My Investing Blog

Is Clipping Coupons Worth It?

Kristen — Tue, 20 Mar 2012 18:34:59 +0000

Photo credit: osseous

Coupon use has increased dramatically over the last few years, with many families looking for ways to cut costs during the recession. It has also been popularized by television specials on extreme couponing and hundreds of blogs that post guides on how to get started and what deals are going on. But many people looking into the coupon world from outside are left wondering if it’s really worth it. For most, the answer is, “It depends.”

Types of Coupons

If you’re new to coupons, you may be surprised to learn that they’ve come a long way since the basic cents-off coupons you find in the Sunday paper. Although these still exist, and are often some of the best coupons, there are tons of other places to find them these days.

Printable coupons allow you to search by product and print just the ones you need. These can be very helpful when you’re putting together a shopping trip and want to save money on things you were planning to buy anyway.

Digital coupons are also becoming increasingly common. You can load them to your smart phone and have the cashier scan them at the register. Many stores also allow you to load coupons to your loyalty card to get discounts in the store as well. And Upromise, which specializes in building college savings, has coupons that don’t take money off your purchase, but instead put it in your savings account.

Most coupons are manufacturer coupons, which the product’s manufacturer prints in an effort to sell products, especially new ones. The store submits these to the manufacturer and gets reimbursed for them. The other type, store coupons, are printed by the store and do not trigger a reimbursement. Most stores allow you to use both a manufacturer’s coupon and a store coupon on the same product, which can add up to big discounts.

Saving with Coupons

Although buying every product for which you have a coupon will technically save you money off retail price, it probably won’t impact your budget much. That’s because you’re buying products you don’t necessarily need, and at prices that may be above what you’d ordinarily be willing to pay for a similar product.

The big savings come when you match coupons to each other and to sales. If a store has an item marked down and you have a manufacturer’s coupon and a store coupon for it, this can bring the price down to a tiny fraction of retail. Sometimes you can even get the product for free! The people who see big savings are doing this, carefully planning their shopping lists to match coupons with what’s on sale in that week’s circular.

You can sometimes even get paid to buy things if you use coupons on products that have rebates. The drug stores Walgreens, Rite Aid and CVS all have programs that print rebates on your receipt, good for dollars off next time you’re in the store. These can in effect make your products free in some cases.

Is Couponing Right for You?

If you stay organized, use blogs to get lists of products on sale that have matching coupons, and use these to help you strategically buy items you actually need, you can save quite a bit of money. The process does take time though, so plan on spending at least a half hour each week getting ready for your shopping trip and finding the exact products you have coupons for. Many stay-at-home moms who have time on their hands feel that the savings are worth the hassle.

For others, couponing won’t do much. Unless you’re matching coupons with sales, most coupons just bring name-brand products down to the price of store-brand products. Therefore, you could get all the savings without any of the work by just switching to the store brand. Busy people whose time is in high demand may prefer to just buy store brand items and what’s on sale without bothering with the coupons.

Have you tried using coupons? Do you think it’s worth the time and effort?

Saving for Periodic Expenses

Kristen — Fri, 16 Mar 2012 19:05:08 +0000

One of the trickiest aspects of establishing and implementing a budget is managing periodic expenses. These are things you don’t pay monthly, but that you expect to spend a specific amount on each year. The challenge is finding a way to set aside money monthly so you have it when it’s time to spend it.

Periodic expenses can vary depending on your situation, but there are some common ones that most households have. They include semi-annual car insurance premiums, basic car maintenance (like oil changes), vacations, gifts (especially Christmas ones), clothing, electronics, furniture and non-consumable household goods, subscriptions, and memberships.

Photo credit: Cheezsy

Creating an Allocated Savings Plan

My husband and I have a system that has worked incredibly well for us that I’d like to share. We call it our allocated savings plan, and the only tools we use are a spreadsheet and a savings account that’s linked to our checking account, but separate from our general savings account. It’s like having a set of digital piggy banks for our periodic expenses.

When you create your household budget, include in it a specific dollar amount that you want to save in each category of periodic expenses. Figure out the amount to save each month by estimating your annual expenditures and dividing by 12. For example, we like to set aside $900 each year for traveling. That’s $75 per month in our budget.

After going through each category, you should have a monthly allocation for each category, along with a total amount you plan to allocate each month toward all of the categories. You’ll put all of your allocated money into a savings account each month. The account’s sole purpose is to hold the money you’ve allocated but haven’t spent yet, ensuring that you have it when you need it.

Tracking Allocated Savings

Track how the money is allocated in a spreadsheet. List each of the categories down the left side and the amount you will allocate for each one in the column just to the right. List the months across the top of the spreadsheet.

Set up a simple mathematical function that fills in all of the boxes by adding the monthly allocation to the previous month’s total in that category. Extend this formula across all the months, so after 12 months, the amount listed should be your annual budget in that category.

Every month, save receipts to track your spending in each category. At the end of the month, go into the spreadsheet and subtract the amount you spent in each category from the total amount allocated as of that month. When you’re done, add up your remaining allocated funds in all of the categories to find out how much money should be in your allocated savings account. Go into your online banking portal and transfer money into or out of the account so it has the correct amount.

Tweaking the System for Your Needs

The beautiful thing about the system is that it allows you to know exactly how much you have saved in each category at any given point in time. This allows you to make informed spending decisions. If you want to spend more than you have, you can even re-allocate money from a different category to make up the difference.

So, that’s our system for allocating savings for periodic expenses. Do you think the system would work for your household?

Am I Ready to Buy a Home?

Jason — Mon, 12 Mar 2012 21:08:41 +0000

By Jason Van Steenwyk

Despite the recent problems in the real estate market, homeownership remains a big part of the American dream. It’s importance is all but woven into the fabric of the American experience: Consider how many of our ancestors came to America fleeing neofeudalism and tenant farming systems, under which they were always at the mercy of oppressive landlords, to pursue the dream of economic as well as political and religious freedom.

But that doesn’t mean homeownership is right for everyone. Indeed, as we have discovered over the past five years or so, homeownership isn’t right for everyone.

Are you ready? Let’s look at the numbers:

Transaction Costs

First of all, let’s take a look at the costs of acquiring a home – and subsequently selling it if you change your mind.

Assuming you finance the house, you can expect to pay a loan origination fee of as much as $2,000 to $3,000, or even more, just to put the financing together. You can pay this all up front, or you can have it “hidden” within the loan itself, by rolling the origination fee into the loan balance, or paying “points” on the loan.

However, whether you pay it in a lump sum up front, or roll it into the loan balance, the mortgage brokers, bankers, and other people involved with the transaction don’t work for free. You will incur these charges one way or another.

Commissions

On top of the transaction costs to originate the loan, you will also have to account for any agents’ commissions as part of the transaction. Traditionally, real estate agents receive about 6 percent of the purchase price of a house, between the buyer and seller’s agents and their parent agencies. That will add $12,000 to the price of a $200,000 house.

Yes, normally the seller pays the commissions, not the buyer, directly. But ultimately, all costs are passed on to the buyer, one way or the other.

So with a price tag of $12,000 to $15,000 on a modest-priced $200,000 home, it doesn’t make much sense to move into a home you’re only going to occupy for a year or two. That doesn’t give price appreciation much time to help you overcome the break-even point!

Most advisors recommend buying only when you plan on remaining in the home for three years or more. In fact, you must live in your home longer than three years out of the five years prior to selling in order to qualify for the $250,000 capital gains exemption on personal residences. For married couples, the exemption is up to $500,000. Special rules apply for those in the military.

Am I ready to buy?

Again, this is an individual question. Most planners recommend that you have some savings in the bank, first, before attempting to purchase a home.

How much savings? Financial planner Thomas Jensen, of Vaerdi Financial, a fee-only advisor in Portland Oregon, suggests maintaining an emergency fund of about six months’ worth of expenses – even after the down payment.

If your income is reasonably secure, you may be able to get away with a bit less. If your job is at risk of elimination, though, or in a very cyclical industry, you may want to have even more cash in the bank or other reasonably easily-accessed account.

Many people make the mistake of thinking they can substitute a credit card or home equity loan to get them through a tough spot, rather than having a robust emergency fund serving that purpose. This is a mistake: Unless you have been in the home a long time, and/or have built up significant liquidity in the home, the lender will be looking to your income to secure any borrowing you do. If you lose your job, you will likely simultaneously lose your ability to borrow your way through the crisis. It’s vital to have enough in hand to see you through an unemployment period of up to six months – a real possibility in today’s economy!

How much to put down?

There are two schools of thought on this: One school of thought recommends making as big a down payment as you can – thus lessening your risk and building equity in the home as fast as possible. If you decide to rent the property, this also makes the property in question go “cash flow positive” that much sooner. Which means you can keep the property indefinitely.

The other school of thought says don’t commit anything more to your down payment than necessary. Why? You may need the cash for something else. Meanwhile, you are taking a tax deduction on the debt. With many home mortgages at less than 5 percent today, for those with good credit, the after-tax equivalent mortgage rate is closer to 3 percent – your “hurdle rate.”

This would be the rate you would have to earn on your money in order for it to make sense not to pay down your mortgage or put extra down on a house. Most skilled investors can make this hurdle. But not everyone can. The right decision is going to be a very individual decision.

Tip: Some states provide substantial creditor protection to home equity. If you are at risk of a lawsuit, this could be an important factor in the decision.

No down payment deals

These are few and far between, these days, unless you qualify for a Veterans Administration loan. For FHA mortgages, you will typically need to come up with something – perhaps 3 to 5 percent, depending on what programs you qualify for. For conventional mortgages, you will typically need to show a down payment or other reliable security of at least 10 percent for owner-occupied mortgages – and 2 to 3 times that figure for investment properties.

One advantage to paying down at least part of your mortgage, though, is that if you have at least 20 percent equity in your house, you don’t have to pay primary mortgage insurance, or PMI. This can save you a couple of hundred per month in premiums – that protect the bank, not you. It’s wasted money, from your perspective. (Note: VA borrowers shouldn’t have to pay PMI. The U.S. government guarantees their loans).

Whatever down payment arrangement you opt for, however, you should still have a substantial emergency fund to see you through those repair and maintenance emergencies and shocks to your income.

If you haven’t been able to come up with a three-to-six month emergency fund, though, or a 10 percent down payment (even if you elect a lower down payment option), that is a very good sign that you are not yet in a financial position to buy a home.

What can I qualify for?

Bankers look at your credit rating: The best loan terms go to those who maintain a credit score of 760 or so or better.

They also look at two key cash flow metrics: Your “front-end” ratio and your “back end” ratio.

Front-end ratio

Your front-end ratio is all your housing expenses (think “PITI”, or payment, interest, taxes and insurance), divided by your gross income. According to the Federal Housing Authority, you want to be able to show a front-end ratio of 29 percent or less. This means that you shouldn’t be paying more than 29 percent of your total income for housing.

Back-end ratio

This is the ratio of your total housing expenses plus all your debt payments to your total income. Federal Housing Authority standards require lenders to insist on a maximum back-end ratio of 41 percent. Guidelines for VA loans are similar.

Tying it together

Homeownership isn’t for everyone. And there are no guarantees, obviously, that your home will go up in value over any given time period. But renting is an expense, too. If you are relatively stable in your location, you have at least three to six months’ worth of expenses set aside in cash or something else reasonably liquid, you fall well under the front-end and back-end guidelines for favorable financing, and you want to own a home, it is certainly still an option worth pursuing. A home can be a valuable store of wealth and retirement security. More on that in a future article!

How Marriage Affects Credit Scores

Kristen — Mon, 12 Mar 2012 19:47:11 +0000

Photo credit: Print North East

When you’re about to get married, you and your future spouse have several things to think and talk about with regard to how you are going to manage your financial life together. Your credit scores are one of the many things to consider as you enter into married life.

Many people are surprised to learn that marriage itself doesn’t do anything to your credit scores. They don’t combine when you get married or get averaged out. You keep your pre-marriage credit, as does your spouse. But marriage can affect credit indirectly in several ways.

The main impact of marriage on credit is that the debt you enter into together will appear on both of your credit reports. Of course, this is only true if both of your names are on the debt. Therefore, if you take out a car loan together and both sign the loan documentation, that loan and all of its payments will appear on both of your credit reports. The same is true of credit cards, mortgages, and other types of loans or lines of credit.

Therefore, although your credit scores stay separate, your financial choices as a couple can affect both of your scores. On the flip side, both of your credit scores can affect your financial choices. The biggest area this applies to is your mortgage. If you both earn income that you need to use to qualify for a mortgage, then both of your credit scores will count as well.

A spouse with a low credit score can cause you to have to pay a higher interest rate, which could cost you hundreds of dollars per year, and thousands over the course of your mortgage. Therefore, it’s important to talk about your credit scores before you get married and work together to improve both of your scores.

One great way to improve your scores is to add the spouse with a lower credit score as an authorized user or joint account holder on the credit cards of the spouse with the higher score. This puts all of the credit history on the spouse with the low score’s credit report, ideally raising the score.

Another strategy for improving your credit is to work together to pay down the debt of the spouse with bad credit. Reducing credit card balances and catching up on accounts with late payments are two major ways to boost a bad credit score. Although there’s no way to erase a history of late payments, as you replace the bad habits with good ones, the score will gradually improve to reflect that.

Having good credit scores makes it easier for you as a couple to borrow money at low interest rates. It also can affect your car insurance premiums, ability to find employment, and ability to rent a home or apartment because all of these entities often check your credit. Therefore, talk about your credit scores before tying the knot and make a plan for how to manage credit wisely as a couple.

Should I Refinance My Mortgage?

Kristen — Fri, 09 Mar 2012 21:30:40 +0000

Photo credit: Alan Light

This week, interest rates on mortgages dropped yet again, leaving many homeowners wondering if now is the time to refinance. The average 30-year fixed-rate mortgage is at 4.1 percent, and a 15-year fixed-rate mortgage is even lower, at 3.35 percent. If these sound good to you, now may be the time to lock in a great rate. However, let’s consider several factors that will help you make a wise decision.

Cost
Refinancing a mortgage isn’t free. In most cases, the costs will be similar to those you paid when you got your original mortgage. You’ll pay a loan origination fee of usually 1 percent of your mortgage balance, plus a miscellaneous collection of appraisal, survey, inspection, and title fees that usually add up to well over $1,000. You can either pay this out of pocket or add it to your balance in one of two ways. The first is to directly increase the amount you borrow, like with a small cash-out refinance, and the second is to get a slightly higher interest rate and use the rebate from the lender to pay the fees. Either way, you’ll pay for it later, so the best choice is to pay the fees out of pocket when you refinance.

Interest Savings
The main thing to calculate before deciding whether to refinance is how much money you will save in interest over the remaining life of the mortgage. Compare the remaining interest you’re scheduled to pay on your current mortgage to the interest you will pay on the new mortgage. A mortgage calculator can help you with this. Or another trick, if you know the monthly payment, is to multiply the monthly payment by the number of months remaining in the loan and subtract the current principal to get the total remaining interest.

Monthly Payment
Although many people focus on the monthly payment, don’t fall into the trap of doing this exclusively. This is because there are two ways to reduce your monthly payment: getting a lower interest rate and choosing a longer repayment term. The former will truly save you money, whereas the latter can actually cost you more! Therefore, although you should make sure you can afford the monthly payment, don’t focus on it. In fact, the best strategy may be to switch down to a 15-year mortgage so you can finish paying it off sooner.

Credit Score
Part of how you can get the best interest rate possible is by having a great credit score. Although developing a good score generally takes years of practicing good habits, there are some things you can do in the months leading up to applying to refinance your mortgage. First, don’t apply for any other new credit. Second, pull your credit reports through AnnualCreditReport.com, look over them for errors, and file disputes if you find errors. Third, pay down your credit card balances. Ideally, you should have a credit card balance of no more than 30 percent on each card, although lower is even better.

If you’re ready to go ahead with a refinance, it’s time to contact your current lender and at least two others to get interest rate quotes. Once you pick a lender, lock in your rate and get the ball rolling on your refinance!

Group Buying: Frugally Chic or Scam?

Maricel — Tue, 06 Mar 2012 00:02:54 +0000

Photo Credit by Paula Marttila

Who hasn’t heard of clipping coupons or printing them from online coupon sites? For a frugal or budget conscious person, every little saving counts and group buying seems to take frugality to the next level. Think about eating in a cool local restaurant, having your nails done in a chic spa or getting as much as 50% in your local organic food store; all these are possible with group buying!

Group buying sites like Groupon and LivingSocial allow bargain hunters to sign-up for free and get as much as 70% on daily deals. So what is the catch? For each deal the buyers has to reach a certain number before the selling deadline otherwise the deal is off. Everything is up for grabs: meals in restaurant, time in a spa or salon, concerts, family activities, food takeout and delivery, even adventure escapades and vacations. Discounts for clothes and shoes are also available. The nice thing about these group deals is that they are tailored to each city where they are offered. These deals are marketed in a way that lets buyer discover the local businesses in their area. If a buyer travels she can simply access the site and change the location to the city where she is located to view the deals in that city.

Buyers who have tried the deals swear by their authenticity and value for money. A lot say that the deals, especially on food allow them to try local restaurants which are otherwise not within their budgets. Since majority of the deals target women, group deals have become a chic but frugal way to relax and bond with women friends and relatives over food, spa and salon treatments.

Although it’s true that group deals have cultivated loyal, bargain hunters and a lot are always on the lookout for each daily deal, how come we still hear bad press about them? Buyers complain that there are businesses that do not honor the vouchers, give bad service to voucher holders or deals are not they signed-up for. Let’s also try looking at the other side of the story, that of the businesses where the deals are redeemed.

If there are deal hunters delighted over the huge discounts, there seems to be local businesses crying scam! BBC News reported on a fruit and vegetable delivery service based in Sussex who signed up on a group buying scheme, was unable to cope with demands and lost money due to refunds. Same kind of complaint is echoed in some small businesses in the US who participated in group deal schemes. There are also reviews that say group deal buyers are in it strictly for the deal only and are not really repeat or loyal customers in the long run.

Well, whichever side of the fence you are on one thing remains clear: always read the fine print and know for sure what you’re getting into. This is true whether you’re a deal hunter or a business owner. No exceptions!

What Information Goes Into My Credit Report (And How Can I Improve My Score?)

Jason — Mon, 05 Mar 2012 22:10:05 +0000

By Jason Van Steenwyk

Lately it seems like everyone is a slave to their credit report. I have an old friend who just went through a bout of unemployment, where she nearly lost her apartment and her car. She has some medical bills coming due, as well – and she’s very stressed out about her credit report.

Well, you don’t have to enslave yourself to your credit report. There are lots more important things to worry about, and if you are having trouble managing the basics, such as food, shelter, clothing, and transportation so you can stay in the work force – well, take care of that, first, before stressing about what it might say on your credit report.

That said, however, your credit score is more important than it used to be. It’s not just lenders who look at credit scores, anymore. More and more employers look at your credit report when applying to certain jobs. And many landlords will “pull a bureau” on you before deciding whether to lease an apartment to you. Even auto insurers are getting into the act: granting auto insurance premium discounts to people with excellent credit scores.

Let’s take a closer look at your credit score, what goes in it, and how you can improve it.

Your FICO Score and Its Applications

Your credit score is also known as your FICO score, which stands for Fair, Isaac Corporation. This is a company that consolidates your credit information from the three major credit bureaus, and consolidates it into a score. Lenders look at your score as a proxy for how safe a credit risk you are. If you have a spotty credit record in the past, statistics say you are likely to have a spotty credit record in the future.

Sure, there are always exceptions. But lenders are in the business of playing the percentages. They don’t know you personally, in most cases, so all they can go by is your credit score and the collateral you present.

FICO credit scores range from 300, which is bad, to 850, which is pristine. Your score calculation is automated. It happens automatically, and your credit score is updated every time your credit information is updated, or when information “scrolls off” your report after a certain period of time (between seven and ten years.).

To get the very best loans available, try to have a credit score of above 760 or so. The lower your score, the higher your interest rates are likely to be, and the higher your required down payment is likely to be on real estate purchases, auto loans, and the like.

Fair, Isaac’s exact algorithm is proprietary: They haven’t released their exact methodology to the public yet. But we do have a pretty good idea of what information they use to calculate your score and how it is weighted.

Your Credit Score: The Ingredients

The biggest and most important part of your credit score is your payment history. According information publically released from the Fair, Isaac Corporation, your payment history accounts for some 35 percent of your credit score.

First of all, FICO looks at whether you have any major legal marks on your credit record. For example, any bankruptcies you have incurred, judgments from lawsuits, wage attachments, tax liens, etc.

These are the most serious issues on your credit report, and some of them, such as a Chapter 7 bankruptcy, will not scroll off your report for 10 years, as opposed to the seven years most information stays on your report.

FICO tracks your payment history on all debts reported to any of the major credit bureaus, including credit card debt, retail cards such as a Sears card, installment debt, finance company loans, mortgages, etc.

They look at how reliable you are with paying them off, including how severe any delinquencies are. A few 30-days delinquencies, here and there, over a period of years, is no big deal. But a history of 60 day and 90 day delinquencies is going to sting your credit score for a while.

They also look at the number of items you have past due, as well as the number of accounts you have paid off as agreed.

Amounts You Owe

The second most important factor in calculating your FICO score is the amount of debt you hold on various types of credit accounts. Of particular importance: Your debt-to-available credit ratio. This is your total balance, divided by the total amount of all credit lines open to you. For example, if you have open lines of credit and credit card limits totaling $50,000, and you hold a balance of $10,000, from all sources, you have a ratio of 20 percent.

For a solid credit rating, strive to pay off all your bills on time, as agreed upon, and keep your debt to credit ratio below 25 percent, and ideally below 10 percent.

This is particularly important when it comes to qualifying for a mortgage, since your debt to total income ratio factors very prominently as well.

According to the Fair, Isaac Corporation, it is also helpful to prove your responsible handling of several types of credit. For example, to maximize your credit score, you may want to hold a small, easily manageable balance on one or more credit cards, an installment loan on an appliance, for example, and a car loan.

Warning: This advice may help you goose your credit score slightly, giving you a way to “game the system.” Opening up several balances may be the best thing for your FICO score. But it may not be the best thing for your overall financial situation. In the end, an interest rate of zero is better than an interest rate you’re paying to someone else! For some people, it’s better to avoid consumer debt altogether and pay cash, accepting a lower credit score, than it is to rack up credit accounts and risk getting into trouble.

Length of History

When it comes to your credit score, length does matter. It helps your score to keep an account open for a long time. Good credit histories that go back years are stronger than good credit histories that are very new.

New Credit Accounts and Inquiries

The sudden opening of a number of new credit accounts raises a red flag among creditors, as does a large number of applications for credit within a short period of time. If you are planning on taking out a big loan for anything, such as a mortgage, try to avoid filling out a whole bunch of applications in the weeks and months before you’re ready to buy.

Note: FICO understands that it is quite normal to fill out several applications for the same loan — say, a mortgage loan — at different companies. They typically don’t count this process against you when calculating your score.

So how can you boost your score?

Keep your old accounts in force. If you have to cancel one of two credit cards, cancel the newer one, all things being equal.
Pull your own credit report once each year (it’s free!) and inspect it for errors. If you find errors, notify the bureau, in writing. By law, they have 30 days to strike false information from your report. Otherwise, they must verify the accuracy via the merchant that filed the adverse report.
Inspect your credit report carefully for forgotten accounts, charge-offs, and delinquencies. Either challenge them or correct them.
Don’t cancel cards right before applying for a big loan. This will not change your debt, but it will lower your available credit amount without changing your balance, which will adversely affect your debt/available credit ratio.
Protect your card number from compromise by identity thieves. Write “Check ID” on the back of the card. Get one with a photo on it. When paying with a credit card over the Web, only use encrypted Web sites (you can tell by the “https://” prefix, and/or by the tiny padlock symbol displayed on your browser.

Above all, don’t treat your credit report like a golden calf, worshipping it like an idol. It is useful if you want to borrow money. But there is a lot more to your financial life than your FICO score.

The good news: No matter how bad your credit history, you can always improve it by paying off your debts on time and managing your fiancés responsibly. Newer credit information is weighted more heavily than older information. It’s never too late turn over a new leaf. And there is no reason why you can’t have a score of 850 in seven years.

How To Save Money When You Already Know How To Save

Jason — Sun, 04 Mar 2012 00:01:20 +0000

Photo Credit: "401K," via Flickr Creative Common License

By Jason Van Steenwyk

There are lots of articles out there about how to save money by looking for bargains and clipping coupons. But here at MIBMoney, we figure you’ve already figured most of that stuff out. There’s a lot less written, though, about what to do with that money once you save it! This article is designed to be a closer look at the importance of savings, and what to do with yours.

The Importance of Savings

Aside from possibly keeping up your car, medical and life insurance premiums, the first step in any good financial plan is this: Cash in the bank. You need to build an emergency fund – and protect it for emergencies. Consider: A recent Harris poll found that nearly one in three Americans have no retirement savings – and one in five have no significant emergency fund whatsoever. What’s worse, the number is rising. Harris is reporting a significant increase in the percentage of savingsless Americans since the last similar poll was taken, just 18 months ago.

That’s a lot of Americans living paycheck to paycheck. If this is you, you are perhaps one or two paychecks away from being homeless – living on someone’s couch, or worse. What’s more, with more and more employers doing financial background checks, an eviction on your credit report could make it much more difficult, in some industries, to get back on your feet in the event of a layoff. And the layoffs are still coming.

Enter the Emergency Fund

The most reliable insulation against sudden income shocks is cash. Don’t rely on credit cards to see you through the rough patches: Banks have a way of cancelling your card just when you need it most. Home equity? Again, don’t count on it. It could take days or weeks to process a home equity loan. And if you’ve just lost your income, you could get declined.

Instead, you need cash. Money that you can get your hands on right away, to pay for that auto repair, or to pay your rent or mortgage for weeks or months while you’re looking for work.

How Much Emergency Fund Cash Do I Need?

Honestly? More than ever. In the old days, it was usually enough to have three months’ worth of expenses in the bank. But stop and think: According to data from the Bureau of Labor Statistics, the percentage of unemployed who have been out of work for six months or longer has exploded by 400 percent since 2008. This means that three months isn’t a target, anymore. It’s the minimum. The reality is that unless you are a very junior level worker able to fit in almost anywhere, a realistic emergency fund should be able to support your basic expenses for a minimum of about six months, according to Thomas Jensen, a fee-only financial planner in Portland, Oregon.

Unemployment Insurance

For many of you, unemployment insurance can help cover part of the gap. But not everyone qualifies. If you have a spotty work history already, if you are self-employed, if you are a 1099 contractor, if you are a seasonal hire or a pure commission employee, don’t expect to be able to fall back on unemployment insurance. You are on your own. (Fortunately, you’re self-employed! You don’t need to rely on anyone else, in theory. Unemployment claims for the self-employed are usually more trouble than they’re worth. Go find some new customers!).

Ok, I’ve saved. Where do I put my money?

The most obvious place? Under your mattress or in a coffee can in the house. This has the advantage of being readily available. Unfortunately, it has the disadvantage of being readily available. Your kids can find it and steal or lose it, for example. Or thieves can walk away with it. Meanwhile, it earns no interest, and slowly gets eroded by inflation.

Our advice: Don’t rely on cash on hand, other than for a small portion of your emergency fund.

Savings Accounts

Notice I wrote “savings account” instead of “checking account.” This is because emergency money in a checking account tends to get spent on non-emergency things. Even with the best of intentions, keeping your emergency savings in the same account as your checking account money can hang you up if you are the victim of identity theft and a thief zeros out your account. By keeping your savings account money segregated from your checking account money, you can help ensure that in the event of identity theft, a bank error, or even an unexpectedly large electronic draft, you can still put food in the refrigerator or gas in your car while you work things out.

Savings accounts generally also pay a somewhat higher interest than checking accounts (though it won’t be much, these days.) More importantly, though, any money you keep in a bank or credit union savings account receives FDIC insurance (CUFA insurance for credit unions) of up to $250,000 per account holder. This should be sufficient for most emergency funds, we think.

You can also generally access this money pretty quickly by transferring it into your checking account, or making a withdrawal from a bank (though you may have to wait until a week day before you can physically withdraw more than the ATM limit, typically of $400 per day).

Certificates of Deposit

These are great for larger emergency funds, because they also receive the FDIC guarantee. They typically pay more interest than either the savings account or checking account. But they are better suited for people who have already established an emergency fund and want to commit a relatively large amount – say, $10,000 or more – to a very safe savings vehicle. That little bit of interest comes at a price: The bank wants to be able to lend it out. If you need to withdraw your money before the CD matures, expect to pay a penalty for early withdrawal. Typically the penalty is six months’ worth of interest, though your mileage may vary. So CDs aren’t as liquid as savings or checking account funds, nor even money markets (see below)

Money Markets

A money market is basically a really, really conservative mutual fund. The fund company buys a whole bunch of very short-term debt, including commercial paper, short term treasuries, investment grade municipal bonds, and the like. They manage the fund to maintain a net asset value of $1 per share, day in and day out. Anything over $1 per share typically gets credited as interest, but you can reinvest your interest back into the money market fund (it’s taxable as income, just as CD and savings interest is).

You usually get a slight boost to your interest payments with a money market. And many money market funds will give you a checkbook, allowing you to write a very limited number of checks against your money market account. You may, for example, be restricted to one or two check transactions per month, so you may want to use your transaction to transfer a significant sum of operating money to your checking account, rather than pay one or two smaller emergencies at a time.

The downside of money markets? They are not FDIC insured. So if the company goes bust, you will be left holding the bag. Also, money markets can, theoretically, lose money, dropping the below $1 per share. This is extremely rare, but it does occasionally happen. Money in a money market fund is pretty safe, but it isn’t risk free, by a long shot.

Life Insurance

You may be able to borrow against a life insurance policy. The insurance company knows you’re good for it, because they know you’re going to die eventually. If you never pay a cent, they will take their balance, with interest, out of the life insurance death benefit they pay your beneficiaries.

If you have a life insurance policy with a cash surrender value, you can consider it part of your emergency fund. Some life insurance policies pay dividends that are much greater than CD and money market interest rates – tax free. Be advised… if you surrender your policy altogether, you could be liable for taxes on any gains within the policy. Usually, it’s better to keep the policy in force to avoid the tax and borrow against it rather than surrender it entirely.

If you’re offered Preferred Shares, would you get a Loan to Finance it?

Maricel — Thu, 01 Mar 2012 12:53:32 +0000

Photo Credit by the.sprouts

This is the question that a friend of mine is facing right now! He has been offered preferred shares in his high school buddy’s company but swears the only way he can afford to invest is by taking out a loan. He got me on board to bounce thoughts off, brainstorm and hopefully come-up with an informed decision.

First the facts of the company, it started out as a mom and pop company built from the ground way back in 2004 and right now has already 11 organic branches and 16 franchises. It is in the service industry with a business model that has a wide blue ocean written all over it – think how Facebook revolutionized social media, or Cirque de Soleil re-invented the circus, or just Google Blue Ocean Strategy to get what I mean. Last year it posted a net profit of 1.5M and according to the nicely written business plan that was sent to my friend, its projected profits 3 years from now is in the vicinity of 5M. The founder, who is my friend’s buddy used to work for a giant chip manufacturer (the “I” inside the computer), quit his job at the prime of his career and started the company with his girlfriend, now his wife. By the way, my friend thought he was crazy when he quit his job back then but have since revised his opinions.

At the minimum participation, the value of each share is very affordable and projected to increase by as much as 30% after 3 years. Exit strategies offered: redemption after 3 years at 12% per year straight interest, 1% interest every year thereafter and on 6^th year callable at 15% straight interest. The company also aims to pay dividends after 3 years.

My friend can get a loan, payable in 3 years with a total annual interest of 4.9% that includes insurance and he swears he can afford the monthly payments. This means that at the minimum cost of participation, he gets to pay a total of 14.7% for three years.

Comparing the above 14.7% to the 36% he can get if he chooses to exit after 3 years, I say the math is pretty simple, right? I know that preferred shares are generally regarded for their long term benefits. They also have the advantage of low price per share, price and income stability and of course liquidity.

I think my friend should get that loan and buy those preferred shares. Or is my view too simplistic? What other risks should my friend take into consideration? More importantly, would you advise him to get that loan?

What Would You Do If You Were Given $50,000 Today?

hank — Sun, 26 Feb 2012 08:01:22 +0000

So the nice folks over at MarketLeverage have agreed to sponsor the contest this round as they’ve been duly impressed with the postings that come out of the M.I.B! I’m happy to say that I’m happy to hear it! That being said, the contest is giving away 3 American Express gift cards for $150, $100, and $50!

We had an opportunity to cook up a laundry list of prizes, but I figured the folks that swing by here want to make THEIR money work for THEM instead of giving prizes that you’d have to turn around and sling up to eBay. I say let your cash work for you!

So in the last 2 promotions (Contest1, Contest2) the rules seemed to work very well and rewarded everyone accordingly, soooooo:

The Prizes

There are a total of (3) prizes worth $300 that will be given out:

(1) $150 American Express Gift card

(1) $100 American Express Gift card

(1) $50 American Express Gift card

The Question

So the question each person needs to answer is:

If you were given $50,000USD (tax free) today, what would you spend it on?

The Entries

There are actually 100 possible entries you can have if you use all the options, so read these rules closely!

1. Leave a relevant comment based on the question above (5 entries)
2. “Favoritize” this page through your choice of preferred methods: Del.Icio.Us / Reddit / Digg / Stumble Upon / Technorati / PFBuzz . After linking, use the contact page to shoot me an email to which page you’ve submitted (5 entries)
3. Sign up for my RSS feed (10 entries) [if already signed up contact me to have your entries added]
4. Sign up for The Money Life Network RSS Feed. Worry not, MLN won’t bite. (10 entries) [if already signed up contact me to have your entries added]
5. Refer a friend to this blog and have them leave an entry here on this post. Contact me with the friend you referred (10 entries)
6. Provide a writeup based on the question above on your own blog and link back to this post (15 entries)
7. Add me to your BlogRoll (15 entries)
8. Review MyInvestingBlog.com on your website (30 entries)

The Rules

This giveaway is all in good fun.
There is no purchase necessary and it won’t improve your chances to win, but I’m always up for free $ if you’d like to send me some.
If it works as planned, I’m happy to offer more giveaways in the future.
The winners will be selected by random number generator.
The winners will be chosen on August 6, 2008 @ 12pm Pacific Standard Time(PST).
Anyone of any age can enter unless it is illegal in your area.
The winners will be contacted via email, SO LEAVE A VALID EMAIL ADDRESS IF YOU WANT TO BE CONTACTED! I promise I will NEVER use your email address for evil purposes. Just to contact you to tell you that you’ve won. You don’t even need to leave a real name if you don’t want, just a valid email address (and home address if you win). If the email address isn’t valid, I’ll use the random number generator to pick another name.
All prizes are provided “as is”.
If you want to host my next giveaway, I’m happy to consider your offer. Contact me.
The odds of winning depend on how many people are involved. I can’t give you this info now, but I can assure you, it’s easier to win than the standard lottery.
By getting in on this you allow MyInvestingBlog to republish what you write either on this blog or other spots.
I am the judge and jury as to what is a “relevant” post. If you’re following the rules above, you’re most likely a valid post; but I reserve the right to delete your post if I feel it isn’t relevant to this blog. For example, if you write something like: “I really like giftcards, and I really really like free gift certificates!” You’ll probably not get in. Please make it a valid post!