How much should you Put into your Emergency Fund?

Three to six months’ worth of living expenses completes your emergency fund. The question now is: Should you go for three months’ worth or should you put in more? Only you can answer this question based on your job, your way of life, and the level of risk you are willing to take. If you have been with the same company for more than 15 years, for example, and are living a fairly good life (no major illnesses in the family, both spouses are working, etc.) then perhaps it’s safe to say that you have completed your emergency fund when you’ve put in three months’ worth of your living expenses in it. Government work is fairly stable compared to working for private companies so if you have no plans of quitting work for Uncle Sam then you could opt for the three-month rule as well.

However, if you are working on commission or are self-employed or are the sole breadwinner in the family, putting six months’ worth living expenses into your emergency fund would be prudent. The instability of commission-based income means that there will be times when there won’t be any cash flowing in. When you are on a single-income household, a higher emergency fund is recommended because any event that will mean a loss of that income can really cripple you financially.

Take note that the emergency fund is meant to be used for your expenses when you do not have any income flowing in yet. Thus, your calculation should be based on your monthly expenses, not your income. You dip into this to keep food on the table and pay for the utilities so you continue to have water and electricity. You do not use this to invest into your retirement while you are still weathering the financial storm.

So where can you find money for your emergency fund?

When you are already on the road towards financial fitness, you’d be surprised at the many avenues you can find to get the money you need to fully fund your rainy day savings. You can still sell stuff or work extra hours just to get that three-to-six months’ worth of living expenses together.

But remember the payments you used to make for your Debt Snowball? Well, now that you are totally debt-free except for your house, you can use the monies you used for your snowball and put those this time into your emergency fund.

It’s very important that every member in the family are into the entire plan, especially both spouses. As a couple, you should agree on anything about money. Secrets will not only ruin your budget, it will also destroy trust and cause problems in your relationship. Besides, once everyone is on the same page financially, you will serve as each other’s cheerleader and police. If one is feeling just how difficult staying on track is, the other can give that much-needed support and encouragement. If one is buying something that is not on the budget, the other can check and admonish.

Saving for your Own Home

When you are already at this stage—paid up all debts and already have an emergency fund—it is very tempting for those who are currently renting to buy a house of their own. Can you get that money for the downpayment from your emergency fund? Absolutely not!

Keep in mind that this fund is only for the rainy days. If you want to get a house of your own, you have to save for it. Let us repeat that: The money you should use for the downpayment should be saved up. Leave your emergency fund alone.

While a home is always a good investment, you should not rush into it. If you do, it will become another burden on you. If you save for a substantial downpayment, you get the advantage of having to make lower monthly payments in the course of the mortgage. However, if you are so eager to get a home with zero down, you will realize later on just how straining the monthly payments are on your budget. If you want to own a home, save for it first. By now, after doing your Debt Snowball and completing your emergency fund, you should already have sufficient experience getting the money together.

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Getting your Emergency Fund Fully Funded

Completing your Three to Six Month- Emergency Fund

The third step in Dave Ramsey’s Total Money Makeover is to complete your emergency fund. If you remember, you started with just $1,000. Obviously, that amount is only good for those little emergencies that come your way, like a broken air conditioner or a minor car trouble that needs immediate fixing. But your starter fund can’t cover those real emergencies that are bound to catch anyone of us at one point in our lifetime—the loss of a job, a major illness, or death of the primary breadwinner in the family. It is for these events that you need to be truly prepared.

Fully-funded emergency savings should be able to cover three to six months of your living expenses. In figures, the amount can range anywhere from $5,000 to more than $20,000 depending on your lifestyle. If you are currently living on $3,000 a month and have a fairly stable job then having $9,000 in your emergency fund can be sufficient. But we will be covering in more just what a “fully-funded” emergency fund is later on in this report.

At this point, you should remember that this is the third step in your Total Money Makeover. You only complete your emergency fund after eighteen to twenty-one months when you have already wiped out all your debts through the Debt Snowball. At this point, you are only spending for the basics of food, utilities, and other basic necessities and the only debt you are paying for is the mortgage on your home. You can imagine just how easy it is going to be to completely fund your savings earmarked solely for emergencies.

The whole point of following the Total Money Makeover step by step is to modify how you think and view debt and money. Paying off your debt little by little also liberates you one step at a time. Now that you have nothing to pay up except the house and are making all your purchases in cash, you can now complete your emergency fund. When that dreadful and unwelcome thing happens, you still feel the blow but the financial damage that it will cause is not totally irreparable. You will not regress into getting into debt again to cover it.

Why you need an Emergency Fund

For many Americans who are still caught in the downward spiral of dependence on debt, the credit card is used as a go-to tool during those moments when we are caught in tight fix and have nowhere else to go. The problem is, using plastic for emergencies can only tide you over for so long. You will have to pay for it after a month. If you can’t, you will get interest—huge interest— slapped on you.

But what happens if the emergency persists? Let’s use the most common—and most feared—example of a real emergency: Getting fired. Without three to six months of emergency savings to use for the meantime, you keep on swiping plastic to cover the cost of groceries and make cash advances on it for your other expenses. Meanwhile you continue to hunt for a job. But what if you don’t get hi.

It is difficult to pay for debt as it is but it is even more challenging to pay for debt when you don’t have any income. This is why having savings which you must only dip into when the rainy days come is of paramount importance. But just what exactly falls under the term “emergency”?

Emergencies are those circumstances which take you unaware. Aside from getting laid off or fired, other situations that can qualify to be real emergencies include accidents or sickness requiring a high deductible before insurance kicks in; the death of the main breadwinner in the family; or a major car repair like a blown engine. If your house got severely damaged by a typhoon or earthquake then that qualifies as a real emergency, too.

What do not qualify as emergencies? School expenses like your son’s college tuition and miscellaneous; that vacation in some exotic Asian island; or even the startup money you need to start a new business are not emergencies. They are things that you should plan and save for. Even that mall clearance sale that temptingly offers that kitchen showcase at 80 percent off for one day only is not an emergency. If you don’t have the money, you can’t dip into your emergency savings funds to get what you want.

A savings fund is for those real emergencies that knock the wind off of you. It is meant to give you peace of mind so that whenever something happens that has to do with money, you know you’ll be able to face it and survive without drowning into debt.

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Dave Ramsey’s Debt Snowball

Some financial experts recommend that the best and most practical way to tackle debt is to pay those with the highest interest rates first. This way, you don’t have to pay as much on interest. But for Dave Ramsey, author of Total Money Makeover, the secret towards becoming debt-free is to have “quick wins” by paying off the smallest balances first. He called his method as the Debt Snowball.

In the Debt Snowball method of getting rid of debt, you are asked to list all your debts (excluding the house) in order with the smallest balance first. Then once you already have this list, Ramsey says that you “pay the minimum payment to stay current on all debts except the smallest.” As for the latter, you are supposed to pour forth all your efforts in paying it completely until you have no remaining balance left.

Then, once that debt is fully paid, you move on to tackle the next debt on your list. Using the payment from the first debt and other extra monies you can find, you pay off the second debt. The same strategy is given for the third debt on the list, except that you now use the money you used to pay for the first and second debts and use that and other monies you may be able to raise to pay for the next debt. The same strategy is applied to all debts in the list until you have paid all your creditors completely.

What makes the Debt Snowball effective is that it boosts your morale when you see that you are actually making progress. No matter how small a debt you have just completely paid off, the sense of fulfillment encourages you to continue with your repayment scheme. Because you see that it actually works, the Debt Snowball gives you motivation to keep on going.

For this strategy to work, Ramsey reminds readers that they must stop borrowing. It makes sense. If you just continue to use your credit cards while working on the Debt Snowball, chances are that you’ll be snowballing perpetually. If you keep on paying off your debts, you’ll never get around to building your nest egg. It’s very important to stop using plastic while you are snowballing to ensure the greatest chance of success.

But what if you still can’t find the cash to start your snowball rolling? Ramsey says it’s time for so some drastic action. “You have to dynamite it. You have to get radical to get the money flowing again.” What are these radical steps you need to do to get the cash for your Debt Snowball?

The most obvious one is to start selling stuff you don’t need and yes, even the stuff you feel you need but can’t afford to have. Go through all the things you have and you’re bound to find something you can sell. Books, clothes, shoes, a piece of furniture, jewelry collection—whatever—all these can be converted to cash by holding a garage sale or auctioning them over on the Internet. But no one would want all my stuff—they’re worthless! We'll, always keep this inspiring quote in mind: One man’s junk is another man’s treasure. Remember, eBay started when founder Pierre Omidyar sold a broken (yes, broken) laser pointer for $14.83 on his site previously known as AuctionWeb.

Should you sell your home or your car? Ramsey only recommends selling the home if you “have payments above 45 percent of your take home pay.” For most families, the home is not the root of all money problems and does not have to be sold. As for the car or other vehicles you may have, the Total Money Makeover recommends: “If you can’t debt-free on it (not counting the home) in eighteen to twenty months, sell it.”

If you don’t have anything to sell or what you sold just wasn’t enough to get your Debt Snowball rolling, you can also take another radical step: Find ways to increase your income. This can mean working overtime or finding a second or even a third part-time job. It doesn’t matter Working long hours and feeling sleep-deprived for what seems like an eternity can be done temporarily—just for the time-being when you are paying off your debts. You can ease back into a more relaxed lifestyle (and feel truly stress-free) once you have taken the burden of monthly payments from your shoulders.

Those who have resolved to get themselves out of debt and be on the road towards financial stability by doing what it takes to legally augment their income in various ways find that despite the pain of parting with a beloved possession and/or the tiredness of mind and body felt after doing ten straight hours of work, they are energized. The inspiration comes from knowing that they are doing this for a reason. They know that they are going to face a better and brighter future not only for them but for their children as well when they have unshackled themselves from the chain of debt.

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Tackling Debt One at a Time

Debt: The Real Foe

When it comes to building wealth, you have one real foe: Debt. Yes, your obligations to your creditors hinder you from becoming rich. Think about it: If you had no car payments to make, no credit card bills to pay, or no student loans to take care of, just how much of your income could go to your savings and retirement funds? A huge chunk, right? Without debt, you can even finish paying for the house years earlier!

Statistics from the Federal Reserve reveal just how much of an enemy debt is on the average American household’s quest to become financially rich: The average household credit card debt is pegged at $7,093 but when only the indebted household is considered, the average debt more than doubles at $15,204. The average student loan debt is $33,005 while the average mortgage debt is almost $150,000. These debts are only the tip of the iceberg. You also have to factor in the common things that American breadwinners normally continue to pay for month after month—a second car and personal loans taken from other sources, among others.

All in all, the monthly payments for these debts can eat up a third or more of one’s take home pay. Debts can make you lose opportunities to build wealth. For instance, if you were paying $1,500 per month for all your financial obligations, imagine just how much that same amount would grow in ten or twenty years if you were to invest it in mutual funds that offered a rate of return of 10 percent per year? As you can see, you can fatten your nest egg faster if you didn’t have to make all these monthly payments.

The reality, however, is that many American households have to make these monthly payments. They are saddled with seemingly insurmountable debt. The figures are so large that getting out of its deadly claws is seen as an impossible feat. However, if you really want to, it is still possible to get out debt without declaring bankruptcy. Make no mistake, the process is not going to be easy. It will take a lot of sacrifice from your end. But once you can finally call yourself debt-free, the benefits are going to be well-worth it.

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Personal Finance Lessons You Ought to Know

Since personal finance is an entire course in college, you might think that you won’t be able to learn it without going back to school. This isn’t necessary. There are a plethora of resources—both online and offline—that you can use to enhance your financial literacy. You only need to comprehend the basic things to be able to manage your money well. We give a preliminary list below—you can always expand to other concepts as your knowledge becomes more sophisticated.

1. Budgeting. Knowing how to allocate your money, how to use a budgeting tool, and how to keep track of your budget are important first lessons in money management.

2. Credit and how it works. Credit is a regular part of our lives that we take it for granted. However, those car loans, mortgages, and credit cards come at a cost and it’s vital that you understand what these are. Related topics are credit reports, and credit scores.

3. Savings. Having an emergency fund for life’s most mind-numbing and pocket-emptying blows helps you ride out these threatening financial storms. Knowing the various types of savings accounts, their interest rates and fees, and the best banks to put your money are just some of the things you need to learn.

4. Investments. Savings are not enough. You also need to get acquainted with the various investment tools like stocks, bonds, and mutual funds and how they affect your financial situation. These investments are also crucial to helping you form a nest egg that will also secure your retirement.

5. Insurance. We buy insurance coverage to transfer the risk we would otherwise take for ourselves to the insurance company. Insurance firms give coverage for health, life, cars, and homes, just to name a few. There are many things to consider before you buy a policy and knowing what to look for is crucial if you want to get the most of the premiums you are paying.

6. Managing debt. This is one of the most crucial lessons that you need to know, especially if you are saddled with heavy financial obligations. Freeing yourself from debt is a must if you want to achieve true financial stability.

7. Filing taxes. You can’t escape taxes but you don’t necessarily have to pay more than what you really need to. Besides, you can lower your tax obligations by claiming exemptions and deductions. Whether you file your income tax yourself or depend on a professional to do it for you, learning about the intricate and complicated rules related to taxes forms a very integral part of your journey towards financial literacy.

8. Estate planning. It is your responsibility to ensure that your assets and wealth will go to the special people in your life you intend them to go to. You might not think that you have enough to warrant the preparation of a will but if you die intestate (that is, without a will) state laws will determine how your estate will be divided. The earlier you know about the basics, the more prepared you and your family will be in case you pass away.

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Importance of Personal Finance Lessons

If you think personal finance lessons are only reserved for those who are in the world of business, think again. To be able to manage your money well, you need to know how to do it. You must grasp the basics so you are able to make the best decisions when it comes to borrowing, saving, and investing. Whether you like it or not, the things that you need to be able to live decently in this world revolve around money so knowing how to handle it is a must.

Let’s use a very common occurrence that a lot of Americans grapple with—budgeting. Living from paycheck to paycheck has become the norm for many and so is getting too deep in credit card debt. Many get a car or a house (or both) that’s too expensive to afford. All these symptoms point to one fact: The lack of basic knowledge about the correct allocation of funds and resources.

Budgeting is the foundation of effective personal finance and unless you know how to do it in theory and in practice, it’s going to be nearly impossible to have a stable financial future. The ability to save and invest will depend on how well you apportion your salary to ensure that you can meet the needs for today without sacrificing your future security.

Aside from budgeting, there’s also the need to be apprised about interest rates because they are always there. From credit cards to mortgage to savings to investments—the interest will determine how much you will ultimately end up paying. If you happen to be saddled with a car loan that is too steep in interest, you might end up not being able to afford it in the long-run. A mortgage loan with high interest rates will put you closer to foreclosure than if you were given a competitive market rate. When it comes to savings and investments, knowing which bank and investment vehicles give the best interest rates will allow you to maximize the returns on your money.

Credit reports and credit scores need to be understood as well since they play a vital role in personal finance management. Nowadays, you can’t afford to be irresponsible with your debts as doing so can have a disastrous impact on your life. Since your payment history is reported to the major credit bureaus, your chances of being able to obtain credit at the best interest rates and even your ability to get a job are affected if you don’t keep a clean credit record.

From a wider perspective, learning about personal finance is important because how you handle your money will ultimately affect your family and the country. Money issues are a common cause of divorce among couples and children often get affected.

Financial failures also impact communities and ultimately, the country. The recent housing crash and economic downturn that the United States is still reeling from up to today is an example of this. While financial and lending institutions are also to blame for the lax underwriting process that accompanied most mortgages during the housing boom that ultimately led to the housing bust, the homebuyers are partly to blame as well. A lot of them knew that they were getting a home that was too expensive for them. But lulled by the initial low or no-downpayment scheme, they decided to just go ahead and take a chance only to find out later that producing the extra money to pay the mortgage is almost next to impossible.

The way you handle your money has serious repercussions, not only to your personal life but to your family and society as well. Thus, it’s extremely vital that you take the time to learn about personal finance concepts.

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Learning Valuable Lessons from your First Job

Your first job is a very fertile ground for lessons that you can take with you as you proceed in your career. Even if you are only offered a modest monetary compensation, you can still make the most out of your first job by filling your cup to the brim with valuable lessons about the work, the people you work with, and the workplace you move around in. Always remember that these insights are more precious in the long run than the salary you are given. If you are just observant enough, the lessons you glean are going to serve you well in case you want to start your own company or are already gunning for a leadership position further on in your career.

So what are the lessons in your first job that you can carry with you as you move through your career?

1. The veterans in your workplace can teach you a lot. Don’t stay glued to your desk all the time. Find time to chat with those around during your breaks and you’ll find that they have a lot of things to teach you not only about the workplace culture but about their field as well. If you are genuinely interested in them, they will be more willing to share their knowledge and “secrets of the trade” with you. In addition to learning a lot of new things, you’ll find that it becomes easier to navigate the office and ask for help if you are on good terms with everyone.

2. Punctuality matters. Your time is precious. Your coworker’s time is precious. Your office’s time is precious. Since you want people to respect your time, you should also do the same. If you know that you are going to encounter traffic on the way to work then leave home earlier. Your superiors are going to notice that you are consistently on time for work and will factor this in during performance evaluations. Once you have ingrained the habit of punctuality, you’ll realize that it gets reflected in other areas of your life as well, making it easier to stay on top of things even during especially hectic days.

3. Preparation is essential. As the newbie in the house, you want to ensure that you don’t get laughed at during meetings so you made sure that you were always prepared. Looking at the agenda first so you know what the meeting is all about will help you generate ideas in case your opinion is solicited during the gathering. Later on in your career, you will realize that having your say in meetings will help you get noticed and advance in your chosen profession. You certainly don’t want to just pretend you know during meetings as this is a surefire way to get laughed at, so always be prepared in everything you do. That goes to everything else in your life as well.

4. Keeping your desk clean makes you more efficient. Different people have different work habits. Some like a cluttered workspace while others don’t. Research, however, has shown that a disorganized work area is bound to contribute to stress, anxiety, and burnout. Find a system of organization that works for you so that you tackle the most urgent matters first. As you advance to positions that require more responsibility, your organization skills are going to have to step up as well. Mastering this on your first job helps make this a habit that will serve you well in your future endeavors.

5. Having a life outside of work is necessary for your health and wellbeing. More and more companies are recognizing the value of helping workers balance the demands of both work and family. While you want to prove your worth at work so you can please your boss, there is no reason for you to linger in the office unless it’s absolutely necessary. Besides, you are bound to be more efficient in your job if you pursue your other interests outside of work. So take the time to exercise, to be with the special people in your life, to be active in your hobbies. Balance is the key to a successful life and career.

6. You are responsible for your money. Now that you are officially working for your keep, you get to receive your pay and are ultimately responsible for how it is spent. The good thing is that you have money to spare for life’s little pleasures. However, you also have to understand that you are going to be responsible for paying your own bills and saving for the future. Knowing how to allocate your money is something you learn from your first job which will you can carry into the future—especially if you want to start your own business.

7. There is no such thing as a stable job. Hopefully, you won’t get to experience getting fired on your first job but it’s important to realize that there is no such thing as job stability these days. The best you can do is learn all you can from your job, build your network, and save some money so that in the event that the rug gets pulled out from under you, you are not entirely caught by surprise. Gone are the days when you worked in one company all your life. Nowadays, you have to be prepared with whatever life throws at you so you can roll with the punches.

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