Wiping out Emergency Savings to Pay off Debt

In the personal finance blogging world, when you bring up the question of whether your primary focus should be on building an emergency fund or paying off your debt first, you will likely get a very strong passionate response supporting one or the other. Those belonging to the emergency fund first camp argue that without an emergency fund, it is easy to slip into the murky world of more debt when unexpected circumstances strike. On the other hand, those belonging to the pay debt first camp argue that to get the best mileage out of your money, use it to pay off high interest debt, instead of letting it sit around in a low interest savings account (and compared to the hay days, even the best online savings accounts look like low interest savings accounts these days!). We definitely belong to the latter camp. For us, debt feels like a constantly nagging thorn on our side and during the past couple of months we pretty much wiped out our emergency funds to pay off our debt. While there were heavy psychological and emotional overtones to this decision, it was not made lightly. I would like to lay out our reasoning here, in case someone else is in a similar boat and finds it interesting.

The psychological and emotional reasons

Before going into the logical reasoning, let me first provide an overview of our situation so it may help you understand why we were so itching to pay off the debt. During our years in grad school, which were our first few years in the US, we had amassed a whopping $42,500 in debt! Coming to the realization of how deep a hole we were in and pulling ourselves out of it bit by bit was a experience that left a permanent distaste for debt. For around 4-5 years after that we were clean. During those years we have been saving and investing aggressively. Last year however, when our trusted 14 year old 150K mile car died, we gave in to our whims and ended up buying our dream car. It was a pre-owned vehicle but way too expensive and not having the liquid cash in hand we ended up financing it. (If interested, you can read my confessions and justifications regrading that decision). While we have no regrets about the car, the decision to finance it has been sticking out like a sore thumb to us.

What makes matters worse is that during the past few months there have been rumors, which are turning to be less of rumors and more of a certainty as the months pass, that our company could soon be bought over, and I will likely lose my job. Being pregnant, it is not going to be easy for me to go find another job immediately. While I think we can handle the dramatic change from double-income-no-kids to single-income-new-baby without going financially downhill again, I would feel a lot more comfortable if we can do it without the added stress of carrying debt. So a couple of months back, when I received the stocks for the past 6 months of investment into the employee stock purchase plan, I sold them for an immediate 15% profit, withdrew almost all the money from our emergency savings and plonked all that money on the cashiers desk to payoff our car loan. Even though depleting the cash reserves was scary, the thrill of being debt-free again (apart from mortgage, which we are continuing to pay off aggressively) is exhilarating!

The plan for surviving emergencies

We did not take the decision to wipe out our emergency savings lightly (nor do I think anyone should, no matter how much of a staunch supporter of the pay debt first ideology they are). Here is our reasoning which is very specific to our situation.

Daily expenses on job loss

Fortunately, since both of us work, this case is not as severe a threat to us as it is to single income families. Even though there is a possibility that both of us could lose our jobs within a span of few weeks from each other, I doubt that it is likely to happen (in the inadvertent case that it does happen, one of the cases listed below should cover us at least for a few weeks, and hopefully one of us can find a job by then?). Currently, we pay twice the amount to the mortgage, max out both our 401Ks, invest in one employee stock purchase plan and could pay our car loan. In case of one job lost, we can cut down the aggressive mortgage payments and possibly reduce the contribution to the 401K just enough to get the employer match. Also, with the car loan gone, that is some more money freed up. With a slightly more frugal lifestyle, I think we can get on by fine for our daily expenses and possibly manage to save a little each month to rebuild our emergency account.

Additional unexpected expenses up to $1000

While we were students, both of us used credit unions. When we started working we started using a regular bank. But since our credit union was our oldest standing account, in the interest of maintaining a better credit history, we decided to leave our credit union accounts open. And in order to keep it in good standing we each have a direct deposit of $50 or so into that account each paycheck. Since we have been doing this siphoning right from our first paycheck, we do not really miss that $50 each paycheck. And since this account grows oh-so-slowly, we do not consider it a part of any of our accounting. Over a period of time we have each had a few hundred to sometimes a cushy $1000 accumulated in that account unnoticed. And it has been a good source to tap into when we have small emergencies but do not want to dip into our real emergency savings. Currently, we probably have low hundreds in each of our accounts, but with monies from both our accounts pooled, we should be able to handle small unexpected expenses up to $1000 or so.

Additional unexpected expenses up to $6000

We are not really into stock market investing (other than our 401Ks). But last year when I had an additional $5K, I had opened a Vangaurd account and had setup an auto deduction of $100 per month to go to this account. With the stock market slump, this account barely stands at $6000+, in spite of a year passing by with money being pumped into it on a regular monthly basis! While I would love to keep this around for a long time and see where it goes, I will not be terribly upset if I have to sell the index funds to pay for an emergency. Sure, I will incur some taxes and possibly lose some money, but frankly I have not been making any money on that account since I got it and the rate of returns is probably at 0% or slightly negative. So, using it up for paying for an emergency will not bother me at all!

Additional unexpected expenses up to $15,000

When the interest rates on savings accounts were high, I used to play the 0% APR balance transfer game quite heavily. With the slump in interest rates the credit cards charging fees for balance transfers, I don't play this game any longer. But between the two of us, we have access to around $80K - $100K in credit and I am assuming that with the car loan paid off and no outstanding debt, we should be able to have access to at least $15K at low interest rates. For instance, currently, I have an outstanding offer from one of my cards for a 0% balance transfer for one year, with 3% fees capped at $199. I have a $17K credit limit on that card (if necessary, by transferring credit lines, I should be able to increase that to $42K). I know this is not something I can rely on, since the offers change from time to time, but it makes it easier to justify against letting money sit in an emergency account earning next to nothing in interest.

Additional unexpected expenses up to $30,000

As listed early in the history of this blog, our financial goals and the approach to realizing them is to rely primarily on our 401K contributions, and owning our house outright as soon as possible. In addition to that, our outside investments (as and when we can) have been mostly into the real estate back in home country. During the past few months, with the car loan, medical expenses etc, we have not been able to do much towards the overseas investments. But during the golden 4-5 years in the middle when we were debt-free and saving like squirrels, we did manage to stash away a little in these investments. In the worst case, for largish emergencies we should be able to liquidate some of our holdings and pay for it. This will likely cause a lot of stress and heart ache and may even cause us to lose some money, but if it an emergency that large, I doubt we will really care! What's money good for if you cant use it when you need it? Besides, we will never stash away $30K in a liquid emergency fund, so this would probably be inevitable in case of large emergencies anyway!

Additional unexpected expenses > $30,000

Finally, for those super large blows (which I hope we will not have to face in this lifetime!!!) I think we can dip into our last resort - a 401K loan, or a home equity loan etc. This one will likely impact our ability to retire on our own terms, but if we are faced with super large emergencies, and live to tell the tale, then that will likely be a small price to pay. Besides, we are still young and we should be able to rebuild from scratch....

Since this analysis was specific to our situation, I don't know if it will help anyone make their own decisions. But it sure was helpful to me in ensuring my peace of mind that in spite of depleting our emergency fund, an emergency in the near future (until we plump up our emergency funds again) will not throw us over the edge into the debt hole again. Irrespective of whether you have a blog or not, I encourage you to do this analysis with your own situation. If you are in the same boat as us (early stages of financial life) or much ahead, it will help offer the peace of mind that you can possibly survive many of life's curve balls. If you are where we were 5 years back (just paid off all debt, but don't have much in savings yet), I am sure an analysis like this will motivate you to stay frugal and save as much as you can. And if you are where we were 7-8 years back (with a pile of debt in front of us, and no savings whatsoever to speak of), then I am sure an analysis like this will push you into digging out of that debt hole much faster. Either ways, feel free to share your thoughts!

*Image Credit: Photograph by 24thcentury (via Flickr Creative Commons)

5 Ways to Save Money in College

(This is a guest article by Heather Johnson*)

When you’re in college you never have enough money. It’s just the way it is, unless you’re a trust fund brat. If you don’t have mommy and daddy’s big pockets, you have to find alternative ways to get by. Chances are most of your purchases will revolve around beer and books. With this in mind you have to figure your budget for each semester to have a goal of saving enough during the summer and winter breaks. But when you’re actually at school, there are many ways you can make sure you always have a little dough to spare. Here are five tips for saving money when you have no real income while in college:

1. Have a financial record. This can be as easy as having a sheet of paper in your desk where you can keep track of your income streams and expenses. Write down how much you’ll have coming in during the month and what you have going out. This will keep you prepared and aware of what you have at your disposal. Once you have this knowledge you’ll know what you can afford when it comes to the weekend. Too bad the weekends start on Wednesdays. Good luck.


2. Keep your receipts. This sounds tedious but it’s important in case you’re ever overcharged. You can’t afford a company’s mistakes. If you’re overcharged you’ll have the receipt to recoup your lost money.


3. Spend money only on what you need. If you went to the store for a twelve-pack then don’t come out with a case and a bottle of wine. Only buy what you absolutely intended on buying. You never know when a parking ticket will appear on your windshield or when you’ll need a new set of tires. Always be prepared for a hidden expense.


4. Consider your options. Go to a local bank near your school and speak with a financial services representative about the different programs they have specifically geared to college students. Most banks will have some system in place for college students and are great ways to get introduced to the real world.


5. Pay your bills on time. The last thing you need are late fees and other expenses associated with not paying your bills on time. Stay current with your credit card bill as the interest alone can clean you out later on down the road. If you stay up to date with your bills there will be no out-of-the-blue fees.

*About the author: This article was contributed by Heather Johnson, who is a regular writer on the subject of instant credit card approval. She welcomes your questions, comments and writing job opportunities at heatherjohnson2323 at gmail dot com.

How Much Should You Borrow for Your Education?

(This is a guest article by Miranda Marquit*)

One of the items that seems to continually go up in cost is education. It's up there with food, health care and gas. Only you don't usually have to take loans out to buy those other things. The rising cost of higher education pretty much guarantees that you will need to take out student loans in order to help fund your degree.

The good news is that there are many sources for student loans, both from the government and from private sources. And even in the current climate, there are still plenty of loans available. Indeed, the danger becomes borrowing too much, and then having to pay it all back. While student loans can help you offset living expenses so you can focus on school (in addition to paying the cost of tuition), few people really need the maximum amount they are approved for.

My mother's voice echoes in my head "Just because you can, doesn't mean you should." This is just as true for figuring out how much to borrow in student loans.

Create a budget

Take a realistic look at your expenses and your education costs. Find out how much you will pay in rent, and get an estimate of the cost of utilities. If you live in housing provided by your school, most utilities are included in the cost of your rent. Even if you don't, many apartment managers can give you a good idea of how much utilities will cost. Estimate a food budget, transportation costs and even a little fun money. Are you planning on getting a job? Figure any income into your calculations. A part time job will reduce the amount you will need to borrow. Also, if you have scholarships and grants, that will reduce your student loan amounts.

Multiply your estimated monthly expenses by the number of months that you will be in school. Then add that number to the cost of your tuition, student fees and estimated cost of books. Take the amount of scholarships, grants and estimated income and subtract that from your total expenses. The difference is how much you will need to borrow. In order to allow for leeway, take 125% of that difference, and round it up to the nearest $1,000. Example:

You estimate that your total cost for attending school is $30,000. Between scholarships, grants and a part-time job, plus your savings, you have $20,000. The difference is $10,000. Multiply 10,000 by 1.25 to get 12,500. Round it up, and you would borrow about $13,000. Each year (if you are getting a four year degree), you would borrow $3,250.

Other considerations

You also need to consider how much you can afford to borrow. With the job you get when you finish, will you be able to handle the loan payments? If you won't be able to afford the loan on your salary, you might want to reconsider your major, or the amount that you are planning to borrow.

Perhaps you should consider a less expensive school as well. Private schools can cost as much in one year as many state school cost in the entire four years. Consider that most private schools do not offer a big enough edge to make paying (and having to borrow) the extra worth it.

Consider your loan type

Another thing to consider is the loan type. If possible, avoid private student loans, since the interest rate is usually higher, and this will result in paying more money back. A federal student loan will result in a lower interest rate, and if you get a subsidized loan, you will not accrue any interest until after you are done with school. This can allow you further savings.

Carefully consider your options before taking out student loans. They can be very helpful, but like any other debt you can find yourself in over your head.

*About the author: Miranda Marquit edits information on debt consolidation for DestroyDebt.com.

Money saving: Keep your money safe

Savings are an important part of every ones financial life. However, the beast of inflation is attempting to take even them from you. If your money is held at home in cash or in your current account and does not accumulate any kind of interest, it is losing its value over time. Inflation cuts down your money's purchasing power and you must use at least some of these savings instruments to protect your money from inflation. And protecting your money from inflation is the primary objective in order for your savings to grow in time, instead of perish in the labyrinths of time.

Simple savings account

Since you already know about the importance of the emergency fund, you already have a savings account, and maybe even made an agreement with a bank so it transfer portions of money from your current account into this one. In this case, a savings account is probably the easiest way to store your savings in. However, savings account does not make make your money work for you.
It is essential to know the interest rate, when your are using a savings account.
You could earn somewhere from around 0.5% to 5% or more, it all depends on your bank and kind of your savings account. However, banks tend to offer higher interest rates to accounts with bigger amounts of money in them. It might even be so, that the interest rate does not cover inflation and you lose some of the purchasing power your money has.
Probably the best thing savings accounts has, is their liquidity. Liquidity is quite an important factor when it comes to savings, as you can get back your money from the bank almost instantly. It does not require for you to wait days to lay your fingers on your money, you can just access your savings account online and transfer your money from savings to current account at grab them at cash dispensers, or just visit a local branch.

Certificates of Deposit

There are various other places to put your savings in to earn a little something, one of them is a certificate of deposit. It is a good place to save your money in. Certificates of deposit are insured, just like your savings account and are generally risk-free. The difference from savings accounts is that the certificates of deposit has a fixed amount of time or term (from three months for up to five years), and, usually, an interest rate that is also already fixed. After that fixed amount of time is over and certificate of deposit reaches its maturity, the money you invested can be withdrawn with the interest it has accumulated. Usually, the longer the term you have agreed to invest your money the higher the interest you will get paid by the bank.
Certificates of deposit tend to be far less liquid than savings accounts, since your money is required to stay invested for the fixed amount of time, so this means that your money is less accessible than in the savings account. If an emergency occurred and you need the money, however you can take back your money before the maturity of the certificate, but you will have to pay a penalty which can easily remove all the money you earned from the interest so far.

Money markets and money market funds

An alternative to a simple savings account are money markets and money market mutual funds. You can choose using money market bank accounts or money market mutual funds. Even though they have quite a similar name, they are not the same. A money market fund is some type of mutual fund (an investment company), where as money market bank accounts are
issued by banks. Money market accounts work very similarly to your normal account, however there are more restrictions, such as having a higher balance or having a number of money withdrawals limited per month.
Investment companies offer money market mutual funds. You need to create a new account in the company to become a part of a money market mutual fund. To have a quite good interest rate These funds invest in a wide range of short-term investments. The downside of money market mutual funds is that, your money does not have insurance, unlike in money market bank account. Money market accounts usually net higher interests than savings accounts, but their liquidity tends to suffer quite a bit, due to restrictions they have.

Treasury securities

There are other choices for your savings such as treasury securities. Treasury securities are bills, notes and bonds issued by the Government of the U.S. Similar to certificates of deposit, treasury securities have a fixed maturity term. The maturities differ from 1 to a whopping 30 years, depending if it is a bill, a note or a bond.
Like with certificates of deposit, liquidity is an issue with treasury securities. But this problem can be effectively solved, as there are highly active and liquid secondary markets where you can easily sell your treasury securities.

What should i do?

As regards savings, there is pretty much no difference on which savings method to choose, as long as they cover inflation, and does not let your money lose value. Everything after that depends on your own needs. If your savings are just those in an emergency fund, then probably a simple savings account would be the most convenient. However if your savings are larger and you intend to save for something big, and it would take months or years to save, your best bet would probably be at looking for better interest rates in certificates of deposit, money markets or treasury securities.
Usually these savings instruments are just a part of investors portfolio. There might be some stocks for some higher yield, maybe some precious metals or other investment instruments. However, the bottom line is that you do not let your money sit in your sock and lose its value due to inflation. Inflation can easily kill your money and you definitely don't want that, do you?

Money saving: Emergency Fund

The key point of building wealth is saving your money. You need to spend less than all your earnings, in order to save any money. But oftentimes this is one of the hardest things to do, however there are plenty of ways to help you to save your money on even the tightest budget. As you probably already know - the money earned is the money saved.

The first thing you need: Emergency Fund

The unexpected always happens in your life when you are the least expecting it, and this is exactly why you must have an emergency fund. It is the best solution to be prepared for those unexpected emergencies that require additional money. Whether it be a job loss, health issues and medical care, car or house repairs, the death of your loved ones or anything that might require quite a portion of our money. And the very last thing you want to do is taking a loan or rely on any other kind of credit. It might even worsen the situation.

The size of the emergency fund

It is commonly known that there should be such an amount of money in your emergency fund, that you could live normally for at least three to six months without worrying. The amount of money in your emergency fund could be modified considering your current situation. It might be changed due to whether or not you have children, have any kind of debt, insurance, other liabilities or even current economic situation. (i.e. Unemployment rate is rising due to hard economic times and your job loss chance is increased.)
In fact, the reason you might want to have emergency fund set up is that the most common reason of family money problems is due to a sudden loss of income. So, if you or your husband/wife loses a job you still have bills to pay and food to buy, and it could take months to find a new job that you would be satisfied with. That's why it is best to plan ahead for the worst-case scenario. In this case less critical emergencies will be easily dealt with.

Start with small deposits

Most people don't have an emergency fund, because they find it difficult to save money. But the key to doing so is to start saving with small deposits. You must realize that saving enough money for one month will take quite some time. If you set your goals to be realistic, small to affordable, you will have a much better chance in reaching them faster. Bank would probably be the best way to get started saving. You could open up a new savings account (if you don’t have one already) and start saving there first. Making regular deposits into this savings account would be the next step. Make it a habit. Creating a schedule could help. Make deposits weekly or monthly and try to never skip it. You could also agree with a bank that it would transfer that money from your current account into that newly created savings account and you wouldn't even need to think about it.
Start with a very small amount, if you feel that it is difficult to begin saving. You could try making deposits as small as $10 a week at the very start. The amount is not impressive and it will not build up quickly, but the important thing is make it a habit to put some cash away. After a while the amount you save and don't spend will not even be noticeable, so you can raise it to a larger sum. With this done, you will have your emergency fund all saved up in no time.

A place for an emergency fund

You should remember that starting with a savings account is the best, simply because it is so easy to use and does not cost you anything. It doesn't care how much you put away every week/month, just do it. After a while when your emergency fund is bigger, you could find a place to keep it where it can gather some nice interest. It is essential, however, to keep it in a fairly liquid place then, such as money markets, so you could get the money out quickly, if any emergency occurs. It is not advised to have this money invested into stocks or mutual funds, because you could lose money in the short-term period, due to the volatility of the markets.

Personal Banking

I thought i would go ahead and write this article just as a little introduction to Personal Banking. Some of the main functions mentioned only. This should give some basic information you need to know about Personal Banking.

Current accounts

A current account is an account which allows customers to take out or withdraw money, with no restrictions. Money in the account does not usually earn a high rate of interest: the bank does not pay much for 'borrowing' your money. However, many people also have a savings account or deposit account which pays more interest but has restrictions on when you can withdraw your money. Banks usually send monthly statements listing recent sums of money going out, called debits, and sums of money coming in, called credits.
Nearly all customers have a debit card allowing them to make withdrawals and do other transactions at cash dispensers. Most customers have a credit card which can be used for buying goods and services as well as for borrowing money. In some countries, people pay bills with cheques. In other countries, banks don't issue chequebooks and people pay bills by bank transfer. These include standing orders, which are used to pay regular fixed sums of money, and direct debits, which are used when the amount and payment date varies.

Banking products and services

Commercial banks offer loans - fixed sums of money that are lent for a fixed period (e.g. two years). They also offer overdrafts, which allow customers to overdraw an account - they can have a debt, up to an agreed limit, on which interest is calculated daily. This is cheaper than a loan if, for example, you only need to overdraw for a short period. Banks also offer mortgages to people who want to buy a place to live. These are long-term loans on which the property acts as collateral or a guarantee for the bank. If the borrower doesn't repay the mortgage, the bank can repossess the house or flat - the bank takes it back form the buyer, and sells it.
Banks exchange foreign currency for people going abroad, and sell traveller's cheques which are protected against loss or theft. They also offer advice about investments and private pensions plans - saving money for when you retire from work. Increasingly, banks also try to sell insurance products to their customers.

E-banking

In the 1990s, many commercial banks thought the future would be in telephone banking and Internet banking or e-banking. But they discovered that most of their customers preferred to go to branches - local offices of the bank - especially ones that had longer opening hours, and which were conveniently situated in shopping centres. However E-banking is still getting increasingly popular for it's convenience, especially after making it more user-friendly. Currently Internet banking allows customers to, for example, transfer funds, pay bills, view checking and savings account balances, pay mortgages,purchasing financial instruments and certificates of deposit, etc. This has lead to millions of people using E-banking daily.

Two commonly misunderstood financial statements

There are two commonly misunderstood financial statements which tend to generate loads of questions for people. So i decided to write a little article about them and clarify what they mean. I hope this will be helpful.

The profit and loss account

P&L Account
Sales Revenue						48,782
Cost of Sales						33,496
Gross Profit						15,286
Selling, General and Administrative Expenses						10,029
Earnings before Interest, Tax, Depreciation and Amortization						5,257
Depreciation and Amortization						1,368
Earnings before Interest and Tax						3,889
Interest expenses						257
Income Tax						1,064
Net Profit						2,568

Companies' annual reports contain a profit and loss account (commonly referred as P&L). This is a financial statement which shows the difference between the revenues and expenses of a period. Non-profit ( or not-for-profit) organizations such as charities, public universities and museums generally produce an income and expenditure account. If they have more income than expenditure this is called a surplus rather than profit.
At the top of these statements is total sales revenue or turnover: the total amount of money received during a specific period. Next is the cost of sales, also known as cost of goods sold (COGS): the costs associated with making the products that have been sold, such as raw materials, labour, and factory expenses. The difference between the sales revenue and the cost of sales is gross profit. There are many other costs of expenses that have to be deducted from gross profit, such as rent, electricity and office salaries. There are often grouped together as selling, general and administrative expenses (SG&A).
The statement also usually shows EBITDA (earnings before interest, tax, depreciation and amortization) and EBIT (earnings before interest and tax). The first figure is more objective because depreciation and amortization expenses can vary depending on which system a company uses.
After all the expenses and deductions in the net profit, often called the bottom line. This profit can be distributed as dividends (unless the company has to cover past losses), or transferred to reserves.

The cash flow statement

British and American companies also produce a cash flow statement. This gives details of cash flows - money coming into and leaving the business, relating to:

• operations - day-to-day activities
• investing - buying or selling property, plant and equipment
• financing - issuing or repaying debt, or issuing shares.

The cash flow statement shows how effectively a company generates and manages cash. Other names are sometimes used for it, including funds flow statement and source and application of funds statement.
British companies also have to produce a statement of total recognized gains and losses (STRGL), showing any gains and losses that are not included in the profit and loss account, such as the revaluation of fixed assets.