What an emergency fund isn’t

Many people make the mistake of thinking that credit cards are an emergency fund. I have a credit card that I take along with me for “just in case” moments while traveling, but I don’t think of it as an emergency fund. Credit cards are a loan. Trying to set them up as emergency funding is just asking for trouble, since you will have to pay interest on the money you use. Credit cards aren’t an emergency fund; they actually increase your chances of big financial problems.

What an emergency fund is

An emergency fund is a well of cash that you can dip into when an emergency comes up. It is money that you can use to tie you over if you lose your job, or that you can use to make unexpected car repairs. It’s also money that you can use to pay deductibles on insurance policies should the need arise. It’s a fund that is there, waiting to be called into action. Many experts agree that $1,000 is a good start for an emergency fund, and that you should keep adding to it regularly until you have around six months (or more) of expenses saved up. For best results, your emergency fund should be:

1. In an interest bearing account so that the money compounds as it sits there.
2. Fairly liquid so that you can access it when you need it (access within two or three days).
3. Not so liquid that you are tempted to use the money to buy big ticket items that you don’t really need.

I keep my emergency fund in a high-yield savings account. It requires a bit of transferring, and it takes two days to get my money. That keeps it out of my immediate reach, allowing me time to determine whether I really have an emergency on my hands, while still ensuring that the money is available to me in a timely fashion.

Do you have an emergency fund? Where do you keep it?

image source: sxc.hu

Post from: EveryJoe

Do You Have an Emergency Fund?

I have a credit card with a $6700.00 balance,with an interest rate of 14%, have a CD which I can cash in to pay this down, CD will yield about $5600.00. Should I use the CD to pay down the credit card?  CD is paying about 3.6%

Personally, I am inclined to take the money in the CD and pay down the credit card. The 14% interest that you pay on the credit card more than cancels out the 3.6% you are getting on the CD. Indeed, you will be paying a great deal more in interest than you could earn on the CD. Savings rates are dropping rapidly in a variety of categories, including high yield savings accounts and CDs. It’s what happens as the Fed rate heads lower. In this climate, it might be best to pay down debt while you can, doing your best to free yourself from obligations. Get the credit card paid off, and then start rebuilding your savings.

My only concern is whether or not the CD has reached full maturity. You may have to pay a penalty for cashing the CD in early if the entire term of the CD has not run its course. Do a cost-benefit analysis. Even with the penalty, you may still be saving more by getting rid of the interest payments on the credit card.

Readers: Do you agree with my assessment? Would you pay off the credit card or keep the CD?

Post from: EveryJoe

Ask the Piggy Bank: Credit Card v. CD

But, while cutting jobs in large numbers seems to be a no-brainer, Citi can’t seem to make the decision to cut executive bonuses. While major banks from Barclays to Goldman Sachs to UBS are lining up to show us they are ready to “sacrifice“,  Citi appears to be having a crisis about getting rid of executive bonuses for this year. (BloggingStocks believes that taxpayer bailout money could go to Wall Street bonuses.)

But the real clincher for me is this: Citi plans to raise interest rates on its credit cards. I don’t normally carry a large balance, but the move still bugs me. Credit card companies have been making some noises about raising interest rates due to the economic times, but most have been reluctant to do so in light of recent Fed rate cuts. Indeed, most have been doing the decent thing and lowering credit card interest rates.

Not Citi.

Consumerism Comentary reports that Citi will be “repricing” rates two or three percent higher. For those who do carry balances, or who are trying to pay down some of their debt, this is not going to be pretty. If your interest rate goes up, it means that more of your payment goes to interest, rather than principal, slowing your debt reduction plan and meaning that you pay more in the long run.

It seems a little backward — and blatantly self-serving — that yields on the savings account are going down while the interest on the credit cards are going up. We’re all having a hard time, Citi. But you’re making it even harder for the rest of us.

What do you think? Is this reason enough for me to ditch Citi and put my money elsewhere?

image source: Citi Web site

Post from: EveryJoe

Is It Time for Me to Pull My Money Out of Citi?

But, since my car is a Saturn, I am suddenly  more interested in the possible GM bailout on a personal level. The level of: Who is going to fix my car if there is no more GM? Sure, dealerships are a rip-off, but they make cars so that you have to go in to the dealership to have those fancy computer diagnostics run now.

Up until now, I have been thinking about it in general terms, wondering about the affect of a GM failure on jobs, industry and the economy. I’ve also been having internal rants about stupid management decisions, dumb business models and executives who would benefit more from a GM bailout than anyone else. And it is in this state of mind that I found this on BloggingStocks:

Despite the claims that 2.5 million jobs will be put at risk, I think the U.S. would be better off not throwing away billions of dollars by giving it to the executives who have overseen a 95% drop in GM’s value since 2000. Perhaps we can convince better run global competitors to purchase GM’s factories and work with its suppliers. For those who do not get jobs with a new owner, we can provide funds to retrain them for other industries — such as making wind turbines.

An interesting idea. Sell off chunks of GM to others with better business models. The only problem is this: Who is going to buy the icky GM stuff? At any rate, I suppose my car will still be able to get service. After all, the guys who own the dealership already have that fancy equipment. They can still run a service shop.

Post from: EveryJoe

Car Repairs and the GM Bailout

All of this is somewhat excerbated by the recent attempts to shore up the economy by rewarding those who haven’t been quite as responsible, reports BusinessWeek:

All of which might be tolerable to the lonely and beleaguered saver if he weren’t taunted daily by lopsidedly pro-spending, pro-creditor news stories. Forget about moral hazard. Forget about rewarding profligacy. Washington is hell bent on putting a floor beneath the housing market. And subtlety got vetoed out of the process.

Some of the stories that have come recently include these gems:

• There has been an increase in Chapter 7 bankruptcy filings.
• Bear Stearns was “saved” with government help.
• Fannie and Freddie have been authorized to increase the mortgage amounts they can accept.
• The FDIC could lower mortgage rates for delinquent borrowers at IndyMac.
• Worries abound that Lehman may be the next bank that is “too big to fail.”
• Some banks are halting foreclosures.
• Congress is considering allowing the DAP loophole to remain open for a while.
• Another round of stimulus checks is being considered.

On top of this, there is no real effort by our leaders to encourage us to save. Quite the opposite. Everything is aimed at keeping consumerism going, and helping debt remain a cornerstone of the economy.

And this not good news for savers, since such policies usually mean interest rate cuts to keep economic growth “sustainable” (which also contributes to increased inflation). And those cuts directly affect the rates of return you receive on your cash savings — money market accounts, high yield savings accounts and CDs. So, if you are a saver, your money probably isn’t working as hard for you as you would like.

On the other hand, if you are trying to pay off debt, now is the time to do it. With interest rates so low, more of your credit card payment can go to the principal. If you have credit card debt, perhaps it is time to shift focus a bit more toward dramatically paying down that debt while the interest rates are more in your favor.

Are you a saver? Do you feel as though you are getting railed?

Post from: EveryJoe

Savers Losing Out in the Current Economy

But there are some things you can start doing now to ensure that next year’s Tax Day isn’t quite so onerous.

• Get organized. Look through your tax return. What sorts of things are you deducting or getting credits for? Throughout the year, keep receipts from charity donations, home office expenses and other information in one place. Just automatically file it there. That way you’ll know exactly where to go for this information next year.
• Pay more throughout the year. If you work for someone, and you still end up owing, talk to human resources. See about re-doing your W-2 form to take out more money for taxes each month. If you have a home business, get the forms necessary to send in quarterly payments. This will make the blow much smaller, as it is spread out.
• If you’re getting a lot back, also go to HR. While it is nice to get a fat tax return, if you can adjust your withholdings, you can be in better shape. Rather than putting that money uselessly by, you should put it in an investment (even if it’s nothing more than a high-yield savings account) to earn interest. But be warned! If you actually owe money, hording it may backfire, since the IRS can demand the interest on it.
• Consider your filing options. Look at what you did this year and see what you could have done differently. Would it have made a difference to go from sole proprietorship to LLC? Will you be able to claim the same number of dependents next year? These are all considerations.

Finally, two things to consider for this year:

1. If you need to file an extension, head to www.irs.gov.
2. If you want your “economic stimulus” tax rebate, you have to file a tax return — even if it’s not something you normally do.

image credit: sxc.hu

Post from: EveryJoe

Tax Day: Getting Ready For Next Year