Financial Matters October/November 2013 – Stuart Burns
First off I want to thank Father Matters for putting together a fantastic Pearl Conference 2013. Was great to see so many couples there listening to both Vance and Rana and Chris and Carmen talking about building strong marriages and I know that all who were there were greatly encouraged.
Hopefully everyone had a great summer and now we get to enjoy the transition into fall. I grew up in the Midwest and Halloween time was special as it marked that transition when the leaves on trees would transform into the beautiful colors, the weather was getting cooler, and the holidays would be fast upon us. Not to mention I enjoyed it because it was one of the few times of the year that my parents might be ok with me eating a few sweets! Now it’s that time of year again when we hear the kids utter that familiar phrase after we open the door …. “Trick or Treat”. After thinking about a good fall topic it makes perfect sense for us to jump into creating a more robust safety net to avoid life giving us a financial “Trick” and allowing us to have the “Treat” of peace of mind.
Why a Safety Net?
Most of us understand that life is not always predictable. Instead of being taken by surprise by one of life’s “Tricks” we can plan and prepare to meet the challenges that these “Tricks” will present so that we have the “Treat” of financial peace. Let’s think about the “Tricks” in terms of large and small events.

  1. Small Events. These are the events that are unplanned and unfortunate, but normally with some planning won’t place a larger burden on us financially. Events here would include things like flat tires, a broken window, or other smaller bills that can surface.
  2. Larger Events. These are the events that are a little more catastrophic and life changing. Some planning can still be achieved to make the impact of these events less stressful financially, which in turn will help make the event less stressful for you overall. Events like; Loss of a Job, health issues resulting in large bills/loss of income, and other large events that completely change your finances.

Where do we go when faced with a “Trick?”
The biggest question is what we have done before we face a financial “Trick”. If we have taken some time to prepare and plan then we can adequately meet the financial challenge that it presents. Think about these statistics and how others have responded when confronted with a $1,000 event in their life.

  1. Existing Debts. 17% of people had to take from existing debts. This means skipping a mortgage or other payments and is never a good position since it will be adding the stress of being behind in payments.
  2. Other Resources. 64% of people responded by going to other financial areas instead of savings. This is how debt can continue to add up until you are swamped by it. Other resources include; Credit Cards, loans, and other means of just adding debt. Sometimes this might be the only alternative, but we want to get to a place of having savings available.

How much should I have available to plan for one of Life’s “Tricks”
There have been a few rules of thumb over the years on what is considered adequate planning so that you can withstand a few life events.

  1. 2-6 Months. The older rule of thumb is to have 2-6 months of your monthly expenses in a safety account to withstand events in life. This is still a great goal to try and achieve and the main idea is that anything that you do to prepare is better than nothing.
  2. 9 months. The new rule of thumb is to try and have 9 months of monthly expenses set aside to prepare for life events. The recent economic downturn and length of time it’s taking for people to find a new position, in the case of loss of a job, is creating the need for us all to prepare even more.

How to get started
So it sounds great to build up a safety net to withstand a few events when they happen. The main question is where we should start to build this account.

  1. Monthly Income/Expenses. We need to start with the fundamentals and look at how much income we have and how much we have in expenditures – in other words, we need a budget. This will allow us to know how much we will have available to place in this fund. If you only have $10 a month in disposable income then that’s where you start. The main idea here is that this is unique to you and there is no specific % or amount that is correct, but you should build toward the overall goal.
  2. Set an Initial Goal. The first goal we should be aiming for is to set aside 3x the monthly expenses. We mentioned that ideally we will want to set aside 9 months of expenses, but our initial goal should be to get 3 months into this safety net account. This is more short term and will show we are making progress.

What kind of account should I put this money in?
There will be some unique features we will want to have in our event account. Most of these accounts are available at the local bank and they will have people that can direct you to the type of account that suits our needs.

  1. Interest. In this case interest can be one of your best friends and we want to look for an account that is interest bearing so that the money itself is helping us achieve our goal. Examples are savings and money market accounts.
  2. Available. The account we choose must make the funds available if necessary. On the flip side, the account should require some effort to withdrawal so that is not used frequently. There are savings accounts which have limited numbers of withdrawals per month/quarter. This feature should cause us to think more before tapping into the account since there could be a fee for withdrawals over the maximum allowed.
  3. Separate. We need to be clear that this account should be a different account than your regular savings or investment account. The goal of this account will be to achieve the 9 months of expenses and not necessarily continued growth after you reach that point. It shouldn’t be looked at as your primary investment/savings. This is strictly a safety net for those expenses that will most likely occur to all of us at some point.

How can I set aside more money?
In some of our prior articles we reviewed some creative ideas on ways to create some more free money so that we can set aside more money into both our safety net and savings accounts. Here are some quick ways to start saving.

  1. Make your own coffee. It seems like there is a new Starbucks popping up all the time. If you limit the specialty coffee shops you can save almost $1,000 a year. That’s factoring in just one $4 drink for 20 work days a month for the year ($960). Many people even exceed that with weekends and multiple stops
  2. Brown Bag. Bringing in your own lunch is actually a good idea on multiple fronts. First you will save money by bringing in your own food and not spending the extra money. Second is that you are more in control of the type of foods and can eat healthier. Great idea, create more savings and actually get healthier by doing it.
  3. Coupons. Those of you who are reading the Father Matters Tribune and Financial Matters over this year have heard me talk about the advantage of using coupons. I won’t expand a lot more since have covered this before, but since you are already buying certain items – why not pay less for that item by using coupons or savings? You can save 50% or more of your food bill with only minimum extra effort of planning and cutting the coupons.
  4. Land lines. Here is another area for possible savings. If you have cell phones – do you need the land line? Many people are making the choice now that landlines are really not necessary and saving the monthly cost by removing them.

These are just a few simple things you can be doing to save some extra each month and then put some extra money into the safety net account. Keep in mind that anything going into the fund is better than nothing. Star t today with what you can afford and look for opportunities to increase it when you can.
“By failing to prepare, you are preparing to fail.” ― Benjamin Franklin
For some great financial tools and resources go to: learn.bankofamerica.com/money-management/ and bettermoneyhabits.com or contact Stuart Burns at 602-464-1381 or email me at stuart.j.burns@bankofamerica.com