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Cash is King – It’s Useful For More Than Mattress Stuffing

Cash Under Mattress 20130709

I seem to be having conversations with clients daily about cash.  We talk about how little they spend in cash anymore, the pennies in interest they are earning in their savings or money market accounts, and about how much they should be keeping in cash at all.  Here are a few short thoughts for you today about Cash and the most common conversations I have around it.

  • Carry Some In Your Wallet – When my 2 1/2 year old wants to play with her cash register, she doesn’t really understand what the paper things in the cash register are for.  She does understand the credit card and how it swipes, and how we use it to pay for things when we go to the grocery store or shopping nearly anywhere.  I now try to carry cash for this reason, to show her that some things we buy are one of the green bills, and some are 5 or more.  It’s a bit early to understand how they’re different amounts, but as your kids get older, can you start to involve them more in the process of understanding how your family spends your money?  If you want a fun question, ask a child where money comes from (even more fun if it’s not your own, I must say).  
  • Save Some For A Rainy Day – Cash in an Emergency Fund or savings account is a critical success factor for financial peace of mind.  When I talk to people who are struggling with spending, it’s a cycle of spending, digging out of a hole of credit cards or other loans, and then they can’t ever seem to make that next step of building up an emergency fund.  Once you have it, you don’t have to be focused on the return that it earns.  Return in an Emergency Fund is just bonus.  The point of it is that you have a stable, secure reserve of cash in the event that there is an emergency.  While you don’t see that return every day, all you need to do is think about a time when you needed some financial backup and it wasn’t there.  The financial return from an emergency fund comes in long-term savings, savings of credit card interest, the ability to have higher deductibles on auto and homeowner’s insurance and the savings you see there.
  • Save Some For An Opportunity – This is really where the old saying “Cash is King” comes from.  Cash isn’t king because you get a little bit of interest on it at the bank.  Cash is King because it allows you to take advantage of opportunity when it presents itself.  When you find the home that you’ve been seeking, having the readily available cash to make an offer and get an affordable mortgage is critical.  When your parents or grandparents invite you along on that big trip you’ve always talked about taking, or you finally decide it’s time for you to do that trip by yourself and you get an email alert about the airfare sale, having the cash on hand to move on it allows you to move forward confidently.

How else do you see Cash affecting your life?

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A Financial Plan for When (If) You Get Laid Off

We’ve all seen the news about the Times-Picayune no longer publishing on a daily basis, and the reduction in staff that will certainly follow such an announcement.  Beyond the obvious effects on all of us as readers, the lives of dozens if not hundreds of the employees who will be laid off are thrown into turmoil who are all facing a lot of difficult decisions in the aftermath.  It’s an unfortunate reality of the world we live in that news of layoffs is becoming all-too common.  I’ve been through it (I was laid off by Janus Mutual Funds in 2001 after the tech-stock bubble of 2000) and many of my friends have been as well.  The fact that it’s more commonplace doesn’t make it any easier to deal with.

So what can you do when your financial world changes in a moment?  Start with the essential questions that I’m sure you have.  I think what you need to know right away is:

  • Is There A Severance Package?  If there’s additional money that you can expect which can help you with your transition, or is the check in your hand the last one you’ll be getting?
  • What’s Happening With The Health Insurance Plan?   Are employer-subsidized health insurance benefits going to continue throughout the severance period, or possibly longer?  Do we qualify for COBRA?
  • Is There Job Placement Assistance?  Has the company contracted with a placement firm to help those that have been laid off find new employment?
Once you’re past the initial shock, start to look ahead.  Here are 7 things to consider in those coming days:
  1. No Snap Decisions.  There are a lot of decisions to be made, but rushing decisions often leads to bad decisions.  Don’t put a lot of pressure on yourself to figure everything out the day you receive your paperwork.  Instead, take a deep breath and:
  2. Reconnect to Your Vision.  What would you do if you could do anything?  What have you been telling yourself that you’d always want to try?  Are there items in your answers that are worth pursuing at this time?
  3. Get Organized.  There will be a lot of decisions to make, and lots of deadlines to keep track of.  Without the routine of a daily job and the calendar at the office that you’ve become accusomted to, you can start to lose track of a lot of small details.  Get a calendar that you can trust, and start to put the important deadlines on them.  When do you need to turn in your COBRA paperwork?  Are there any deadlines around rolling over your 401k?
  4. Communicate With Your Colleagues.  If you were part of a larger-scale layoff, chances are you know many other people who are going through the same challenges you are.  Can you share questions and answers with some of your friends that you trust?
  5. Preserve Cash.  It may take longer than you think to land the new job you’ve been hoping for, or it may not offer some of the benefits that your previous job did.  Saving your cash can give you more choices and stability while you work your way into the next phase of your professional life.
  6. Remember That You’re Not Alone.  There are people around you who love you and who are there to lend a hand.  Be thoughtful and reach out to them.  You’d want to do whatever you could to help them if the shoe was on the other foot, so don’t let your ego stop you from asking your friends for introductions, job leads, or just a shoulder to lean on.
  7. Believe in Yourself and the Future.  Know that transitions are always hard, and know that you’ll come out of the other end stronger for it.

With some focus and smart decisions, you can land on your feet and hopefully look back one day at how far you’ve come from these difficult times.

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Financial Rules of Thumb Series – Is Saving 10% Enough?

[This post is part of the Financial Rules of Thumb series.  Check out the rest here!]

Saving 10% of your income is often tossed out as a solid rule of thumb.  Is it a good rule of thumb?

The Upperline: Generally solid advice, but you should run the numbers to see if you need to save more, or if you can afford to save less.

If you’ve started saving at a young age and are spending within your means, 10% may be enough.  Use one of the tools online or contact a fee-only financial planner to help you get some clarity on what it will take to retire the way you want to retire.  Liz Weston suggests what I think may be a better rule of thumb, which is “Save 10% for basics, 15% for comfort, 20% to escape.

Now, some common misconceptions about saving:

I’m saving 10% in my 401(k), so I’m on track.

Saving in your 401(k) or other retirement plan at work is a great step in securing your financial future.  My main concern here is that while having tax-deferred savings is great, you’ll want to have some savings that you can get your hands on before retirement, in an emergency fund or some other investments.  Things happen, and you’ll need to replace your air conditioner, or pay some medical bills at some point, and you can’t (strikethrough) probably don’t want to raid your retirement to pay for that.  Stay on track with your retirement savings, and start setting some money aside in your savings account for a rainy day.

I can’t save that much, so why bother?  I’ll just have to work forever anyway.

It’s natural for us as humans to see a goal that looks far too far away for us to reach, and we get discouraged.  Frustrated by what we feel is a lack of progress, we do nothing.  Even if you can only save 1% of your pay, that’s magnitudes better than 0%.  Then, take a few more steps towards your goal by:- Paying yourself when you pay off other debts.  Have a car loan that you’re close to paying off?  Set up an automatic transfer from your checking to savings once it is paid off, in the amount of the car loan.  You’re used to making that payment, now pay yourself and set that money aside for the future.  When you get raises, set up an automatic deposit into savings  for part of that raise.  Take some to spend and automatically save the balance for your future goals.

Remember – additional debt payments count as savings

If you’re paying off debts on an accelerated schedule, remember to count that money in your savings total.  It’s money that you were going to have to repay anyway, but you’re paying it off sooner than you needed to.  Pat yourself on the back and be sure to credit those extra payments towards your “savings” target.  Just be sure you only count the extra portion not the part you’d have to pay regularly.

(Big thanks to my friend @RussThornton of Wealthcare Capital for giving me a 2nd opinion on this piece)

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Emergency Fund – Is 3 Months of Expenses the Right Amount?

[This post is part of the Financial Rules of Thumb series.  Check out the rest here!]

I’m sure you’ve heard the term Emergency Fund in the financial media, but might not be certain what it means.  Here’s a quick definition, and then my take on the topic.

Definition: Emergency Fund – Money that you can get your hands on quickly in the event of an emergency.

The Upperline:  An Emergency Fund is one of the best things you can create, financially speaking.  It sets a solid financial foundation and protects you from using high-interest debt.  The question is, how much?

Your Emergency Fund can be in a savings account, money market, extra money in your checking account, whatever works for you. The important thing is that you have money available in case the transmission falls out of your car, the AC for your home goes out, or your home is temporarily damaged by a natural disaster. (But that probably won’t ever happen, right?)

If you don’t have money that you can access easily when bad things happen, you’ll have to

a) rely on friends/family/strangers

or

b) spend on credit cards or lines of credit.

If you’ve got these resources it’s not the end of the world if you rely on them in your time of need, but better for you if you can take care of the problem in advance by having sufficient cash. As I’ve said before, Cash is King not because it’s a great investment, but because it allows you to take advantage of opportunity or survive a small or large catastrophe.

“How much should I have in an emergency fund?”  That’s up to you. This has more to do with you and your comfort with risk than anything else. If you have a stable, steady income and prospects don’t seem to be changing, then 2 to 3 months of expenses might make sense. If you have an income that can fluctuate, own a business, or are generally more conservative, then having 6 months or more of expenses makes sense.

“It’s going to be hard to save that much money.”  Just because it’s hard doesn’t mean it isn’t the right thing to do.   Set aside what you can every month, and create a visual tracking aid (like the thermometer that United Way uses) to chart progress towards your goal.  Find a way to celebrate when you reach your goal.

If you don’t find a way to save small, regular amounts then you’ll never reach your goal without a big windfall of some kind.

But when that windfall comes, there’s another chance to do the right thing. Set aside some money for fun things, and use a big chunk to get closer to (or meet) your emergency fund goal.

With your emergency fund, you’ll have a resource that you can use, without high interest charges to pay for that new air conditioner.  Then, you can then repay yourself rather than your credit cards.

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Financial Rules of Thumb – A Planner’s Perspective

Financial rules of thumb.  We all know several, and have based our decisions off of them for most of our financial lives.  But how much truth is behind the common wisdom?

This post will serve as a table of contents for this series as I write and publish the content for you.  View the list below, and please suggest other rules of thumb in the comments that you’d like to see addressed.  I’ll link each new post back to this one and write one post per week until the series is complete.  If you want to be sure you get all of them, please subscribe to my blog and you can get them as they’re published either by email or in your RSS reader.

One last note – I don’t agree with some most of these the way they’re written.  The problem with general advice is that as my friend Tim Maruer likes to say, “Personal finance is more personal than finance.”

Saving
Spending

Investing

Home Ownership

Retirement

Insurance

  • “Life insurance should equal 5 times your income (or 8 or 12 times)”

What other Financial Rules of Thumb should I address?  Please let me know in the comments!

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Preparing for Disaster

I recently contributed to a piece for the Financial Planning Association’s consumer website on the topic of crafting a disaster plan.  The images of Japan in the aftermath of the Tsunami called me to reflect on our own experiences with Katrina.  We were prepared, but not as well as we could have been.  Hopefully this piece will encourage others to revisit their own planning and take steps now.

If you’d like to read the entire article, please click here to be taken to the Financial Planning Association.

Thanks to Bob Powell, the FPA, and to Rick Miller of Sensible Financial Planning for co-authoring!

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6 Secrets to Help Sweethearts Overcome Cash Conflicts

I was recently interviewed by the Financial Planning Assocation for their consumer website, on the topic of helping new couples merge their financial lives.  I’ve written about newlyweds merging their finances in this previous post, but the FPA article does touch on some new ground.

I have to say also that while I was interviewed for the article, I don’t agree with each point.  One of points is titled “Be methodical instead of emotional” and while that might be a great goal, we are emotional human beings.  There’s no way around that.  I believe the best we can do is create structures that we are happy with, and keep talking about areas of conflict.  In relationships there’s no way to take the emotions out of our decisions.  Let’s focus on having good, constructive conversations and nurturing the positive emotions of the relationship.  When the negative emotions pop up, that’s generally a sign that we have work to do.

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Is cash really king?

The old saying is “cash is king”.  A reporter recently asked me if this was still true, given all of the upheaval we have experienced since 2008.  I still believe that’s true, but not because cash is such a great investment.  Just look at this quote from a recent MetLife study:

“50% of Americans say they are only one month 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 fore more than two weeks.”

Here are a few reasons that having a cash emergency fund of 3-6 months of living expenses is still a great idea.

  • Cash keeps you out of debt.  When the unexpected happens, a cash cushion can be a lifesaver.  If the air conditioner goes out or the transmission needs to be replaced in your car, having the cash to pay for it saves you from tapping lines of credits or using high-interest credit cards to pay for those expenses.  Rather than paying your bank interest, pay with your emergency savings and pay yourself back.
  • Cash can save you money by raising your deductibles.  If you’ve got a cash cushion, you can save money on things like homeowners and auto insurance by raising your deductibles.  Since you’ve got the cash to take care of minor incidents without filing claims, you’ll save money in the long run by having a better claims record, and save money in the short run by reducing your coverages and premiums.
  • Cash lets you take advantage of opportunities.  You’ve always wanted to go to Europe and you find a great deal on airplane tickets.   Got a great lead on a job in another city and not sure how you’d make the move?  A cash foundation can allow you to take advantage of opportunities like these.
  • Cash takes advantage of the snowball effect of savings.  Like most new things, the hardest part of savings is getting started.  Setting up a portion of your regular paycheck to go directly into savings can get you started.  Soon that balance increases and it can become a positive challenge to find ways to save even more money in any given month.

What do you think?  Is cash still a good investment?

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