Uncommon Cents

We’ve talked about having an emergency fund before; to some extent we’ve talked about budgeting for expenses. There are also standard expenses, things we pay for every day. For me, in addition to having separate funds, I also have separate accounts for all of these.

My emergency fund, which I’m going to need to tap soon, is at iGoBanking.com. This is a true online bank; no checks, but online transfer options galore. The interest there was the highest I could find when I started, and now pays 3.28%; as usual (just like all my other bank accounts), it’s FDIC insured–not that I have anywhere close to $100,000, let alone $250,000, in there.

My budgeted expense account, where I send in a certain amount of money twice a month for regular expenses like mortgage, insurance, vehicle registration, and memberships, gets a lot of action; it’s in a Capital One Direct account. This has an ATM card (which I’ve never used) and checks (which I do use, although there is a limit on how many checks I can write a month) as well as online transfers. I can also send in deposits in prepaid envelopes, which I like. It pays 2.98% interest, which is less than the iGoBanking.com account, but the check writing makes it more flexible (as you may be able to tell, while I can get my money in a couple days with the iGoBanking.com account–the emergency one–a couple of days can be a real issue).

Finally, my standard, everyday account is at a local bank. I’ve had it since college at a bank my mom is a retiree of. It pays no interest, but I keep it there due to its accessibility and the fact it’s linked with my mother’s accounts in the event she needs money urgently. The local ATMs and branches are an advantage, and they recently opened one branch in a supermarket that’s seven days a week. It has limited online banking as well.

Having multiple funds is a given; having multiple accounts helps me to keep my banking situation straight on paper as well as in my head. This might be a concept worth trying if you, like me, need help keeping your money separated physically as well as mentally.

If you’ve followed my still unfolding truck odyssey you’ll note that I made reference to my emergency fund and I’m needing to dip into it. This is warranted in my opinion; this is an emergency, although not in line with a medical emergency or unemployment. While my need for a vehicle is not in line with my need for shelter, air, or food, it’s definitely higher up than, say, a new computer or bicycle or digital camera.

The problem that comes up with dipping into the emergency fund is discerning what expenses are truly related to the emergency and what are not. For instance, I got a ride home from a friend on the night of the incident and a ride into work today from a different friend. In each case, I gave the driver a few dollars (and a thank you card) for gas. Are those dollars part of the emergency?

Similarly, because I was running so behind on Monday, I couldn’t do my usual grocery shopping and dinner prep. Is the soda I bought the next morning (in lieu of the one I usually bring out of my grocery stash) and the fast food meal I bought the next night part of the emergency as well?

In the first case, I think the answer is yes; in the second, the answer is no.

One of the issues I have with urgent or emergent situations is that they tend to get me out of my routine, and when I get out of routine, efficiency and frugality go out the issue. It becomes difficult to get blog posts done on time. It’s easy to decide to eat out rather than make food at home. And of course, the longer I stay in this funk, the worse the situation becomes.

For me, at least, emergency spending can easily become overspending. When I’m in this mode, I must refocus, retreat, review, and reverse–anything to get myself back in gear and back in routine. Awareness is a lot of the battle, and now that I’m aware what mode I’m in, I need to make effort to get out of it.

On Monday, I returned to my truck after a long day of social work to find it had been broken into and someone had attempted to steal it. My things were not missing, but the steering column, ignition, and dash were damaged and the truck was not drivable.

Fortunately, a friend wouldn’t let me wait alone for the tow truck and ended up driving me home. After a misadventure in towing, GEICO estimates the damage–so far–at over $1300. In addition, the truck is likely down until at least the day after Thanksgiving (anyone want to lay bets that the truck won’t be ready that day?). I’ve been using my sister’s car since she’s been out of town, but she returns tomorrow, so I lined up a rental car for about as cheap as possible–$225 from Hotwire.com for 11 days, with 5% ShopDiscover cash back.

So far my out of pocket cost will be at least $725, and they still haven’t figured out exactly why the truck won’t start anymore, and over a week without my truck.

My mental and emotional cost is considerably higher. As was pointed out in a comment to a post on Get Rich Slowly where JD chronicled his vehicle being burglarized a second time, there’s a feeling of violation that comes along with a break in.

However, as said in a line from a movie I watched this past month, when you lose something, you also receive something. A friend who I often complain about for various reasons wouldn’t let me wait in the rain alone for the police and the tow and drove me home, miles out of her way and I have an emergency fund for exactly these kinds of situations. I don’t really feel anger toward the individuals who broke into my truck; instead, I feel sorry for them being so desperate.

There’s all kinds of other things going on in my life, many professional which I can’t talk about very openly, that make me realize that as bad as things were, things could be much worse. And as American Thanksgiving approaches, as one of my former ministers at the temple said, every day in life is an opportunity for giving thanks.

We now return you to your regular episode of Uncommon Cents.

Yes, the economy is a fiasco. Yes, the stock market has been in bear market mode. And yes, the job market is tight. People are uptight and I hear tons about financial distress everywhere. I’d be lying to you if I said that my portfolio was looking great.

Yet things are not horrible, at least not for me. I still have no credit card debt; I still have a nicely established emergency fund; my paychecks are coming in on time; my blog is earning a little money; my spending is managed pretty well. In fact, I’m going to earn more money in 2008 than I ever have.

The point is that even in a downturn, not everyone does horribly. If you have planned and executed well, you’re more likely to do well. Yes, it’s possible that your employer will unexpectedly collapse (anyone remember when Lehman Brothers was a secure place to work?), but it’s also possible you’ll have many other opportunities lined up or multiple streams of income–a subject that we really need to talk about here but haven’t–going on.

Yes, luck has something to do with it, no question, but to some extent you make your own luck. While there’s no question some of the economic slowdown has affected my finances–I can see that whenever I log into my Vanguard, Firstrade, or Sharebuilder accounts–due to my having taken care of my debts, achieved pretty secure employment, and having multiple streams of income (including this blog), in some ways, 2008 will be my best financial year ever.

Planning isn’t just for emergencies; it’s also for your investing. One of the most important things to remember in investing is not to just have a plan, but to follow it.

Times like these, when the stock markets are in bear market mode, are the times to remember to follow your plan. I’m seeing more and more of my personal finance blogger colleagues worrying that they’re throwing good money after bad and considering switching their asset allocations dramatically. If your plan was sound when you made it, follow it! Also consider this: one year ago, when the markets were right around their all time high, was it a better or worse time to buy stocks than right now?

Food for thought.

Some people discover their risk tolerance is rather low, or lower than they thought, in stock market times such as these. If that is indeed the case, what options do these people have?

The principle of risk/return does not disappear just because someone can’t deal with somewhat higher risk; rather, it becomes very clearly in effect. If someone wants to take absolutely no chances with their money (or just shy of no chance), they can certainly do that, but the returns their money will gain will be quite low–but they will exist. This is unless it’s someone who would rather bury money in coffee cans in their back yard or stuff it in their mattress, of course–but that’s not investing.

Realistically, everyone needs a safe place to put at least some of the dollars they have. An emergency fund needs to be kept away from stock market risk, because emergencies don’t come on a schedule (some would say the market currently is in a state of emergency!). So “chicken money” is something everyone has at least some of–money we’re too chicken to put at any risk at all.

Savings or Share Accounts: These are your typical accounts at a bank or credit union. Right now the rates of interest on them are anemic–in the case of my mother’s bank account, one fourth of one percent of interest! That’s definitely not keeping up with inflation. However, since the account is FDIC insured and she’s well within the limits of the insurance, it’s as safe as the federal government’s word. If you’re going to use one of these, make sure you have insurance by the FDIC or the NCUA (in the case of a credit union). You won’t make much, but your money will be safe, and it’s really high in liquidity, meaning you can get at your money pretty much anytime (provided the bank’s business hours work for you).

High Yield or Money Market Accounts: These tend to be a lot like savings or share accounts but with a somewhat higher rate of interest and possibly more limits on accessing your money. For instance, I have a Capital One Direct high yield savings account that pays me 3.55% interest and allows check writing and ATM access–but limits how many checks I can write per month. Fortunately, it also allows electronic access, which is a bit more liberal. This is a nice place to stash an emergency fund, since it’s almost as liquid as a savings or share account.

Certificates of Deposit: CDs tend to have rates about the same if not a little higher than high yield or money market accounts. In return for offering a little more interest, you lose liquidity. Still, CDs you may be appropriate for an emergency fund with a little planning (having a CD mature every month with 5/6 of an emergency fund means at most you’d be one month away from access, and having that remaining 1/6 in something like a high yield account could do it) but for simplicity’s sake, you may not want to use these for that purpose. Make sure you are wary of the FDIC limits (which apparently will be increasing, at least for awhile) on how much they’ll insure if you really are concerned about safety!

Treasury Bonds or Notes: In many ways considered the safest of investments, there are lots of different bonds and notes you can get; some may offer tax advantages. I have a bit of my portfolio in I series bonds, for instance. There are also government issued bonds or notes from local or state governments that may be worth looking into as well. Again, the rates are not fantastic, but combined with possible tax advantages as well as safety, this could be a viable option.

Money Market Funds: Not quite the same as the money market accounts, these are mutual funds that invest in short term instruments. They are not backed by FDIC or NCUA insurance as they are mutual funds, although they recently had some temporary insurance offered to them with unusual circumstances that led to a “run” on them as a consequence of the Lehman Brothers bankruptcy. Money Market funds nearly always have a stable net asset value of $1 per share and pay a return based on how their investments do. Of course, since it’s a mutual fund, your initial investment will likely need to be more than you can put into a savings account, money market account, or CD, and you may have commissions to deal with.

Bond Funds: In bond funds, you have a ton of choice just as you do with stock funds. If you’re looking for safety, consider the quality of the bonds in the fund; “junk bonds” may offer higher yields, but more risk. Funds that are based on Government National Mortgage Association bonds–Ginnie Mae funds–tend to be both very safe and pay very nice returns. A fund like the Vanguard Total Bond Market Index has offered similar performance and safety to the Ginnie Mae funds over time. Again, these are funds, but unlike the money market funds which almost never move off the $1 per share net asset value mark, these do fluctuate a bit, but historically, nothing like stock funds.

There are some alternatives–from about as safe as you can get to pretty safe with some amount of risk–to consider for your chicken money, whether that’s just your emergency fund or your whole portfolio. Good luck in selecting one that might meet your needs!

…I’d tell them to stop acquiring new debt. Right now.

I’d tell them that there were things they wanted to buy that they couldn’t afford–like $700 billion of bailout money and Medicare Part D (well, too late on that last one).

I’d tell them they need to figure out where their money’s coming from and where their money’s going and to figure out how to spend less–by making difficult decisions and sacrifices–and how to increase income–even if it means increasing taxes.

I’d tell them to get started on an emergency fund for rainy days–like the rain that’s coming down right now!

I’d tell them to figure out where their worst debts are and to put the majority of their money there; to consider snowballing their debts or to pay off the highest interest rates first, but to have a strategy of some type to effectively pay their debts, including refinancing them if necessary.

And I’d tell them this was not going to be easy; it was going to be difficult, it was going to take a long time, and everyone in their family would need to sacrifice, but in the end, it would be well worth it.

Funny how if the businesses and individuals who got this financial fiasco going in the first place had done their personal finance homework in the first place… there wouldn’t be a financial fiasco going on.

Well, sadly, no, not funny.

One of the things that we all need is a safe place that earns some interest in which we can park some money; this is typically “chicken money”, money we need in case of emergencies and cannot put at any stock market risk. For these, a high yield savings or money market account are likely the best choices. Sometimes these accounts allow check writing and have automatic teller machine (ATM) cards for easy access; they also often require minimums but pay comparatively high yields.

Where to find these accounts? Here are some ideas:

Your local bank: the obvious place to look would be your local bank, assuming you have one. Unfortunately, this may also be the worst place to look. While not its money market account, my local bank pays–get this–0.25% on its regular savings account. Yes, that’s right, one fourth of one percent. I can’t imagine its money market rates will be thrilling. The one big advantage a local bank has is that they are, well, local–meaning you can walk in and get your money when you need it.

Your local credit union: Credit unions for decades have been alternatives to traditional banks that tend to pay higher interest rates. They also are local to you, and many have liberalized their rules as far as membership goes–for instance, the Hawaiian Tel FCU here lets anyone on island join. The question is whether or not they’re higher enough versus some of the other alternatives.

Your memberships: Perhaps you’re a Costco member or belong to an auto club or professional organization; it’s worth checking to see if you can get any kind of special rates. Costco, for instance, has an arrangement with Capital One Direct. Even your employer may qualify you for something.

Online: Bankrate.com provides easy comparison of interest rates. You may also want to consider an online bank; Virtual Bank, ING Direct, iGoBanking, Capital One Direct, and many others are offering higher rates of interest than you would typically find in a local bank or credit union, often with no or low minimum initial deposits.

Consider all of these options when looking for a home for your chicken money. We all need a safe place to put some of our money; we may as well try to get the best interest rate we can in the process. For what it’s worth, if you’re interested in opening an account at either ING Direct or Virtual Bank, I still have some referrals which will get the two of us a bonus when you open a new account! Contact me if you’re interested.

While this is being listed under “Basics”, it may surprise some that the argument between which to do first: save for goals (retirement, a home purchase, college education, or other long term goals) or pay off debt.

The answer I have for this argument is a bit complicated, and includes a little of both, but the short version is: both are important.

When you’re at the point of dealing with this saving vs. debt reduction argument, it’s pretty much a necessity you’ve examined your baseline budget and gotten a handle on your cash flow. If you’ve not done these, do so first! Once you’ve got your cash flow positive from month to month, let’s go ahead and work on what to do with those positive dollars.

First off, start with an emergency fund. Consider a money market or high yield savings account (possibly with ATM card and check writing, like at Capital One Direct) for this money. How large of an emergency fund? We’ve discussed this before, but if you’re considering this choice, I’d suggest having at least $1,000 in there (if, however, you’re at the point that you’ve paid off all of your unsecured debt–basically everything but a mortgage–you’ll want to bump up that emergency fund to something between three and six months of your earnings). So the first part of this answer is, “save–for a $1,000 emergency fund”.

Second, consider your time horizon: if you are less than five years away from retirement, you will want to make saving a priority over debt reduction; however, if you’re on the opposite end of that timeline, debt reduction–and hopefully debt elimination–is certainly a priority.

Third, you are likely to want to do a bit of both at the same time, the question is how much of each you do. If you’ve decided debt reduction is your priority, make a plan and stick to it. Put the majority of your positive cash flow into paying down–and paying off–that debt. Consider the Debt Snowball or some of the other options we’ve written about previously. If you’ve chosen to concentrate on savings, put the majority of your positive cash flow into that (we will discuss some thoughts on how to put your savings dollars to best use at a later date). No matter which you’ve chosen, though, make sure you pay at least the minimums on your debt promptly–late charges and possible hikes in interest fees for paying late or insufficient amounts will make it even harder to overcome these debts.

Finally, keep at it! Persistence and perseverance are the keys to your eventual financial success. There will be many difficult moments along the way, but the sooner you start–and the more diligently you follow your plan–the quicker this will all happen. A journey of 1,000 miles begins with one step–so take the step of figuring out which to work on as your first priority: debt reduction or savings.

I received the following email from a reader:

“Any suggestions on what to do with money that I’d like to have earning at least a little interest but need to be able to access quickly? I’m thinking perhaps a money market, but I’m not sure where to find a good one.”

This kind of money, which commonly is an emergency fund, is what is called “chicken money”, a term I credit to Terry Savage of the Chicago Sun-Times. Chicken money is money that you cannot afford to expose to the risk of the stock market (or any other kind of similar fluctuation).

Chicken money is commonly in either money market (or similar high yield) accounts or certificates of deposit. The issue with using CDs is exactly what our reader cites–the need to be able to access it quickly. While you certainly can get money out of a CD, you pay a penalty if you do it when the certificate hasn’t matured.

That mostly leaves a money market or similar account. Local banks here have been paying pathetic rates; credit unions are a bit better, Internet only banks tend to be even better (to check out current rates as well as any special promotions, consult with Bankrate and Bankdeals). Internet only banks have their advantages, but due to their lack of physical branches that can make access difficult. Having a debit or ATM card associated with the account is beneficial (although there tends to be limits on how much you can withdraw during a day and the network of no charge ATMs might be limited), and check writing would give about as close to “full” access of an Internet bank’s account as possible.

Two options I have personal experience with are ING Direct and Capital One Direct. ING Direct’s Orange and Electric Orange accounts tend to have decent rates (and if you would like, I have bonus referrals available that will give you a few more dollars, contact me for details) and provides a debit/ATM MasterCard; they also have a network of “no fee” ATMs. The good news for me is that there’s such an ATM within two miles of home; the bad news is that there might not be such a situation for you. They do not, however, give you a checkbook (for my Electric Orange account I can have checks issued by them; they mail them out, which takes a few days). Like most online banks, they prefer to deal with money transfers online, which is instantaneous between accounts at ING Direct, but takes a few days to other institutions.

For accessibility, Capital One Direct adds a checkbook to its ATM card (which, unlike ING’s, is not a debit card). This is helpful for me, as I often make deposits from that account into a local bank. However, their ATM network seems very limited compared with ING’s–I cannot find a single no charge one within 75 miles of me, which is basically the entire island, and likely the entire state. The checkbook in many ways makes the money more accessible than the ATM card and does not subject the user to the typical $500 (or so) per day limit on ATM withdrawals. I was offered a special interest rate when I opened my Capital One Direct account as a Costco member but I was not able to find such an offer perusing Costco.com.

So there are two options for chicken money; both are quite safe, pretty liquid, and pay about as high a rate of interest as can currently be found. Capital One Direct has a checkbook which can be quite useful in terms of liquidity; both have ATM cards; ING Direct’s ATM card doubles as a debit card and they appear to have a larger network of no charge ATMs. Take a look at these (and other) options if you have a need to stash away these kinds of dollars.