In case you haven’t heard, you need an emergency fund, and you need it yesterday. In the good times, we could rely on home equity loans and credit cards to tide us through the bad times. Now, HELOCs are gone or shrinking and credit card issuers are reducing credit limits. Unless you want to borrow against your 401K (which has probably also shrunk), you need an emergency fund. But just how much should you save?

Three Month Emergency Fund vs. Six Month Emergency Fund
Most experts recommend six months of living expenses (not income). I generally agree with this assessment. However, there are situations where three months may be enough to get you by. If you or your spouse is a healthcare provider, K-12 teacher, or public safety officer, then you may only need three months of living expenses. Even in a deep recession, we’ll still need doctors, nurses, teachers, cops, and firefighters.

If you or your spouse work in a risky field, you might want to save nine months’ living expenses. By risky I mean: auto industry, financial services, real estate, and retail. If you haven’t already lost your job, chances are good you will soon. Even if you keep your job, you may have to take a pay cut. Can you live on less?

Some experts say that any family with two working spouses needs at least six months, on the theory that you need both incomes to survive and its harder to replace one of those jobs than it is for a non-working spouse to get a job for the first time. I don’t entirely see the logic in this argument. If you both work, hopefully one of you will keep your job. If only one of you works, then your sole source of income could vanish. It’s not easy for a non-working spouse to just jump back into the workforce in a severe downturn, or even if good times.

What’s the Minimum?
The bare minimum recommended by Dave Ramsey is $1,000, but that’s not even enough to cover the mortgage for many people. Save up at least one month’s living expenses right away. Stop contributing to your retirement fund and paying down debt if you have to, but make sure you can cover at least a month. Even if your job is safe, you never know when you’ll need to take family leave due to illness.

What If You Can’t Save?
You can. You can save up enough for basic living expenses. Take a look at your monthly spending and pare it down to the ultra-basics:

  • Housing (rent, mortgage)
  • Transportation (gas, insurance, metro card, car payments)
  • Healthcare (necessary prescriptions)
  • Utilities (water, power, gas, basic telephone)
  • Food (a minimalist diet, no frills)
  • Child support
  • Tuition

You can cancel subscriptions to cable, movie rental services, the gym, magazines, the newspaper, and anything else if the situation gets bad. Just make sure you can cover your “monthly nut” for one month. Once you’ve got that, try to save up two months, and then three.

It seems like a lot of money now, but it won’t seem like much if you suddenly need to live off of it. It’s also not just reserved for a job loss. I would avoid dipping into it in the current economy, but you can use it for emergency major car repairs, emergency medical bills, and other major emergencies that require a lot of cash, quickly when times are flush.

You have nothing to lose by saving an emergency fund in a nice, safe, boring savings account. Do it now to get your new year started right and give yourself a little financial peace of mind.

The 111th Congress officially convened on January 3, but since that was a Saturday, they officially got to work today. Rather than waste time declaring national observances, I want them to hit the ground running, so I’ve prepared a to do list of things for them to accomplish in 2009:

  • Fix the economy
  • Fix the environment
  • Fix healthcare
  • Fix retirement

It’s a short list, so totally doable, right? Okay, maybe I should get a wee bit more specific in my requests.

Pass an Infrastructure Funding Package
As I’ve said before, I believe an infrastructure funding package would be a much better form of economic stimulus than tax cuts or rebate checks. Infrastructure spending creates jobs, which encourages spending, which in turn creates tax revenue (as does increased employment.) We have to fix our roads and bridges anyway, so why not make it a two-fer?

Fortunately, Obama’s economic plan leans heavily on infrastructure projects, especially turn-key projects, like all of those that were recently halted in California because the state is low on money. Congress, start building the package now so you can pass it on January 20 and Obama can sign it right away.

Create Enforceable Financial Regulations
Instead of driving used children’s clothing stores about of business, focus on creating solid financial regulations for lending, investing, and insuring all manner of financial products, then give the SEC the funding and teeth to actually enforce them. Maybe that would get the banks to finally start lending to consumers and small businesses again.

Fund R&D for Alternative Energy
Gas is briefly cheap, but it won’t stay there. Unfortunately, the market has been slow to develop alternatives. In this case, Congress may have to step in to speed up the process by providing grants and research funding towards sources of fuel and energy that don’t rely on oil, coal, and corn ethanol.

Pass Solid Environmental Regulations and Improve Enforcement
Rather than let lobbyists water down attempts at meaningful environmental regulations, pass some rules with real teeth, then let the EPA enforce them. It’s their job, and they’re not doing it right now. If you have to, increase their funding so they can actually do the job.

Pass Health Insurance Reform
You’ve started to do it already, but you really need to pass regulations that would limit the ability of healthcare insurers to kick out patients who require expensive care. You also need to limit their ability to determine whether a procedure is necessary. No one should die because their health insurance company doesn’t want to pay for the treatment.

Eliminate the Roth IRA Income Cap Permanently
In 2011, there is no income cap for contributions, but then it falls all the way back down in 2012. Even if you don’t make the associated Bush tax cuts permanent, remove this cap permanently. There’s no reason for the income limit on this fantastic retirement vehicle, so this year you should remove the limit permanently.

This isn’t a simple list, but it’s necessary to get our country on the right track again. What do you want Congress to accomplish this year? List your to dos in the comments.

Okay, you’ve set your financial goals, or fitness goals, or personal goals, for 2009. You’ve recorded the list somewhere you’ll remember to check. Now what? Here are seven easy steps to help you achieve any goal, but especially financial goals.

Make Sure Your Financial Goals Are Reasonable
We all have grandiose goals – I’d like to save $4 million dollars for retirement. But that’s not on my list of financial resolutions is it? No, because unless I win the lottery (woo hoo!), I’m not saving $4 million in one year. The same goes for paying off debt – don’t set an aggressive goal to pay off more than you earn. Look at your finances and figure out what you can realistically achieve in a year, then add 10-20% to make a stretch goal.

Divide Your Goal into Pieces
Now that you have a reasonable goal, it’s still too much to accomplish right away. Take that larger goal and break it down into smaller weekly or monthly goals. If you want to lose ten pounds, set a goal of one pound a week. If you want to pay off $20,000 in debt, set a goal of $1,666 a month.

Budget for Your Goal
Now take those pieces and fit them into your budget. You may know, for example, that you have to attend a wedding in July and won’t be able to meet your debt goal that month, so trim it a little and add the difference to a month when you expect to have more money. Once you have it noted in your cash flow or monthly budget, you’ll be less tempted to blow the money on other things.

Announce Your Plans
For many people, it helps to have a buddy working toward the same goal. Unfortunately, this isn’t always possible with financial goals. If you have a spouse, you should work toward the goal together. However, even if you don’t have anyone to be your goal buddy, you should still announce your goal to someone who will help keep you on task. Not sure you know someone like that? Start a blog or join a social networking community where people will cheer you on.

Determine Your Rewards
For me, simply knowing I achieved a goal is reward enough, but some people need more. Determine a small reward for each step on the way to the goal, as well as a larger reward for completing the goal. For example, let’s say you download a lot of music. If you pledge to stop downloading music so you can pay off your debt, allot yourself $5 for downloads each month you achieve your step-goal. Set a larger reward, like a new iPod stereo, for the day you achieve the final goal. Your rewards shouldn’t be too extravagant, but definitely make them worth the effort.

Poke Yourself with a Stick
If you respond better to negative motivation, use a site like StickK to set a punishment if you don’t achieve your goal. Ask a friend to be your referee, or trust yourself to be honest. Either way, pledge to give money to a cause you despise if you fail. That ought to be enough to ensure you achieve your goal.

Stay on the Wagon
If you fail at your step-goal one month, don’t give up. Recognize that sometimes life intervenes, and then start again. Even if you don’t make it all the way to your goal, making it halfway is still better than not making it at all.

If you make your goals manageable and set up a system of accountability, you’ll have much greater success at achieving them than if you just set it and then figure it will work out. Trust me, I didn’t pay off $40,000 in debt just by saying I would do it. I had a plan, and that made all the difference. If you want to be accountable, go ahead and post your goal in the comments here. It’s a small step in the right direction.

Every January, I make a list of about ten goals and write them in the little notebook I carry everywhere. Looking at 2008, I achieved three of the financial goals and almost none of the others. Oops. Hopefully I’ll do better in 2009. To be fair, some of them are outside my control, but I make them goals anyway. I should rethink that – I’m just setting myself up for failure. Here are the goals I can control:

Buy a House: We have half the down-payment (a gift from my parents) and will receive the other half in a couple of months. We’ve created our list of dealbreakers and potential neighborhoods. In January, we’ll visit open houses in each neighborhood and get a sense of the mortgage we qualify for. Then in February or March, we’ll hire a real estate agent and start looking for real.

Pay Off that Little Debt: We still owe around $4,000 on an unconsolidated student loan. The interest and monthly payment are low, but it’s a bill we don’t need.

Boost Our Emergency Fund: We currently have a sizable cash cushion, but it’s all going toward taxes. I’d like to save at least $10,000 by mid-year.

Increase Our Retirement Savings to 10%: We need to make a big push for retirement. We currently save 3%, plus whatever my husband receives as a defined contribution. I’d like to save 10% of our total income next year, which isn’t an insubstantial figure.

Buy a New Car: After we buy a house, I’m getting a new car. My Toyota is 12 years old and has 130,000 miles on it. It’s holding up, but it’s also showing its age. It’s time to upgrade to something with remote door locks and an MP3 jack.

Save for Our Next Big Vacation: My husband hadn’t been on vacation in three and half years, and it had been two and a half for me. We need to go on trips more often. We have a local excursion planned for next year, but we also want to start saving for Australia – the next big destination on our list.

As always, the year will hold financial surprises that will either cancel or delay some of these goals, but at least three of them will happen for sure: house, car, and retirement savings. If we only succeed at those, I’ll consider the year a success. What are your goals for 2009? Share them in the comments or link back from your own blog.

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