What if your bank failed to deposit your paycheck?

One piece of emergency prep advice that is often overlooked is to have some emergency cash at home. The typical reason given is that major storms will knock out power so ATMs won't work for several days when you might need cash to buy supplies or pay repairmen.

And now a recent event in England gives another reason...

Many people live from paycheck to paycheck with no reserves or savings. In June NatWest Bank had a computer glitch that failed to update customers’ balances overnight on a pay-day. Customers using ATMs or online found that their paycheck was not there! What did the bank do?  It apologized and promised to fix the problem “as soon as possible” (Wow what service!) It also said "no customers would be left permanently out of pocket" (huh, does this mean instant loans?) and kept 1000 branch offices open until 7pm just in case you had a day job.

Customers were not amused.

Spend Less Than You Earn

The fundamental principle of financial security can be said quite simply, "Spend Less Than You Earn". Or as Saturday Night Live put it many years ago, "Don't Buy Stuff You Cannot Afford". FreeMoneyFinance.com says, Becoming Wealthy May Be Simple, But It’s Not Easy

While simple in theory, there's a few gotchas to keep in mind.

1. You must spend less than your take-home pay which will be much less than your salary. Taxes and Social Security take a big bite out of the pay check.
2. You need to factor in emergencies. It's not enough to say I keep my expenses within budget but this month I had to visit the vet, the doctor, the mechanic, etc and that put me over budget. Emergencies are part of life and need to be part of the budget too.
3. You need to prepare for retirement. If you spend every penny you earn today, what will you live on when you stop working?

One way to address the issues above is the 50/30/20 budget described by Liz Weston at MSN Money.

1. Start with your after tax income.  "If your employer deducts other expenses from your paycheck, such as 401k contributions, health insurance premiums and union dues, add those back into your net pay to get your after-tax income."
2. Work hard to limit your "must-have" expenses to 50% of what you earn after taxes. The "must-haves" included insurance, rent/mortgage, utilities, essential food, and minimum loan payments. If you choose not to buy something (like clothing) then it is not a "must-have".
3. Limit your "wants" to 30% of after-tax pay. This includes gifts, clothes, dining out, extra features for your TV or phone, etc. Is the Internet a want or a must-have? Think about it.
4. Save 20% of your after-tax income for savings or early debt repayment. "Any loan payments you make above the minimum belong in this category, as do contributions to your retirement and emergency funds."

For many families this may sound impossible. But when you exceed the limits above you put yourself into an impossible situation of a debt that you cannot pay back.

 “Interest never sleeps nor sickens nor dies; it never goes to the hospital; it works on Sundays and holidays; it never takes a vacation. … Once in debt, interest is your companion every minute of the day and night; you cannot shun it or slip away from it; you cannot dismiss it; it yields neither to entreaties, demands, or orders; and whenever you get in its way or cross its course or fail to meet its demands, it crushes you.” - J. Reuben Clark Jr., 1938

$500 in the bank

MSN Money has a great article titled, Why you need $500 in the bank, which is cited in another story worth reading, 3 money tips for every income.

In the money tip for households earning less than $20,000 (below the poverty line of $22,000 for a family of four), Liz Weston says, "Forget, for now, all the advice about saving three to six months' worth of expenses." Yes, that is a worthy goal, but out of reach for a family below poverty. But this does NOT mean a family in poverty is off the hook from saving anything. Liz sets a target of $500 in the bank for emergencies.

Begin with $100 left in the checking account - always. This cushion will help protect against the costly mistake of bouncing a check. One tip is writing a $100 check to yourself, then don't cash it. Record it in the checkbook but then rip up the check. [Personally this would drive me batty since I balance the checkbook every month to the penny, but it works to "trick" some people into not spending that last $100]

Next: month by month put away a little money, say $20 per month, more if you can, into a savings account to reach $400. This will cover many common emergencies like a car repair bill, doctor bill, and replacing a broken refrigerator.

Lastly don't touch this savings unless there is a real emergency. If you do spend it, you must restore it ASAP.

Bottom Line

What happens if you don't have $500 in the bank? You may be forced to use a credit card and pay high interest rates for an emergency bill over months or years. Or use a payday money lender who will charge an outrageous fee. Or fail to pay your rent and risk eviction. Etc.

Everyone, should have at least $500 set aside for emergencies.

Retirement Savings

The trouble with retirement is that you never get a day off.
~Abe Lemons

How much retirement savings do you need? Probably more than you think. I read one column about a couple that thought 1 million dollars would be enough. But the children needed help with their mortgages and the money was greatly depleted.

Megan McArdle at TheAtlantic.com says, You Need More Retirement Savings. The old school thinking was that your expenses will be less during retirement. The house is paid off. (Maybe? Did you get a second mortgage or treat the house as an ATM with repeated home equity loans?) The kids have graduated college. Your house is furnished and you're not planning any major changes. Only a car loan remains.

In retirement the work expenses of commuting driving or train, business lunches, business clothes, etc are a thing of the past. But there'll be new expenses for health care - especially once you're off the Cadillac quality health plan and facing higher copays and deductions.

"Medicare does not cover everything--Medigap insurance is costly, and may still leave you with considerable out-of-pocket expenses."

You may also find that you'll need to hire a maid service to keep the house clean, or someone to mow the lawn, shovel the snow, etc. Not that you're lazy or lack the time but you might be physically unable to do the labor like you used to.

But I've thought of that you say. I'm planning to sell the house, buy a cheaper condo or assisted living apartment and pocket the difference. But suppose you're trapped in a terrible housing market like we have now where no one is buy or you get half of what your home used to be worth? Or you're competing with the other baby boomers for decent retirement space and prices for "retiree" homes shoot up.

Bottom Line

McArdle concludes that you retirement spending habits will be "about the same amount as I need now ... Even assuming that Social Security continues as promised, most people don't have nearly enough saved to make up their current incomes."

What are your neighbors buying?

"Some couples go over their budgets very carefully every month; others just go over them."-Sally Poplin

If you have a family budget (and you really, really should have a family budget), then you’ll appreciate a new web site that allows you to see what your “neighbors” are spending (in aggregate). The site is at http://www.bundle.com/ and is called EverybodysMoney. The photo at right is a screen shot of the site looking at spending for Stamford, CT, where I work. The values show monthly spending for the “average” neighbor.

$1,668 Family & Health (Pets, Insurance, Healthcare, School, Charity)
$1,139 Shopping (General, Hobbies, Office Supplies, Clothing, Electronics)
$1,022 Food & Drink (Dining out, Groceries)
$ 892 House & Home (Utilities, Phone, Home Improvement, Home Maintenance)
$ 659 Getting Around (Gas, Auto expenses)
$ 455 Travel & Leisure (Commuting trains, air fare, hotels, entertainment & cable TV)

Curiously Rent/Mortgage is not included anywhere.

In each bubble you can hover the mouse and click “Go deep” to get subcategories. Hover over the subcats and you can “See Stats” for greater detail. For example the top Merchant under Dining Out in Stamford is Starbucks! You also have the option of changing the location, looking only at homes with X kids, or only at homes in a particular income bracket.

This site is marked Beta and the data set is skimpy in places. I tried to look at Ossining, NY and could only get results for all of Westchester county.

Bottom Line

A tool like this can help you to discover that your spending is higher than average for your region. If yes, you may want to cut back. But don’t get too smug if all your expenses are “average”. I added $1000 per month to the Stamford numbers above for rent and got $6,835 spent per month. Multiply by 12 and this means $82,000 per year in EXPENSES. Assume 30% for taxes and you have to earn $120,000 per year to be “average” in Stamford.

Tax Breaks

“I'm proud of paying taxes. The only thing is--I could be just as proud for half the money.” - Arthur Godfrey

CNNMoney.com has some ideas for lowering the federal taxes you owe. But you must act before Dec 31 to take advantage of these tax incentives:

· New-car sales tax deduction: you can deduct the state and local taxes you paid for a new car purchased between Feb 17 and Dec 31 up to a vehicle price of $49,500 and if you earned less than $125,000 single or $250,000 as a couple.

· “First-time” homebuyers: there is a credit for anyone buying a new house who has not owned a house in three years.

· Green Appliance rebates: see energystar.gov (click on Tax Credits for Energy Efficiency)

· Use your stock market losses: if you sell a deadbeat stock with a loss, you can subtract that loss from profits made on other stocks sold. If you have more losses than gains, you can deduct up to $3000 from ordinary income. For losses to count you cannot buy a new “substantially identical” stock within 30 days of the sale.

· Watch out for the AMT penalty. See the article for details.

· Deduct any gifts you give to charity: this is the last year you can do a direct rollover from an IRA to a tax-exempt organization.

Bottom Line

Be careful with any financial advice. The tax law is full of holes and tricks and it’s easy to make a mistake. See a professional.

We got burned once with bad advice from our estate lawyer. He suggested cashing in the IRA of my wife’s deceased mother over two years to minimize the financial impact on our tax bracket. However he overlooked that there is a one-time partial IRA exemption that is not taxed with an inheritance. By splitting the IRA in two we did not get the full benefit of the exemption and ended up paying more taxes.

Misc

I also liked an article at FiLife.com but there wasn’t enough there for a full post so I’ll tack it on here. How much money can you safely withdrawal from your retirement account without draining it dry before you die? The recommendation is 4.1% to 4.6% annually. At a rate of 4.6%, in order to withdraw $50,000 in the first year, your retirement account needs to exceed $1.1 million dollars. Ouch!

Clever Ideas for Saving Money

“A penny saved is a penny earned”
- Ben Franklin in Poor Richard’s Almanac

According to the The 2009 MetLife Study of the American Dream, “A disturbing 50% of Americans say they are only one month — or only two paychecks — or less away from not being able to meet their financial obligations if they were to lose their job, and more than half of these, a startling 28% of the total respondents, couldn’t survive financially for more than two weeks.” [MetLife] And yet, with the current recession, “Three quarters of Americans have already been touched by unemployment in some way as a result of the financial crisis, with nearly two in ten reporting that they have recently lost a job and an additional 55% having a friend, relative or neighbor who lost their job.”

When I was laid off last year, it took me six months to find a new job close in pay to my old job. We still had to pay bills, especially the COBRA insurance payments, buy food, etc, using only a modest severance payoff, a pittance from unemployment insurance and our cash savings.

Everyone needs an emergency savings account. Otherwise you can be forced into some very bad choices. For example, if you stop paying for health insurance, you create a “gap”. When you do get employed and resume insurance, the new insurer may refuse to cover any “prior conditions”, that is ANYTHING you’ve seen a doctor for in the past.

Liz Weston at MoneyCentral wrote that, “A reader asked me for help after racking up more than 2,000 in bounced-check fees. Another owed thousands to a payday lender. A third despaired of ever paying down his credit card debt. Every time he started to make some progress, his car would break down or he'd encounter another unexpected expense that wound up charged to the cards.”

Fortunately MSN has an excellent article called An emergency fund out of thin air. The author, Donna Freedman, asked readers for ways to save money and they responded.

• Save part of every paycheck, no matter how small. Just $10/month will add up over time.
• Ideally you should save 10% of your earnings instead of $10. This may not be possible – so set a value that works for you, set it aside, and don’t touch it.
• If possible have your bank automatically direct-deposit your fixed monthly savings from your paycheck to a separate account.
• Save spare change, found coins, and dollar bills and deposit these in your emergency fund
• Sell items on eBay or Craigslist
• Rent out your parking spot or condo for weekends
• Use coupons
• Get a second job (even if it's just temporary or seasonal)
• Shop for better insurance rates online
• Collect cans or metal for recycling cash
• Trim your budget, spend less
• Sacrifice a little, drop cable TV and get films from the library for free or watch them online
• Make your own food. Eat out less and buy fewer prepared meals.

Bottom Line

The secret is to be consistent and most importantly to spend less than you earn. At my last job, 11% was deducted from my paycheck to go into a 401-K. Unfortunately I don’t have that option at my new job so I have to come up with my own plan for setting money aside on a regular basis.

HyperInflation

“The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.” - Ernest Hemingway

We live in brave, new, perilous times for the US economy. Historically the US dollar has been the most trusted currency in the world. But that could change given the unprecedented level of debt that the current administration is creating. Here are some recent headlines:

• Profligate borrowing and spending puts America’s AAA credit rating at risk


• Fed cannot account for $9 trillion


• Nothing Suggests We're Anywhere Near the Bottom of this recession


• April Foreclosures Rise 32%


• Social security to run out of money...


• Medicare already in the red

And yet things could become even worse. Typically when governments print new money to cover overspending and debt, the result is inflation. Huge debt and a loss of faith in a nation’s ability to pay can lead to hyperinflation where rates of currency devaluation can exceed 50% a MONTH. Few people comprehend what a high compounding interest rate can do. At 50% monthly inflation, a loaf of bread that costs $1 in January will be $1.50 in Feb, $2.25 in March, $3.38 in April, $5.06 in May, and $86.50 by December. After two years the $1 loaf would sell for $11,223.

When hyperinflation occurs, normal cash is insufficient; who carries $11,000 in their wallet? The government starts printing larger denomination bills in response. Instead of $10, we start carrying $100 bills, then $1000, then $10,000 bills, etc. You may be thinking, where would I get $10,000? If you’re lucky your salary will be adjusted for inflation and your pay will skyrocket; though probably not as fast as prices are skyrocketing.

Some real world examples of Hyperinflation include:

• The 1923 Weimar Republic of Germany issued two-TRILLION Mark banknotes and a postage stamp worth 50 Billon Mark. Banknotes lost value so quickly that some were used as wallpaper.


• In 1946 the Hungarian National Back issued a banknote for 100 quintillion pengo (100,000,000,000,000,000,000). Hyperinflation in 1946 Hungary peaked with prices doubling every 13.5 hours. This record held until 2008…


• In July of 2008 in Zimbabwe, an egg cost ZW$50 billion yet ATM withdrawals were limited to ZW$100 billion to keep the machine computers from crashing due to numerical overflow. One British pound was worth ZW$1.2 trillion. With an estimated annual inflation rate of 90,000,000,000,000,000,000,000% many shops would only cash checks if the customer wrote double the amount, because the cost would go up by the time the check had cleared.

Bottom Line

Will the US experience extreme levels of inflation? No one knows. Normally a recession is an antidote to inflation since record levels of unemployed people have little money to spend and this drags prices downwards. The official US inflation rate for March 2009 was negative, a state of deflation. (US Prices Fall Most Since 1955) But despite economic theory – sometimes you get the worst of both – inflation and unemployment. This is called Stagflation and occurred in the US under President Carter in the 1970s.

How can you prepare for inflation and what can you do about it? SurvivalBlog.com has some answers:

1. Time Eats Money. Know the rate of inflation vs. your rate of return on investments. If inflation were 5% annual and your savings accounts pays 1% then you are losing 4% of you money every year. Look at your stocks and bonds also. What are they paying out vs. inflation? You may need to find an account that pays better or…


2. Convert your money to tradable goods, like silver and gold, that hold their value. Personally, I’m not a big fan of this. Who can I trust to buy my gold back? In college I sold an engagement diamond ring back to a jeweler and got just 1/10th of its value. And are you savvy enough to avoid being defrauded with diluted or false silver/gold?
   
3. Stockpile useful goods that you will use or can barter. The “sin” goods of alcohol and tobacco will always be wanted and often become “currency” in regions where money is lacking. Or you can keep your hands clean and store more honest goods like aspirin and other medicines, canned foods, soda drinks, grain, etc. Don’t stockpile anything that will spoil. And don’t boast about your stockpile least you become the target of thieves.


4. You might also convert your dollars to the currency of other nations that are not in a crisis. However with this global recession, who isn’t in trouble? And beware! Those offering the best rates on CDs are often the most desperate and on the verge of collapse. Iceland was the darling of Europe with amazing currency and bank rates until the bubble burst and the nation essentially went bankrupt overnight.


5. Think replacement cost. With hyperinflation you must always know the current and near-future value of goods. Yesterday’s prices or what you spent before is meaningless. Recall the stores in Zimbabwe asking for double the cost value in checks because of time it takes for checks to clear. Home insurance for the purchase price of your home is useless. You need to be insured for the replacement cost to rebuild in the future. Likewise you might buy something at $10 and sell for $15 and feel quite proud. But while you held the item its value increased 100% so you really sold $20 at a loss.

When should you spend to save?

"Are warehouse store memberships a good deal? How about extended warranties? It all depends on the products -- and on you, the shopper." - Liz Pulliam Weston

Sometimes you need to spend money to save money when accidents happen. A classic instance of this is insurance, be it life, home, medical, travel, or extended warranties. Often the benefits of insurance are obvious: you might pay a thousand to replace your home worth hundreds of thousands; or perhaps ten thousand yearly to protect your family from millions with serious medical injury.

With extended warranties the payback is less certain. Is it worth $20 to cover a $200 appliance for only one year? For me the answer is usually no. However an excellent article at MSN MoneyCentral suggest some cases where an extended warranty can be a good investment: laptops and equipment rental.

The MSN MoneyCentral article also looks at the cost of joining warehouse clubs, roadside assistance (like AAA), theme parks, coupon books and money saving appliances.

Bottom Line
Deciding whether to buy a money savings plan is really quite simple with a little mathematics. To calculate the break even point, divide the cost of club or discount membership by the percentage savings. Example: you are offered a $40 membership that will save you 10% on future purchases for one year at store X. The break even value is 40/.10 = $400*. If you plan to buy more than $400 during the year at store X the discount will save you money. If you spend less than $400, you won't make back the $40 membership cost.

*Math Note: 10% means 10/100 so you divide the cost by .10 instead of 10