Water Heater fixed!

I went with my dad to Lowe's this morning to get a new water heater and related materials for installation. We decided to convert from gas to electric for safety and cost reasons. It will pay off over the long term in utilities costs and efficiency.

It took my dad most of the day to get the electrical and plumbing redone but I now am mostly back to normal again. It is nice to have a hot shower!

I spent $300 on materials and am taking my dad out for a nice dinner tonight for his help. All said and done I am looking at close to my $500 estimate. Luckily I had money saved for house repairs to pay for this.

This is the perfect example of why we all need an emergency fund!

How much savings will make you sleep better?

That is the question I am trying to answer. I am still saving for my emergency fund and have been back and forth in my mind on a target number. I have now decided:

I need 1 year's worth of bare bones bills saved up to not worry about job loss or some other life event.

That changes my new target to roughly $20,000.00. That seems like a lot but to live an entire year, 365 days without income, is a nice safety net. That is also the amount I would need in order to attempt starting my own business or going to consulting/contracting full time. This target represents that goal.

My main goal in life is to be financially independent enough to not have to work 40 hours per week. That leads to other goals like travel and part time contracting to fill the gaps. The more I have in savings the less I actually need to work in order to live. I don't want to quit working completely at this point just not have it be the focus of my entire life.

Having time to do what I really want is the most important. I don't need a Mercedes, 18-bedroom house, or 67 plasma TV's. Just time to do what I like (mostly travel at this point). Without having to work 40-60 hours per week I can enjoy myself more. That is the real aim here.

I know that if I had a savings account that could cover my bills for the next 365 days I won't be as worried about losing my job due to some unforeseen event. I can focus on other things and move forward. My patience is thin but I am getting there. Hopefully another year or so and I will be in a much better position.

Goals Shifting a bit

Since my new raise kicked in I am allocating the new income to more savings. I am accelerating the emergency fund transfers and also starting a fund for a new laptop. I am approaching 5 years with my current MacBook Pro and will need an upgrade soon. Either this one will die or Apple will stop supporting it. I need to be prepared.

I am transferring $50 per month to a new savings account just for my new laptop. My target is $2000 so I will add to it later as I get more side income and have a larger emergency fund. It all starts with the first $1 saved and snow balls from there!

I am doubling my contribution to my emergency fund to hit my target sooner. I want to have 1 year's worth of bills saved up and I am about 1/3 of the way there. Doubling my transfers will get me there a lot faster!

The main point here is that I am immediately putting my new income into savings and not letting lifestyle inflation eat into it. All other aspects of my budget remained the same. This is a big win financially!

Taxes are filed!

I have completed my tax return for 2011. I will get just north of $1700 as a refund and the state of Georgia finally allows direct deposit of refunds. All I have to do now is wait for the deposits to hit my account.

Getting a refund is nice. It allows me to get further in my personal financial goals. The refund this year was much higher than I expected. My plans for it now are to help fund a small business idea and also add to savings. The sooner I get the emergency fund ramped up the sooner I can have more freedom in life as a whole.

I used H&R Block software again which cost $20 but saved me hours and a lot of paper and mailing. E-filing is the way to go as it gets you the refund the quickest. Unfortunately e-filing for state costs $20 extra so I elected to paper mail it in. Waiting an extra week or two puts $15 more in my pocket after mailing costs. Worth the wait to me!

Turn loose change into Amazon.com credit

My local grocery store has coin star machines. These are great for counting your change but normally charge a staggering 9% for the privilege. I recently discovered that you can exchange your coins for gift cards from a list of merchants. Amazon.com is one of them and the most useful to me. Best of all you get 100% of your deposit on the gift card.

I have some change that has built up over the past year and I will cash it in. I currently plan to get a book on Easter Island for my upcoming trip as well as a copy of Marco Polo's Travels to read while I am in Thailand sitting on the sunny beach. It will end up costing me little out of pocket since I don't track the change in my net worth.

It is a win-win since I get a couple books I want and get rid of my loose change at the same time. I turn a hassle into something nice as well. All of the little tips and tricks like this add up over time!

10 Items that an emergency fund needs to cover

Lately I have been putting a lot of focus on my emergency fund. I am working hard to get it up to the level I want: 1 year of expenses covered. I have done some thinking and realized that yearly expenses are more than just bills and groceries. There are a lot of bases to cover!

Here is what an adequate emergency fund should cover:

1. 6 to 12 months of monthly bills (utilities, food, rent, gas, etc)
   
2. ALL insurance deductibles (home, health, auto, etc)
   
3. 5x doctor visit co-pays
4. 2x prescription co-pays
   
5. $500-$1000 car repair fund
6. $500-$1000 emergency home repair fund (plumber, electrician, locksmith, etc)
   
7. $1000 travel emergency fund (death or sickness in family, etc)
8. 6x minimum debt payments (for all non-mortgage debts)
9. $500 pet emergency fund (if you have pets this is for non-budgeted vet visits)
   
10. $500 catch-all slush fund for random items (parking tickets, smaller unexpected needs, etc)

Some will argue this is excessive. Obviously some of these items will not apply depending on your own financial scenario. Pick the parts you need. I may be over-thinking it here but I want to be sure that just about any disaster that life can throw at me will be covered. Having too much savings is a great peace of mind to me. It is always better to oversave than the opposite.

Does your emergency fund cover everything you need?

Setting up "Escrow" savings for irregular bills

One of the challenges of budgeting your monthly income is bills that are not due monthly. Examples include taxes, insurance, homeowners dues, and many more. My solution is to break the amount of the bill up as if it were due each month and have automatic transfer so a dedicated "bills escrow" savings account. I will use my own example:

I have two "irregular bills" that I must pay:

1. Homeowners Association dues: $150 due every 6 months
2. Water/Sewage: $60 average, billed every 2 months

If you do the math #1 is $300 a year. That works out to be $25 per month. For #2 it works out to be $30 per month on average. I have set up an automatic transfer of $55 per month to go to my "bills escrow" savings account. When they come due I will have the money waiting for it (and earning some interest!).

When the time comes I will transfer the appropriate amount back to my checking and pay it on the due due. At the end of the year I will re-evaluate the escrow system and make any adjustments up or down as needed. Using this system prevents you from having to dip into savings or have hardship when the "irregular bill" comes. It makes balancing your finances much easier!

CD Ladders Explained

I have had some friends and family ask me about how a CD ladder works. I am currently holding one with part of my emergency fund. They are a great investment tool to utilize to keep your average interest rate up over the years. You won't always get the best rate but you will consistently get a good rate.

Here is an example that I started back in September of 2008 with ING Direct. They actually have the ability to create a ladder on their site and you can pick the maturities. It is very easy to use and great for someone starting out. Always check rates at other banks as convenience usually costs you in the form of lower rates. They were the best rates I could find at the time for the amount I could invest.

1 year @ 4.00%
2 years @ 4.00%
3 years @ 4.00%
4 years @ 4.00%
5 years @ 4.25%

These are very good rates that I locked in before they dropped off. Normally you would roll each maturing CD into another 5 year CD (which typically has higher rates than the shorter terms). This, in turn, means you maintain a good rate over the long haul. After the 5th year you will be holding all 5 year CD's with each maturing every year in turn.

My one year is maturing on September 8th of this year and they are offering 1.65%. That is barely more than my current savings rate so I will move it over my savings until rates rise. If rates were better I would have rolled into another 5 year CD. I do admit that I am a bit of an interest rate chaser and want better than a "good" return.

I am using part of my emergency fund to invest in this ladder as I am banking on not needing it in the near future. One must be careful here as the penalties for early withdrawal can be steep! My current ING CD's would cost 3 months interest to take out early except for the 5 year which would take 6 months. This can really add up on a large amount of money and you can actually take a loss if you withdraw quickly after openeing.

ebates.com: Earn money for purchases you already make!

I am always looking for a way to make an extra buck. ebates.com allows me to make online purchases and get rebates for shopping at their 1,100+ affiliates. You accumulate money as you shop (using links from their site) and they will send you a check or pay by paypal if you prefer. Payments are made quarterly on set dates. I prefer check so I don't have to eat a paypal fee (upwards of 3%!).

They have lots of big names such as Kohls, Sears, eBay, Orbitz, Old Navy, and the list goes on and on. It is free to join and you get paid to buy things you would buy anyway! This goes great with a rewards points or cash credit card (assuming you pay your balance each month). This is a great way to pad your savings a bit by shopping normally.

I am kind of upset that I did not know about this sooner. I could have saved hundreds over the years! I am just happy that I am signed up now and can start using this money to help reduce my debt. They give you a sign up bonus of $5 cash. Click here to join and get your $5 today and begin saving!

Avoid a financial trainwreck: Have an emergency fund!

I have done quite a bit of reading and everyone seems to have differing opinions on how much of a cash emergency fund one should have at hand at all times. I read many different angles on it and have formed my own educated decision. The money should be in a separate, interest bearing account like a money market, savings, or CD. I prefer CD as I earn more interest if I don't use it and pay a small penalty if I do. It also makes it a little harder to get at the money and you will think twice before spending it!

For those of us who have "normal" salary or hourly jobs we should have about 4 (minimum) to 6 (maximum) months of living expenses. You arrive at this number by looking at your monthly budget and multiply the total by 4 (or 6) and that is the target. Self employed people should have at least 1 year saved. This may sound excessive but in a recession like our current economy it can be very handy when work is harder to come by.

Your emergency fund is exactly that and should not be used for any other purpose. I define it as the money I will use to live in the event I lose my job and am forced to look for another. This protects your sanity and your credit and you do not have to rely on unemployment (assuming you even qualify). Only other purpose I can think of is to use the money for expensive medical bills or repairs on a car or home. Basically you save it to make sure your life is not interrupted due to some event beyond your control.

If you do use the funds for any of the above purposes it must be replenished as soon as possible. I would even argue that debt payments should go down to the minimum until you have it built back up. Paying off debt early is always good but if you have little or no emergency money you will be unable to pay the minimums if something were to happen. This leads to higher interest, collections calls, and bad credit marks. It is worth paying a little interest today to avoid this in the future.

Do you have an adequate emergency fund? Is it invested safely?