We and some of our friends have started to track how much time we spend on looking at grocery ads, clipping coupons, and shopping compared with how much money we save.  I am always skeptical on whether or not it’s really worth the time.  I don’t want to be the guy who drives 30 miles out of the way to save $.05 per gallon in gas, wasting time and a gallon of gas to save $.50 on my ten gallon tank (okay, so I’ve done it a couple of times.)  

With our shopping, we are initially finding that we are earning $15-$30 per hour of ‘work’ on finding deals.  Best of all, this saved money is after taxes.  If you are in a 25% tax bracket, it’s like earning $18-$38 at a job.  We are learning at it is worth your extra time clipping coupons and even shopping at more than one store in order to find the best deals (though I heard that Publix matches competitors offers.) 

There are a couple of good websites for coupons (and I hope that the readers can contribute more websites that I forget. Hint, hint.)   

www.couponmom.com

www.southernsavers.com

Also, attention all nerds!  I need your numbers.  Can you please track your time spent clipping coupons, looking at ads, and shopping as well as your savings.  The more data I collect, the better case I can make that this actually works.

Use Roth IRA as your backup emergency fund

Pros

- Money grows tax free.  This works especially well if you don’t have a major emergency.

- Less temptation to take money out.  It would truly have to be an emergency if you have to withdraw your money and you would be less inclined to take money out for a questionable ‘emergency.’ (You know what these are.)

Cons

- Increased Hassle and paperwork.  It may take a few days to get your money when it’s in a Roth IRA. 

- You can only contribute $5,000 a year.  You can’t use your Roth like a checking account, moving money in and out of your account.  The idea is to put your money in and keep it there. 

Overall

I am not opposed to doing this as long your emergency is not aggressively invested.  I would also keep a portion of your emergency fund in a more accessible savings account where you can get you money in a couple of days.

For an answer to the first question, I will need to go back and read my own post on why I shouldn’t touch my emergency fund. 

For the remaining two questions, I did a little research and my findings are somewhat comforting. 

Calculating the “Real Interest Rate” is just as important as what interest rate you are currently receiving.  This is rarely ever talked about by individual investors, but is important to know.  Here is the formula:

Real Interest Rate = Current Interest Rate – Inflation

Note:  Please don’t share this formula on any first dates.

"Hi, I'm date Mike. Pleased to meet me. You wanna hear the formula for the real rate of return?"

 As of today’s rates, I am earning only 1.1% on my savings account (This is what’s making me depressed.) 

However, the average annual rate of inflation over the past 12 month is an average of .025%. 

Source: http://www.usinflationcalculator.com/inflation/current-inflation-rates/

Therefore, my real rate of return = 1.075%  (1.1%-.025%)

Let’s compare this to 2008 when Money Markets were averaging 2.89%.  Inflation that year averaged 3.8%.  My real rate of return, -0.91%.  Even though my money market made nearly 3% on average, I was really losing money based on the rate of inflation. 

If you don’t believe that inflation has been eroding your buying power, use this calculator on the US Bureau of Labor Statistics website.  http://data.bls.gov/cgi-bin/cpicalc.pl

Though our emergency funds are not making in a lot of interest, I can feel better knowing that my real rate of return is in the black. 

When (I didn’t say if) inflation kicks up (just wait for the employment numbers to start improving) we may be having a completely different conversation on what to do with your emergency fund.  Even more of a reason to continue following this blog.

With spring upon us, I figured it would be a good time to go over your financial spring cleaning to do list.  If you are married, this won’t be your only to do list.  It is important that we are protected from some of the curveballs that life throws at us.   Here are 7 chores to get in order for this spring:

1.  Check Your Credit Score  – You should view your credit score at least once a year (I would suggest 2-3 times per year.)  You can do this for free once a year at each of the three main credit sources ( Equifax, TransUnion, and Experian) at www.annualcreditreport.com.  You need to pay to get your actual credit score, but viewing the report is free.   If you view one credit source at a time over a year, you will be able to view your credit score 3 times a year for free.

You will want to review this report to make sure that there are no unrecognized debts.  This is especially important for those who have a lot of debts outstanding and for those who are delinquent on a lot of debts. 

Are you still not feeling secure?  Buy identity theft insurance before you become a victim at www.lifelock.com or http://www.zanderins.com/idtheft/idtheft.aspx

2. Create a Living Will – I have a couple of simple forms on the blog in case you need it in a pinch.  Otherwise, I would suggest paying $15.00 on www.uslegalforms.com and getting an authentic last will.  This way, you will be sufficiently covering your bases.  

3.  Auto Insurance – Make sure you are current on your auto insurance.  Are there any cuts you can make?  We saved 40% on our insurance when we realized that we didn’t need the $1000.00 deductible on our really old cars.  Though we are in a rare situation, there are potential adjustments you can make.

Also, are you saving money up to pay one lump sum at the beginning of your next term?  It could be the best risk-free rate of return you can get this year.

4. Health Insurance – This is an incredibly important part of your spring cleaning, especially for those who don’t have health insurance.  If you are not covered by health insurance, I would advise that you get a quote with an endorsed local provider of the Dave Ramsey show.  http://www.daveramsey.com/elp/health-insurance

You can also get a quote on www.ehealthinsurance.com.  When I was a small business owner, I used this web site. 

5. Homeowners/ Renters Insurance – Again, this isn’t very expensive and could save a lot of grief having this taken care of.  Go here to get a quote:  

http://www.daveramsey.com/elp/home-insurance/

6. Life Insurance – Nobody likes to think about this, but you will want to be covered if something were to happen to you.  I like term life insurance, as our financial planning will have us financially secure in 20 years.  Basically, we will be self-insured by then.  In addition to that, term life insurance is cheaper than whole (pennies on the dollar.)

How much?  You will want to make sure you are covered 10 times your yearly salary.  If you make $40,000 a year, you will want to buy $400,000.00 worth of life insurance.  Most corporations will offer life insurance up to a certain amount. 

 Our spring cleaning to do list includes buying additional life insurance for myself and Dana to cover us for 10 times our salary.  I received a quote for a $200,000, 20 year term life insurance policy for $19.14 per month.  Dana’s quote was $24.80 per month for $300,000, 20 years. 

Get your own instant quote at: https://www.zanderins.com/term/instantquote.aspx

7. Disability Insurance – Since we are covering ourselves from dying, we should also cover ourselves for disability insurance.   You should get at least 60% of your salary as adequate coverage.  I can get good disability for under $25.00 per month based on my circumstances.  Please use after tax money here.  That way, your benefits money, should you receive it, will come back to you tax free. 

Get your own instant quote here: https://www.zanderins.com/disability/disinstantquote.aspx

Optional: 8. If you are over 60 years old, you will want to buy long term care insurance.  If you are over 60 years and reading this blog, please email me (I would like to thank you personally…and give you further instructions.)

When you are finished, you can update your information on your JAM Interactive workbook on the “Insurance, Etc.” tab.  When you are finished with your to-do list, everything on your sheet will be green…just in time for spring.

I first asked her why she punched me and then told her that our wills were written but not signed by two witnesses.  We finally had our wills signed by two witnesses last night and are set to go.  I am proud of Dana for being on top of our financial affairs when I slack. 

Here are a couple of forms that you can use for free to create your own living will.  Please let me know if you find any sources that provide free wills.   You may want to pay to have a will professionally done if your situation is more complex. 

Simple WILL

Extended – LAST WILL AND TESTAMENT

Well, despite the short month, we did go over our budget, not by $800, but by over $500.00.   I told you we would mention our victories as well as our set backs.  Here is a setback.  We all have setbacks and go over budget from time to time.  What I would like to write about is what are we going to do and not do about it. 

1. Revisit Your Expenses/ Determine What Went Wrong

Simply looking back on your expenses is a great starting point for learning which areas you are overspending. 

We spent $703.43 on groceries compared to our $440.00 monthly budget.  Ouch.  There’s almost $300 of our overspending right there. 

Our dining expenses were $261.49 compared to our $160.00 monthly budget.  There’s another $100.00. 

The third area was an eye appointment that sent us back $200.00 (compared to our budgeted $100.00)  There’s the remaining $100.00.  The $200.00 was with vision insurance.  The doctor called our insurance the “Rolls Royce of vision insurance”.  I don’t even want to think of the damage without this insurance, though I can now say we have a Rolls Royce. 

2. “Can you Control It”?    

Asking the question, “Can I control the above?” can help you filter whether the above problem areas were unforeseeable or something that can be altered with some modifications.  For us, the Answer is yes, yes, and no. 

• Groceries?  Yes
• Dining?  Yes
• Eye Doctor Bill?  No

We could have altered our food and dining expenses during the month.  I suppose you can make the case that we could have foreseen the eye exam, but I didn’t.  Therefore, I am classifying this as something we can’t control.

3. What Will We Do About It?

What’s done is done.  We can’t go back and change the past.  We can only move and deal with the next month.  Here are some things you can do and shouldn’t do:

• Refocus and tighten the belt.  Dana and I like this one.  We will simply need to refocus and make sure this doesn’t happen again anytime soon. 
• Use the envelope system.  My debit card doesn’t tell me that I am over my grocery limit for the month.  However, if I allocate the budgeted amount in cash in an envelope, it’s very clear where we stand for the month.   We have done the envelope system at our house, especially when things are tight and will go back to it if we continue to go over on groceries and dining out.
• Alter your budget.  If you have already tightened the belt and are using the envelope system, and still are going over budget consistently, you may have the budget set unrealistically low.  Raising your budget to the appropriate level will alleviate some pressure and make your budget less of a bully and more of a realistic road map. 

Don’t:

• Dwell too much on it.   Learn from your setback and move on.  Dwelling on the past gets you nowhere. 
• Quit.  Blowing your budget doesn’t mean you should quit.  Click here to read further if you are struggling to make your budget work. 
• Blame your spouse.  Work with them not against them on this.  I was the poster boy for passing the blame (“So, Dana, how was Panera Bread this afternoon?  I can see the $7.47 debit in our bank account.  I thought we decided not to eat out for lunch this week. ”)   I have since learned to chill out, thank goodness. (and Dana says, ‘Amen.’)

Coming Up:

Set and Forget It:  What we do to automate our bills/savings/investments

I have a lot to say about cars and their affect on our finances.  More to come on that this month. 

What other topics do you want to read about?   Please email me or make a comment.

-Dana

ING checking or savings-  If you have been reading this blog at all, you know my heart, for savings accounts, lies at ingdirect.com.  

Money Market Funds-

You will see Money market funds in your brokerage accounts.  Money market funds are large pools of money invested in short term notes and historically return amounts that mirror the Fed interest rate.  With the Fed rate at 0-.25%, it is no wonder why money market funds are returning close to nothing.   If all else fails, you will know a money market fund by its price: constantly $1.00 per share every day.

Like I said before, you will not get rich from these funds (though you will not lose any money either.) 

Here is a list of some popular Money Market Funds:

Where Would I Not Put It?  CD’s. 

CD’s historically earn more interest than your traditional savings or money market.  However, I would currently advise against buying CD’s for a couple of reasons.

1. There are excessive fees if you need to access your money for an emergency when you are invested in a CD.
2. Interest rates are at historically low rates, which can’t go any lower.  Buying low and selling high is good for stocks, but buying a CD at a low rate locks in that low rate.  When interest rates rise, your CD rate remains the same.   It was only 2 years ago when an average money market savings account was making 5.00%.  With the economy gaining traction as well as our unprecedented government spending, I am expecting these rates to go back up (and then some) sooner before later. 

That being said, I don’t want to be locked in a 1.5% CD for more than 6 months at a time. 

Stocks

Your emergency fund and your investments are to perform different functions.   Stocks will be good for investments, and that step will come soon.  In the meantime, there are two main reasons not to invest your emergency fund in stocks.

1. Stocks fluctuate.  A lot.  I want to buy stocks low and sell them high.  When there is an emergency, there is no choice when to sell.  It’s now.  I want my emergency fund to remain constant, even if I feel that I am missing out on higher potential returns. 
2. Stocks take T+3 days to settle.  T means today and 3 means good business days.  MLK, Presidents Day, Memorial Day, and Labor Day are good business days for me (I work in the financial industry and have these days off)  but are not good business days for getting your money out of stocks.  Take for example, you sell your stock for an emergency on a Wednesday (T), that money is not available to withdraw until next Monday (+3) or Tuesday if there is a holiday.    Add another couple of days to get your hands on the money and you are at a full week.  Your emergency fund should be more accessible than that. 

Mutual Funds

Like stocks, there’s a time and place for mutual funds, but your emergency fund is not the place for them.   

Where do you invest your first $1000.00 and your emergency fund?

Savings Account

Just like your first $1000.00 saved, you want to find an account that:

1. Doesn’t charge you any fees to have the account.  Move your money out and close your account the first time you get charged and don’t look back. 
2. Gives you something in interest.  Don’t expect to earn a lot of interest these days, but if your money is making you zero, (I’ve been there) look for a new account.

I moved our emergency fund to www.ingdirect.com.  There are no account/balance fees and I currently earn 1.25 APY (as of Jan 15, 2010) 

Brokerage Account

Brokerage accounts can be a good place to house your emergency fund if you are dealing with the right company.   It is also convenient to keep all of your accounts (retirement and non-retirement) with the same company.  The same two rules apply for brokerage accounts.  In addition to the two rules, it is important that your brokerage company won’t charge you to get in and out of your money market, if you need to get the money. 

A couple of good places to start that won’t charge you fees:

Fidelity Investments – www.fidelity.com

Charles Schwab: www.schwab.com

Where are you/will you put your emergency savings?

Once the length, in months, is set, you can apply your monthly expenses to get your emergency savings goal. 

Emergency Savings Amount = Expenses per Month X Number of Months

Here are a few factors that need to be addressed to find the emergency fund target that’s right for you. 

Your Income.

Shannon italia, head of Career Services at the University of North Florida, told me that the average length of a job search depends on the salary you are looking for.  She believes that you can expect an average of 1 month search for every $10,000 in yearly salary.  According to this equation, if you are looking for jobs in the $30-$40k range, you can expect an average job search of 3-4 months.   If you are in the $80-$120k range, it may be 8-12 months before you find the right fit.

That being said, you will want to tailor your emergency fund around the above equation.   Those making a higher yearly salary will want to lengthen their emergency savings accordingly. 

Your Empoyer/Industry

Your employer and industry may play a part in the length of your emergency fund.  These are not hard and fast rules, but generally, the smaller the company, the more susceptible to layoffs you may be.  Is your employer making good profits quarter after quarter, or are they struggling to keep the lights on?  These answers may not be completely evident, but most employees can see clues when their company is struggling financially.  These are clues to perhaps lengthen your emergency fund.

Is the industry you work in a boom and bust industry?  If I were a doctor or a nurse, I would be shaking my head no.  If I were a mortgage broker or a real estate agent, I would be shaking my head yes.  This question also plays a role in how long your emergency fund should be.

Not sure how to answer this question?  Ask yourself how deeply your industry has been affected by the recent economic downturn.  I can say that for me, the financial/banking industry has been significantly impacted by the recent recession; therefore, we need to plan our emergency fund accordingly. 

Your Risk Tolerance

Your tolerance of risk should affect your length of emergency savings.  I know people who lost a lot of sleep in 2008 due to the economic turmoil and some people who were oblivious to it.  Both sets of people had money invested in the then tanking stock market, but reacted completely differently.  If you fall on the low end of the risk spectrum, you will want to add length to your emergency fund.  

Your risk tolerance, or lack thereof, is nothing to feel bad about.  It is simply something that needs to be addressed.   For married couples, this is an especially important issue to be addressed.   For instance, I would be a 7 out of 10 on a risk tolerance scale (1 being the lowest, 10 being the highest.) Dana would also be a 7.  I try to account for the average of the two of us when making decisions based on risk tolerance. 

Please remember to account for your spouse.  For a long time, our decisions were based on my risk tolerance.  Why?  I was making the financial decisions alone and not including my spouse.   I didn’t have ill intentions, I was just flying solo with our financial decisions.  Talking to your spouse about these decisions will add a whole new dimension to your relationship as well as your finances.

You can use the attached Excel spreadsheet to determine your emergency savings goals. 

Click on the link to open Emergency Fund Calculator

What Is your/will Your Emergency Fund Savings Target Be?