Eight Questions about 529 Accounts for Jonah Keegan, the Founder of Freshman Fund

These days, whenever I get some time, I have been thinking and reading about 529 plans and trying to determine if we should have one for our baby. Coincidentally, I was recently contacted by Jonah Keegan about an interview to introduce his site Freshman Fund to the readers of this blog. Since its a good chance for me to get some of my questions answered, I quickly took up the offer! I hope some of these questions and answers will be helpful to you readers as well. If you have more questions, I have added the contact information for Jonah at the bottom of the interview - please feel free to contact him directly.

Jonah Keegan is the founder of Freshman Fund. Freshman Fund helps parents save for college by giving them a free online gift registry for their college fund. When you register your 529 college savings plan at Freshman Fund, gifts from friends and family go directly into the plan.

OK. Here we go...

ISPF: With so many different 529 accounts available, how can one determine which plan is the best for them?

Jonah: Like Smokey and the Miracles say, "You Gotta Shop Around." The best 529 is going to be different for each family depending on their child's age, their investment pattern and other factors. Similar to big-ticket purchases like a computer or television, you will find that there are a large number of plans that fit your basic needs, and from there it's a matter of doing some research or working with your financial advisor to determine the best choice for your family.

The good news is that if you do want to enroll in a 529 directly, there are some great online tools for comparison-shopping.

The number-one industry expert is Joe Hurley, and his site SavingForCollege.com has great features that let you look at the plans available in your state, run comparisons on different plans or plan features, and see what he thinks are the current top-rated plans.

ISPF: How can parents pass word to relatives and friends that they would prefer to receive the gifts in the form of contribution to the 529 accounts?

Freshman Fund makes this easy in two ways.

First, we have a contacts manager that lets you import your webmail or social network address book. This makes it easy to build and manage messages on our site, as well as discover if anyone in your address book is already using Freshman Fund.

Second, we've included a notification message that you can send right from your Freshman Fund account. Login, and you will see a "Notifed" link next to your student. Clicking the link takes you to our notifications page (Tip: Import your contacts first and adding message recipients is as easy as clicking on their names, right from your message page). We provide a default message, but you can customize it however you like before you send.

ISPF: What are the limits on how much can be saved in a 529 account each year? How do contributions from friends and family effect this?

The limit on 529 savings for each student is set by the IRS gift tax exclusion limit, currently $12,000. This is a limit per student and not per donor, so parents who save or receive gifts at or near this amount need to keep an eye on their annual savings. Also, this is not a per plan limit, so if a student has multiple 529s in their name, they will also need to keep track of their account balances.

In part, this is one of the problems we started Freshman Fund to solve. Parents were telling us that between grandparents, godparents and themselves, they had multiple 529s open for their children and no idea how much money was actually being saved each year. Freshman Fund lets parents consolidate 529 savings to a single account to better plan for the future (and avoid a visit from the tax man!).

Oh, and most plans have a maximum contribution limit as well, it varies from plan to plan, but on average it's more than $250,000 per account.


ISPF: How does a 529 account affect a child's federal financial aid?

The impact of a 529 on a student's financial aid depends on who owns the plan (the beneficiary of a 529 is always the student, but the owner could be the parents, grandparents or the student themself).

If the 529 is owned by the parent or another non-beneficiary, it is treated as a parental asset, and assessed at a 5.64% rate when calculating financial aid awards.

If the 529 owner and beneficiary are the same, the rate could be as high as 20% for the 2008-09 school year because the funds are treated as a student asset, but starting with the 2009-10 school year, they will be treated as a parental asset whether or not the parent owns the 529, and will be assessed at the 5.64% rate.

Also, 529 distributions are not counted as income for that year, which helps when next year's financial aid eligibility is calculated.

ISPF: What happens if my child does not want to go to college?

Parents with a child who does not attend college can transfer the account to a sibling, grandchild, step-sibling, cousin, niece, nephew or in-law without incurring any taxes or penalties.

Other transfers would be viewed as "non-qualified withdrawals" by the IRS, and the account would be subject to federal (and possibly state) income tax on any account earnings, as well as a 10% federal penalty tax on earnings.

ISPF: What qualifying expenses can be paid with 529 savings without incurring a penalty?

The easy ones are the following: tuition, room & board, any mandatory college fees, books, and a computer (if required).

From there, it varies from plan to plan and state to state, if you have a question about something that is not on the list above, consult with your plan manager or financial advisor.

ISPF: Does investing in a 529 make sense for families who may possibly return to their home country before the children start college?

Much like the question "What's the best 529 for my family?" there is no one answer to this question, families who foresee this scenario in their future should research all of the available college savings options, including 529s, or talk to their financial advisor before making a choice.

I can tell you that 529 savings may be used to pay for many non-U.S. colleges, you can search a list of eligible institutions at http://www.savingforcollege.com/eligible_institutions/, in the STATE: drop-down list, choose Canada for a Canadian college, or Foreign Country for any other international school.

ISPF: What are some alternatives to 529 accounts?

Here are some of the more popular college savings options. Space, time and the limits of my expertise prevent me from including every feature of these savings options, but here are a few highlights.

MUM (Money Under the Mattress... or in a no-interest savings account)
Very rarely a wise choice for any type of savings, and college savings are no exception. Loses ~3% per year at the current rate of inflation, and if it's earmarked for college then you're in even worse luck, as college costs inflate at about twice that rate, or ~6% per year.

U.S. Education Savings Bonds
Savings bonds can have tax benefits at both the federal and state level, but the exact nature of the benefit varies depending on the exact type of bond purchased. Unlike 529 gifts, savings bonds are not covered by the gift exclusion. Also, to qualify for the tax benefit, savings bonds may only be used for tuition and fees, whereas 529 distributions can be used for the broader array of expenses mentioned above. The annual limit on bond purchases is $5,000 per owner per type of bond, or $90,000 over the 18 years of a typical future freshman's life. In contrast, 529 plans have an average lifetime maximum contribution of more than $250,000.

UGMA/UTMA
The Uniform Gift to Minors Act and Uniform Transfer for Minors Act are custodian accounts set up for minors by a donor, usually a parent or guardian. The donor is the custodian of the fund, but the donations are an irrevocable gift and must be used for the benefit of the minor. Further, custodianship terminates when the minor reaches the legal age (18 or 21 depending on the state of residence) and may be spent on whatever the beneficiary desires. As you might expect, UGMA/UTMAs are treated as student assets when making financial aid determinations.

Coverdell Education Savings Accounts (ESA)
An education savings account that is more flexible than an UGMA/UTMA, and unlike 529s, can be used for pre-college education expenses. HOWEVER, the ability to use Coverdell ESAs for pre-college expenses will expire at the end of 2010 unless Congress intervenes to preserve this feature. Two other things to note with Coverdell ESAs is that only $2,000 per year may be saved in a beneficiary's name, regardless of who owns the account or how many accounts exist for the beneficiary, and the government steps that limit down, ultimately to zero, starting with incomes of at least $190,000 per year for couples or $95,000 for single filers.

I would like to thank Jonah for taking the time to answer my questions. If you have any additional questions about Freshman Fund, please feel free to contact Jonah at jonah dot keegan at freshmanfund dot com, or 347-416-6498. Please note that he is not a financial advisor, so while he can provide information, he cannot make recommendations. For specific advice, please consult with a financial advisor or tax professional.

Chasing Money - Is There Ever An End To It?

I chatted with an old friend today after a long time. And while we were talking about our jobs and how our companies fared, he told me that they had recently got a new CEO. And as a matter of conversation, he mentioned that the new CEO was going to be paid something along the lines of 30+ Million dollars in stocks (restricted units, not options!), in addition to 1.2 Million dollars in annual salary and 2.4 Million dollars in annual bonus, to take the job. The numbers were just mind boggling. And this new CEO guy is just 45 years old!!! As most conversations with old friends go, we were all over the place, and before we knew it we were debating about whether we would even want to be in the shoes of this guy.

On the one hand, being just 45 and being offered so much money to take on a job seems like an incredible accomplishment. Especially for a guy who was just like us - with a Ph.D. degree and not a fancy schmancy M.B.A degree or someone who wasn't exactly born with a silver spoon in his mouth. How cool is a life with millions of dollars to throw around!!! On the other hand, how much life would this guy have had? He must have worked his butt off to get where he did right? Sure, luck and timing and being at the right place at the right time had something to do with it.... but unless he burnt a lot of midnight oil and stressed out enough to turn several hair gray, I doubt he could have got where he is today. When you are busy building such a high profile career, where is the time for the simpler things in life? To smell the roses, to attend your children's plays and recitals, to cook a meal with your spouse and enjoy it on the back porch? What good is several million dollars, if you don't have time to enjoy spending it? We consoled ourselves that our average Joe jobs that paid decent salaries while allowing us time with our families was good enough.

After I hung up the call though, I couldn't stop thinking about this. Are we really that different from this CEO guy, other than the fact that we don't make a multi-million dollar salary per year (that's a big glaring difference, but lets ignore that for a second, shall we?). Let me take my example. I am currently *very* pregnant but I still continue to go to work, so I can save all my PTO for the time after the baby comes. Even with all this saved vacation and the short term disability pay, I will have only about 9 weeks of time off with my new baby. And then I need to make a choice - either go on unpaid leave or return to work. And I am not very open to the idea of going on unpaid leave for long periods of time :(

Now, do we *need* the pay I will get by foregoing those few weeks of unpaid leave? Well, not really. The better half makes a decent salary, and we have some money in both short and long-term savings and we can survive fine without my paycheck for several weeks, months or maybe even years. So, why am I so reluctant to forego a few weeks of salary? Ultimately, are we all addicted to money so much, that we cannot stop chasing it? Do we all just trade in our time blindly in the pursuit of money? In some cases like that of the CEO guy its millions, and in other cases like me it is a few thousands but is it the same thing? Do we all intentionally (or out of habit) just chase financial security at the cost of quality family time?

I don't think I am cut out to be a stay at home mom. I admire those that have made the brave decision to give up their careers to raise families. But a large majority of my friends and the people I know are like me - they have reluctantly got back to work after having babies. They spend the days from morning to late night switching roles - an ideal employee to an ideal mom to an ideal spouse. Trying to advance the career and bring in a bigger paycheck, while at the same time trying to be a good mother and wife and provide a good nurturing family. Balancing, juggling, being super women....

What is it that fuels this insane desire to chase money? Is there ever an end to it? Do any of you ever wonder, or is it just my pregnancy hormones talking? :)

*Image Credit: Photograph by David M* [via Flickr Creative Commons]

PS:This article was featured as an Editor's Picks in the Carnival of Personal Finance #165 over at No Debt Plan. Head on over there for some really good reading...

Don’t Go Down with the Economy!

(This is a guest article by Melanie Taylor*)

It’s hard to open a news site or newspaper without hearing more about the economic woes besetting the world in general and the States in particular. From credit crunch to housing crisis, it seems like everything that could go wrong now officially has. It’s no wonder the airwaves are full of heated debates disputing the meaning of the ‘R’ word, and whether or not we can officially use it (yet).

A recession might not be ‘real’ until we’ve seen two consecutive quarters of decline in real GDP, yet plenty of individuals started suffering long before the economy as a whole. Regardless of the nation’s communal health, the real question is this: “What’s my financial situation – and how can I improve it?”

There’s always something you can do (basically earn more & spend less) to improve your finances, and it’s always a good idea.

At a time like this, it’s simply more important.

Rule 1: Use it wisely
You may be tired of hearing the word ‘budget’, but money management is more important than ever during times of economic uncertainty. So figure out your income and expenditure. Spend a month writing down everything you spend. This can deliver three benefits – practical, psychological and motivational.

• Practical. Everyone wastes some money – it’s just a question of how and how much. Pinpoint where you’re wasting money and you’ll know what to do.


• Psychological. Doing ‘the wrong thing’ is always harder when someone’s watching, even if it’s only yourself. If you find that ‘self-auditing’ helps keep you on the straight and narrow, keep it up – when your debts are paid off and today’s problems are a distant memory, this could be the key to saving for retirement.


• Motivational. Calculate how much you could save in three months, or in a year – there’s nothing like multiple zeroes to inspire an economy drive...

Now use that calculation to figure out how much faster you’ll be able to pay off your debt, and how much interest you’ll be saving. The sooner you clear your debts, the sooner your money will be your money again, to spend or invest as you see fit.

Rule 2: Don’t panic
Trading down – either property or cars – can be a good idea and save you a fortune in the long run. Just make sure you don’t:

• Overreact. Don’t sell your $250,000 house because you need $5,000.


• Mistime your reaction. Don’t, for example:
  
  • sell property during a property crash – there may be alternatives, such as renting it out and moving into a smaller property yourself.
  
  
  • sell shares when they’re down – if they’re worth $500 now and might be worth either $0 or $5,000 in a year or two, isn’t a $4,500 profit worth risking a $500 loss?

Rule 3: Careful what you borrow – and how
There’s nothing wrong with debt per se. ‘Healthy’ debts can more than pay for themselves: your mortgage might be your ticket to property-boom profits, for example, or your car loan might be your only path to a better-paying job.

‘Unhealthy’ debt, on the other hand, can lead to a miserable existence that’s the exact opposite of the picture painted by adverts of smiling people waving credit cards at shop clerks. As a general rule, credit cards are fine if you use them because they’re convenient – and pay them off a.s.a.p. – but once you start using them to borrow money, you’re running a real risk of entering a ‘debt spiral’.

So if a slowing economy means you’re faced with short-term cash flow issues, remember there are better ways of dealing with them. Just three ideas:

• Talk to your mortgage provider about taking a payment holiday (a short break from making mortgage payments).


• Cut out luxuries altogether until you’re back on track.


• See what you can sell to raise cash.

If you’re just a few dollars short, you may be able to find it elsewhere, without resorting to credit cards.

And if you’re faced with a serious shortfall, then borrowing a lot on your credit cards is almost certain to lead to serious interest charges, especially when lenders are reacting to economic problems by raising interest rates.

Rule 4: If you need debt help, get it!
There’s no shame in asking for help with your debts. If you’re frightened that people will think you’re a fool for being in debt, how much more foolish would it be to let that fear deter you?

The kind of help you need depends on your situation: your existing debts, your current finances and your future earning potential.

• You might just need some advice from a seasoned professional – someone who understands how budgets work, how lenders think, how repayment plans are calculated…


• Or you might need a professional debt solution. Talk to a professional who understands the various solutions available and can advise you on which one would be best for you. Make sure you find a company that offers a range of solutions so you won’t feel they’re pushing you down a path that isn’t appropriate.

Rule 5: Remember you’re an individual
Finally, remember you’re not the USA. Your finances and the country’s are not inextricably linked.

A few tips.

• Threats: prepare for the worst


• Do whatever you can to stand out at work – take night classes, volunteer for special assignments, do overtime...


• Cut your spending to an absolute minimum and save – if you do lose your job, you’ll need this safety net.


• Read the papers. If your company’s in trouble, don’t be the last to know.


• Keep your eyes open for alternative employment, whether you’re just establishing a Plan B or convinced that your job / company is doomed. Just don’t forget the ‘last in, first out’ rule – unless you’re confident about the new company’s future (and your own in it), making yourself the ‘last in’ could be a terrible move.


• Opportunities: hope for the best


• Think about moving into a ‘recession-proof’ industry that does well in troubled times (food, for example, medical services, energy provision or debt collection)


• If you’re in business, be prepared to seize the market share that’s freed up when competitors go out of business.


• If you have a bit to invest, keep an eye out for shares that have come down in price because of today’s troubles. If a big company’s shares have fallen from $5 to 50c, there’s a good chance they’ll be back at $5 in the not-too-distant future. It might be best to spread your bets – rather than buying $2,000 of share in one company, buy $200 in ten companies.


• If you have a lot to invest, do your homework and look out for cheap property.

Just as some people suffer more than average from a (potential) recession, others suffer a great deal less. Plenty of people buck the trend altogether and do as well as usual – or better. There’s a lot of luck involved, but there’s also a lot of skill…

*About the author: This article was contributed by Melanie Taylor, of GregoryPennington.com, a debt management specialist.


*Image Credit: Photograph by lemonjenny [via Flickr Creative Commons]

Hurdles on the Path to Career Success – Part 2

Last week, in Part 1 of this series we looked at a few hurdles that we create around us that prevent us for being as successful as we can otherwise be. Here is a list of few more gotchas to watch out for.

Being an island
The world today is a much smaller place than yesterday. No matter who you work for – be it for a small firm, a large corporation or for yourself, unless you are willing to go out, network and make contacts, you probably will not be able to succeed on a large scale. It does not mean that you need to go out and have drinks with peers and clients every day of the week. But you do need to make an effort to shed your shyness, leave your comfort zone and venture out of your shell to meet people.

How to fix it: Make some key friends. If you are an extrovert and it comes naturally to you to make contacts, you will likely not have this problem. If you are an introvert, find those few extroverts that you are comfortable with and be friends with them. You don’t have to know everyone – just knowing those one or two people who know everyone will get the job done most of the time!

Not marketing yourself
If you are still naïve enough to believe that if you are good, people will notice you, then it is time to wake up! In a world of cut-throat competition, if you cannot market yourself, you could be in for some serious disappointment. It does not matter whether you work in a research lab or a multi-national corporation – you need to learn to sell yourself.

How to fix it: Practice! If you are from a cultural background where boasting is shunned, recognize that and find ways to make your accomplishments noticed. Learn to speak up, and take credit for what you have done. Make sure that your manager knows how much effort you have put in the project and the small successes you have had. Learn to keep your failures to yourself, unless you have been asked about it, in which case learn to share them in a positive light.

Not being able to take criticism
There is positive criticism and there is negative criticism. And chances are, you will come across both at your work place. Getting defensive and not learning from the criticism is and will always remain one of the biggest down fall of most people.

How to fix it: When you receive positive criticism, thank the person and try to implement the changes suggested. These can help you grow both as a person and an employee. On the other hand, if you receive negative criticism, go ahead and make the necessary changes – you can still learn from these. In addition, work with the person to see if you can help them grow as a person and improve their communication skills. If not, just brush it off as some behavior quirk and move on.

Not keeping up with the latest advances
It seems like every day there is a new, easier and “improved” way of doing things. Sometimes it is exciting. At other times, it could be downright annoying, disruptive or scary. But if you hesitate to embrace the change, then you will soon be replaced by someone else who is not so threatened by it.

How to fix it: Network with the younger generation and stay in touch with what is the latest. Read voraciously, and attend trade shows, conferences etc. Do not hesitate to ask someone for help if you find the technology intimidating. If needed register for classes – either at the company’s learning center, or community college, or online!

Being prejudiced
All of us have our quirks. There are some things that we are not quite comfortable with. But in a world where half the office is in the US and the other in India or China, half the work force is male while the other is female, and the skin color takes on all shades of white, black and everything else in between, unless you learn to overcome your prejudice, you will have trouble adjusting to your career.

How to fix it: Look deep into yourself to find out what caused the prejudice. Maybe it was a dinner table discussion between your grand father and your parents that instilled the prejudice in you – do you still think it is valid? May be some experience while growing up caused you to start looking down on a particular race – isn’t it time to grow past it? Again, getting to the roots of your prejudice to free yourself will not only help you in your professional life, but personal life as well!

Nobody is perfect, but we can all try to get rid of some of the limitations around ourselves and aim to be better than we are now. I am sure there are a lot more hurdles out there that prevent us for reaching our full potential for success. I would love to hear your views on this. I will write more on this topic in the future weeks.

*Image Credit: Photograph by misspiepie [via Flickr Creative Commons]

Hurdles on the Path to Career Success – Part 1

All of us have inside us the potential to succeed. To go above and beyond the average. But over a period of time, consciously or not, we end up creating hurdles around us that block us from being as successful as we can otherwise be. This is true both in the career, and life itself. Here is a quick look at some of the common hurdles in the path to career success.

(What has this got to do with personal finance, you ask? Well simple. The personal finance equation has two parts to it - how much you make and how much you keep. And needless to say your career success has a huge impact on how much you make. So there you go. Now, lets move on to the focus of the article - the hurdles on the path to career success)

Trying to please everyone
Remember the old adage “He who tries to please all pleases none”? This is particularly true at work. If you try to please your colleagues, boss and subordinates all at the same time, eventually you end up not pleasing anyone. Worst of all, you could end up with a particular sense of dissatisfaction that can ruin your peace of mind.

How to fix it: Prioritize! The first and the most important person is of course yourself. You need to be happy and content with what you do. Next, it should be the boss/manager who is responsible for your career progress. Next, is your subordinates. Finally, your friends and colleagues.

Not clearly understanding the expectations
If you do not communicate well with your manager and your peers, your understanding of what needs to be done, and theirs can be very different. Even if you put in a lot of hard work, if you are working against a wrong set of requirements, eventually none of it matters.

How to fix it: Listen! And then repeat. It may sound silly – but a simple repetition of what the expectations are can clear up the understanding. Make the following sentences part of your discussion with your manager and peers: “Let me see if I got it straight – you want me to…”; “OK, so here is my understanding. Please let me know if this is correct…”; “Based on what you just said, here’s the list of things I need to get done…”. If you are a manager, encourage your subordinates to summarize your discussions and listen carefully for any misunderstandings.

Too focused on job security
Last year my company laid off a little over 7% of the job force. There is nothing unique or strange about that number. For many of us that work in the tech sector, lay off is a part of life. Unfortunately, some of use adjust to this fact better than others. If you are worried to take risks and speak up because you are too focused on the job security, then you could be seriously curtailing your own growth – both professionally and personally.

How to fix it: Prepare! Have a list of other companies that you can work for if you get laid off. Keep your resume updated. Have an emergency fund and maybe some sources of alternate income. Once you are prepared to face a lay off, you will stop worrying about it and be willing to take on more challenges at work.

Letting personal life influence work life
Everybody has issues in personal life at some point or the other. There isn’t one of us that has a perfect hassle free life out of work. There are ups and there are downs. If you let it effect the quality of work, then eventually your career will come tumbling down.

How to fix it: Practice professionalism. Learn to mask your emotions at work. In fact, take it one step further – when you feel utterly dejected in personal life, make sure you find ways to achieve success in your work life! When you can make your work complement your personal life and offset the downs, you will succeed not just in your career but also in your personal life!

Short-term thinking
Last year I was assigned to a project which I was not too keen on doing. The work was boring and I thought it did not use my “potential” well. Needless to say I was quite disappointed and not very motivated. One of the days when I was stuck in traffic, I was thinking about this, and realized it was not all bad. The project is has high visibility, so if I did a good job, I can get some recognition. In addition, there is no defined team lead – and I could easily step into the role and take on more responsibility. The more I thought about it, the more it seemed like this project was far better in the long term than the project I had coveted and was hoping to be a part of.

How to fix it: Step outside and think long term. How will what you are doing now help you 2 years down the line? 5 years down the line? What are you learning now that will prepare you for success in the long run – not the promotion next year, but in the next job that you accept in some other company? And the one after that? If you get into the habit of questioning the long term implications of your every day actions, you can escape the myopic stand that most average people end up taking.

These are by no means the only hurdles that stop us from being successful in our careers. But if you do identify any of these as part of your life, work to improve. All of us are mere humans and susceptible to flaws. The real tragedy is if we do not identify these flaws and try to fix them! I will post part 2 of this article soon.

*Image Credit: Photograph by Stew pendous [via Flickr Creative Commons]

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.