Oh, what a difference a fat emergency fund makes. When I first started this blog, my husband wasn’t much into saving. He didn’t spend wildly, but he was definitely feeling like we’d never get out from under our debt and wasn’t as committed to paying it off quickly.
Then I created the Plan. Then the Plan started to work and he started to see the light. Then the Plan was complete and the prospect of buying a house became very real. Then we bought a house, and still had money left over. Now, the fat emergency fund has become a sacred cow.
Baby Stepping to Savings
I always had faith in my plan, so at first it was hard for me when why my husband didn’t see the plan. But each month, he stuck to it and started to believe, too. The first key was that I never stopped believing we could get out of our debt. As long as one of you believes and is willing to convince the other, then you can do it.
The second key was that my plan was doable and methodical. I ran calculations and determined we could pay off $40,000 by December. I knew approximately when our windfalls would arrive, so that helped. As it happened, they arrived sooner than anticipated and we paid off our debt faster.
The third key was that I built in initial successes. We were fortunate that the highest interest rates also correlated to the lowest debt, so we targeted that first. Once that was paid off, our snowball really picked up.
The fourth key was that we had a clear goal – pay off the debt so we could start saving up to buy a house. We also had a debt payoff deadline – our interest-free credit card would expire in August of that year and we wanted to pay as little interest as possible. We ended up only paying two months’ worth of interest, or about $200 on an initial debt of $17,000. Not bad!
Once that debt was paid off and our goal started to become real, his enthusiasm for saving really took off.
Where We Are Now
Fast forward 18 months. One day in April, 2009, my husband announced that “saving money is fun”. This was a breakthrough, people!
Now it’s 18 months after that and we’ve been in our house for a year. My husband has started to say things like “we can afford that,” when I say that I want to make drapes for a $400 cost instead of buying drapes for a $2000 cost.
But, we had another breakthrough when it came time to buy me a new car. Losing 30% of our income this year due to my husband’s surgery and a couple major home repair expenses means our emergency fund isn’t as fat as it once was, but it’s still going pretty strong. We didn’t have to dip into the fund at all during his disability leave.
Last month, my husband looked at the fund and realized we could almost afford to pay cash for my new car. We opted not to, because we didn’t want to drain the fund, but that realization was a big step. He now sees that we still need to be saving precisely so that we have these options, and other options, in the future.
In addition to the cushion in an emergency, that’s what the fund does: it gives you the freedom to make choices about what you want to do with your money. Need new drapes? You can decide between making them or buying them. Personally, I decided that the time investment was less important to me than the financial investment, so making them was the clear choice. But you may be able to make a different choice if you have a savings cushion and a commitment to saving.
Before my husband went on disability, we stopped spending money in order to increase our savings. We’ve found that our spending has actually been much lower while he’s been out of work, but we also had a few unexpected events develop where the savings has come in handy.
Delays in Disability Pay
The first issue is delays in processing disability pay. We were prepared for it to take up to a month to get the first check, so we needed to have at least one month’s expenses in the bank. As it turned, we got the first check in two weeks, but it gave us peace of mind anyway.
Being on Disability Longer than Planned
We initially planned for my husband to be out of work for two months. Due to a complication, that timeline stretched out to three months. We reached that point, and another small issue arose. My husband won’t be returning to work until three and a half months after he went out, and he may not be full time at first. Fortunately, we still have savings to cover any gaps, because our spending will start to rise again once he returns to work.
Gaps in Disability Pay
The initial disability application had an end date of April 1. At the end of that period, the state sent us an extension form, but it took a month to restart the payments from that point. We received back pay, but our check account got a little low during the gap period because we also had a plumbing emergency and some work done on the kitchen. Again, because we’d saved up, we were able to cover the gap without a great deal of stress. We were close to transferring money from our savings, but the checks arrived just in time.
So far we haven’t had to spend any of our savings, although we will when the plumber finally asks to be paid. We were very fortunate to be able to plan for disability, but this is yet another reason you need an emergency fund. California provides state disability pay (funds come from employee payroll taxes), but most other states do not. If you don’t have disability insurance, or your disability coverage is taxable, make sure you have enough money to cover a three-month shortfall. You’ll be glad you did you or a family member suffers an accident or illness.
I’ve mentioned CD ladders as good options for tax refunds and emergency funds. They’re a safe way to earn a bit more in interest than the basic savings account. Currently, you won’t earn significantly more, but in the past I’ve seen CD rates go as high as 7% on a 5-year CD.
What is a CD Ladder?
Basically a CD ladder is five CDs, each with different maturity dates. Traditionally, the maturity dates are 1, 2, 3, 4, and 5 years. You buy them all at the same time. Then, when the 1-year CD matures, you roll it over into a new 5-year CD. After 5 years, you’ll have 5 CDs with the highest possible rate at the time of purchase, and you’ll always have a CD maturing within the next 12 months in case you need the funds.
Where Can I Create a CD Ladder?
Most banks offer CDs, so choose any bank or credit union. It’s best to get them all from the same bank or credit union to avoid future confusion. Before choosing a bank, read the reviews to make sure they don’t have issues with properly informing you about CD maturity. If you don’t notify them of your intention within the designated time period after maturity, they’ll automatically renew it into a CD with the same term.
Potential CD Ladder Earnings
Here’s an example of the interest you could earn with a CD ladder vs. a traditional savings account. We’ll start with $1,000 CDs. You may need more than this to open a CD at some banks, but it’s a nice round number for calculations. If you have a significant amount of money to invest, you can buy jumbo CDs, which have higher interest rates. These are Everbank rates. Even though I no longer love the bank, they have all the rates on their website, and they’re pretty generous.
1-year CD – $1,000 – 1.39%
2-year CD – $1,000 – 1.85%
3-year CD – $1,000 – 2.27%
4-year CD – $1,000 – 2.78%
5-year CD – $1,000 – 3.30%
After 5 years, you’ll have earned $768.40 in interest vs. $360 from a standard savings account. Of course, this assumes that interest rates won’t rise in the next five years. They will, because they move with the Fed rate, but CD rates will also rise with the Fed rate, so you’re renewed 5-year CD will earn substantially more than a savings account.
Of course, the more you can start with, the more you’ll earn. If you’re just starting, shoot for $10,000 total. Then, as each CD matures, consider adding more funds to each CD until eventually you have $25,000 in a CD ladder. The money is safe, it can be used for emergencies, and it’s earning a decent return.
My husband and I have been debating what to do with our emergency fund. Should we keep it all liquid in an online savings account currently earning about 1.22% interest or put some it in a CD ladder? There are pros and cons of both options, so really it comes down the size of your fund and how liquid you need it to be.
Fully Liquid Emergency Fund
Right now our money is in a savings account earning a piddling amount of money in interest. Because the Fed rate is 0%, savings interest rates are low. For a while, banks were offering high teaser rates, but those don’t last long.
However, we chose to keep the fund fully liquid for the time being so that we would have full access to it while my husband is on disability. We haven’t had to tap it, but it’s there if we need it.
So here are the pros of the liquid emergency fund:
Always available. If your roof caves in during a storm, the money is ready to go. No need to wait for the funds or get financing in the interim.
Easy to access. We just transfer it from our online savings account to our checking account. It takes about three days for the interbank transfer.
No fees for withdrawing. We can take our money out anytime we want and we can add money to it whenever we want.
There are also cons to the liquid emergency fund:
Low interest rate. If you want to make money off your money, then a savings account isn’t a lucrative way to do that.
Temptation to spend it on non-emergencies. If we had less self-control, we might use that money for other purchases because it’s so easy to access.
CD Ladder Emergency Fund
You should always keep some money fully liquid. I’d keep at least one mortgage payment in cash – you never know when the bank will screw up (or when you and your husband will accidentally overpay the mortgage.) However, once the minimum is covered, you could move some of the emergency fund into CD ladders.
Pros of the CD ladder emergency fund:
Higher interest rate. Rather than 1%, CDs typically earn 4% or more. Not a huge amount, but a lot. When you ladder it into 1, 2, 3, 4, and 5-year CDs, interest rates climb with each year.
No temptation to spend it. If you want to break open a CD early, you usually have to pay a penalty. You can get no-penalty CDs, but the interest rate is lower.
Cons of the CD ladder emergency fund:
Difficult to access. If you need the money to fix your caved-in roof or overhaul the engine on your car, you either have to wait until the CD matures, and then wait for them to send you the money after you request it, or you have to break it open early and pay the penalty. In the meantime, you might have to get financing to cover the repairs, and that could cost more than the interest from the CD.
For now, we’ll stick with our liquid emergency fund, but we may start CD laddering as it grows. I’m thinking the right ratio would be 50% cash, 50% CD ladders. Then we would have enough to cover the initial emergency cost, and would be earning more interest on the rest in case a serious emergency (like a massive earthquake) develops.
I’ve mentioned a couple times that my husband is receiving disability insurance while recovering from surgery. However, I was startled to discover recently that California is one of only five states with a state-run disability program. If you don’t live in one of these states (California, Rhode Island, Hawaii, New York, New Jersey), you should pursue other options for getting this insurance.
How State Disability Programs Work
In states that offer disability programs, your employer deducts your contributions through payroll deductions. Some organizations and government agencies are exempt, but may have a similar internal program. If you’re self-employed, you may be able to buy benefits through the state program.
Once you have a disability, you apply for benefits through the disability program, which is usually operated by the unemployment department. The specifics vary by state, but in general, you’re paid 55% of your previous salary per week, based on your highest-earning quarter out of the last five quarters. There is a cap, however. In California it’s $987. Disability income is not taxable, so even though you receive about half your salary, you’re not losing as much income as it seems. In California, there is a 52-week cap on benefits.
If you’re unemployed when you become disabled, you may also qualify for benefits, which will be higher than your unemployment benefits. Unemployment payments are low to encourage workers to return to work quickly. Disabled workers obviously can’t do that. You can’t receive both benefits at the same time.
How Employer-Provided Disability Programs Work
If you don’t live in a state with a government disability program, your employer may offer it privately as an employment benefit. Many employers provide it as a free benefit, but some ask employees to contribute. If your employer asks you to contribute, do it. It’s much cheaper to buy coverage through a large group plan than through an independent plan.
Unlike state plans, which are the same for everyone in your state, you should check with human resources or your insurance provider for information about eligibility, waiting periods, and filing a claim. Most plans cover up to 60% of your salary. My husband’s employer provides a state supplemental for 60% of his income. If your employer pays for the coverage as a benefit, the income may be taxable. Ask your employer.
How Private Disability Insurance Works
If your state or employer doesn’t offer disability insurance, you can acquire it privately. You’ll most likely be required to undergo medical underwriting as part of the application process. You may also be subject to a longer waiting period before benefits become available.
If you’re a high-earner, you may want to supplement your existing state or employer disability plan with a private plan. Private plans will usually cover 70-80% of your income. It can cost $600-1800 a year, so review your plan carefully to make sure you have adequate coverage and that it includes an “own occupation” rider. Without that, benefits may stop if you can return to any work. You want to be covered until you can return to your current occupation.
How to Apply for Disability Coverage
In order to apply for disability, you and your doctor must complete the form that proves your disability. Contact your state, employer, or insurance company for the proper forms and follow the instructions carefully. Be sure to notify the insurer when you return to work in order to stop the payments. Failure to do so is insurance fraud.
Worker’s Comp vs. Disability Insurance
Disability insurance is for injuries or illnesses that occur outside the workplace. If you’re injured on the job, then you should file a worker’s comp claim. All employers are required to maintain proper worker’s comp coverage. You don’t have to opt-in or pay for the benefit. Benefits and the claims process will vary depending on your state, so contact HR for advice.
State/Employer Disability vs. SSDI
If you’re disabled for more than a year, then you will most likely qualify for a Federal program known was Social Security Disabled Insurance (SSDI). SSDI is part of your FICA contributions. The benefit amount is based on your lifetime average earnings. If you expect to be disabled for more than a year, contact Social Security or speak to your doctor’s office about filing a claim.
Sources of Disability Insurance
If you live in one of the five states that requires disability insurance through the state program, then you probably already have it. If you’re employed and don’t live in one of those states, ask your employer about it.
If you’re self-employed, contact your insurance agent for information about applying. It’s vital that a self-employer person by coverage because you’ll have absolutely no income if you become injured.
If your employer doesn’t offer insurance, you have a few options. If you’re a member of a union or trade group, contact them to see if they have a group program. My husband bought a small, cheap plan through his professional organization. It has a 3-month waiting period, so we won’t be tapping it for his current injury, but at $80 a year, it’s worth it in case of future emergencies. If you don’t belong to a trade group, contact your insurance agent for information and q
As I mentioned earlier, my husband was scheduled for surgery last week (hence my absence from the blog.) Even though we were pretty prepared, it’s been quite the learning experience nonetheless. Here are some tips I’ve learned along the way.
Warn Colleagues Ahead of Time
Obviously this tip is only if you know your spouse or child is scheduled for hospitalization. I kept my team members, bosses, and project managers apprised of my schedule and any changes so they could adjust client expectations or pick up any overflow. Everyone is very understanding, but it’s helps to keep in touch just in case something comes up.
Schedule Bill Payments in Advance
Before my husband went to the hospital, he scheduled all upcoming bill payments so I wouldn’t have to think about it. If it’s an emergency, try to take a few minutes as soon as you can to pay bills online, then you won’t worry if you paid the electric bill.
Arrange to Have Someone with You
Even with a routine surgery, things come up. I was hesitant to have my mom come stay with me, but I’m very glad I did. She stayed at my house to make me dinner, run some errands, and even did a little cleaning. She also provided moral support when I was stressed out. If you have kids, it’s even more important to make arrangements in advance to have someone help out. Just make sure it’s not someone who will cause you even more stress!
Get Money from the ATM
You don’t want to be hunting for cash when you want to buy a bottle of water. Take out some money before the surgery so you don’t have to worry about it later.
Investigate Weekly Parking
When my husband checked in, the hospital gave me a flyer listing parking options. As you probably know, parking charges at hospitals are often outrageous. However, they offered a lower-cost parking plan at a garage half a block away. I bought a weekly parking pass for $25. This way I don’t have to worry about having cash for parking or what time the garage closes. If I used the valet or another garage, it could easily cost me $11-$20 a day.
Pack Water and Healthy Snacks
Hospital cafeterias are not the cheapest places in the world (although they’re no worse than any other cafeteria.) Rather than contend with whatever they happened to be serving that day, I ate lunch and dinner at home, and packed healthy snacks and bottles of water for my hospital visits. Obviously, I brought books to help pass the time, too.
Get Out of the Hospital
It’s hard, but you have to leave the hospital some times. Go home for meals if possible. Go home to sleep. Take some time for your mental and physical health. You can’t take care of your loved one if you don’t take care of yourself.
Complete an Advance Directive
You can give your advance directive to your personal doctor to have on file. You should also bring one to the hospital for scheduled surgeries. They’ll ask you about it. Be prepared to make decisions and sign documents on your spouse’s behalf.
Even when it’s scheduled and “routine,” a hospitalization is stressful for everyone in the family. Make sure you take care of yourself, get the support you need, and be as prepared as possible. It will reduce some of your stress.
If we learn anything from the Haiti disaster, it’s that they can happen anywhere, anytime. According to NPR, most Haitians didn’t realize they lived in an earthquake zone. Given the poverty of the country, there probably isn’t anything the people could have done to prevent the destruction even if they had known. We can’t always prevent destruction in our own country, but we can do something to prepare for emergencies and disasters.
Update Your Emergency Kit
When I moved, I discovered that I hadn’t updated my emergency kit in eighteen months. Most of the food inside it had expired and the water was starting to evaporate. Since the food was canned, it’s unlikely it would have poisoned us, but we replaced it anyway.
Get Your Documents in Order
Last year, I wrote two week’s worth of posts listing every document and item you need for an emergency. Since we’re starting a new year, this is a perfect time to review your preparations or pull things together.
Write an Advance Directive
Making your wishes known isn’t enough. You need to write an Advance Directive. This isn’t just for emergencies. Before my husband scheduled his surgery, he was asked if he had an Advance Directive. We’ve been instructed to bring it to the hospital with us. If you don’t have one, download the form and complete it now before something comes up.
Have a Plan in Place
I’ve mentioned before that my husband and I carry emergency phone numbers in our wallets, behind our driver’s licenses. In addition to attempting to call each other in an emergency, we will also call my parents, who live 400 miles away, to let them know we’re okay. They can then communicate to the rest of the family. My husband’s card includes his brother’s info so emergency workers can call him if they can’t reach me.
Obviously, a disaster doesn’t have to as severe or unexpected as the Haitian earthquake, but you should always be prepared. Even if you don’t live in a “disaster zone,” fires or personal emergencies can happen anytime.
Yep, it’s another post about the emergency fund and budgeting for everything, this time from a very personal perspective. It’s also about the importance of preparing for the unexpected.
You Never Know When Something Will Go Wrong
It’s called an “emergency fund” for a reason. Most of the time, these emergencies are relatively minor stuff, like your transmission going out. It’s expensive, but you can handle it. Then there are the personal emergencies that send your budget into a tailspin.
Last week we learned that my husband needs surgery. It’s not life-threatening, but it’s better to do it now than wait until he’s old and has more risk factors. He’ll also likely be out of work for several weeks. That’s where the challenge comes in.
On the plus side, this isn’t emergency surgery, so we have time to make arrangements and reduce spending to prepare for the gap in income.
Always Leave a Buffer for Emergencies
After my husband and I bought our house, we had a nice sum left over that we planned to use for furniture. I don’t know if I had a psychic moment, but I didn’t want to use ALL the money for furniture and then replenish the fund later. My husband did, because we’re having guests at Thanksgiving and don’t currently have enough places to sit.
Then that money slowly started vanishing. First, water mains started blowing up all over Los Angeles, so we got flood insurance. Then we opted for earthquake insurance. Those were unplanned expenses. Then we realized we really should get some sort of window coverings. There goes another $1800. We’d managed to spend $3200 without buying a stick of furniture!
And then we got the news. Suddenly we were glad we hadn’t bought the furniture yet.
Know Your Disability Benefits
Our first step was figuring out how much income we’ll have while he’s out. In addition to my salary, he gets state disability. In California, that’s about 50% of your salary, but it typically takes four weeks to actually start receiving benefits. He bought a cheap disability policy through his trade organization, but unfortunately it doesn’t kick-in for 90 days after the start of the disability. His employer also has a disability policy, which we’re getting details about.
Note that disability benefits aren’t taxable, because they’re insurance, so you get the full amount, unlike unemployment benefits, which are taxable.
We realized that we’d have enough to cover our monthly expenses, especially since he’ll be spending less while he’s recovering, but we won’t be able to make extra purchases or save any money while he’s out.
Plan Your Major Purchases and Irregular Budget Items
As I’ve mentioned before, I built an extensive lists of upcoming house projects and major purchases running out through December, 2010. We’ve been parceling those out along their scheduled deadlines, shifting a little here or there. The furniture was on the list for this month and next month. It was already built into our cash flow chart, too.
Our next step was to sit down with our budget and start cutting. We immediately took out $4000 in furniture expenses. We kept the fridge expense, because 1. not getting a new fridge soon will create a new emergency, and 2. Cash for Appliances is coming and could save us a decent amount of money.
We’ll just push everything back by a few months, and then once he’s back to work and we’re saving again, we’ll be able to reprioritize our list.
We’re very fortunate that we were able to build up savings, and that we have low enough expenses that we won’t be in trouble with one of us out of work for several weeks, however we vowed to increase our emergency fund even more after all this is over. You never know when something will go wrong.
There have been a couple of recent high profile losses of large amounts of stolen money. Most of us aren’t in the habit of hiding a million dollars in the mattress, but you probably have a few dollars stashed somewhere in your house. So where are the best and worst places to hide money?
Best Places to Stash Money
Unless you’re Al Capone, a bank is the best place to stash large sums of cash. It’s not earning interest sitting under your bed. My friend’s father was a WWII immigrant and didn’t put much faith in banks. One night, he decided he would be dead by morning and revealed a shoebox full of $8000 to his wife. He didn’t die, and was so angry that he moved the money the next day. However, he did finally die a few years later and his wife and children found $30,000 hidden throughout the house. This, I would consider extreme. Even at 1% interest, $30,000 over 30 years adds up to an extra $10,495. That’s not pocket change.
Your Emergency Kit
If you live in a disaster area, then you should have an emergency kit. In addition to food, water, flashlights, etc., you should also have a few hundred dollars in cash. If the power goes out, your credit and ATM cards may not work, but cash is accepted everywhere. In this case, your goal is not to protect it from burglars, but to be ready for an emergency.
If you have kids, buy a toy with a Velcro compartment and stash some money in there. Put the toy with the rest of the toys. Then make sure you child doesn’t leave the house with the toy!
Worst Places to Stash Money
Not just in the mattress, which sounds horribly uncomfortable anyway, but under it. Burglars know to look there, which makes it an unsafe option. You also shouldn’t hide the money under the bed, because once the mattress has been tossed, you’re hiding place is easy to access.
In the Underwear Drawer
Once again, not a great choice because it’s a cliché. Frankly, if I were looking for a place to hide money from burglars, I’d list the first 20 places I could think of and then rule them out as being too obvious.
A Money Hiding Kit
You see these advertised on TV as cola cans, chip cans, and other items that are supposed to disguise the money. Here’s my problem with that – first, don’t you think the robbers know what those look like? Second, what if you have a guest or worker who sees the item, tries to enjoy the snack, and then finds the money. An unscrupulous guest or worker might take it. You could decide not to keep it in the kitchen, but then it’s even more obvious.
PF Advice had an article with more places to hide money. It got me thinking – when you’re trying to stash money, think like a burglar. Imagine what you would do if you were ransacking a place. Could the money accidentally fall out if the item was thrown? If you were searching a house, where would you look? If you didn’t care about your possessions, would anything stop you from getting to a specific spot? Avoid all of those spots and look for the unconventional instead.
As I said last year when Heath Ledger died, my first thoughts always go to the children of the deceased. I worry that stars with young children haven’t prepared for the possibility. In Heath’s case, he hadn’t updated his will to include his daughter. Now we have the even more challenging situation of Michael Jackson’s death. According to court filings, Michael Jackson died without a will. No matter how famous or unfamous you are, take this as a lesson that you need a will, especially if you have children. Even better, get a trust.
Why You Need a Will
In the average Joe’s case, a will states the people you would like to inherit your estate. In most cases, surviving children or spouses will automatically inherit without a will, but it’s ultimately up to the state to decide. Do you trust the government to divide your estate for you?
What Happens if You Die Without a Will
In Michael Jackson’s case, his intestate death will result in years of legal wrangling and thousands of dollars in legal fees. Like Elvis, he is probably worth more dead than alive. (It sounds callous, but it’s true. His estate will continue to earn royalties for decades after his passing.) If he had a will or trust, he could have named someone to oversee his business following his death. Now the court will determine who has that right. Most likely, his children will inherit everything, but they are minors and will therefore need someone to manage his affairs until they are adults.
In addition, a will would have allowed him to name his children’s legal guardian. Some reports said he wanted them raised by his nanny. Other reports indicated that the birth mother of two of the children may make a claim. The courts have so far granted custody of all three children to Jackson’s mother, but that could change. If multiply custody claims are filed, this issue could drag on for quite some time.
A Trust is Better than a Will
Given the size of his estate, Jackson would have been better served with a trust. A will must still pass through probate court, which can be expensive and slow. A trust typically avoids the courts while also ensuring that the children’s rights are protected and their financial support arranged from day one.
But I’m Not Famous, You Argue
Some people argue that they don’t have assets, therefore they don’t need a will. If you’re childless and living in your car, that’s probably true. However, if you have children, you need a will or a trust, regardless of net worth. It’s the only way to ensure that your wishes are carried out, rather than the wishes of the state. If you have any assets, even a falling down shack, consider a trust to reduce the tax impact and transfer time of the assets. When minors inherit a trust, the trust maintains ownership and the designated trustee is responsible for managing and distributing the assets. That won’t happen in Jackson’s case.
Many people worry about the expense of creating a will or a trust. If your estate is complicated, you should see a lawyer. If it’s fairly uncomplicated, you can use a legal service site like LegalZoom.com to prepare your documents quickly and affordably. Worst case, handwrite your will on a piece of paper, sign it, and put it in a safe place. These aren’t legal in some states, but it’s something at least. A formal will or trust is always best.