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How to Prepare For Once-in-a-While Expenses
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Everyone has those once-in-a-while expenses that require some planning and preparation in order to pay: car insurance (once or twice a year), yearly dues or memberships, and even taxes.
They're a bit odd because they're not recurring monthly bills, so you're not always thinking about them, but when they hit, they can hit pretty hard.
Here's the easiest way to prepare for those once-in-a-while expenses: automatically set aside money to pay those bills once a month.
By setting up a new online savings account or an ING subaccount, you're establishing a fund solely for these once-in-a-while expenses. Rather than having these bills take a big chunk out of your checking account once or twice a year (which itself requires creatively moving money around), the money is coming from a separate location.
But you still need to feed these accounts — and the easiest way to do it is to make your big once-in-a-while expense a bunch of little monthly expenses.
Got a $1200 car insurance bill you know comes every January 1? Set your new account to automatically transfer $100 from your main checking every month. That way, when the bill lands at your door, you've already paid for it.
You may find it works better to have one account for each once-in-a-while bill or to have a once-in-a-while slush fund, where you transfer the total amount of those bills (divided by 12) each month.
Whichever way you choose, the point is the same: by automatically setting aside the money for these bills, it's like you've already paid for them.
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Why IndyMac's Failure Matters to You (Even if You Don't Have Money There)
All savers should pay attention to what happens with the recent IndyMac Bancorp default.
IndyMac Bancorp is different than other recent defaults because IndyMac is a bank that offers checking accounts, which are money by definition of the Federal Reserve Bank and by common understanding of depositors and everyone else. Bear-Stearns, remember, was not a bank.
It is good that accounts are insured by the Federal Deposit Insurance Corporation up to $100,000, but that is not the only protection for depositors. Failure to guarantee every dollar of every checking account has potentially severe and dangerous consequences for savers and the economy.
Failure to pay on a bank default introduces risk for those who are holding money as deposits. Every business and individual needs somewhere to hold money that is risk free.
If businesses and individuals realize there is risk to holding checking accounts, they will change their financial habits in unpredictable and unmanageable ways that will make it much harder to manage the U.S. economy.
Businesses can hold accounts abroad. Individuals can horde cash and so on.
As a bank offering checking accounts for depositors, IndyMac only had to hold around fifteen cents on each dollar of deposits as reserves to pay on their customer's checks. In the normal course of business that is adequate because those writing checks will about equal those making deposits.
In the normal course of business, their borrowers will be paying monthly principal and interest to further assure they have reserves to pay on their checking account customers.
There in lies the problem. The banks were careless and made many risky and foolish mortgage loans. The loans were made with the other eighty five cents on the dollar of depositors' money; loans made without the knowledge or approval of depositors.
Notice how different that is from someone who buys a stock or a bond by their own decision and using their own money.
Our Federal Reserve Bank and other bank regulators have the full ability and authority to regulate and supervise loan practices and review their financial condition. They failed to do so.
Our Federal Reserve Bank has full ability and authority to protect every dollar of the IndyMac accounts in addition to deposit insurance. They can provide the reserves in case of default. They determine and manage total bank reserves. Now they must do so. Pay close attention here.
Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com
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Alan Greenspan on the Turbulence of Savings
In his recent book, The Age of Turbulence, former Federal Reserve Chairman Alan Greenspan discusses savings.
"The shift of shares of world Gross Domestic Product since 2001 from low saving developed countries to higher saving developing countries has increased world saving so much that aggregate growth of savings world wide has greatly exceeded planned investments," he writes. "Or to put it another way, the supply of funds looking for a return on investment has grown faster than investment demand."
His tenure as Federal Reserve Chair began in 1987, so there is also some saving and lending history that he writes about. Speaking of banks in 1987, he says "[they] were in serious trouble."
And what was their problem? "… [Too] much speculative lending; in the early eighties, the major banks had gambled on Latin American debt, and then, as those loans went bad, like amateur gamblers trying to get square they'd bet even more by leading the whole industry into a binge of commercial real estate lending."
Amateur gamblers? Too much real estate lending? Isn't that what we have just been having?
When we save and earn an interest return, we entrust banks and financial intermediaries to use our savings wisely. The best loans for an economy create long lived physical assets.
On the news, I often hear that America's infra-structure needs improving. The levees in New Orleans and now on the Mississippi river need expensive capital improvements.
If banks use loanable funds as amateur gamblers when America needs levees, then it's not just banks that are in serious trouble as Mr. Greenspan mentions.
Remember savers, the more our savings are used to produce new products and new technologies, the more valuable your savings in the future.
Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com
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Savings Onion: Where Our Money Goes
Saving is easy, especially when you pay yourself first. With automatic transfers and recurring investments, you barely have to think about pocketing money for the future.
But where should your money go? Should it be for the short term or saved for retirement?
This is the question you need to answer.
Like Dave Ramsey's debt snowball, there are some layers to your savings; hence, the savings onion.
Our savings onion started with an emergency fund. It's the place to fund first since you never know when you will need it. We live with 3 months of expenses in our emergency fund, since we are also saving for a house in a liquid savings account.
If you're getting started, reach for a goal of $1,000 in your emergency fund. It won't help you for too long if you lose your job, but will cover any emergencies that pop up (and they do).
After we got 3 months of expenses in our emergency fund, we stopped contributing money. We've used it when our windshield cracked thanks to a rock in the road, but thankfully, that's it.
The next step of our savings onion is retirement accounts. At work, I began contributing 6% of my salary to a 401(k) — enough to get my employer match. When I got a raise, I automatically bumped it up to 10%. If I never see the money, I can't spend it!
To increase our retirement savings, we each opened up Roth IRAs. We started out only contributing $100 per month each, but have been able to increase our monthly savings and were able to fill up the accounts.
The Roth IRA contributions were automatic — no need to manually make the transfer. With that layer of savings going, we moved on to the next step: saving for a specific goal.
In our case, we're saving for a house. Since we wanted to be aggressive hitting this goal, we set up automatic transfers from our checking account to a new online savings account — for a year. Our first year of autopilot savings was a huge success — in addition to the money being put away automatically, we transferred every extra penny at the end of the month into the account.
Thanks to the "extra" savings at the end of each month, we were able to triple what our automatic deposits would have contributed during the normal year.
Our Savings Onion
Starting with the outside, here's what our saving onion looks like:
Specific Goal (a House)
Roth IRAs
401(k)
Emergency FundWhat does your saving onion look like?
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What Are Your Favorite Personal Finance Books?
Open thread: what are your favorite personal finance books?
I'll start it off. Two of mine are:
The Bogleheads' Guide to Investing got me started on the path to index investing, helping me realize that there is no way to long-term successfully beat the market. It preaches paying low fees and going along for the ride, rather than trying to actively outperform benchmarks.
The Automatic Millionaire taught me about paying yourself first and automating savings and investing. When you're automatically socking money away, you're increasing your net worth without even thinking about it.
Share your thoughts. What are your favorite personal finance books?
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A Radical Idea: Crowdsource Your Finances
Can the wisdom of the crowds decide how to manage you finances better than you can? I'd love to find out.
Imagine a person who left all of their financial decisions up to "the crowd." From budgeting to investing to spending, their entire financial situation was determined by others.
A number of social finance sites, like Wesabe, have popped up. But they're more about comparing your spending to other people.
What would happen? Could the crowd successfully manage someone's finances?
This would be something really compelling to follow — whether it's a blog or a podcast or whatever. And it's my gift to you — absolutely free to use.
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Automate Your Finances, Feel Comfortable
One of the biggest reasons you should put your finances on autopilot is for the sheer comfort of it.
Literally.
When your bills are getting paid automatically, your savings is being fed without you touching it, and your paycheck is going straight into your checking account, you don't have to worry about them. It's the biggest weight off of your shoulders.
You don't need to find the time to head to the ATM. You automatically pay yourself first. You don't have to worry about the post office losing your check in the mail.
The only bill I still pay by check is my credit card, and every other day I forget exactly when it's due and, therefore, when I need to send it in. It's weighing down on me.
So much about money management is mental. Am I saving enough? Should I save for the long run or the short run? Do I really need that thing I want?
The less you have to worry about, the better off you are. Don't let your finances overwhelm you.
Automate today and feel more comfortable.
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Real Savers Don't Gamble
Real savers do not gamble.
Now I'm not talking about a bet in your football pool at the office or a game of cards with friends on Saturday night — that's fun and entertainment. I'm talking about repeated bets in commercial casinos or state lotteries. Gamblers gamble by placing bets day after day, or month after month.
There is a reason why. Suppose you bet a dollar on the flip of a coin. For a head you win a dollar, for a tail you lose your dollar. You probably recognize that bet as fair; your chance of winning a dollar just equals your chance of losing a dollar.
But suppose you play the game day after day after day. Each day your chance is the same, but after 100 days you might win 56 out of a 100 to be $6 up. After another 100 days, you might win 47 and be up only $3.00.
Keep playing and the laws of large numbers take over. Play the game 10,000 times and you can only expect to win $5,000 but lose $5,000. Play the game long enough and in the parlance of chance, your expected return will be zero: nothing.
Real savers will not be happy earning nothing.
What is true for a private game of coin flipping is also true for all fair bets. Parties to a fair bet will earn nothing unless one of them stops soon after they have a stretch of good luck.
Now we all know the state lotteries and commercial gambling casinos are earning money. State lotteries and casinos earn money because they are allowed to tilt the odds in their favor and the laws of large numbers take over to earn them a return.
The state legislatures have gambling commissions to make sure the casinos and lottery boards do not get carried away and stack the game too much.
Maybe you've heard the phrase "Real women do not pump gas," or "Real men do not eat quiche." Well, "Real savers do not gamble."
Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com
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