Emergencies and emergency funds

 

Hurricane

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.

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Smart savings for education

 

Loans

Loans (Photo credit: zingbot)

Open any newspaper or visit any financial website and you only need about 10 seconds to find a story about students with massive education debt. Do you wonder how this happens? I think I can answer that, and also offer a smart technique I just learned from a client. First, let’s look at some of the ways you (or your child) can rack up a huge bill, with an eye to AVOIDING these “techniques”.

  1. Choose a dumb major. I’m all for a liberal arts education. I do not think undergraduate work should be trade school. So if you want to major in English, or history, or Near Eastern archaeology, go for it. There are a few things that I would strongly discourage—film studies, speech, hospitality industry—but mainly because these aren’t even recognized by most employers as solid academics. Nothing wrong with a few courses, but pick something that seems to indicate you might actually be able to write and analyze something. The problem with a dumb major is that there’s almost no possibility of getting a job in the field. If you’re going to choose a dumb major (film studies, again), it better be at the absolutely best school in the field, or you have NO HOPE. It’s also not a career plan to be a professional athlete, novelist, or opera star unless you have 1) significant professional recognition in college 2)independent inheritance, indulgent parents, or a wealthy and willing spouse, 3)a way to make a living while you’re trying. Music majors especially can cost a fortune in coaching, instruments, and all the little extras.
  2. Change majors several times and spend more than four years in school. This is a good way to add another $40-50K to your bill. If you don’t know what you want to major in, maybe you need to take a year or two off and WORK until you figure it out. Unfortunately you will then need to begin repaying any loans you’ve taken out. Best to buckle down and finish something. In college and in life, sometimes things aren’t perfect but you still need to stick with them.
  3. Borrow everything. I wish someone would tell me how they tote up $160,000 in loans for undergraduate work. If you really had no money and filled out the aid forms, you should have had some portion in grant money. If you were determined but not sought after (i.e. nobody offered you money but you went anyway) you need to keep your eye on the finances. If you’re also borrowing all your living expenses, you need a JOB. Really.
  4. You borrowed money without ever considering what you might earn. Don’t borrow more than your potential profession earns the first year. Major in English and figure out what a teacher, editor, meeting planner, etc. makes the first year out—and know what jobs people from your school got with that major. Talk to your professors—they’ll be stunned that anyone showed up for office hours. Get know to the careers office—you’re paying for that service whether you use it or not.
  5. You paid the full freight for graduate school. This is where I think people really hit the big time on loans. If you’re getting a grad degree in the liberal arts or humanities, you’d also better be getting significant aid. If you’re not, THEY DON’T WANT YOU and neither will an employer when you get out. To make a living in academia, you need to be shining pretty brightly by graduate school.

It’s a different story for the professional schools: biz, law, medicine, etc. Virtually the only “aid” available is loans. This is because (at one time) anyone who landed a degree walked out with a huge new salary and often (in biz & law) with a signing bonus big enough to take a huge bite out of the debt. No more. And the real poor idiots are ones that drop out before completing the degree—they have nothing BUT the debt.

And now the really smart thing I learned from my client:

Start saving into a Roth as early as you can—yes, this means high school or college if at all possible, but certainly as soon as you graduate from college. Also, put the max into your employer’s retirement plan and get that match. Maybe you’re not going to save it for the next 40 years (although I hope you will). But guess what—under normal circumstances you can take this money out for education. Voila! A very good chunk of change to get your MBA, or social work degree, or whatever. Look at the stats—plenty (most, in MBA programs) of people are in their late twenties or early thirties in professional programs. Maybe it helps to know the landscape of the profession by working in it before you incur two or three years of lost income and $150K in loans. You’ll be far less likely to drop out before finishing, be an unfocused slacker, and you’ll have done your “market research” on whether the degree is worth the cost. With any luck, you’ll have found an employer that will either pay for part of the degree or give you some time off to get it.

As in all other life situations, some savings give you far more options.

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Optimize everything?

 

Hamster on Wheel

Hamster on Wheel (Photo credit: Wikipedia)

One of the benefits to the flood of information available on the web, and the self-publishing industry that the web makes possible, is that in two seconds or less, you can learn the ultimate best way to pick stocks (so they say), paint your porch, or manage your office work flow. Not a day goes by that I don’t get calls or a dozen emails from people pitching me to optimize my insurance recommendations, my archival backup, or my time management. Have a senior in high school? If they don’t know how to write a college admissions essay, hundreds of books and consultants will drum it into their slacker little heads.

But should we? Maybe even Harvard can’t transform Junior from a slack-ass into a star. Of course, if Junior’s last name is Bush, it won’t much matter in the slacker department. If not, he better be knocking himself silly from seventh grade on. In the rush for college admissions that consumes the better part of all day, every day from September to January for parents and high school seniors, I’m bemused (horrified, actually) at the number of kids I know with eating disorders, super-sensitivities, self-harming behavior, can’t be touched, not interested in the opposite sex—all the same issues as stressed lab rats in too small cages. In “my day” we just smoked dope, hated our parents, and went to protest rallies. And didn’t think the world would end if we didn’t go to Ivie U.

So let me ask you, have you had anything like these conversations lately?

            “So, how have you been?” “Really busy, as always.”

            “I’m sorry I haven’t gotten back to you, I’ve just been so BUSY.”

            “Is now a good time to talk?” “There’s not really ever a good time.”

Yeah, me too. Regrettably. And I keep picturing a future when things are sure  to “slow down”.

Then there’s the endless financial and job advice.

  • Are you saving enough for retirement? (the answer is always no).
  • Is this a good time to buy ______? (No, but whenever you didn’t, THAT was the good time)
  • Is this the optimal mix of investments? (let’s argue about whether you should have 8% or 11.5% in internationals).
  • Should I buy Apple? (Even if you did, you won’t be happy. Because then you should have bought it in 1985, when it was $15 and your ex-husband wouldn’t let you. Or you did buy 25 shares at $200, but why didn’t you buy 100? Both of those would be me.)

So, my financial advice for today is, go live your life! Go slurp down a frappucino without thinking about the calories or the cost. Your kid will survive a few rejection letters. Don’t have a virtual life.

Maybe, just maybe, financial planning advice could set some of these things to rest. As to the optimal mix of investments, we do know what “works” and it’s pretty simple—keep costs down, don’t churn your account, have a decent mix of types of investments, save and live below your means. A financial advisor can certainly help with a plan, set it in motion, and help you manage it. Professional advice can do much of the fine-tuning (and worrying) for you. But really, lighten up. You can only control your decisions, not every possible outcome. Make a sensible plan and let go.

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