Archives for March 2015

Is It Time to Dip Into Your Emergency Fund?

One of the most important things you can do for your financial security is to build an emergency fund. Unfortunately, many Americans aren't prepared with a fund that they can tap in the event of a financial emergency.

The Americans that do have an emergency fund, though, might not know when to tap into it. It's easy to feel as though any setback is an emergency. Another temptation is the fact that you have a large amount of money sitting there, and it seems like you could do something better with it, like buy a new TV or go on a vacation.

Before you dip into your emergency fund, you need to take a step back and ask yourself whether or not it's truly necessary. Here are some ideas for using your emergency fund appropriately:

Maintenance and Repairs

One of the best things you can do is make sure that your home and your cars are properly maintained. First of all, it can make more sense to have a separate maintenance fund, designed specifically to take care of routine maintenance and repairs. You know that your car's oil will need to be changed and that eventually you will need to buy tires. It's also clear that at some point your roof will need to be replaced, and that there are things you should do each month to keep up your property.

Creating a separate fund for expected maintenance and repairs can be a good way to plan ahead without the need to deplete your emergency fund when you have a maintenance or repair cost that amounts to less than $2,000. Consider using a small emergency fund for these types of costs.

Major Setbacks

Your main emergency fund should be built up to handle major setbacks. These are items like medical emergencies, natural disasters that damage your home, or job loss. You don't want to be depleting your major emergency fund over time if it means that you will be less able to handle your setbacks.

At the very least, you want to be able to pay the deductible on insurance claims. Another consideration is what other resources are available to you. When my dad had a heart attack and a hospital stay, his portion, even though he had insurance, was still quite large. The hospital offered a no-interest payment plan for six months, so rather than deplete the emergency fund in the name paying it all at once, my parents took advantage of this payment plan. It allowed them to take a smaller amount from their emergency fund, so there was less to do to build it back up later.

What About Paying Off Debt?

Be careful about how you use your emergency fund to pay off debt. If you have a high-interest credit card you want to get rid of, it can make sense. However, you don't want to deplete your emergency fund to the point where it is ineffective if you run into trouble. In these cases, you could easily then run up debt again. Find the balance between paying down debt and making sure you are covered in an emergency.

What is your approach to using the money in your emergency fund?

Is A Zero Based Budget Right For You?

By Miranda Marquit 11 Comments

One of the budgeting techniques that has gained some popularity in recent years is the zero based budget. In this budget, you make sure that every dollar is accounted for at the beginning of the month. You look at what you expect to get in terms of a paycheck, and then use every penny to pay bills, or accomplish your goals. As part of your budget, you decide what will go to debt reduction, or to building an emergency fund, or to your retirement account. You can also put money toward a vacation or some other goal, on top of making sure your groceries, gas, insurance premiums and other expenses are covered. Every dollar of income is assigned to a spending, saving or giving category. No dollar remains un-assigned.

A zero based budget is also expected to help you manage your cash flow. You match up expenses with your paychecks so that you can see when to pay your bills, dividing expenses into first of the month costs and end of the month costs. You can make the process a little easier with the help of bill scheduling so that your credit card payments, utility bills and other expenses are paid automatically — on a day that works best for you.

Is A Zero Based Budget For Everyone?

While I know people who swear by the zero based budget, I admit that it kind of makes me nervous. This type of budget doesn't really account for leaving a cushion (although I suppose you could budget in a cushion one month, and then it would be there for the future). I like to have extra money in my checking account at the end of the month, even after I've contributed to retirement and short term savings. It doesn't need to be a lot of money in the checking account, but I like to have a little something in there.

Another issue with the zero based budget, at least for me, is that I don't have a regular income. My income is variable. Trying to figure out exactly what I will make each month, and then matching it up with expenses, doesn't work for me, since my exact income depends on which projects I am doing, and whether I have extra money that month — or less coming in. Of course there is the option of faking a regular paycheck when you have an irregular income.

Instead of using a zero based budget, I prefer to create a more general spending plan. I figure out how much I need each month for regular expenses that are important spending priorities. Fixed expenses, like insurance premiums, the mortgage payment, car payment, IRA contributions and utilities, are all taken care of first, via automatic withdrawal or by using bill scheduling. Then I spend on other things that I want or need for the month. I track my income and spending, so that I don't exceed what I make, but I don't create a budget to limit what I can spend on entertainment, dining out, charity or other variable expenses.

In the end, how you decide to spend your money is up to you. But it does help to have a plan. Think about what sort of plan would work best for you, whether it's a zero based budget, or some other type of spending plan. As long as my most important expenses are covered, and my future provided for, I don't worry too much about where I spend my other money, as long as it reflects my priorities.

What about you? Do you have a preferred budgeting technique?

How To Recover After Bankruptcy

By Miranda Marquit Leave a Comment

For the most part, bankruptcy should be the action of last resort when it comes to your money issues. However, there are times when bankruptcy really is the last option you have left.

If you have experienced a long-term employment problem, or if you have had a medical problem that causes you financial distress, bankruptcy might be your last option.

Once you have filed for bankruptcy, however, it doesn't mean that it's the end of your financial life. You can rebuild after bankruptcy, but it takes effort. As you work to overcome bankruptcy, and avoid financial setbacks in the future, here are some things to keep in mind:

Make Sure All the Qualified Debts are Included in the Bankruptcy

The first step to rebuilding after bankruptcy is making sure that all of your debts are included in the settlement. Everything included in the bankruptcy is covered under a single umbrella, and you want to make sure that all of the eligible debts are included in that. Whether you are filing Chapter 7 or Chapter 13, you want to make sure that everything is covered in the settlement so that it makes it easier to rebuild.

You might also need to revisit your credit report regularly to make sure that the included debts aren't listed separately. In some cases, the debts covered in the settlement are listed out separately in the credit report, and that shouldn't be the case. Check occasionally to make sure that these debts remain under the umbrella.

Reform Your Financial Habits to Get to the Root of the Problem

Your next step is to make sure that you have reformed your financial habits. Bankruptcy is a symptom of the problem, not the problem itself. Re-order your finances so that you aren't living beyond your means. You should also work toward building up an emergency fund so that you can better handle financial setbacks. Changing your financial habits so that you no longer engage in the behaviors and oversights that led to your bankruptcy can help you rebuild your situation and possibly avoid another financial catastrophe.

Use Credit Carefully Going Forward

Once you have changed your money habits, you can start using credit carefully in order to help you rebuild your credit score. Start out by getting a secured credit card so that you can start re-establishing your financial reputation. You should be careful only to spend money that you already have. Even after you have had a secured credit card long enough to begin rebuilding your credit score, you need to be careful. Once you get another unsecured credit card, you need to be especially careful in ensuring that you only use your credit card for purchases that you have money saved up for. It's best not to carry a balance, but if you do, try not to spend more than 30 percent of your available credit.

With the right approach, you can rebuild your credit after bankruptcy, and even improve your finances. Take the careful approach so that you don't end up back in the same place again.

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