Category Archives: Budgeting

Putting Emergency Funds Aside

On Thursday, 12/5/13, Andrew Blackman, writing in the Wall Street Journal, took on the conventional wisdom of having an emergency fund equal to 6 months of expenses and that those funds be in a bank account. He suggested as possible alternatives: a 5 year CD (with a low withdrawal penalty) and a diversified equity portfolio. While the first one would be fine, the latter just puts more money into the broker’s pockets in place of it going into banker’s pockets.

Why not start at the root?

The six month figure sounds fine, but as a starting point not an ending.

Why should we not go back to the source to find the funds needed?

True, if you are an “At Will” employee and the employer may come to you at any time and say that you are not needed you need six months of reserves. However, what if you know you will receive at least some number of weeks or months in the form of a severance package? How about unemployment insurance? Shouldn’t those sums be subtracted from the six months figure to reduce the need for the six months cash reserve and let people feel better about investing in alternative ways.

Thoughts on another advisor's advice

Suze Orman has been in the news recently and made me think of a number of things that Ms Orman suggests that don’t sound as if they should be put into practice.  Rather, they sound as if they were lobbied for by the banks.

Having an emergency fund is great.  The question is how many months of expenses should be in that bank account.  Six months expenses mighty be the right amount.  Further, if one is an “employee at will” for a company six months might be appropriate.  Who is an “employee at will”?  Someone who may be discharges for any reason or no reason without any recourse.  Of course that is not most people.  If one will receive a sum of money when they are fired (laid off, downsized, etc.) the amount of money that they will receive should reduce the six month figure.  So, if you will get two weeks notice you need five and one half months savings.  If you’ve been with the company for 10 years and will get one months salary for every year you’ve been there you need no money in the emergency fund.

Another bad idea is the savings account when you have debt.  When I was teaching a continuing ed course at NYU one of the first things I asked was how many of you have credit card debt.  A number of people raised their hands.  I then asked those who had hands up to keep them up if they had money in the bank.  A good percentage did.  When I asked why, they told me they were told to do that in case of an emergency.  So my next question was, “if you reduced the debt by the amount in the bank and you had an emergency couldn’t you the charge the money to the card?”  In the meantime they would not be paying 15 or 20 % on the debt and getting 1% minus taxes on that income.  WOW.

As long as we’re discussing her recommendations there is one I totally agree with.  If you need life insurance buy Term.  Insurance is risk transference.  If you do not have enough in wealth to permit those who depend on you to continue living in the lifestyle you have been providing they need extra money to invest to continue the lifestyle.  Term life insurance is the vehicle. Other types of life insurance are there to make the insurance company richer.

Not to Worry, or better yet, Worry Not

I was reminded again this weekend why asset allocation is such an important aspect of financial planning.
I don’t necessarily mean the allocation between the categories HFH Planning uses to diversify, I mean the allocation between equities, fixed income and cash.
If one is 35 or 40 years old with YEARS to go before you need to withdraw from you accounts, time is on your side. Take advantage of it. No need for money market or fixed income. Your chances of having more loaves of bread in your accounts when you start withdrawing is huge. Yes. I said loaves of bread. Dollars, Pounds, Euros, Yen don’t count. What you want when you start to take money out of the account is buying power. More loaves of bread than when you put the dollar equivalent of a loaf of bread into the account.
What about if you want to buy a “big ticket” item in the not too distant future? Well that money should be in a liquid instrument – Money market, CD, short term mutual fund, etc. You don’t want to come across the “right” apartment or house just when the market dumps and you need X dollars and the investment is now X minus.
As you come closer to retirement the investment in fixed income should grow while the equity portion is lowered. Further, we suggest that if you are retired you take out the percentage you and the planner have agreed upon at the beginning of the year. If you divide the sum into 12 pieces it will be just as if you were receiving your monthly pay check. You’ll budget accordingly. Money that you don’t spend in month one goes to a savings account (just like you used to do) and is available for the vacation, extra purchase, etc.

Bank Fees

Most people who read this blog do not use a bank debit card. For those who do, I implore you to switch your bank to a bank that does not plan to charge a fee for the use of the card. I also encourage you to examine the use of a credit union. There are a number of reasons to do so.
The interest rate on your deposit is generally higher than at banks.
Loans are generally easier to obtain and the charges are, again, generally lower.
Most care about the people they serve.
If you need the name of a credit union to use – email us.