Tip of the Week June 24-July 1

Emergency Funds & Insurance

As if I haven't beaten this topic enough, I'm going to do it again. On average you have a major life event (job loss, major medical crisis, other very bad things that impacts your finances) at least once a decade. I knew we were due to have one and we did in the form of having our 3rd daughter. She was born 3 1/2 weeks early and ended up staying 2 weeks in the NICU. Facing massive medical bills we were so glad that we were prepared with the proper insurance and an emergency fund. We only ended up paying $770 of the $32,000 bill. As a bonus we made money because we had a supplemental maternity/hospital policy through Alfac. While this was originally purchased because we have a high deductible health insurance plan, I could never imagine how useful it ended up being. We didn't have to use our emergency fund to pay for hospital bills because it paid entirely for our portion until our max out-of-pocket was met.

While you may think everything is going well today. You are making good money, everyone is healthy, and life is good right now; everything and I mean EVERYTHING can change in the blink of an eye.

Homework:
If you don't have a plan for your money or are not actively working towards those goals, you are by default moving away from those goals. Being prepared for life doesn't just happen. Start or resume those plans today!

I'm Back!...Well, Mostly

The last few months have been a world-wind of busyness.  I meant to start blogging again a few weeks ago but have been side-tracked with family, yard work, and life.  I'll try to post as often as my time allows, but anyone who has had a newborn knows how time consuming they are.  Baby #3 has come with its own challenges.  She was born 3 1/2 weeks early and then spent 2 weeks in the NICU because of apnea and reflux.  While she is doing really well now, it was quite the ordeal, both exhausting physically and emotionally.  I didn't have to worry about finances in the process though because we had insurance and emergency savings.  See my tip of the week for June 24-July 1.  

The Importance of Emergency Savings

I know you have all been patiently waiting for me to get back on top of things and blog again.  I just was busy last week and didn't get around to it.  Anyway, last month we had quite the experience that illustrates a few major points in personal finance.  First, you must live below your means.  If your expenses meet or even exceed your income, you are building a house of straw.  When the first big wolf (aka life) comes along, he'll blow you down.  Second, this experience shows the importance of having and maintaining an emergency savings.  Remember it's not if, it's a matter of when one will happen. 

It all started last month with the great HSA debacle.  I haven't talked about HSAs.  In case you don't know, it stands for Health Savings Account.  I will talk about the benefits of these in the future, but basically they allow you to save for and pay for medical expenses with pre-tax dollars.  We have one through my husband's work.  Without realizing it, we over-funded it for the year and so when his HR manager went to add our contribution, it wouldn't let her do it because of the tax implications.  We are talking about a few hundred dollars.  The paycheck had already been cut so she couldn't just add it back in.  We had to wait until the next pay period to get the missing money.  Normally this would have been nothing more than an annoyance, but that pay period we needed to order my husband's medication.  He has a chronic condition and the medication is very expensive, almost $800 for a three month supply, until we meet our deductible.  Without that money in the HSA there wasn't enough to cover the full cost.  We ended up pulling money out of our savings account to cover the cost and waited to get a partial reimbursement from the HSA and get the rest of the money in the next paycheck.


When this happened, the first thing I thought of was, what would we have done if we didn't have that money set aside?  This would have been a true crisis!  I mean, he couldn't just not have his medication for a few weeks.  I guess this would have been a situation where someone without savings would have put it on a credit card and added to their debt load.  


To finish the story, a few weeks later we got an extra big paycheck and were able to put the money back into savings.  However, last pay period things went wonky again when an error was made because the automatic HSA contribution wasn't changed.  Yet again, we found ourselves shorted a few hundred dollars.  This time we only had to wait a week to get the extra money, but it was still annoying.  Again I thought, what if we weren't in a position to handle this shortage?  So please take a lesson from my story.  Ask yourself what you would do in this situation?  If being shorted a few hundred dollars temporarily completely rocks your world, please make some changes today.  If you don't know where to begin, I'd be happy to help.  This is what I live for!

The Baby Emergency Fund

If you don't have any money in savings, then getting a $1000 between you and life could be challenge.  This step needs to be done ASAP.  Go crazy-  have a yard sale, sell stuff on craigs list or Ebay.  I learned recently that Ebay will waive the seller fees for up to 5 auctions a month.  Check it out. But no matter how you get that $1000, get it as fast as you can.  Also I must add, if you are behind on any bills (mortgage or utilities) get current on these bills first.  Of course, I'm not talking about old, bad, charged-off debts.  You just don't want to get your lights cut off, be foreclosed on or have your car repossessed in the process.   


Remember, this is an emergency fund not an investment account.  You can either put this in a savings or money market account at your bank or keep it in cash in a safe in you house.  Some of you (especially you men) will be tempted to use this money like an investment.  DO NOT put this money in a CD or retirement account.  It's not there to earn interest, it's a security blanket.  Wherever you keep it, the point is that you can access it easily in an emergency, but not so easily that you spend it on non-emergency things.


Now to those of you who already have this much money and then some in the bank.  I am going to suggest a very radical idea and to you savers this will sound crazy.  Drop your savings down to a $1000, use the rest to pay down on your debt.  I know, bare with me.  Consider this, if you have a paid for car would you borrow money against it just to keep the money in a savings account?  Keeping a bunch of money in the bank when you have a bunch of debt sitting out there is doing the same thing.  It doesn't make sense to earn at best 2% in then bank when you are paying 5-30% interest on your debts.  The thing you need to remember is that this is only a temporary step because after your debts are paid off you will build up that fund again.


Here are a few cautions to go with this advice.  Only do this if you are committed to the process of getting out and staying out of debt, as fast and intensely as possible.  If you are going to continue to borrow money or mosey your way out over a period of many years then, don't do this.  The other caveat is, don't do this if you are not in agreement with your spouse.  It will create undo stress in your marriage.  These issues go deeper than just the money and need to be worked through before you take action.  However, if your spouse is willing to lower it some, say down to $1500 or $2000, that's a good start.  As he or she gets more comfortable with the idea and you see progress, then you can drop it down again to the $1000.


One last thing.  I said that this is not meant to support you if you lose your job.  If the word around the water cooler is that layoffs are coming and you fear that your job is on the line then please, pile up as much money as you can to prepare for the storm.  After the threat passes then you can use that money to pay down debt.  Obviously there is only so much you can predict but if there are clouds on the horizon then hunker down and get ready for them.

What is an Emergency?

Now as I said, the emergency fund should ONLY be used in an emergency. So what constitutes an emergency?  Simply put, it's an unexpected expense that comes up during the month.  Obviously, this does not mean "I forgot, we want to buy pizza tonight", "Oh, we need the oil changed this month" or "my daughter needs a prom dress".  Those are all things that should be worked into your month-specific budget and yet another reason why a proper budget is crucial.  But if your transmission blows, you have a visit to the emergency room, or you get in a car accident and have a deductible to meet, these situations are what the fund is for.  If you took the time to watch our debt free story, then you saw that during our journey in becoming debt free we had some emergencies arise.  When I was 6 months pregnant with our 2nd daughter, the air conditioner died, in August no less. (This was actually edited out of the video segment.)  We also had our house flood when a faucet connector in the bathroom came out.  We had to pay the insurance deductible for the repairs.  These were legitimate emergencies and the reason why you have a fund for them in the first place.  Remember it's not a matter of if, it's a matter of when one will occur.