Made Into Another Carnival
My post on The Before and After of Closing made to the 21st carnival of homeowners.
Emergency Fund
Why do you need an emergency fund?
An article at bankrate.com outlines in great detail as to why an emergency fund is required. A few of the unexpected financial cracks are
1) Car breakdowns / repairs
You never know when your car is going to breakdown. You cannot anticipate this. Though you might have car insurance, you might have to pay a minimum deductible before your insurance covers the rest. This minimum can range from $100 to $2500.
2) Losing a job
Both me and my husband hold high tech jobs. So there is always a chance of losing our job with the market fluctuations. We need to have a reserve that totals to atleast 6 months of our household monthly budget.
3) Last minute travel emergencies or vacations
We don’t put aside money for travel. So when we plan our vacations, it would come out of that month’s income. We would try as much not to touch our emergency fund.
4) Medical emergencies
I haven’t faced one. But I would like to have about $10,000 for medical emergencies.
5) Safe feeling
I personally look at investing in stocks and mutual funds as a long term investment. So when the market fluctuates and goes south, the emergency fund would keep me from making any impulsive decisions to buy or sell any stocks.
How much money in an emergency fund?
Including the above categories, the amount that we are comfortable for the emergency funds is $50000.
Where should you have the emergency fund?
1) 3-month CD : I do not prefer this one because I will not have access to the account for 3 months. For me this is not ideal for an emergency fund. Also online savings account offer almost the same interest rate as those of 3-month CDs.
2) short term bond fund : Same as the 3-month CD
3) High yield savings account : I pick this because of the ease with which I can access the money and also because of the competitive interest rates.
When to use the emergency fund?
This is a habit I want to emulate from my father. He saves money for a future event expected and unexpected. But when the event occurs, he tries as much not to use the emergency fund. He tries to cover it with that current months income. I think this is the best way because it is very hard to set aside money. I would prefer not saving anything for one month than touching what I have already saved.
My goal for year 2008 looks at filling 80% of our emergency fund. The rest would go towards reducing our debt. It is a conscious choice that we made. Any extra income that we receive would be funneled into our emergency fund. So if everything goes better than we estimate, we should have our emergency fund completely funded by end of year 2008.
Goals Keep Me Focused
As I read the posts from each and every personal finance blog, it is extremely tempting to get my feet wet in the stock market. All that it takes for me to keep focused is my goals that I set forth in December 2007 Networth Update. It makes me realize that my goal for the next year is to fund our emergency savings account and pay back our parents. When I look at the goals, I know that it would be stupid for me to take the plunge into taking the risk without having a fall back strategy.
Another good thing that keeps me focused is that this blog makes me feel answerable to all my readers. Thanks to everybody who reads my posts. It really helps me stay on track.
After saying all this, I should probably confess about something that is going to put a small dent in this month’s objective. We are going on vacation this month and it is going to cost us. But I promise to save wherever I can and will still aim to reach this month’s target.
Bloggers Rock…Readers Rock and Setting Goals Rock!!
The Millionaire Next Door
I have been reading ‘The Millionaire Next Door’ by Stanley and Danko for the past couple of days. I am a slow reader. And this book is probably one of my first few non-fiction books and definitely my first personal finance books. This book was recommended by most of the personal finance bloggers I read every day. Some of their reviews are here:
I have probably completed the first couple of chapters in the book. It reminds me so much about how my dad earned and saved money. He went to work in a very early age because he had to take care of his family. Though my grandfather had not left the family in a bad shape, I can say that it was not enough to sustain a family. My dad joined a small company as a worker and he owns the company today. He has never used a credit card and he has never had a car. He plans for every major event in the family. He paid for our tuition till we completed college and paid for our wedding. He is 60+ and still works everyday. He wakes up early at 5am and goes over the accounts. He owns 4 houses, a lot of agricultural land and his company without owing anything to anybody.
The book is also true about how my dad gave us whatever we wanted. He wanted us to have those things that he did not have growing up. This probably made me a spend-thrift for a few years in my life. I do not regret a second of those times. I spent then and so I am ready to save now.
For such an aspiration, I can probably say that I have started this journey rather late compared to him. Every now and then when I think about how I should handle our finances, I try to think how my father would have handled this. This book has increased the respect I had for my dad and for those first generation PAWs.
Effect Of Compounding?
FrugalTrader has a post about 2007 PF Blogger Net Worth Comparison. This intrigued me to write a post about the how starting early makes money grow better. Each point represents one of the bloggers. I used the earliest and the latest networths posted on their blogs or from networthiq.
Though Canadian Dream at Canadian Dream: Free at 45 feels comparing networths could be a danger, I liked doing this. It makes me believe it is possible to improve my networth if I am aware of my finances. The message that I derived by doing this is that the sooner we become aware of our money the better it grows — Effect of compounding?? There are a few exceptions, but I am willing to look at the bigger picture.
If of the above listed bloggers want their comparison to be removed or if anybody wants to be added, please leave a note. If any of the data is incorrect, let me know. I will honor your request.
Being Financially Organized
We are fairly organized when it comes to bills. But I don’t clearly understand what it means to be financially organized.
There are various things we do to stay on track
1) Monthly bill payments – We use a simple excel sheet. It contains a list of bills that we would need to pay on a monthly basis. We look at the sheet twice a month and pay the bills that are due. Most of our bills are online. We update the sheet with the payment date, the amount, confirmation numbers for online payments or check numbers. We calculate the total bill amount paid and make sure our bank balance has money for this plus an allotted monthly spending amount. We have been doing it for almost 3 years now and it has helped us to avoid late payments.
2) Analyze monthly spending – Until recently, we used a tool provided by my online bank account to categorize my spending and compare with an allotted budget. Last week, I went and bought Quicken and we have just started using it. Will update you later on my experience with Quicken.
3) Taxes – For most part, I let my husband do the taxes. But this year, I am going to be involved. This year is crucial because we need to itemize our deductions. We are expecting that we would owe some money to IRS. We need to be more careful about this for the year 2008.
4) Documents – We are very careful about our documents. They are pretty well organized. But we do not file our account statements or receipts. I don’t know the pros and cons of doing it. Any information with regards to this would be helpful. How long to store statements and receipts? Why do we need to store these? Is it okay if we scan and store soft copies? etc.
What are the ways in which you keep your finances organized?
December 2007 Networth Update
This is my first networth update. Things did go really well because of a bonus check. I have set goals for the next month and for the next year.
We are projecting a small fall in the cash department since we are paying some money back to our parents. The good thing is that the 401k is set up. We are expecting to have some money before the next update into the 401k account. There was a jump in the credit card. But there is no interest on the credit card for another 9 months. I don’t intend to use the card anymore. So it’s only pay back time on the card from now on. The other loan payments would go just as scheduled. No extra payments towards the loans.Will keep you updated next month on our progress
The Food Budget
Our monthly food expenses for the month of October and November total to about $800 on an average. About $500 of this goes to eating out and the rest towards grocery.
Though we knew for a long time now that we were eating out a lot, we didn’t realize how much until recently. We analyzed our monthly spending from the past two months around the first of December. When we looked at it in terms of numbers, it really hit us. So this was the first thing that we wanted to be tackled in our budget.
Out of this $500, 35% was being spent for lunch on weekdays. The past couple of weeks, we have been bringing lunch to work. The intention of bring lunch to work makes us to cook in the evenings, resulting in less eat outs for dinner during the weekdays.
To check our progress so far into this month, I summed up the spending for 10 days in the past couple of months. The first 10 days of each month, we had spent about $170 eating out. For this month, it is so far $30. Though we cook more at home, the grocery bill has gone up only by $15 compared to last month. I think this is a great progress and we need this to go on.
To keep us motivated to do this, we are planning to use the cut down savings from food towards buying the new LCD HDTV. At this rate, we need to continue doing this for another 4 months. We will keep you updated about our progress.
How much do you spend on food every month? How has budgeting helped you reduce your food related spending?
My First Carnival !!
Plonkee Money listed my post on “Roth IRA Vs Debt Reduction” for the 117th Carnival of Debt Reduction. This really helps me to be motivated to write and to think of ways to improve our finances.
Roth IRA Vs Debt Reduction
Our situation today demands us to choose between Roth IRA and paying our parents back.
There are a couple of posts on this. Far less than I expected.
1) Get Rich Slowly discusses his options in “Real-Life Choices: Retirement Savings vs. Debt Reduction”. Decides to put it in Roth IRA.
2) A 21-year old contemplating between retirement and debt reduction – “401k + IRA Vs. Debt”. A lot of different people with a lot of different advice.
3) OmniNerd has a post Home Down Payment vs Roth IRA.
We just started our 401k investment. And we are not funding it to the max this year since we are slightly low on cash flow at this point. But we are committed to funding it fully next year. We will not be eligible for Roth IRA next year. On the other hand, our parents are nearing retirement. They would have taken some money from their retirement savings to loan us part of the down payment. When it’s a decision between funding our retirement and funding our parent’s retirement, I am sure you all agree with me that we should pay back our parents. So that’s what we are going to do.
