?

What will it cost per year over its expected life? Let’s take 10 years for a sewing machine. Even though it comes with a 25 year warranty, I don’t expect anything electronic to last that long—computer technology just moves too fast. Working with my $7,500 example, the thing will cost me $750 a year, or $62.50 a month. Will I save that much? Borderline—if I made 2 suits, a shirt, and a pair of silk pants, maybe.
Does it have maintenance or corollary costs? For a boat, gas, maintenance, a place to dock or store it, maybe a trailer to haul it, bigger car—there’s a reason why people say a boat is a black hole in the water where you pour money. For a sewing machine, it’s a question of restraining yourself from buying more and more fabric, books with cool ideas, new gadgets, a yearly tune up ($100), etc. That’s what a hobby is, but you need to consider that one purchase will likely make you spend on more purchases. For me, the books, gadgets and tune up probably add $300 a year. I’m not telling on the fabric.
What’s the entertainment value worth? The 750 bucks is about the same cost as season tickets to the opera and a movie a month. I’d rather have the sewing machine than the movies, and now that dear daughter is off to college, I’ll probably cut down on the number of operas. Or think of it as a weekend away—definitely worth it for me by this measure.
Have you wanted it for a long while, and scoped out what’s available? Impulse or crisis purchases tend to be less satisfactory. Even if money is no problem, I recommend connoisseurship—if you really know what you’re buying, and know it’s perfect for you, you’ll get far more value and satisfaction from your purchase.
Drill down. Once I started sitting in the driver’s seat, I discovered that there are some cachet issues—some brands have a tremendous snob value (what a surprise). Even if you know what you want your purchase to do, there are so many improvements that you may discover you can do stuff you never even knew you wanted to do. But the less advertised brands may be trying harder, and offer a lot more.
Check out warranties and trade in value. Maybe you don’t have to go quite so large immediately if you can get good trade-in in the future. Get used to the new offerings and changes and see if you really value or use them.
Is there a resale or pass-it-on value? If you upgrade before the wheels fall off, there might be enough resale value to make a big purchase be a smaller net purchase. Or your child may be salivating to steal the darn thing right off your desk.

So what have I ended up with? After test-driving a bewildering array of brands, reading a lot of reviews on the internet that I really didn’t have time for, and making a chart of features and cost per year (what did you expect? I’m a financial planner), I finally popped for a $1,600 Brother “pre-loved” with full warranty and trade-in value. My kid figures she’ll sweet-talk me out of it in about 2 years.